The Multifamily Investor Expo 2023, a premier event for real estate investment professionals, recently convened a distinguished panel of experts to dissect the multifaceted strategies for wealth development through multifamily real estate. Moderated by Andy Hagans of AltsDb and WealthChannel, the session featured insights from Ashley Tison, founder and CEO of OZPros; DJ Van Keuren, co-managing member of Evergreen Property Partners and founder of the Family Office Real Estate Institute; and James Hance, founder of Green Bison Capital. The discussion, available for viewing on YouTube, delved into the enduring appeal of multifamily properties as a vehicle for both wealth creation and preservation, particularly for high-net-worth investors and family offices.
The Enduring Appeal of Multifamily Real Estate
The foundational question addressed by the panel was the inherent strength of the multifamily sector in fostering long-term wealth. James Hance articulated this by highlighting the intrinsic value of residential properties, emphasizing the constant human need for shelter. He pointed to the stability offered by a diversified tenant base within a single property, a significant advantage over single-family rentals. Hance also underscored the income-generating potential, the ability to force appreciation through effective asset management, and the considerable tax advantages, particularly depreciation, that direct real estate investment offers. "It’s a deferred tax strategy," Hance noted, emphasizing the ability to offset tax liabilities through depreciation allowances.
DJ Van Keuren corroborated Hance’s points, drawing on extensive research conducted through the Family Office Real Estate Institute. His findings consistently show multifamily as the dominant property type for family office investments. Van Keuren attributed this popularity to its understandability and its inherent risk mitigation. "If one tenant leaves an office building, you could have a pretty big problem," he explained, contrasting it with a multifamily property where a single vacancy represents a minimal impact on overall occupancy. He also highlighted the growing demand driven by affordability challenges in the single-family housing market and the increasing need for rental accommodations in areas with strong job growth.
Ashley Tison further elaborated on the scalability and efficiency of multifamily investments. He described how condensing numerous residents into a compact area optimizes resource utilization and reduces infrastructure needs compared to managing dispersed single-family units. Tison also extended this concept to other forms of housing, such as mobile home parks and RV parks, noting their alignment with the multifamily investment ethos.
Strategic Tax Advantages: Beyond the Basics
A significant portion of the discussion revolved around the sophisticated tax strategies that enhance the returns from multifamily investments. Ashley Tison, an expert in Opportunity Zones (OZ), detailed how this federal program can be a powerful tool for investors looking to defer or eliminate capital gains taxes. He explained that gains realized from the sale of an asset can be reinvested into Qualified Opportunity Funds, which invest in designated low-income communities. The program offers a deferral of the initial capital gains tax until 2026 or the sale of the OZ investment, whichever comes first. Furthermore, investors can achieve a step-up in basis on the appreciation of their OZ investment if held for at least 10 years, effectively eliminating capital gains tax on that portion of the profit. Tison highlighted that for investors already in multifamily, leveraging the OZ program for new developments or substantial improvements can significantly boost Internal Rate of Return (IRR), potentially by 3% or more, when compared to similar investments outside an OZ.
DJ Van Keuren emphasized the widespread utility of the 1031 Exchange, noting that a significant percentage of families he surveyed were not utilizing this strategy. The 1031 Exchange allows investors to defer capital gains taxes on the sale of investment property by reinvesting the proceeds into a "like-kind" property. Van Keuren argued that this mechanism is crucial for compounding wealth over time, as deferred gains can be reinvested to generate further returns. He also mentioned other tax credit programs, such as Low-Income Housing Tax Credits (LIHTC) and New Markets Tax Credits (NMTC), as avenues for sophisticated investors to explore.
James Hance confirmed the significant uptake of 1031 exchanges within his client base, noting that approximately 20% of the capital his group raises comes from these exchanges. He highlighted the growing trend of investors using 1031 exchanges to transition from active property management to passive syndication investments, thereby optimizing their time and capital. Hance also touched upon the potential for DSTs (Delaware Statutory Trusts) as a vehicle for 1031 exchanges, although he noted that some investors have found returns squeezed in recent times, leading them to explore syndication options more actively.
