The Multifamily Investor Expo 2023 recently hosted a dynamic panel discussion focused on leveraging multifamily real estate for wealth development. Moderated by Andy Hagans of AltsDb and WealthChannel, the session featured prominent industry 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 at Green Bison Capital. The experts delved into the multifaceted advantages of multifamily investing, exploring its resilience, scalability, and significant tax benefits, particularly in the current economic climate.
The Enduring Appeal of Multifamily Real Estate
The panel opened with a fundamental question: why multifamily? James Hance articulated a core reason: the intrinsic value and essential nature of housing. "People always need a place to live," Hance stated, highlighting the inherent stability of this asset class. He emphasized the dual benefits of consistent cash flow and the potential for forced appreciation through effective property management and operational improvements. Hance also pointed to the significant tax advantages available to direct real estate investors, particularly depreciation, which can offset tax liabilities.
DJ Van Keuren, drawing on his extensive experience with family offices, echoed this sentiment. Through the Family Office Real Estate Institute’s annual study, multifamily consistently emerges as a primary investment vehicle for families managing substantial portfolios. Van Keuren attributed this popularity to its understandability and risk mitigation. "Unlike an office building, if one tenant leaves, you could have a pretty big problem. But on a multifamily side, if one leaves and, you know, if you had 100 units, now you only have 1%… release in the occupancy perspective," he explained. He also noted the growing demand driven by housing affordability challenges and the migration of individuals to areas with job growth, where apartments offer an accessible solution.
Ashley Tison, known for his expertise in Opportunity Zones (OZ) and tax-advantaged structures, underscored multifamily’s scalability. He described how it allows for the consolidation of a large number of residents within a concentrated area, leading to more efficient management and reduced infrastructure needs compared to dispersed single-family rentals. Tison also framed multifamily as an environmentally conscious choice, contributing to reduced urban sprawl and promoting more sustainable living patterns. This "green" aspect, he suggested, could be a valuable point in addressing community concerns and garnering support for new housing developments.
Navigating Tax Advantages for Enhanced Returns
A significant portion of the discussion revolved around tax-efficient investment strategies within the multifamily sector. Tison highlighted the powerful benefits of Opportunity Zones, which allow investors to defer, reduce, and potentially eliminate capital gains taxes. He detailed how OZ investments can defer gains from previous investments, and the subsequent appreciation within the OZ property can be tax-free if held for the requisite period. This can lead to a substantial increase in Internal Rate of Return (IRR), often cited as around 3% for qualifying OZ investments, which is a significant uplift in a market with historically low cap rates.
The panel also extensively discussed the 1031 exchange, a mechanism allowing investors to defer capital gains taxes by reinvesting proceeds from the sale of one investment property into a like-kind property. Van Keuren expressed surprise at the relatively low utilization of 1031 exchanges among families, suggesting that education is a key factor. He emphasized its role in compounding gains over time, allowing investors to continuously grow their wealth without immediate tax implications.
Hance confirmed the strong uptake of 1031 exchanges within his firm’s capital raising efforts, noting that a significant percentage of their recent capital has come from these transactions. He further explained that 1031 exchanges can be effectively utilized within syndication structures, enabling investors to transition from active property management to passive participation while deferring taxes and potentially achieving a step-up in basis. This offers a dual benefit of tax deferral and a more efficient use of an investor’s time and capital.
The Current Investment Landscape: Opportunities Amidst Higher Interest Rates
As interest rates have risen significantly in 2023, the question of whether it’s an opportune time to invest became a central theme. Hance acknowledged that the era of cap rate compression is likely over. He stressed the importance of rigorous due diligence on sponsors, emphasizing the need for vertically integrated operators with a strong track record and sound financial backing, especially in the current environment. He suggested that opportunities are emerging from distressed properties and loan maturities, particularly for well-capitalized investors.
Van Keuren echoed this sentiment, noting that family offices, having learned from past market cycles, are actively deploying "dry powder" rather than waiting for a market peak. He cautioned, however, that fundamentals remain paramount. Investors must assess the underlying demand, cost of living, and quality of life in target markets. He also highlighted the critical need for stress-testing investments, considering scenarios like increased vacancy rates and higher interest expenses, to ensure returns remain attractive even under adverse conditions.
Tison agreed that while caution is warranted, the current environment presents opportunities, particularly for those within the Opportunity Zone framework. The ticking clock of the OZ program incentivizes investors to deploy capital, and the inherent value-add potential in many OZ projects offers a buffer against market volatility. He also raised a nuanced point regarding estate tax implications, suggesting that Opportunity Zones might offer a benefit by freezing the value of an investment for estate tax purposes, unlike 1031 exchanges which may result in a step-up in basis that could be subject to future estate taxes.
Learning from Generational Wealth Builders
A key takeaway from the panel was the wisdom that can be gleaned from generational wealth builders and family offices. Van Keuren emphasized patience and disciplined decision-making as core tenets. He noted that while the initial wealth creators often possess strong business acumen, subsequent generations may struggle to maintain it, underscoring the importance of education and professional guidance. The illiquid nature of real estate, he argued, can be a benefit, fostering a long-term perspective. Building trust with partners and conducting thorough due diligence on sponsors, including their ability to navigate various market scenarios, are critical.
Tison shared an anecdote about a client who faced a significant capital gain and struggled with the immediate liquidity needs for an Opportunity Zone investment. This experience highlighted the crucial need for careful planning and professional advice to avoid tax liabilities and ensure compliance with investment regulations. He stressed the importance of surrounding oneself with experts and educating family members about financial management to preserve wealth across generations.
Hagans, the moderator, synthesized these points, emphasizing humility as a foundational virtue for investors. He noted that success in one venture does not automatically translate to expertise in another. The ability to recognize one’s limitations and surround oneself with talented professionals – be it financial advisors, tax experts, or skilled real estate operators – is the hallmark of successful wealth management. He underscored the importance of partnering with sponsors who have experienced multiple market cycles, ensuring their expertise is battle-tested.
The Future of Multifamily Investment
As the panel concluded, a rapid-fire question on ground-up development versus value-add strategies in the current environment revealed diverse perspectives. Hance favored value-add due to his preference for lower risk, while Tison leaned towards ground-up within his OZ expertise, citing the need to meet substantial improvement thresholds. Van Keuren offered a more nuanced view, stating that the optimal strategy depends on property type, market dynamics, and the specific opportunities presented, always emphasizing the need for a thorough risk-return analysis.
The discussion at the Multifamily Investor Expo 2023 provided invaluable insights into the strategic advantages of multifamily real estate. From its inherent stability and cash flow potential to sophisticated tax strategies like Opportunity Zones and 1031 exchanges, the asset class offers compelling avenues for wealth accumulation. The experts’ consensus pointed towards a market ripe with opportunities for well-informed and disciplined investors, emphasizing the enduring importance of expert guidance, strategic planning, and a long-term perspective.
