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 brought together three distinguished 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 industry leaders delved into the multifaceted ways in which multifamily real estate serves as a robust vehicle for wealth creation and preservation, offering insights valuable to both seasoned investors and those new to the asset class.
The discussion, captured and available for viewing on YouTube, underscored the enduring appeal of multifamily properties in today’s dynamic investment landscape. The panelists, each with unique perspectives shaped by their extensive experience, highlighted the fundamental strengths of multifamily as an investment.
The Intrinsic Value and Stability of Multifamily Investments
James Hance of Green Bison Capital opened the discussion by emphasizing the intrinsic value and stability inherent in multifamily real estate. "It’s the intrinsic value of a building, and it’s where people have to live," Hance stated, underscoring the non-discretionary nature of housing. He elaborated on the stability derived from a diversified tenant base within a single property, contrasting it with the greater volatility of single-family rentals. "The cash flow is there. You can get value out of the income," he added, pointing to the asset’s ability to generate consistent returns. Furthermore, Hance highlighted the potential for "forced appreciation" through effective property management and operational improvements, a key differentiator for astute investors.
Beyond operational advantages, Hance stressed the significant tax efficiencies afforded by multifamily investments. "The tax efficiency is there as a direct investor," he noted. "As opposed to owning a paper asset, you can really take great advantage of what real estate provides, which is depreciation." This depreciation, he explained, can be used to offset tax liabilities, effectively acting as a "deferred tax strategy." For limited partners, this means enjoying tax benefits without the burdens of active management.
Multifamily’s Dominance in Family Office Portfolios
DJ Van Keuren, whose work with the Family Office Real Estate Institute provides unique insights into the strategies of ultra-high-net-worth investors, confirmed the overwhelming popularity of multifamily among family offices. "Multifamily has continued to be the main property type for families to invest into," Van Keuren reported, citing data from the institute’s annual studies. He reiterated Hance’s points about the asset class’s understandability and risk mitigation capabilities. "You’re also able to mitigate your risk on having so many units," he explained. "So, 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."
Van Keuren also linked the growing demand for multifamily to broader economic trends. "With the way that student loans have been so expensive or has caused a lot of people not to be able to buy a home, homes have really gone up in price over the years. And so, you know, the easiest way for that shelter is to rent." This trend, he added, is particularly evident in areas experiencing population growth and job creation, where apartments represent the most accessible and affordable housing solution. The stability of multifamily during economic downturns, a point also noted by Andy Hagans, further solidifies its appeal for capital preservation, a critical objective for generational wealth building.
Scalability and Environmental Benefits of Multifamily
Ashley Tison of OZPros, known as "The OZ Sherpa," brought a unique perspective on scalability and the often-overlooked environmental benefits of multifamily investing. "It’s the opportunity to be able to scale and to scale effectively," Tison asserted. He described how multifamily allows for the consolidation of a large number of residents into concentrated areas, which can lead to more efficient infrastructure utilization and reduced sprawl. "It’s an ability for us to be able to consolidate the amount of sprawl that’s happening," he explained. "It’s also the ability to be able to effectively manage that with significantly less infrastructure." This efficiency, he argued, is a direct contrast to the dispersed nature of managing numerous single-family rentals.
Tison further extended this concept to other forms of rental housing, such as mobile home parks and RV parks, and even developments of single-family homes intended for rental, all of which align with the core principle of condensing housing needs. He also highlighted how multifamily developments can contribute to a more sustainable urban environment by potentially reducing reliance on personal vehicles and promoting the use of public transportation.
Navigating Tax Advantages: Opportunity Zones, 1031 Exchanges, and Beyond
A significant portion of the discussion revolved around the tax advantages available to multifamily investors. Ashley Tison elaborated on the powerful benefits of the Opportunity Zone program, explaining how it can defer capital gains taxes, eliminate depreciation recapture, and ultimately lead to a significant increase in Internal Rate of Return (IRR). He noted that for investors looking to reinvest capital gains, Opportunity Zones offer a compelling wrapper that can enhance returns by as much as 3% on an annualized basis, particularly when combined with the inherent benefits of real estate investments.
