The Multifamily Investor Expo 2023, a premier event for real estate investment professionals, recently hosted a pivotal panel discussion focused on "Wealth Development Strategies with Multifamily." Moderated by Andy Hagans of AltsDb and WealthChannel, the session brought together 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 thought leaders delved into the multifaceted appeal of multifamily real estate as a cornerstone for building and preserving generational wealth, offering insights relevant to a wide spectrum of investors, from high-net-worth individuals to large family offices.
The core of the discussion revolved around why multifamily properties consistently emerge as a preferred asset class for sophisticated investors. James Hance initiated the conversation by highlighting the intrinsic value proposition of multifamily. "It’s the intrinsic value of a building, and it’s where people have to live," Hance stated, emphasizing the fundamental and enduring demand for housing. He elaborated on the stability derived from a diversified tenant base within a single property, contrasting it with the higher risk associated with single-family rentals or other commercial ventures. Hance also pointed to the consistent cash flow potential and the ability for investors to actively drive appreciation through effective property management and operational enhancements. Furthermore, he underscored the significant tax advantages inherent in real estate, particularly depreciation, which can offset taxable income, positioning multifamily as a powerful deferred tax strategy.
DJ Van Keuren, drawing from his extensive experience with family offices and his research through the Family Office Real Estate Institute, corroborated Hance’s points. Van Keuren noted that multifamily has consistently ranked as the top property type for family office investments over the past four years of his study. He reiterated the ease of understanding the asset class, a crucial factor for investors managing substantial portfolios. Van Keuren also highlighted how multifamily mitigates risk by diversifying occupancy, meaning the departure of a single tenant has a minimal impact on overall revenue. He linked the persistent demand for rental housing to broader economic trends, including the rising cost of homeownership and the ongoing impact of student loan debt, which collectively drive individuals towards rental accommodations, particularly in high-growth urban and suburban areas.
Ashley Tison, known for his expertise in Opportunity Zone investments, expanded on the scalability and efficiency of multifamily. He described how multifamily allows for the "consolidation of an enormous amount of people" within a concentrated area, leading to reduced infrastructure needs and more efficient management compared to scattered single-family rentals. Tison also presented a compelling argument for the environmental benefits of multifamily development, framing it as a more sustainable and less sprawling approach to housing. This "green" aspect, he suggested, could be a valuable tool in addressing community concerns and regulatory hurdles associated with new housing developments.
The Multifamily Advantage: Beyond the Fundamentals
The panel explored the strategic advantages that make multifamily so attractive, extending beyond its fundamental stability. For high-net-worth investors and family offices, the emphasis often shifts from gross returns to net returns—the capital that can be reinvested after all expenses, including taxes and inflation.
Tax Efficiency as a Key Driver:
The discussion extensively covered the tax advantages associated with multifamily investments, a critical component for wealth preservation and growth. Ashley Tison highlighted the power of Opportunity Zones (OZs) as a wrapper for these investments. He explained how OZs allow investors to defer capital gains taxes from prior investments, potentially eliminate depreciation recapture, and achieve tax-free growth on new investments held for the required duration. Tison provided a tangible example, stating that the OZ program can enhance an Internal Rate of Return (IRR) by approximately 3%, a significant boost when comparing a 3% cap rate deal to a 6% cap rate deal. This effectively doubles the return potential on the same underlying asset.
DJ Van Keuren emphasized the underutilization of the 1031 Exchange among family offices, with an estimated 80% not leveraging this powerful tool. The 1031 exchange allows investors to defer capital gains taxes by reinvesting proceeds from the sale of one investment property into a "like-kind" property. Van Keuren argued that consistent use of 1031 exchanges enables a compounding effect on wealth, as returns are reinvested without immediate tax liabilities. He also touched upon other tax-advantaged vehicles such as Low-Income Housing Tax Credits (LIHTCs) and New Market Tax Credits (NMTCs), as well as emerging opportunities like carbon credits, demonstrating the diverse tax strategies available within the real estate investment landscape.
James Hance shared his firm’s experience, noting that approximately 20% of the capital they have raised in the past two years has originated from 1031 exchanges. He further explained that these exchanges can be effectively executed through syndication structures, allowing investors to transition from active property management to passive participation in larger, cash-flowing deals. This offers a significant return on time investment, in addition to the tax benefits and potential for stepped-up basis at death.
