There may be many good reasons for new investors to invest in multifamily real estate. Multifamily is usually a stable long-term investment that may serve the farsighted young investor well with a steady cash flow and appreciation potential. If you are thinking, Should I invest in property?, consider the following and weigh your decision carefully. The first step you will take is to choose the type of investment property to acquire. There are benefits and disadvantages to all categories of investment property, and you should study them carefully.
Should I Invest in Luxury Multifamily Property?
There are distinct advantages to luxury multifamily real estate investing that you should consider, including:
Cash flow and appreciation. Multifamily is a relatively stable investment. Because housing is such a basic necessity, there is typically a demand for it. Additionally, the steady cash flow it typically provides generally will increase with inflation, if not at a faster rate.
Advantageous to a balanced portfolio. Multifamily market cycles are dependent on demographic changes and national and local economic conditions but have a low correlation to the overall stock market. Because of these characteristics, real estate investment can potentially increase safety and diversity in an investment portfolio.
Ease of financing. The comparative simplicity of mortgage financing means that, if you are able to make the down payment and you choose to use debt, you can purchase more real estate than you would have obtained with limited cash.
Tax advantages. Tax optimization through cost segregation and tax deferral using 1031 exchanges can be valuable tools for wealth preservation. Depreciation can also be used to the property owner’s advantage, making extra cash available sooner through bonus depreciation.
Potential Downsides of Real Estate Investments
The rosy picture of real estate investing can potentially be clouded by the risks that real estate investors—particularly new investors—face. For example:
The high cost of investing. Accessibility of financing does not equal affordability. You will be required to produce a hefty percentage of the cost of your asset as a down payment. If you are a new investor without an extensive credit record or other properties, you may have to pay high rates for your financing as well. Add to this the numerous fees that are paid in the course of a transaction.
Potential to overpay. You will have to find and value your investment property and negotiate its sale. These are daunting undertakings that require extensive knowledge and specific, highly developed skills that are acquired gradually through experience and education. Besides the risk of overpaying, there is also the chance that you will purchase a property that you cannot afford. Cash flow, operating expenses, and loan servicing have to balance in a way that meets your abilities and goals. Ensuring this requires sharp accounting skills and reliable data.
Not necessarily passive income. Property management will cost you a portion of the cash flow. You will have to seek a management company, too. You may have the ability and inclination to operate the property yourself and save that money, but then your investment has become a job.
Liability and loss risk. You will be able to form an LLC or similar business structure to limit your liability for your property to the amount you have invested in it. This protects your personal property in the event of catastrophic debt or an unfavorable court judgment. But it is still possible for you to lose the entirety of your investment.
Consider a Multifamily Real Estate Investment Management Firm
By investing with a multifamily real estate investment management firm, you can potentially mitigate some of the risks of multifamily real estate investing, while still potentially receiving many of the advantages. Beginners’ missteps can be avoided thanks to the high level of knowledge and skills of an experienced firm’s staff and quality property management is assured. At the same time, your share of the firm’s assets can still be used in a 1031 exchange. You can receive cash flow and your asset may appreciate in value.
At CWS Capital Partners, we are a fully integrated multifamily real estate investment management firm that offers everything from due diligence and multifamily real estate valuation to transaction support and property management. We specialize in assisting our clients with 1031 exchanges, acquisitions, repositioning, and development. We also own and manage luxury multifamily investment communities in major markets around the country and employ a team of experts who can help you hone your investment strategy.
For more articles like this one, check out our investment strategy blog posts.
Please contact us to learn more about investing with CWS Capital Partners, or view our current offering by completing our self-certification form for accredited or qualified investors.
The information provided here is for your general informational purposes only. It should not be considered a recommendation or personalized advisory advice. CWS has made this third party information available from authors it believes are knowledgeable and reliable resources. However, its accuracy or completeness cannot be guaranteed and sentiment may change due to legal or economic conditions.
All investments involve risk including the possible loss of principal. You should familiarize yourself with all risks associated with any investment product before investing.
Advisory services are provided by CWS Capital Partners LLC, a registered investment advisor.
Securities offered by CWS Capital Partners LLC are through an affiliated entity, CWS Investments. CWS Investments is a registered Broker Dealer, member FINRA, SIPC.