Four Tips for HNW Investors Who Want to Buy Multifamily Assets

In a new report, commercial real estate company CBRE says workforce housing represents “an appealing investment strategy” in 2019 thanks to a favorable supply-and-demand balance. As such, that high demand promises to generate gains in rental rates next year for workforce housing units, CBRE researchers forecast.

The current climate for workforce housing, otherwise known as affordable housing, opens the door for HNWIs who want to pump money into the multifamily sector, but might be unsure about precisely where to put that money.

The multifamily sector continues to pique the interest of HNWIs, with NREI research showing it’s increasingly their go-to property type. In a 2018 NREI survey of HNWIs, 76.27 percent of respondents cited multifamily as their preferred property type, up from 69.13 percent in 2017 and 67.19 percent in 2016.

In the heavily favored multifamily sector, HNWIs should consider diving into workforce housing, commercial real estate professionals say, in large part because of the post-recession decline in the U.S. homeownership rate. HNWI investors should pay particular attention to class-B and class-C multifamily assets, experts say.

Class-B and class-C multifamily assets are expected to keep performing well, as vacancy rates remain low, according to Randy Hubschmidt, managing partner of Fortis Wealth King of Prussia, Pa.

For 2018, vacancy rates for class-B and class-C categories were projected to be 6 percent or below, compared with a 9 percent rate for class-A properties.

Multifamily investor Michael Blank adds that class-B and class-C multifamily assets are “super attractive” during down cycles, noting that both classes held their own during the Great Recession.

“Class-A apartments are the most competitive sector and have the highest likelihood of generating substandard returns over the next few years. Properties in prime locations with high-end finishes and amenities, while desirable, are also facing the most competition for tenants,” Hubschmidt says.

For HNWIs weighing investments in workforce housing, commercial real estate experts offer these four tips.

1. Think small

Blake Christian, a partner at accounting firm HCVT LLP in Long Beach, Calif., and others suggest investing in smaller, rather than larger, multifamily properties. Christian points to duplexes and fourplexes as a possibility, since many them need to be updated and, therefore, offer a value-add aspect.

“These smaller units are easier to manage and limit investor risk. Larger complexes will require more capital, more maintenance and more risk,” Christian says.

Along those lines, Dean Sigmon, co-director of the multifamily team at commercial real estate company Transwestern, recommends HNWIs investigate multifamily properties with less than 100 units.

HNWIs “shouldn’t try to compete with newer property types,” Sigmon says. “They won’t be competitive in the bidding process against more well-capitalized investors.”

Will Mathews, who leads the multifamily advisory group for the Eastern region of commercial real estate company Colliers International, cautions investors against jumping on a property just because it’s touted as value-add. Rather, he says, HNWIs should find assets with “genuine upside.”

“Depending on their internal return threshold, it’s important to secure a meaningful return and have the ability to push rents through a variety of income strategies, as well as efficiently operate the asset,” Mathews says.

2. Go with what you know

Even if a property manager will be hired, HNWIs should invest in multifamily properties that are a relatively short distance by car from where they live, Christian says. That way, they can keep a close eye on their investments.

“Out-of-state or out-of-area investing is not for the faint of heart,” he notes. “There are too many risks and added costs in such situations, but if you have reliable family members nearby to oversee the project, this can make sense in limited situations.”

3. Check out Opportunity Zones

Explore multifamily investments enabled by the federal government’s new Opportunity Zone program, recommends Peter Muoio, executive vice president and chief economist at real estate investment platform Ten-X Commercial.

Under this program, investors can realize tax benefits on accumulated capital gains through investments made in any of 8,700 economically distressed census tracts across the United States.

According to the Tax Policy Center, multifamily properties are eligible for Opportunity Zone investments. In previous federal programs designed to spur economic development, multifamily properties were excluded.

Marc Robinson, vice chairman of the multifamily advisory group at commercial real estate company Cushman & Wakefield, urges caution in approaching Opportunity Zone investments.

“Be prepared for your money to go long, and if you’re able to find an Opportunity Zone fund, it’s a great way to shelter the gains,” Robinson says. “Don’t get overly caught up in just looking for Opportunity Zone deals, though, and miss other opportunities. It’s a craze, but it’s not the only way to make money. And it ties up capital for very long periods to fully realize the gain.”

Nonetheless, Opportunity Zones are worthy of attention.

As noted by the Economic Innovation Group, a Washington, D.C.-based advocacy organization, the housing stock in the average Opportunity Zone has a median age of 50 years, more than 10 years past the U.S. median—“a sign that many of these neighborhoods urgently need reinvestment.”

4. Get a handle on the neighborhood

It’s critical to be aware of the characteristics of a neighborhood where a multifamily investment is being mulled, says Michael Ward, a commercial real estate attorney in the Atlanta office of law firm Culhane Meadows PLLC. This includes understanding the neighborhood’s demographics and figuring out what the neighborhood will look like in five to 10 years.

One of the factors to weigh: Will the neighborhood, and the multifamily properties within it, appeal to millennials or baby boomers?

Millennials tend to prefer urban mixed-use environments featuring ground-floor retail and multifamily above that, Ward says. However, some older millennials are gravitating toward the suburbs as more of them get married and start families.

“Younger workers are much more inclined to walk or use public transportation to get to their jobs, so proximity to schools, shopping areas and employers will yield a premium on rents,” Christian says.

As for baby boomers, many of them are downsizing and migrating from the suburbs to close-in areas outside big cities, Ward says.

“Ultimately, good real estate deals can be found in virtually any area of the U.S. based on the market segment,” he notes.