The Multifamily Investor Expo 2023, a premier event for real estate professionals and investors, recently hosted a pivotal panel discussion focused on "Wealth Development Strategies with Multifamily." Moderated by Andy Hagans of AltsDb and WealthChannel, the session brought together three 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 leaders shared their insights into why multifamily real estate continues to be a cornerstone for building and preserving generational wealth.
The discussion, held at the Multifamily Investor Expo 2023, aimed to dissect the multifaceted appeal of multifamily investments for sophisticated investors. The panelists, each with extensive experience in alternative investments, private equity, and real estate syndication, provided a comprehensive overview of the sector’s enduring strengths and its evolving landscape.
The Enduring Appeal of Multifamily Real Estate
The core of the discussion revolved around the fundamental question: why multifamily? James Hance initiated the conversation by highlighting the inherent stability of residential real estate. "It’s the intrinsic value of a building, and it’s where people have to live," Hance stated. "People always need a place to live. You have the stability of many units. So, it’s much more stable than single-family." He further elaborated on the income-generating potential, the ability to drive appreciation through operational improvements, and the significant tax advantages, particularly depreciation, which can offset tax liabilities for direct investors and limited partners alike.
DJ Van Keuren, drawing on his extensive work with family offices and ultra-high-net-worth investors, corroborated this sentiment. His research, including the Family Office Real Estate Investment Study, consistently shows multifamily as the leading property type for family investment. Van Keuren pointed to the escalating costs of homeownership, exacerbated by factors like student loan debt, as a primary driver of sustained rental demand. "The easiest way for that shelter is to rent. And that’s really what’s been driving demand is, you know, people moving to these different areas where there’s affordability and new jobs, and apartments is the easiest place to go, and affordable," he explained. This persistent demand translates into a more resilient investment during economic downturns, offering a degree of capital preservation that is highly valued by investors focused on long-term legacy building.
Ashley Tison added another dimension to the appeal of multifamily, framing it through the lens of scalability and efficiency. "You have the ability to be able to condense an enormous amount of these people, right, that are looking for a place to stay… But you can take them and you can consolidate them into a very small area," Tison remarked. He also highlighted the environmental benefits, suggesting that denser housing developments reduce sprawl and require less infrastructure compared to dispersed single-family homes. This "green" aspect, he noted, is becoming increasingly relevant in discussions with planning commissions and communities facing housing shortages.
Navigating Tax Advantages: Beyond Opportunity Zones
A significant portion of the panel’s dialogue was dedicated to tax-advantaged investment strategies within the multifamily sector. While Opportunity Zones (OZs) were a prominent topic, the experts also delved into other critical tools for wealth preservation.
Ashley Tison, an expert in Opportunity Zones, emphasized their power to defer and eliminate capital gains taxes. He explained how investing capital gains into qualified OZ funds allows investors to defer tax liabilities, with potential for further tax reductions on future gains, including the elimination of depreciation recapture. "The fourth benefit of, you know, the opportunity zone program is that it eliminates depreciation recapture. So, to James’s point about being able to harvest that depreciation to offset income, you know, when you layer on top of that, you know, the opportunity zone benefit, it’s amazing what you get relative to kind of an after tax bump. Generally, it’s around a 3% increase in IRR," Tison stated. He illustrated this with an example, showing how an OZ investment can effectively double the return on a deal compared to a non-OZ investment by bridging the gap between a 3% cap rate and a 6% cap rate.
DJ Van Keuren identified the 1031 exchange as another paramount tax-advantaged strategy, noting that a significant percentage of families still underutilize this powerful tool. "The 1031 exchange is by far I would have to say the other tax benefit that people should be looking at," Van Keuren commented. He highlighted its role in compounding gains tax-free over time, transforming a 15% annual return into a 21% return over several years. He also briefly mentioned other tax credits, such as Low-Income Housing Tax Credits and New Markets Tax Credits, as potential avenues for sophisticated investors.
James Hance confirmed the strong uptake of 1031 exchanges within his firm’s capital raising efforts, with approximately 20% of capital sourced over the past two years stemming from 1031 exchanges. He also noted the viability of using syndications, particularly through tenant-in-common (TIC) structures, to facilitate 1031 exchanges for passive investors. This allows individuals who are actively managing properties to transition to a passive role while deferring capital gains taxes. Hance also touched upon Delaware Statutory Trusts (DSTs) as another option, though he observed that some investors were finding their returns squeezed in recent times, leading them to explore syndication alternatives.
