The Multifamily Investor Expo 2023, a prominent event for real estate investment professionals, recently hosted a dynamic panel discussion focused on leveraging multifamily properties for robust wealth development. Moderated by Andy Hagans of AltsDb and WealthChannel, the session featured insights from industry leaders Ashley Tison of OZ Pros, DJ Van Keuren of Evergreen Property Partners, and James Hance of Green Bison Capital. The experts delved into the multifaceted advantages of multifamily real estate, exploring its potential for long-term wealth creation, capital preservation, and tax efficiency, particularly for high-net-worth investors and family offices.
The panel, held as part of the broader expo designed to connect investors with alternative investment opportunities, underscored the enduring appeal of the multifamily sector. The discussion, available for viewing on YouTube, highlighted how this asset class continues to be a cornerstone of diversified investment portfolios, offering stability and predictable returns in an evolving economic landscape.
The Enduring Appeal of Multifamily Real Estate
The core of the discussion revolved around the fundamental reasons why multifamily properties remain a favored investment. James Hance of Green Bison Capital initiated the conversation by emphasizing the intrinsic value of a building where people fundamentally need to live. "People always need a place to live," Hance stated, pointing to the inherent demand that underpins the sector’s stability. He further elaborated on the advantages of scale, noting that a multifamily property with numerous units offers greater resilience against vacancy risks compared to single-family homes. This diversification within a single asset class contributes to more consistent cash flow, a critical component for wealth development.
Hance also highlighted the operational aspects that allow for value creation. "You can drive that value, and force appreciation through good operations of that asset," he explained, underscoring the ability of skilled operators to enhance profitability through efficient management and strategic improvements. Beyond operational gains, the tax efficiency of real estate, particularly depreciation, was a key theme. Hance noted that even as a limited partner, investors can leverage depreciation to offset tax liabilities, effectively creating a deferred tax strategy.
DJ Van Keuren, drawing from his extensive experience with family offices and his role at Evergreen Property Partners, echoed these sentiments. He referenced the annual Family Office Real Estate Investment Study, which consistently shows multifamily as the primary property type for family office investments. Van Keuren attributed this to its understandability and risk mitigation. He contrasted the stability of multifamily with other commercial properties, explaining that a single tenant vacancy in an office building can have a significant impact, whereas in a 100-unit multifamily property, a single vacancy represents a mere 1% occupancy decrease.
Furthermore, Van Keuren pointed to broader economic trends that bolster multifamily demand. He cited the rising cost of homeownership and student loan burdens as factors pushing more individuals towards rental housing. "The easiest way for that shelter is to rent," he observed, linking population growth in affordable, job-rich areas to increased demand for apartments.
Ashley Tison of OZ Pros, known for his expertise in Opportunity Zones, added another dimension to the discussion by framing multifamily as an environmentally conscious investment. He argued that consolidating housing in denser areas reduces urban sprawl and infrastructure demands. "It’s an ability for us to be able to consolidate the amount of sprawl that’s happening," Tison explained, aligning multifamily development with principles of sustainable urban planning and reduced environmental impact. This "green" aspect, he suggested, can be a powerful tool in navigating local zoning challenges and addressing community needs for housing.
Navigating Tax Advantages and Investment Structures
A significant portion of the panel was dedicated to exploring the various tax-advantaged wrappers and strategies available to high-net-worth investors in the multifamily space. Andy Hagans emphasized the importance of "triple net returns," focusing on what investors can take home after all expenses, including taxes and fees.
Opportunity Zones (OZ) emerged as a prominent strategy. Ashley Tison, as an OZ expert, detailed how the program allows investors to defer capital gains taxes by reinvesting those gains into qualified opportunity zones. He highlighted the four key benefits of the OZ program: deferral of capital gains, reduction of capital gains by up to 15% after five and seven years, respectively, and elimination of depreciation recapture upon disposition of the OZ investment after 10 years. Tison illustrated the financial impact, stating that OZ investments can yield an approximate 3% increase in Internal Rate of Return (IRR) compared to similar non-OZ investments. This enhancement can significantly boost returns, especially in a market where cap rates have historically been low.
DJ Van Keuren identified the 1031 exchange as another critical tax-advantaged strategy, noting that a substantial percentage of families do not utilize this mechanism. The 1031 exchange allows investors to defer capital gains taxes by reinvesting the proceeds from the sale of one investment property into a like-kind property. Van Keuren stressed the compounding effect of reinvesting these deferred gains, potentially turning a 15% return into a 21% return over time. He also mentioned other, less commonly known tax credits, such as Low-Income Housing Tax Credits and New Market Tax Credits, as avenues for tax-efficient investing.
