Over the 25-year period from 1992 through 2017, multifamily real estate provided the highest average annual total returns of any commercial real estate sector with the second-lowest level of volatility, according to research cited in a 2018 report by CBRE.
At DiversyFund, we choose to invest in multifamily apartment buildings. Multifamily real estate is an attractive investment option for many reasons. Here are some of the main ones:
Multifamily commercial real estate has experienced 3-4X fewer down years than the stock market, making it a low-volatility asset class. Investing in multifamily real estate does not see the ups and downs of the broader market.
The demand for larger accommodations, new homes, and luxury places decreases in a market downturn, making multifamily an obtainable option for many.
More cash flow means less risk. For example, if there is a 100-unit multifamily property, yet 5 of those units were unoccupied and therefore not generating rent, the ownership still has 95 other units generating cash flow. In comparison, with a single-family investment, if your one tenant moves out, then your one source of cash flow is now gone or on hold. Vacancies that occur in multifamily REITs are less problematic because they are offset by the numerous other units that are still occupied.
Another attractive feature of multifamily real estate is that the demand is high and the forecast is for that demand to remain high. A bad market can increase the demand for multifamily housing. This is because this type of housing is attractive for those downsizing and/or looking to lower their monthly bills. Furthermore, the decrease in new construction in an economic downturn will increase the demand for already-built multifamily buildings.
Multifamily benefits from overall demographic trends as well. Millennials and Baby Boomers are among the largest groups of people renting. Baby Boomers will often downsize to an apartment because to save money and for the benefit of less upkeep. The youngest millennials and now even Gen Z are also renting heavily as they’re entering the workforce and as home prices remain high.
Statistics also demonstrate the robustness of this investment type. Multifamily REITs saw average returns of 12.23% from 2008 to 2018. In comparison, overall REITs seeing returns of 8.4% over the same time period.
Arming your portfolio with defensive investments like multifamily REITs will elevate your financial standing and help you create wealth. In the event of an economic downturn, the smartest plan is to be proactive with your investments. This way, you can ensure your portfolio is prepared to weather any storm.