The Multifamily Investor Expo 2023, a premier event for those focused on real estate investment, recently hosted a pivotal panel discussion titled "Wealth Development Strategies with Multifamily." Moderated by Andy Hagans of AltsDb and WealthChannel, the session brought together distinguished experts: Ashley Tison, founder and CEO of OZPros; DJ Van Keuren, co-managing member at Evergreen Property Partners and founder of the Family Office Real Estate Institute; and James Hance, founder of Green Bison Capital. These thought leaders delved into the multifaceted advantages of multifamily real estate as a vehicle for building and preserving generational wealth, offering insights relevant to a wide spectrum of investors, from high-net-worth individuals to family offices.
The discussion underscored the enduring appeal of multifamily properties, highlighting their inherent stability, consistent cash flow potential, and operational advantages. James Hance of Green Bison Capital emphasized the intrinsic value of residential real estate, stating, "People always need a place to live." He elaborated on the stability offered by a diversified portfolio of units compared to single-family homes, and the ability to drive value through proactive asset management. Hance also pointed to the significant tax efficiencies available to direct investors, particularly through depreciation, which can offset tax liabilities and serve as a deferred tax strategy.
DJ Van Keuren, whose extensive work with family offices through the Family Office Real Estate Institute provides a unique perspective, echoed these sentiments. His research indicates that multifamily remains the dominant property type for family office investments. Van Keuren attributed this to its fundamental understandability, coupled with risk mitigation strategies inherent in managing multiple units. He noted the growing demand driven by factors such as rising home prices and student loan burdens, which are pushing more individuals toward rental accommodations. The migration to areas with affordability and job growth further fuels demand for multifamily housing.
Ashley Tison, known as "The OZ Sherpa" for her expertise in Opportunity Zones, focused on the scalability and efficiency of multifamily investments. Tison highlighted how condensing residents into a smaller geographic footprint can reduce infrastructure demands and operational costs compared to managing dispersed single-family rentals. She also touched upon the environmental benefits of multifamily development, framing it as a more sustainable approach to housing in growing urban areas, aligning with modern urban planning principles that prioritize density and reduced sprawl.
The Multifamily Advantage: Core Principles for Wealth Growth
The panelists collectively identified several key pillars that make multifamily real estate a powerful tool for wealth development:
- Stability and Demand: The fundamental need for housing ensures a consistent demand, making multifamily properties resilient even during economic downturns. Historical data suggests that this sector often outperforms others during recessions.
- Cash Flow Generation: Multifamily properties offer predictable rental income, providing a steady stream of cash flow that can be reinvested or used for wealth preservation.
- Value Appreciation: Beyond rental income, multifamily properties have the potential for significant capital appreciation through strategic improvements and market growth.
- Tax Efficiency: Depreciation allowances, 1031 exchanges, and Opportunity Zone investments offer substantial tax advantages, allowing investors to defer or reduce tax liabilities.
- Operational Control and Value-Add Potential: Unlike passive investments, multifamily properties allow for direct operational influence, enabling investors to force appreciation through renovations, improved management, and rent optimization.
Navigating Tax Advantages: Beyond the Basics
The conversation extended to the sophisticated tax strategies employed by high-net-worth investors. DJ Van Keuren emphasized the underutilization of the 1031 exchange, a powerful mechanism for deferring capital gains taxes by reinvesting proceeds from the sale of one investment property into another "like-kind" property. He noted that a significant percentage of families surveyed in his studies do not leverage this strategy, often due to a lack of education.
James Hance confirmed that a substantial portion of capital raised by his firm comes from 1031 exchanges, suggesting a growing awareness of its benefits. He highlighted the possibility of utilizing 1031 exchanges within syndication structures, allowing passive investors to transition from active property management to a more hands-off approach while still deferring taxes. This offers a dual benefit of tax deferral and a significant return on time investment.
Ashley Tison provided a deeper dive into Opportunity Zones (OZ), explaining how they can defer capital gains taxes, reduce future capital gains on appreciation, and eliminate depreciation recapture taxes. She presented a compelling case for OZ investments, stating that they can enhance Internal Rate of Return (IRR) by approximately 3%, a significant uplift when comparing deals with identical underlying metrics but differing tax treatments. She illustrated this by noting how an OZ investment could effectively turn a 3% cap rate deal into a 6% cap rate deal from an after-tax perspective.
