Investors who are looking for greater diversification and the potential for a steady stream of income may consider adding multifamily real estate to their portfolio. While there are many different property types available to investors, multifamily properties have remained a consistently popular asset class for years.
Often referred to as “Apartments,” multifamily assets may be an attractive option for investors seeking an alternative source of income beyond traditional fixed income securities. In addition, privately owned multifamily properties generally have a lower correlation to publicly traded securities, which can help diversify an investment portfolio and potentially reduce volatility. These characteristics often make multifamily properties an appealing option for 1031 exchangers seeking a replacement property.
What is a Multifamily Investment Property?
As the name suggests, multifamily properties house multiple families in a single location. Technically, any residential property that contains more than one rental unit (each with its own kitchen and bathroom) is considered a multifamily property. This is true whether the units are located side-by-side or stacked within the same building.
As mentioned, the most common type of multifamily investment property is the apartment complex which the industry generally recognizes as being one of three types – garden style, mid-rise or high-rise.
Are Multifamily Properties a Smart Investment?
Recent studies show that 36% of U.S. households are currently renting their homes. Overall, homeownership is on a downward slide. The recent sharp uptick in home prices has impacted a whopping 39% of potential would-be homebuyers who earn more than $50,000 annually, by pricing many of them out of the housing market.*
In addition, a greater number of higher-income Millennials are choosing “lifestyle renting.” This phenomenon refers to a preference towards the flexibility and amenities provided by upscale rental units over the desire for home ownership. The allure of an all-inclusive location with all of the amenities you could want located in your apartment building, is quite enticing when considering where you would like to live and what you’re willing to spend. The demand for rental units is further fueled by retiring baby boomers, many of whom are selling their homes and moving into adult-only multifamily housing.* These housing developments work well for the outdoor maintenance-free requirements with the camaraderie and lifestyle amenities to entertain a retired renter.
Potential Challenges of Multifamily Investing
While multifamily properties may provide investors an alternative source of income and the potential for appreciation, the task of actively managing these properties may be too burdensome for many.
In additional large multifamily properties generally carry a high price tag and the large upfront investment may put them out of reach for most investors. The good news is, there is another strategy available to investors who want to own multifamily properties. If suitable, one can add multifamily properties to their portfolio by investing in alternative investments such as a Delaware Statutory Trust (DST). The DST is a passive investment option that typically requires a much lower minimum investment because investors own a fractional interest in the property along with other investors. DSTs provided investors the opportunity to own institutional quality multifamily assets, completely managed and operated by professional companies.
A DST that holds multifamily properties provides all the benefits discussed above without the hassle of active management. A DST also can provide significant opportunities for diversification because it can hold different types of multifamily in multiple locations.
1031 Exchange into a Multifamily DST
If you are an accredited investor who currently owns an investment property and are ready to replace it with a multifamily investment, a 1031 DST may be a viable option. This allows you to have access to all the potential benefits of a multifamily DST while also deferring your capital gains and depreciation recapture taxes.
To learn more about this investment strategy or explore replacement properties currently available in our inventory, contact us today. Our 1031 exchange professionals are available to answer your questions and help guide you through every step of the exchange process.
3 https://www.sayrhino.com/blog/posts/baby-boomers-renting and https://www.newspressnow.com/news/local_news/business/baby-boomers-becoming-larger-part-of-rental-market/article_c4a68dce-65a4-11eb-836d-67afdf7acd0d.html