DJ Van Keuren underscored the widespread underutilization of the 1031 exchange, stating that a significant majority of families do not leverage this crucial tax deferral strategy. He explained that 1031 exchanges are instrumental in allowing investors to "continue to grow your gains and having a compounding effect," effectively allowing capital to grow tax-deferred over multiple transactions. He also mentioned other, less commonly known tax credits such as Low-Income Housing Tax Credits and New Markets Tax Credits, as well as emerging opportunities in carbon credits.
James Hance corroborated the significant capital flow into multifamily investments via 1031 exchanges, noting that approximately 20% of the capital his firm has raised comes from these exchanges. He also highlighted the possibility of utilizing 1031 exchanges within syndication structures, allowing investors to transition from active property management to passive investment while deferring taxes. This is particularly beneficial for individuals who have inherited or managed properties and wish to shift to a more hands-off approach.
The panelists also touched upon the nuances of estate planning and how different tax strategies interact with evolving tax laws. Ashley Tison raised a critical point regarding the estate tax exemption, which is scheduled to decrease significantly after 2025. He explained that while a 1031 exchange offers a step-up in basis at death, thereby potentially reducing future estate tax liability, Opportunity Zone investments offer a unique benefit by freezing the value of the contributed capital against the estate, regardless of future appreciation. This distinction, he noted, is crucial for individuals with substantial net worth approaching the new exemption thresholds.
Market Conditions in 2023: Opportunities Amidst Higher Interest Rates
The conversation then shifted to the current market environment, with a particular focus on the impact of higher interest rates. James Hance acknowledged that the era of cap rate compression is likely over, emphasizing the increased need for investors to be "particularly astute" in their due diligence, especially concerning the sponsor’s operational capabilities and financial stability. He pointed to an emerging wave of distressed properties due to maturing debt and refinancing challenges, suggesting that 2023 presents significant opportunities for well-capitalized investors.
DJ Van Keuren echoed this sentiment, noting that family offices, having learned from past market cycles, are actively positioning themselves with "dry powder" to capitalize on current opportunities. He cautioned against a complete withdrawal from the market, stressing the importance of fundamental analysis of specific markets and the ability to generate returns regardless of market direction. Van Keuren highlighted the potential for negative leverage and the increasing scrutiny on floating-rate debt, predicting a period where the strength of operators will be more evident. He advised investors to stress-test their assumptions, considering scenarios of increased cap rates and vacancy rates.
Ashley Tison added that while his focus on Opportunity Zones often involves ground-up development, which carries its own set of risks, the inherent demand for housing and the potential for value creation in these designated areas remain strong. He also noted that the time constraints imposed by the Opportunity Zone program encourage investors to deploy capital, creating a sense of urgency that can lead to strategic investments.
Learning from Generational Wealth Management
In a segment dedicated to long-term wealth building, DJ Van Keuren offered invaluable lessons from successful family offices. He emphasized the importance of patience and making good decisions, acknowledging that while some families struggle to maintain wealth across generations, the fundamental principles of sound investment remain constant. He stressed the illiquid nature of real estate as a benefit, encouraging a long-term perspective and the cultivation of trusted partnerships with sponsors. Van Keuren also highlighted the critical role of quantifying risk through thorough stress testing of potential investments.
Ashley Tison shared an anecdote illustrating the pitfalls of impulsive decisions, particularly when dealing with significant capital gains and tax implications. He emphasized the need for caution and a clear understanding of the rules governing tax-advantaged strategies to avoid costly mistakes. Both Tison and Van Keuren stressed the paramount importance of education and building strong relationships with experienced professionals, not only for the current generation but also for future heirs to ensure the preservation of wealth.
Andy Hagans concluded by reinforcing the idea that true wealth management requires humility. He noted that even highly successful individuals in one industry may not be experts in another, such as real estate. The wisest approach, he suggested, is to recognize this and to surround oneself with talented experts – financial advisors, legal professionals, and experienced real estate operators – who can provide the necessary guidance and execution. This collaborative approach, he posited, is the hallmark of effective generational wealth stewardship.
The panel at the Multifamily Investor Expo 2023 served as a comprehensive guide to leveraging multifamily real estate for wealth development. The insights shared by Ashley Tison, DJ Van Keuren, and James Hance provided a roadmap for investors seeking to navigate the complexities of real estate investment, tax strategies, and long-term wealth preservation in an ever-evolving economic climate.