Tison also introduced a critical consideration regarding estate taxes. With the lifetime estate tax exemption set to decrease significantly after 2025, investors with estates approaching $10 million need to be strategic. While 1031 exchanges offer a step-up in basis at death, potentially avoiding estate tax on the appreciated value, Opportunity Zone investments can freeze the value contributed to the fund against the estate, offering a different, potentially more advantageous, tax outcome for very large estates.
Market Dynamics in 2023: Navigating Higher Interest Rates
A central theme of the panel was the current investment climate, particularly in light of higher interest rates in 2023. Investors are keenly assessing whether current cap rates adequately compensate for increased borrowing costs. James Hance indicated that the era of aggressive cap rate compression is likely over. He stressed the importance of rigorous due diligence on sponsors, favoring those who are vertically integrated, possess strong track records, and are well-capitalized. Hance predicted that the current environment would present opportunities for investors who can capitalize on distressed assets resulting from refinancing challenges and maturing debt.
DJ Van Keuren noted that family offices, having learned from past economic cycles, are more strategically positioned. Many have been holding "dry powder" and are waiting for optimal entry points, rather than waiting until the market begins its recovery. He cautioned against a complete halt in investing, emphasizing that strong fundamentals in a specific market can lead to success regardless of the broader economic conditions. However, he echoed the sentiment that a "reckoning" is coming, and operators will be tested. Van Keuren advised investors to underwrite deals with conservative assumptions, considering scenarios of higher interest rates and increased vacancy, and to seek investments where the projected returns still justify the risk.
Ashley Tison acknowledged the importance of stress-testing investments, a concept that balances her optimistic outlook. She highlighted that many investors in Opportunity Zones are motivated by the ticking clock of tax deadlines, encouraging them to deploy capital. Tison also pointed out that OZ investments often involve a value-add component or ground-up development, which can provide a buffer against market fluctuations due to inherent upside potential.
Learning from Family Offices: Principles for Generational Wealth
DJ Van Keuren shared key lessons that independent investors can glean from successful family offices in managing generational wealth. He emphasized patience and sound decision-making as paramount. While acknowledging that some families struggle to maintain wealth across generations, he stressed that the fundamentals of real estate investing remain constant, whether the investment is $100,000 or $100 million. Finding a trustworthy, experienced partner and maintaining a long-term perspective are crucial. He also underscored the importance of rigorous due diligence on sponsors and the value of referrals and networking within the investment community.
Ashley Tison added that for families managing newly acquired wealth, establishing clear core values and a mission statement is as vital as it is for their businesses. This intentionality, documented in a family constitution, helps guide future generations and trustees in managing and distributing assets according to the original vision, preventing wealth erosion.
Ground-Up vs. Value-Add: Strategic Outlooks
In a rapid-fire closing segment, the panelists addressed the outlook for ground-up development versus value-add strategies in the current environment. James Hance favored value-add, citing his personal preference for lower risk-return profiles and the inherent complexities and longer timelines of ground-up projects. Ashley Tison, however, leaned towards ground-up development, particularly within the Opportunity Zone framework, where the "substantial improvement" threshold often necessitates new construction to qualify for tax benefits. DJ Van Keuren offered a more nuanced perspective, suggesting that the optimal strategy depends on the specific property type and market conditions, highlighting opportunities in both categories where thorough analysis and risk assessment are paramount.
The overarching consensus from the Multifamily Investor Expo 2023 panel was clear: multifamily real estate remains a cornerstone for wealth development, offering a blend of stability, income generation, and significant tax advantages. While the current economic landscape presents unique challenges, particularly concerning interest rates, strategic investors who prioritize due diligence, understand tax implications, and partner with experienced professionals are well-positioned to capitalize on emerging opportunities and build lasting wealth. The insights shared by Tison, Van Keuren, and Hance provided a roadmap for navigating these complexities and leveraging multifamily investments for long-term financial success.
