Hedge Against Inflation
With inflation on the rise, the costs of goods and services are increasing for most people, and the same holds true for their largest expense - housing. As multifamily investors, we play an important role in this as we can ensure that these residents are receiving a good value for their monthly housing expense, while ensuring it remains competitive with the local market. In return, our revenue stream increases with the inflation, while our mortgage payment remains fixed. The outcome; inflation allows rents to increase - increasing our net income stream, while our debt balance decreases - providing additional returns through the increased equity in the asset. Investing in appreciating hard assets is a great hedge against inflation.
Economies Of Scale & Valuation
Multifamily assets with more than four units are classified as commercial real estate and their valuation is based upon their net operating income. This allows the operator of the asset to increase their market value by improving net operating income, similarly to any other business model. The larger the asset, the more efficiently they can operate, by leveraging resources and minimizing overhead costs per unit, enabling it to deliver superior returns.
Beats The Stock Market
When comparing the stock market returns to those of multifamily real estate, there are several things to factor in. The true returns of the stock market are less than they seem, after you deduct fees, taxes and inflation. Those costs vary by the individual investor but greatly reduce the actual returns. Multifamily real estate routinely yields an average annual return of 13% or more and that’s after fees, it is also taxed at a much lower rate, if at all (using depreciation and other provisions outlined in our tax codes), and keeps up with inflation through the appreciation of the asset, the increase in equity through the amortization of the associated debt, and the increase of the income stream.
Low Volatility During Recessions
Over the past decades, multifamily assets have been less volatile than residential properties and the stock market. During the 2008 recession, residential loan delinquencies peaked at 4%, however multifamily loans averaged around 0.4%. Based on those numbers, multifamily assets' performance was 90% higher than the single family assets over that period.