Navigating the Current Market: Interest Rates and Opportunities
The panel also addressed the prevailing economic climate, particularly the impact of higher interest rates on multifamily investment decisions. James Hance acknowledged that the era of cap rate compression is likely over. He stressed the importance of meticulous due diligence on sponsors, particularly those who are vertically integrated, possess a strong track record, and are well-capitalized. Hance indicated that the current environment is ripe with opportunities, especially for properties experiencing distress due to rising debt costs and maturing loans. "We’re already seeing it," he stated, referring to instances where owners are forced to sell due to an inability to refinance.
DJ Van Keuren observed that many family offices, having learned from past market cycles, are strategically deploying "dry powder"—available cash—to capitalize on potential downturns. Unlike in previous recessions where families waited for the market to recover, many are now actively seeking opportunities at the bottom. Van Keuren cautioned that while opportunities exist, a fundamental analysis of market fundamentals, including cost of living, quality of life, and demand, remains paramount. He also stressed the importance of stress-testing investments, considering scenarios such as increased vacancy rates or higher interest expenses, to ensure projected returns remain viable under adverse conditions. He noted a sentiment from banking professionals suggesting that debt challenges in the current market might be more severe than anticipated, with less likelihood of government bailouts.
Ashley Tison echoed the sentiment that while exuberance is warranted, a practical approach involving rigorous stress-testing is crucial. He highlighted that for investors utilizing Opportunity Zone funds, the inherent time constraints of the program can also drive investment decisions, encouraging the deployment of capital to work. Tison also pointed out that value-add opportunities within OZ investments often provide a buffer against market volatility due to their inherent upside potential.
Lessons from Generational Wealth Builders
In a segment focused on long-term wealth management, DJ Van Keuren shared insights gleaned from his work with family offices. He noted that while the creation of wealth is often a testament to entrepreneurial drive, its preservation across generations requires a different skillset. Key takeaways for individual high-net-worth investors include the virtues of patience and making well-considered decisions. Van Keuren emphasized that real estate’s illiquid nature necessitates a long-term perspective. He advised investors to build trusted relationships with sponsors, conduct thorough due diligence, and actively seek referrals from other families.
Ashley Tison underscored the importance of intentionality in family wealth management. He advocated for establishing a clear family core value statement and mission, akin to a business’s strategic plan, to guide decision-making and ensure alignment across generations. Tison stressed that this deliberate approach is even more critical for families than for businesses, as it lays the groundwork for responsible wealth stewardship.
Andy Hagans, the moderator, synthesized these points by highlighting the humility required of successful investors. He noted that even those who have amassed significant fortunes in one sector must recognize that expertise does not automatically translate to all asset classes. The most effective investors, he observed, are adept at surrounding themselves with talented professionals—attorneys, financial advisors, and experienced real estate operators—and leveraging their specialized knowledge. Hagans emphasized the importance of partnering with sponsors who have navigated multiple market cycles, underscoring that experience is a critical factor when entrusting hard-earned capital.
Ground-Up vs. Value-Add: A Strategic Choice
A rapid-fire question from the audience sought clarity on whether ground-up development or value-add strategies hold a better outlook in the current environment. James Hance expressed a preference for value-add, citing his personal aversion to the longer timelines and higher risks associated with ground-up development. Ashley Tison, conversely, noted that his experience with Opportunity Zones has led him to favor ground-up projects, as achieving the "substantial improvement" threshold required for OZ benefits can be more readily accomplished through new construction. DJ Van Keuren offered a nuanced perspective, suggesting that the optimal strategy depends heavily on the specific property type and geographic location. He highlighted that stalled development projects could present significant value-add opportunities, while sectors like cold storage, facing a considerable supply-demand imbalance, might necessitate ground-up development to meet market needs.
The panel concluded with a strong emphasis on continuous education and professional guidance. The experts collectively encouraged attendees to actively seek out knowledgeable advisors, build robust networks, and prioritize a long-term, disciplined approach to wealth development, particularly through the robust and adaptable multifamily real estate sector.