A nuanced discussion emerged regarding the long-term implications of 1031 exchanges, particularly concerning estate taxes. Ashley Tison raised a critical point about the lifetime estate tax exemption, which is set to decrease significantly after 2025. He cautioned that while 1031 exchanges offer a step-up in basis at death, assets exceeding the reduced exemption threshold could be subject to estate taxes at their then-current market value. In contrast, Opportunity Zone investments can freeze the value of the initial contribution against an estate, potentially offering a more favorable outcome for very large estates.
The 2023 Investment Landscape: Navigating Higher Interest Rates
As the conversation turned to the current market conditions, the impact of higher interest rates on multifamily investment became a central theme. Andy Hagans posed the critical question: is 2023 a prime time to invest, or should investors hold cash for future opportunities?
James Hance acknowledged that the era of aggressive cap rate compression was likely over. He stressed the importance of meticulous due diligence on sponsors, emphasizing the need for vertically integrated operators with strong track records and robust capitalization. Hance predicted that the current environment would present opportunities, particularly for distressed properties and those facing refinancing challenges due to maturing debt. "This will be a year, I think, for opportunities, particularly with debt and things that are… Properties that are under distress," he stated, noting that such opportunities were already beginning to surface.
DJ Van Keuren observed that many family offices, having learned from past market cycles, were proactively holding "dry powder" and waiting for opportune moments to invest, rather than waiting for a full market recovery. He cautioned against a complete halt in investing, emphasizing that fundamentals like cost of living, quality of life, and demand remain crucial for success in any market. Van Keuren highlighted the increased scrutiny on operators, stating that the current environment would reveal the strength and resilience of those in the business. He also pointed to the potential for negative leverage and the challenges posed by floating interest rates, suggesting that a more rigorous underwriting process, including stress-testing deals against adverse scenarios like increased vacancy rates or higher interest rates, is essential.
Ashley Tison echoed the sentiment of caution within exuberance, emphasizing the importance of stress-testing investment models. He noted that while Opportunity Zone investors often operate with a sense of urgency due to program timelines, the inherent value-add potential in many OZ projects can provide a buffer against market volatility. This often involves investing in growth areas where demand is high, offering more room for error compared to mature assets in established markets.
Learning from Family Offices: The Pillars of Generational Wealth
The discussion shifted towards the philosophies and habits of successful family offices managing generational wealth, offering valuable lessons for independent high-net-worth investors.
DJ Van Keuren, while acknowledging that wealth can be lost across generations, highlighted key principles. He stressed the universality of real estate fundamentals, regardless of investment size. Patience, sound decision-making, and a long-term perspective were identified as paramount. The illiquid nature of real estate, he argued, can be an advantage by fostering patience. He also underscored the importance of building trusted relationships with sponsors and conducting thorough due diligence, including rigorous stress-testing of potential investments. Referrals and networking, a cornerstone of family office operations, were also cited as crucial for identifying reliable partners.
Andy Hagans added that successful leaders, whether in business or managing family wealth, understand the importance of humility and surrounding themselves with expert talent. He emphasized that amassing wealth in one sector does not automatically translate to expertise in another, such as real estate. Therefore, partnering with qualified professionals and experienced operators with a proven track record across multiple market cycles is a hallmark of smart wealth management.
Ashley Tison further elaborated on the concept of intentionality in family wealth management. He proposed that families should develop core value statements and mission statements, akin to business planning, to guide their financial decisions and ensure the preservation and transfer of values across generations. This intentional approach, he suggested, is even more critical for families than for businesses, as it underpins the long-term stewardship of wealth.
Ground-Up vs. Value-Add: A Lightning Round
In a rapid-fire segment, the panelists addressed the current outlook for ground-up development versus value-add strategies in the present market.
James Hance expressed a preference for value-add, citing his personal inclination towards lower risk and return profiles and a cautious approach to the complexities of ground-up development in the current uncertain environment.
Ashley Tison, with his extensive experience in Opportunity Zones, leaned towards ground-up development. He explained that the substantial improvement thresholds required for OZ projects often necessitate new construction rather than renovations, making ground-up the more prevalent strategy in his specialized area.
DJ Van Keuren offered a more nuanced perspective, stating that the optimal approach depends on the specific property type and market. He noted that stalled apartment projects could present value-add opportunities, while sectors like cold storage, with significant supply-demand imbalances, might necessitate ground-up development. His overarching advice was to analyze the return potential against the associated risks for each project.
The panel concluded with a strong emphasis on the enduring power of multifamily real estate as a vehicle for wealth creation and preservation. The experts underscored the importance of strategic planning, rigorous due diligence, and partnering with trusted professionals to navigate the complexities of the market and achieve long-term financial success. The insights shared at the Multifamily Investor Expo 2023 provided attendees with actionable strategies and a renewed appreciation for the robust potential of multifamily investments.
