The Multifamily Investor Expo 2023, a premier event for real estate investment professionals, recently hosted a pivotal panel discussion titled "Wealth Development Strategies with Multifamily." Moderated by Andy Hagans of AltsDb and WealthChannel, the session featured a distinguished group of 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 cornerstone for building and preserving generational wealth, offering insights into market dynamics, tax advantages, and strategic investment approaches.
The Enduring Appeal of Multifamily Real Estate
The core of the discussion revolved around the fundamental reasons why multifamily properties continue to be a favored asset class for sophisticated investors, including family offices and high-net-worth individuals. James Hance underscored the intrinsic value of multifamily, emphasizing the universal and consistent demand for housing. "People always need a place to live," Hance stated, highlighting the stability inherent in a property with multiple income-generating units. This stability, he explained, contrasts with the volatility of single-family rentals, offering a more predictable cash flow.
Hance further elaborated on the operational advantages, noting that multifamily properties allow for "forced appreciation through good operations." This means that diligent management, strategic renovations, and efficient expense control can directly increase the property’s value and profitability. From a tax perspective, Hance pointed out the significant benefits of real estate depreciation, which can offset tax liabilities, especially when structured as a limited partnership investment. This "deferred tax strategy" is a critical component for wealth accumulation.
DJ Van Keuren, drawing from extensive experience with family offices, corroborated the widespread adoption of multifamily investments. His firm’s annual study on family office real estate investment consistently shows multifamily as the leading property type. Van Keuren attributed this popularity to its understandable nature and risk mitigation capabilities. Unlike a single commercial building where the departure of one tenant can create a significant problem, the impact of a vacancy in a multifamily property with many units is considerably diluted. He also highlighted broader economic trends driving demand, such as rising home prices and student loan burdens making homeownership less accessible, thereby increasing the demand for rental housing. This dynamic is particularly pronounced in high-growth areas with job opportunities, where apartments offer an immediate and affordable shelter solution.
Ashley Tison, known as "The OZ Sherpa," added another layer to the discussion by emphasizing the scalability and efficiency of multifamily investments. He noted the ability to "condense an enormous amount of people… into a very small area," which not only addresses housing needs but also contributes to more sustainable urban development by reducing sprawl and infrastructure demands compared to managing scattered single-family rentals. Tison also pointed out that this consolidation can extend to other forms of rental housing, such as mobile home parks, RV parks, and even strategically developed single-family rental communities, aligning with the core principles of multifamily efficiency.
Navigating Tax Advantages and Investment Structures
A significant portion of the panel’s discourse was dedicated to the various tax-advantaged strategies available to multifamily investors. Ashley Tison, an expert in Opportunity Zones (OZ), detailed how these zones offer a powerful mechanism for deferring, and in some cases eliminating, capital gains taxes. He explained that investors can reinvest capital gains from previous investments into Qualified Opportunity Funds, which then invest in designated OZ areas. The benefits include deferral of tax on the initial gain until 2026, a potential reduction of up to 15% on the deferred gain if held for five and seven years respectively, and elimination of capital gains tax on appreciation of the OZ investment if held for at least 10 years. Tison highlighted that the OZ program can add approximately 3% to an investor’s Internal Rate of Return (IRR) by effectively boosting returns compared to non-OZ investments.
DJ Van Keuren championed the 1031 exchange as another crucial tax-deferral strategy. He expressed surprise that a large percentage of families do not utilize this mechanism, attributing it to a lack of education. The 1031 exchange allows investors to defer capital gains taxes by reinvesting the proceeds from the sale of a "like-kind" property into another. This compounding effect, Van Keuren noted, can significantly accelerate wealth growth over time. He also mentioned other, less commonly discussed tax credits, such as Low-Income Housing Tax Credits and New Markets Tax Credits, as potential investment avenues.
