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Can Multifamily Real Estate Provide Inflation-Protected Returns?

Updated: Jun 28, 2023

Inflation? It can be a real headache for investors who want to protect their returns. Luckily, there's a solution that doesn't involve popping an Advil: multifamily real estate.


You might be wondering why, and this is why we love multifamily properties opposed to single-family residences, condos, etc with just 1 dwelling unit per location. Investing in these types of properties can provide returns that are protected from inflation. Here's how:


First, Rental Income is one of the primary sources of revenue for investors. Since rental rates tend to increase with inflation, investing in multifamily real estate means you can earn higher returns over time. According to the National Multifamily Housing Council, multifamily rental rates increased by an average of 3.8% per year from 1990 to 2020. That's higher than the rate of inflation, which averaged 2.2% during the same period. For a more recent and local analysis, Indianapolis, IN has seen one of the highest rental growth rates in the nation in the last 12 months at 7.3%, according to an article published by ApartmentList.com in February 2023! We are thankful to be based and primarily focused in this growing market.

Below is a great visual from fsinvestments.com to see how multifamily compares in rent-growth trends:



Long-term leases are another way investors can benefit from multifamily real estate. Most properties offer leases that range from six months to a year or more. These long-term leases provide investors with a stable income stream that is less likely to be affected by short-term fluctuations in the economy. Additionally, leases often have built-in rent escalations, which can help investors keep pace with inflation. As a part of our built-in lease document legal language, we incorporate provisions with rights to adjust rental income metrics mid-lease cycle such as utility bill backs like water, sewer, trash, etc if we see a dramatic increase in these expenses. To date, we have not needed to exercise this option, but at Focused Capital, we feel it's important to include for risk mitigation with the current economic environment.


Appreciation Potential is yet another benefit of investing in multifamily real estate to hedge against inflation. Real estate assets tend to increase in value over time, which means that investors can benefit from appreciation in addition to rental income. According to the National Association of Realtors, the median sales price of existing homes increased by 12.9% in 2020. This appreciation can help offset the effects of inflation and provide investors with a higher return on investment. Since multifamily apartment complexes are valued on a cap rate basis (more to follow on this topic in upcoming articles), when the NOI (Net Operating Income) increases as a result of revenue growth, the property value grows exponentially.

Investing in multifamily real estate can also provide diversification benefits to an investor's portfolio. Real estate investments have a low correlation with other asset classes, such as stocks and bonds. This means that real estate investments can help reduce the overall volatility of a portfolio and provide a more stable return.


However, as with any investment, there are risks associated with investing in multifamily real estate. It's important to do your due diligence and understand the potential risks before investing. Some of the risks can include:


Market risk: The performance of multifamily real estate is highly dependent on the local real estate market. Economic conditions, population growth, and job growth can all impact the demand for rental properties. It's important to analyze market data and trends before investing to ensure that there is strong demand for rental properties in the area. This is why we work diligently to only source assets that are in great areas with solid fundamentals.


Property management risk: Multifamily real estate investments require active management to ensure that the properties are well-maintained and tenants are satisfied. Poor property management can lead to higher vacancy rates, lower rental income, and decreased property value. Focused Capital only works with proven, reputable local property management companies to run each property efficiently. Focused Capital’s job is to asset manage - basically we “manage the manager”, by tracking KPI’s(Key Performance Indicators) on a weekly and monthly basis. We hold weekly conference calls with the property management companies to review each properties performance and trends.


Financing risk: Most real estate investments require financing, which can expose investors to interest rate risk and default risk. It's important to carefully evaluate financing options and consider the impact of rising interest rates on the investment. This is one of the most important factors. Since debt service is one of, if not THE largest expense to a property, its important that the type of debt is selected very carefully so it matches the business plan. To date, we have only utilized fixed rate loans at a moderate leverage percentage. Floating rate debt can be appealing in the short term, but can also lead to problems down the road if interest rates rise quicker than anticipated.


Despite the risks, investing in multifamily real estate can provide investors with a stable source of income and protection against inflation. At Focused Capital, we specialize in real estate syndication opportunities that provide our investors with superior risk-adjusted returns. Our team and advisory panel has a wealth of experience in multifamily real estate investments and we use our expertise to identify opportunities that meet our strict investment criteria.

We're committed to providing our investors with the highest level of transparency and communication. We provide regular updates on the performance of our investments and work closely with our investors to address any questions or concerns.


Our investment approach is all about finding multifamily properties that have strong potential for cash flow and appreciation. We look for properties in areas with strong job growth, population growth, and other economic indicators that suggest a strong demand for rental properties. We also focus on properties that are well-maintained and have a strong history of rental income.


Once we identify a potential investment opportunity, we conduct a thorough due diligence process to evaluate the property and assess the potential risks and returns. This includes a detailed analysis of the local real estate market, a review of the property's financials and operating history, and an assessment of the property's physical condition.

If we decide to move forward with an investment, we work closely with our partners to manage the property and maximize returns. This includes implementing a proactive property management strategy to ensure that the property is well-maintained and tenants are satisfied. We also work to identify opportunities to increase rental income through targeted renovations and other improvements.


At Focused Capital, we're not just about numbers and data. We understand that investing in multifamily real estate is a big decision that requires trust and transparency. That's why we work hard to build strong relationships with our investors and provide them with the information and support they need to make informed decisions.

In conclusion, investing in multifamily real estate can be a smart way to protect your returns from inflation. Rental income, long-term leases, and appreciation potential are just a few of the benefits that make multifamily real estate a compelling investment opportunity. Of course, as with any investment, there are risks to consider. That's why it's important to work with a reputable investment firm that has a proven track record of success.

Investing in multifamily real estate might seem intimidating, but it doesn't have to be. With the right guidance and expertise, you can achieve your investment goals while protecting yourself from inflation.


If you would like to learn more about passively investing in multifamily, please set up a meeting with us by emailing info@focusedcapital.com, and download our ebook "The 11 Must-Avoid Mistakes When Investing In Multifamily Real Estate Syndications" HERE.





Chad Schieler

Focused Capital

Founder | Principal



 


 


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