Multifamily assets have a place in a well diversified investment portfolio. In 2010 we continue to survive the “great recession”. Last spring, the Dow dropped nine percentage points in one day only to bounce back up the next day. High unemployment persist. Yet people will always need a place to call home.
Food and Shelter- kind of important
Why should you want to grow your multifamily portfolio? Because it will help to feed your family in more ways than one.
I worked in Virginia sometime ago. There was a little breakfast/lunch restaurant in the basement of our office building that was good for a quick meal. The owner was always happy to see her customers.
I asked her once how she seemed to always be happy even though working in a basement every day with no sunshine. Her response was; “I am very happy to feed my customers because they help me to feed my family, and that makes me very happy”.
Diversification, Scale, Liquidity and Yield
So how can owning apartments help to feed your family? Partly by offering diversification, scale, liquidity and yield, all playing their part to enhance the whole of the investment.
One can be diversified by asset type (stocks, bonds, real estate, etc) and also by geography (by region, country or hemisphere). Multifamily is an important asset class that offers diversification by geography and quality.
Having scale in apartments means spreading fixed costs over additional units with limited impact on marginal costs. Example: adding 100 units to a portfolio of 400 units in the same city will not increase management costs by 25% in a centralized management system.
Of the major asset classes within real estate (office, industrial, retail and multifamily) I would argue that multifamily is the most liquid. This is one of the most compelling reason to invest in this asset class. Add geographic diversity and risk is further diluted.
Yield is a function of risk. Risk is best controlled by direct management control. The better the management, the more impact management will have on yield. Spending money on management is not just an investment/expense. It is an investment/investment in quality control and risk management.
Portfolio Size Matters
In multifamily ownership, economies of scale play an important role in controlling costs and in creating expansion opportunities. Banking relationships, professional service providers and others will sometimes determine pricing and service levels based on the volume of business they are generating from your umbrella of holdings.
Portfolio allocation theory suggests that an investment portfolio should have between 5% and 15% of assets in real estate (excluding your personal residence). Thus, investors should have between $50,000 and $150,000 in real estate for every one million dollars in net worth.
Investment Real Estate Provides Yield
Behold, the yield generators! They are:
- Income – as derived from rents or other ancillary income generated
- Tax shelter – provided by depreciation of the physical asset over time
- Appreciation – from increasing rental revenue over time
- Mortgage pay down – using rental income to decrease mortgage debt
Multifamily is not the only alternative investment to stocks and bonds but it is a sound, solid asset class with legs and less volatility than commodities, oil and gas or pork bellies.
Multifamily assets may not be all that exciting or sexy (any more than that basement restaurant). But apartment ownership, when applied with skill, will be there to feed your family as your investment provides a roof for others to live under.