James Hance confirmed the significant uptake of 1031 exchanges within his client base, noting that approximately 20% of the capital his group has raised over the past two years originated from 1031 transactions. He emphasized that 1031 exchanges can be effectively executed within syndication structures, allowing investors to transition from active property management to passive participation while still deferring taxes. This is particularly attractive for individuals looking to shift from managing inherited properties to a more hands-off investment approach, while also benefiting from the cash flow and potential step-up in basis that syndications offer.
The panel also touched upon the nuances of these strategies. Ashley Tison, while a proponent of 1031 exchanges, cautioned high-net-worth individuals about potential estate tax implications after 2025, as the lifetime exemption is set to decrease. He contrasted this with Opportunity Zones, where the value contributed to the fund is frozen for estate tax purposes, offering a different kind of tax advantage.
Adapting to the Current Market: Interest Rates and Opportunities
A central question for investors in 2023 is the impact of higher interest rates on multifamily investments. Andy Hagans posed the critical question: Is this a good time to invest, or should investors hold cash for future opportunities?
James Hance acknowledged that the era of cap rate compression is likely over, and emphasized the need for investors to be "particularly astute" in their due diligence, focusing on "rock-solid" sponsors with strong operational track records and sufficient capitalization. He predicted that the current environment would present opportunities, particularly with distressed properties, as some operators struggle with refinancing maturing debt. "We’re already seeing it," Hance stated, referring to properties coming to market due to operators unable to secure new financing.
DJ Van Keuren echoed this sentiment, noting that family offices have learned from past recessions and are proactively positioning themselves. Unlike in previous downturns where they waited until the market showed signs of recovery, many are now holding "dry powder" and are ready to deploy capital strategically. He stressed the importance of fundamentals, such as cost of living, quality of life, and job demand in specific markets, as these factors allow for profitable investments in any market cycle. Van Keuren also highlighted the increasing prevalence of "negative leverage" scenarios, where the cost of debt exceeds the property’s unlevered yield, and the potential for floating rate debt to create challenges for some operators. He advised investors to "stress test" deals by considering worst-case scenarios, such as higher interest rates and increased vacancy rates, before committing capital.
Ashley Tison, while inherently optimistic, agreed with the need for practical assessment. He pointed out that investors in Opportunity Zones are often driven by time-bound investment windows, which can encourage deployment of capital. He also noted that the current environment often presents "value-add plays" with inherent upside potential, which can provide a buffer against market fluctuations.
Lessons from Generational Wealth Builders
The panel concluded with a discussion on what independent high-net-worth investors can learn from family offices managing generational wealth. DJ Van Keuren emphasized the virtues of patience and making well-considered decisions. He noted that while some families struggle to maintain wealth across generations, the underlying principles of successful wealth management remain consistent. He highlighted the importance of partnering with quality sponsors who have a proven track record through multiple market cycles. Van Keuren also stressed the value of referrals and building trusted relationships within the investment community.
Ashley Tison elaborated on the concept of intentionality in wealth management, suggesting that families should define core values and a mission statement, much like businesses do. This can help guide investment decisions and ensure that wealth is preserved and utilized in alignment with familial principles. He stressed the importance of educating younger generations on these principles and the necessity of relying on professional advisors to navigate complex financial landscapes.
Andy Hagans summarized by emphasizing humility as a key trait among successful wealth builders. He noted that individuals who have amassed fortunes often recognize their limitations in specific areas, such as real estate, and proactively surround themselves with expert talent. This collaborative approach, he suggested, is crucial for long-term success.
The discussion at the Multifamily Investor Expo 2023 provided a comprehensive overview of why multifamily real estate remains a preeminent strategy for wealth development. The convergence of stable demand, operational upside, and a suite of powerful tax-advantaged structures, coupled with the current market’s potential for discerning opportunities, positions multifamily as an attractive sector for investors aiming for sustained financial growth and legacy building. The insights shared by Tison, Van Keuren, and Hance underscore the importance of strategic planning, expert guidance, and a long-term perspective in navigating the complexities of real estate investment.