Navigating the Current Market: Interest Rates and Opportunities in 2023
A significant portion of the conversation focused on the prevailing economic climate, particularly the impact of higher interest rates on real estate investment decisions. The question on many investors’ minds is whether the current market presents a favorable entry point or warrants a more cautious, cash-holding approach.
James Hance offered a nuanced perspective, stating that "the days of cap rate compression are over." He stressed the importance of rigorous due diligence on sponsors, favoring those who are vertically integrated, possess strong track records, and are well-capitalized. Hance anticipates a year of opportunities, especially for distressed assets and properties facing refinancing challenges due to rising debt costs. He noted that some properties are already coming to market because their current operators lack the capital or a viable plan to manage debt maturities.
DJ Van Keuren echoed this sentiment, observing that many family offices have been strategically holding "dry powder" and are now looking to deploy capital. Unlike previous downturns where investors waited until the market showed clear signs of recovery, families are now proactively seeking opportunities at the bottom of the cycle. However, he cautioned that fundamental market analysis—including cost of living, quality of life, and job growth—remains paramount. Van Keuren warned against negative leverage scenarios and the potential impact of floating interest rates, advising investors to stress-test their investments against adverse conditions, such as increased vacancy rates or higher interest expenses. He also highlighted that the current environment will be a true test of operator capabilities, distinguishing those who can navigate challenging markets from those who relied on a favorable market to succeed.
Ashley Tison acknowledged the general market apprehension but pointed out that for investors utilizing Opportunity Zone funds, there is an inherent time-bound imperative to deploy capital. This "clock" encourages action, often leading to a more bullish outlook. He also highlighted that value-add plays, particularly in Opportunity Zones, often have inherent upside potential due to the areas’ growth trajectories, providing a buffer against unforeseen market shifts.
Learning from Generational Wealth Builders: Family Office Philosophies
The panel then shifted to a discussion on the lessons high-net-worth investors can glean from the practices of successful family offices managing generational wealth. DJ Van Keuren emphasized the importance of patience and making well-informed decisions. He noted that while some families struggle with wealth preservation across generations, the underlying principles of sound investing—due diligence on sponsors, market analysis, and long-term perspective—remain constant regardless of investment scale. Van Keuren stressed the value of illiquid assets like real estate for long-term wealth building and the critical role of finding trusted partners and conducting thorough due diligence on potential sponsors, including stress-testing their investment theses.
Ashley Tison shared an anecdote about a client facing a substantial capital gain who initially invested in the market, only to see a downturn. This experience underscored the critical need for caution, professional guidance, and the ability to navigate unexpected market volatility. He stressed the importance of educating younger generations about wealth management and the necessity of building strong relationships with trusted financial advisors and asset managers. Tison also introduced the concept of developing a "family constitution" outlining core values and missions, which can guide financial decision-making and wealth distribution across generations, ensuring that the principles that created wealth are preserved.
Andy Hagans concluded this segment by emphasizing the humility required for successful wealth management. He noted that individuals who have achieved significant financial success in one field may not automatically be experts in another, such as real estate. The most effective investors, he suggested, are those who recognize their limitations and strategically surround themselves with talented professionals and quality operators with proven track records, ideally having navigated multiple market cycles.
The Ground Up vs. Value-Add Debate
In a rapid-fire closing segment, the panelists addressed the current outlook for ground-up development versus value-add strategies in multifamily. James Hance expressed a preference for value-add, citing his personal aversion to the longer timelines and higher risks associated with ground-up construction. Ashley Tison, however, leaned towards ground-up development within the Opportunity Zone framework, noting that it often better meets the "substantial improvement" requirement for OZ benefits. DJ Van Keuren offered a more contextual answer, stating that the optimal strategy depends on the specific property type and market dynamics, acknowledging that both approaches can present compelling opportunities depending on the underlying fundamentals and risk-reward profile.
The session concluded with a collective acknowledgment of the power of multifamily real estate as a vehicle for wealth creation and preservation. The experts underscored the importance of strategic tax planning, diligent sponsor selection, a long-term investment horizon, and the wisdom of seeking expert advice to navigate the complexities of the real estate market, particularly in the current economic environment. The insights shared at the Multifamily Investor Expo 2023 provided attendees with a comprehensive understanding of how to leverage multifamily investments for sustainable financial growth.