James Hance confirmed the significant role of 1031 exchanges in capital raising for his firm, noting that approximately 20% of their capital over the past two years has come from 1031 investors. He also discussed how 1031 exchanges can be effectively utilized within syndication structures, allowing investors to transition from active property management to passive investment while deferring capital gains. This is particularly beneficial for individuals looking to divest from actively managed properties and seek the benefits of passive income and professional management.
Ashley Tison also provided a nuanced perspective on 1031 exchanges, particularly concerning estate tax implications. He cautioned that for individuals whose net estates approach $10 million, especially after the estate tax exemption is set to decrease in 2025, the step-up in basis at death associated with 1031 exchanges could lead to taxable gains above the exemption threshold. In contrast, he pointed out that Opportunity Zone investments freeze the value of the contributed capital against the estate, offering a potential estate tax advantage.
The panelists agreed that the optimal strategy often involves a combination of these approaches, akin to a "multifamily feast," as Hagans put it, with investors strategically employing OZs, 1031 exchanges, and other tax wrappers to maximize their after-tax returns.
Navigating the Current Market Environment: Opportunities Amidst Higher Interest Rates
A pressing question for investors in 2023 concerns the impact of higher interest rates on multifamily investments. James Hance acknowledged that the era of cap rate compression is likely over. He advised investors to be particularly discerning about the sponsors they partner with, emphasizing the need for vertically integrated, well-capitalized operators with proven track records and strong broker relationships. Hance suggested that the current environment, characterized by higher interest rates, will present opportunities, especially in distressed properties where current operators may struggle to refinance maturing debt.
DJ Van Keuren noted that family offices, having learned from previous market cycles, are strategically deploying "dry powder" rather than waiting for the market to fully rebound. He stressed the importance of fundamental analysis, including cost of living, quality of life, and demand in specific markets, regardless of market conditions. Van Keuren cautioned against a complete halt in investment, as opportunities can arise in any market. However, he highlighted a coming "reckoning" for operators, where performance will be a key differentiator. He also advised investors to underwrite deals with conservative assumptions, considering scenarios like increased vacancy rates or higher interest rates than initially projected.
Ashley Tison offered an optimistic outlook, tempered by the need for practical considerations. He emphasized the importance of "stress testing" investments, urging investors to consider worst-case scenarios. Tison pointed out that investors in Opportunity Zones, due to the program’s time constraints, often feel a greater impetus to deploy capital, which can lead to more bullish investment decisions. He also highlighted that the value-add component inherent in many OZ projects provides a buffer against market downturns.
Lessons from Family Offices for Long-Term Wealth Preservation
DJ Van Keuren shared insights gleaned from his work with family offices on building and preserving generational wealth. He acknowledged that the loss of wealth across generations is a common issue, underscoring the need for education and intentional planning. Van Keuren emphasized patience and disciplined decision-making as key tenets of successful family office investing. He noted that the illiquid nature of real estate necessitates a long-term perspective and a strong trust in partners. He also advocated for thorough due diligence on sponsors, including their ability to articulate and execute stress tests for their investments. Referrals and building trusted networks, he noted, are also crucial habits of successful family offices.
Ashley Tison elaborated on the importance of intentionality, drawing a parallel between the strategic planning that drives business success and the planning required for family wealth. He encouraged families to develop a "family constitution" that outlines core values and mission statements, guiding investment decisions and wealth transfer across generations. This proactive approach, Tison argued, is essential for ensuring that wealth not only accumulates but is also managed responsibly and passed down effectively.
Andy Hagans concluded by reinforcing the idea that true wealth development, particularly generational wealth, requires humility and a recognition of one’s limitations. He stressed the importance of surrounding oneself with expert advisors, like those on the panel, and partnering with reputable operators who have navigated multiple market cycles. This collaborative approach, he suggested, is the hallmark of sophisticated investors who aim for sustained success.
The panel concluded with a rapid-fire question on whether ground-up development or value-add projects hold better prospects in the current environment. James Hance favored value-add due to his preference for lower-risk opportunities. Ashley Tison, specializing in Opportunity Zones, leaned towards ground-up development to meet the substantial improvement threshold. DJ Van Keuren offered a more nuanced view, stating that the optimal strategy depends on the specific property type and market conditions, emphasizing that opportunities exist for both approaches if properly underwritten.
The consensus among the experts was clear: multifamily real estate, when approached with strategic planning, robust due diligence, and a long-term perspective, offers a powerful vehicle for wealth development and preservation. The insights shared at the Multifamily Investor Expo 2023 provided attendees with actionable strategies and a deeper understanding of how to navigate the complexities of this dynamic asset class.
