The Multifamily Investor Expo 2023, a prominent event for real estate investment professionals, recently hosted a dynamic panel discussion focused on wealth development strategies leveraging the multifamily sector. Moderated by Andy Hagans of AltsDb and WealthChannel, the session brought together 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. The panel delved into the enduring appeal of multifamily real estate as a vehicle for building and preserving generational wealth, exploring its inherent advantages, strategic tax implications, and current market dynamics.
The Importance of Multifamily in Wealth Creation
The discussion kicked off with a fundamental question: why multifamily? James Hance highlighted the intrinsic value of multifamily properties, emphasizing that housing is a perpetual human need. He elaborated on the stability offered by a diversified tenant base within a single property, contrasting it with the volatility of single-family rentals. Hance underscored the income-generating potential and the ability to drive appreciation through effective property management and operational improvements. Furthermore, he pointed to the significant tax advantages, particularly depreciation, which can offset tax liabilities for direct investors and limited partners alike, framing it as a powerful deferred tax strategy.
DJ Van Keuren, drawing on his extensive experience with family offices and his role in conducting the largest family office real estate investing study globally, corroborated multifamily’s dominance in institutional portfolios. He noted that multifamily’s accessibility and ease of understanding are key factors for these sophisticated investors. Van Keuren also highlighted the risk mitigation inherent in a large unit count, where a single vacancy has a minimal impact on overall occupancy. He further linked the sector’s growth to broader economic trends, such as the rising cost of homeownership and student loan burdens, which have increased demand for rental housing, particularly in areas experiencing job growth and affordability.
Ashley Tison echoed these sentiments, focusing on the scalability and efficiency of multifamily investments. He described how condensing residents into a concentrated area minimizes infrastructure needs and operational complexities compared to managing dispersed single-family units. Tison expanded this concept to include other forms of housing, such as mobile home parks and RV parks, which share the core multifamily principle of efficient unit management. He also introduced the "green" or environmentally friendly aspect of multifamily, suggesting that denser housing developments contribute to reduced urban sprawl and can be a compelling argument in local planning discussions.
Navigating Tax Advantages and Investment Structures
A significant portion of the discussion revolved around the tax advantages that enhance the attractiveness of multifamily investments. Ashley Tison provided an in-depth overview of Opportunity Zones (OZ), a tax incentive program designed to spur economic development in distressed communities. He explained how OZ investments can defer capital gains taxes, and under certain conditions, eliminate them entirely, along with depreciation recapture. Tison illustrated the potential for increased Internal Rate of Return (IRR) through OZ investments, noting it can add approximately 3% to an investment’s profitability. He contrasted the potential of a 3% cap rate deal versus a 6% cap rate deal when enhanced by OZ benefits, highlighting the significant financial uplift.
DJ Van Keuren emphasized the pervasive underutilization of the 1031 exchange, a cornerstone of tax-deferred real estate investment. His research indicates that a substantial majority of families do not leverage this mechanism, often due to a lack of education. He stressed that 1031 exchanges allow investors to continue compounding wealth tax-free by deferring capital gains taxes on the sale of investment properties. Van Keuren also mentioned other tax credit programs, such as Low-Income Housing Tax Credits (LIHTC) and New Markets Tax Credits (NMTC), 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 funds raised originating from such exchanges. He pointed out that 1031 exchanges can be effectively implemented within syndication structures, allowing investors to transition from active property management to passive investment while deferring taxes and benefiting from the potential for a step-up in basis. This strategy is particularly appealing to those looking to exit legacy, actively managed properties for more passive, income-generating investments.
Current Market Conditions and Investment Opportunities
The panel then addressed the prevailing economic climate, characterized by higher interest rates. Andy Hagans posed the critical question: is 2023 a favorable time to invest in multifamily, or should investors hold cash for future opportunities? James Hance acknowledged that the era of cap rate compression is likely over, advising investors to focus on robust sponsors with strong operational track records, preferably vertically integrated and well-capitalized. He suggested that current market conditions, including potential property distress due to maturing debt obligations and refinancing challenges, are already creating opportunities for astute investors.
DJ Van Keuren noted that family offices, having learned from past market cycles, are strategically deploying "dry powder" rather than waiting for the market to fully rebound. He emphasized the importance of fundamental market analysis, including cost of living, quality of life, and demand drivers, stating that profitable investments can be made in any market if executed with diligence. Van Keuren cautioned about negative leverage scenarios and the potential impact of floating interest rates, urging investors to underwrite deals conservatively and stress-test them against adverse conditions, such as increased vacancy rates or higher interest expenses.
Ashley Tison, while acknowledging the need for practical considerations, maintained an optimistic outlook, particularly for investors utilizing Opportunity Zone funds. He highlighted that the time-bound nature of OZ investments often compels investors to deploy capital, thereby mitigating the risk of missing out on potential gains. Tison also pointed to the inherent value-add potential in many OZ locations, which can provide a buffer against market downturns.
Learning from Generational Wealth Managers
A significant segment of the discussion focused on the philosophies and habits of successful family offices that manage generational wealth. DJ Van Keuren offered insights into these ultra-high-net-worth entities, acknowledging that while wealth can be lost across generations, the core principles of successful investing remain consistent. He stressed the importance of patience, making well-informed decisions, and rigorously vetting partners and sponsors. Van Keuren advocated for thorough due diligence, including stress-testing investment scenarios and understanding potential downsides, and emphasized the value of referrals and strong professional networks.
Ashley Tison elaborated on the importance of intentionality in family wealth management. He shared an anecdote about a client who, after a substantial capital gain event, struggled with liquidity and tax implications. Tison underscored the need for careful planning and consultation with professionals to navigate such complexities. He also introduced the concept of establishing a family’s core values and mission statement, akin to a business’s strategic plan, to guide wealth preservation and distribution across generations, often formalized in a family constitution. This proactive approach, he argued, is crucial for preventing wealth erosion.
Andy Hagans, reflecting on the expertise of the panelists, underscored the importance of humility for investors. He noted that amassing wealth in one sector does not automatically translate to expertise in others, such as real estate. The most effective investors, Hagans observed, are those who recognize this and strategically surround themselves with talented professionals and reputable operators with proven track records, ideally having navigated multiple market cycles.
Conclusion and Future Outlook
The panel concluded with a rapid-fire question regarding the outlook for ground-up development versus value-add strategies in the current environment. James Hance favored value-add, citing personal risk tolerance and the complexities of ground-up development. Ashley Tison, however, leaned towards ground-up development within the Opportunity Zone framework, where it often meets the "substantial improvement" threshold for tax benefits. DJ Van Keuren offered a nuanced perspective, suggesting that the optimal strategy depends on specific property types, market conditions, and the potential for value creation, emphasizing that rigorous underwriting remains paramount.
The discussion at the Multifamily Investor Expo 2023 provided a comprehensive overview of multifamily real estate as a powerful engine for wealth development. Experts highlighted its inherent stability, income potential, and significant tax advantages. The panel also underscored the critical role of strategic tax planning, diligent sponsor selection, and a long-term, patient approach to investing, drawing valuable lessons from the disciplined practices of family offices managing generational wealth. As the market continues to evolve, these insights offer a roadmap for accredited investors seeking to build and preserve their fortunes through multifamily real estate.
