Real estate investing offers an appealing way to diversify one’s portfolio. Among the categories of opportunity, one with extensive benefits is multi-family commercial real estate.
CBRE reported that “Multifamily weathered the 2020 recession better than most property sectors … and market deterioration was far less than in previous recessions.” They predict a full market recovery by early 2022.
Here, we define multi-family commercial real estate for curious investors, and show you the five main benefits of this type of investing.
The U.S. Census defines separate multi-family categories for buildings housing two families, three-or-four families, or five-or-more families. Multi-family housing falls into the commercial category, rather than residential, as long as a building has more than four units and is held for cashflow.
Multi-family commercial property may also fall into the mixed-use category. Mixed-use real estate combines housing, e.g. apartments, with other types of commercial property such as retail, office or restaurant. Typically the housing units make up the majority of the square footage. A mixed-use development may be new construction or a rehabilitated existing building.
Multi-family residential developments are classified from Class A (highest rental rates) to Class C (lowest rental rates). The classification takes into account the location, age of the property, tenant income levels, growth prospects, appreciation, and building amenities.
Multi-family and mixed-use real estate is growing in popularity, both with renters and with municipalities looking to attract them. It often provides the most affordable option for people at various stages of their lives, particularly in markets where homeownership lies out of reach for the middle class.
CBRE predicts that Class B assets will experience the lowest vacancy rate and fastest growth of any real estate class in 2021.
There is increasing demand for co-living spaces, in particular, both among residents and investors. Renters get better quality for their money, while owners are able to charge more rent per unit for increased income.
This brings us to the reasons to invest in multi-family commercial real estate. Investors stand to reap a number of benefits.
Investing long term in the stock market, you can expect a 7-8% return based on historical performance. From 1992 through 2017, multi-family real estate provided an annual return of 9.75%, the highest of any commercial real estate sector. With smart investments in a strong real estate market, it’s possible to see a return in the range of 10 to 12%. Through real estate investing, you can improve both overall returns and current cash flow compared to stocks and bonds.
Real estate offers an alternative for those unwilling to withstand the volatility of the stock market. While Class A, or luxury real estate assets, may experience greater extremes in supply and demand in response to the economy, Class B and C assets are always in demand. You get more sense of control by picking and choosing which real estate developments to back, compared with letting someone else manage your trading. While no real estate investment is without risk, there is a level of predictability that goes along with a long term development plan, which provides great peace of mind to many investors.
The “downside” of all investments is capital gains tax. Real estate, however, is a unique asset class that allows tax efficient strategies through depreciation, 1031 exchange, and Opportunity Zones to reduce your taxable income and capital gain liabilities. Depreciation in real estate investments increases your current income by lowering your annual taxable income. 1031 Exchanges enable investors to reinvest real estate gains and continually defer payment of capital gain taxes. Another new incentive is Opportunity Zone investing, whereby investors ultimately decrease and even eliminate their capital gain tax liabilities.
Opportunity Zones, created as part of the Tax Cuts and Jobs Act of 2017, incentivize investors to develop real estate in some of the lowest-income communities in the U.S. When an individual invests in an Opportunity Fund with 90% of its assets in qualified investments, they can defer eligible capital gains until December 31, 2026 and earn a 10% reduction in their capital gains tax basis. Furthermore, if the investment is held for 10 years, the investor benefits from a 100% decrease in capital gain liability for the new investment’s appreciation. Speak to your tax advisor for specific guidance on how commercial real estate investments might impact your personal situation.
As with any investment, higher risk translates to higher reward. Commercial real estate withstands its greatest risks early in the development process, when feasibility, funding, zoning, and entitlements are all still in play. With an experienced real estate developer, you stand a greater chance of making it over these hurdles successfully. The results stand to pay off much greater than, for example, flipping a house or other forms of quick turnaround real estate investments.
Investing in affordable, multi-family rental properties is a great example of impact investing. In cities where housing costs are disproportionate to income levels, working families and middle class individuals struggle to find housing they can afford. When there is less housing than the population demands, or an aging housing stock that poses health and safety concerns, the discrepancy is even greater. Investing in rental property can make a positive impact on the community by giving residents better options for where to live and reducing their financial burden.
When you invest in one of our projects we seek to provide you with all of these benefits. Our deep knowledge of architecture, land use and entitlements positions us to make smart development decisions and make the most of your investment. We syndicate our own capital to mitigate risk. As an investor, you can make a difference in coastal communities of LA’s South Bay while realizing impressive cash flow and returns. Contact us today to get involved.