Building an investment portfolio is one of the most important steps you can take toward retirement, and with the necessary due diligence and in the proper form, including multifamily rental property among your retirement investment options is often a wise move. Finding the right multifamily investment can strengthen your portfolio and maintain your investment income in most, if not all, economic conditions.
What Makes Multifamily a Good Retirement Investment Option?
Having real estate in your retirement investment portfolio is a good way to provide diversification and lower your overall level of risk. Real estate usually produces an income stream and, because its value is subject to market cycles that occur largely independent of the stock market or fixed income investments like bonds and ETFs, it can provide a generally reliable income stream when those markets are not performing well.
Real estate is also considered relatively stable. Because it tends to hold its value well, it’s a great place to invest money that you won’t need to touch for 10 years or more. Not only that, the income real estate provides tends to go up in times of inflation and, when managed by others, the income it provides is truly passive income. Multifamily rental property provides particular advantages in this regard. It is easier to finance than many other forms of real estate, as lenders are attracted to its high stability and economies of scale. Luxury multifamily housing is likely to hold its value the longest (appreciate) while providing a steady income.
Choosing the Best Multifamily Investment Option for You
There are several ways to invest in multifamily housing. The first is through individual direct ownership. While large multifamily complexes are almost never owned by one investor, small complexes often are. This suits some investors well, as they might make their complex into a family business. Management can be an issue for retiring owners of small multifamily complexes, however. If they have been managing the property themselves and want to turn those duties over to a management company, their income from the property will be drastically reduced.
Another way to invest in multifamily housing is through partial ownership of a large multifamily property (300 units). There are a number of advantages, including the high level of stability of this type of property and lower maintenance and management costs per unit.
Partial ownership of multifamily real estate can be obtained through a REIT (real estate investment trust) or a real estate investment management company. While there are major differences between the two, both are pass-through companies, which means they avoid taxation at the corporate level and the income they provide is taxed only as personal income. This is another advantage for retirees. They can also offer diversification by way of allocation of investments in different types of properties as well as geographic locations. Both provide vehicles to carry out 1031 exchanges that delay the recognition of capital gains in addition to providing a step-up in basis to market value in the case of the owner’s death.
A REIT may be a publicly traded company or a private one that is divided into shares. A REIT offers liquidity for an illiquid asset by offering to buy and sell its own shares or list the shares on a public exchange. The only way to 1031 exchange into a REIT is through an UPREIT, which requires an investor to contribute his or her property to the REIT in exchange for units in the UPREIT, which can later be exchanged for REIT shares (which may trigger a taxable event).
A real estate investment management company offers investors ownership in a property or a fund of properties by way of a limited partnership or LLC through a fresh cash investment. Income that is generated through these entities typically results in the offset of income tax liability due to depreciation, which can lower your tax liability. Since these offerings are generally private placements and illiquid, investors benefit by having a long-term perspective and by not selling when they are either fearful of the market or desire to make impulsive purchases. These entities can participate in 1031 exchanges as well, thus allowing the investor to defer capital gains and depreciation recapture when selling his or her share.
Real estate ownership as a retirement investment option is not without risks. Real estate investments can be cyclical and performance will vary with economic conditions. There is no assurance a REIT or investment management company will meet its objectives. There is a possibility that a 1031 exchange may not qualify under IRS provisions or may be challenged. Communities owned by individuals can be mismanaged. REITs and real estate investment management companies can pass through losses as well as income. Due diligence is necessary when making any investment, but when properly done, an investment in multifamily real estate can be a great benefit to you in retirement.
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.
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.