When building your real estate investment portfolio, you have many property types from which to choose —industrial, commercial, residential, multifamily, and many subgroups within those categories. There are numerous advantages to investing in luxury multifamily real estate, as opposed to other types. If you are looking to add stability to your portfolio and gain a dependable income stream, investment in luxury multifamily properties could suit your needs well. Bear in mind, however, that it requires a comparatively large investment. Therefore, seeking the advice of a real estate investment professional early in the process may improve your investment strategy.
Considerations for Investing in Luxury Real Estate
The decision to include one or more luxury multifamily properties among your holdings will be based on a number of factors. Leaving aside questions of property management, which the investor might not attend to personally, benefits include ease of financing, low overhead costs, and stability during economic downturns. That is to say, it is somewhat less challenging to get a commercial mortgage for a multifamily property, operations enjoy economy of scale, and when residents are forced to cut costs, their apartments are usually the last to go. Because of this stability, multifamily holdings will often lower the overall risk associated with your portfolio.
Keep in mind, though, that multifamily real estate requires a relatively large investment. While the returns should be proportionate, small investors or beginning investors might want to consider another option, such as a single-family property. The multifamily market is much smaller than the single-family market, which can lead to fiercer competition for properties. Because of the large investment and small market, as well as the complexity of evaluating a property, the multifamily market is, for the most part, dominated by seasoned investors, including corporate and institutional investors.
Multifamily housing is divided into A, B, and C property classes. Class A, the highest class, nearly always reflects the newest properties and those only slightly older that are well furnished with in-unit and communal amenities. Luxury housing, the high end of Class A, offers the most impressive amenities and the best locations, such as city centers. Class A housing also has the lowest cap rate, which is a measure of profitability, but holds its value longest. This means that investing in luxury housing is the best way to receive long-term steady income. Conversely, a Class C property has the potential to generate more income, but can also represent a considerably higher risk investment.
What Powers the Luxury Multifamily Market
To hold its value and be a sound investment, a luxury multifamily property must remain in demand. Due to the steep pace of building in recent years, the competition for new residents is high in the luxury segment in many markets, but demand is not drying up.
In this strong economy, the wealthy are not curtailing spending, and even though analysts are looking closely for any signs that millennials will increase their home buying, it is not happening on a meaningful enough scale to shift the demand curve—millennials like apartments. The real power behind the luxury market is retirees. Far-reaching research done in 2017 shows that a “silver tsunami” will hit the luxury market as Baby Boomers, born between 1946 and 1964, begin to downsize and seek living environments more conducive to their changing lifestyle.
Rent growth has slowed in some luxury multifamily housing markets because of overbuilding, but with a resident base that is clearly growing, the market has a promising future. Since real estate is a long-term investment under many circumstances and there may be opportunities available before the market fully recovers, this is not a bad time to enter the market.
Luxury multifamily real estate is a promising investment. And the amount of your investment could vary widely, from the high cost of an entire complex to a somewhat more modest outlay for a share in a REIT or a private equity firm. Choosing a market to invest in could be challenging, too. Experience and knowledge will help you make the best choice; so, consulting with professionals is recommended.
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.
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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.
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