Alts Expo Will Be Held On December 8, 2022
Multifamily is gaining momentum toward becoming the largest rental asset class. It’s a stable asset with low interest rates and a hedge against inflation and other economic disruptions that’s creating investor demand. Not to mention tax advantages and portfolio diversification, the outlook for multifamily is distinctly promising.
Scott Hawksworth is a co-founder of MultifamilyInvestor.com and an entrepreneur based in Chicago. MultifamilyInvestor.com covers trends and opportunities in multifamily real estate investing and helps High Net Worth investors, family offices, RIAs and financial advisors, and industry service providers navigate the ins and outs of the multifamily landscape.
Click the play button above to listen to our conversation.
- What investment advantages will multifamily real estate produce for a portfolio.
- How to improve the profitability of multifamily assets.
- What are ways multifamily investors get ahead of the competition?
- Why multifamily properties can be more resilient than other asset classes amid ongoing economic uncertainty.
- How do opportunity zones offer multifamily investing in tax-beneficial ways.
- What is the location criteria for investing in multifamily real estate and what are other considerations when searching for multifamily properties.
Featured On This Episode
Industry Spotlight: MultifamilyInvestor.com
MultifamilyInvestor.com covers trends and opportunities in multifamily real estate investing and helps High Net Worth investors, family offices, RIAs & financial advisors, and industry service providers navigate the ins and outs of the multifamily landscape.
Learn More About MultifamilyInvestor.com
About The Alternative Investment Podcast
The Alternative Investment Podcast covers new trends in the alternate investment landscape. Hosts Jimmy Atkinson and Andy Hagans discuss diversification opportunities in the alts universe, including direct investments, DSTs, opportunity zones, private equity and more.
Jimmy: Welcome to The Alternative Investment podcast. I’m your host, Jimmy Atkinson.
Andy: And I’m your co-host, Andy Hagans.
Jimmy: Multifamily is the single most popular asset class for real estate investors, and it’s also an important piece of the larger alternative investment landscape. Joining us today is Scott Hawksworth, co-founder of multifamilyinvestor.com, a website that Andy and I are also co-founders and co-owners in. Scott joins us today from Chicago, Illinois. Scott, welcome to the show, buddy.
Scott: Thanks, Jimmy. Thanks for having me. Thanks, Andy, as well.
Jimmy: Yeah, thanks for being here with us, Scott. And let’s dive right in. Why multifamily? What do you like about that asset class for real estate investors? Give us the case.
Scott: Yeah, I love it, going right for the meat. When someone asks me, why multifamily investments? Really, I think there’s five points to consider. First is just that it’s this opportunity for an attractive total return, which includes, not only ongoing cash flow but also the potential for multiple liquidity events, which is really enticing for investors. Two, exposure to residential real estate, and we are in a period of housing shortages across the United States. So, the fact is, is that people need more homes than there are available, so getting exposure to that just creates tremendous opportunity. Then number three, I look at it because there’s always this concern people always have on their mind, 2008. They think about recessions, they think, you know, what’s gonna happen if the economy turns? Well, multifamily is an asset, which has proven to be the property sector that is most resilient to recessions. And that’s actually according to a CBRE study. So, when you’re looking at properties, multifamily actually gives you the best chance to have that resilience. So, I mean, I think that’s an incredible case right there. Then, you can look at the significant tax advantages, depending on the asset, and, of course, the investment wrapper. Jimmy, I know you’re very familiar with, for example, the opportunity zones wrapper that many multifamily properties are cased in. And then it can also function as a potential inflationary hedge, as real estate asset appreciation can outpace inflation. So, if you’re looking for a way to diversify your portfolio and really hedge against inflation, I argue that multifamily investments are one area to really consider. So, if you’re asking why, those are kind of five of my big points there.
Andy: Yes. So, there’s a lot to digest there. Obviously, investors are always starting with returns, right? Investors want alpha, they want total return, and I think more and more. So, you mentioned a couple points there, you mentioned tax advantages and you also mentioned inflation. So, tying together three of your points, I want total return but I view it on a triple net basis, right? I want return net of fees, net of inflation, and net of taxes. So, you already mentioned how this asset class outperforms during periods of inflation. But let’s talk a little bit more about the tax advantages and go into a little bit of detail there, if we could, Scott. So, could you talk about, you know, some of the different wrappers that sponsors can wrap around multifamily assets that would be an attractive way for investors to increase their triple net returns?
Scott: Yeah, it’s a great question, Andy. When you’re talking about the tax advantages, so there’s a few direct tax benefits that you can see if you’re the property owner, or your direct investor there is you have depreciation, which, of course, owners and investors of multifamily properties are entitled to depreciate the value of their asset each year, which reduces that taxable income and that liability, so that’s a significant one. And then second, if you directly own that multifamily property, of course, you get those direct expense write-offs, which, you know, when you’re talking about repairs, utilities, insurance, premiums, maintenance, all of that, that’s some tax advantages there. But when you’re looking at the wrappers, which are really where I think the rubber meets the road, and a lot of the excitement in these investments is you have one, which, Jimmy, knows quite a bit about, and that is the Qualified Opportunity Fund. And, of course, that’s any investment vehicle that’s organized as a partnership or corporation for investing in these opportunities zones, which have numerous tax benefits. But the big one is, of course, the elimination of those capital gains taxes. And then you also have DSTs, which is, of course, the Delaware Statutory Trust, and, of course, that’s an investment, where it’s organized as a trust that generates passive income from real estate. And this allows investors to see the same capital gains benefits from a 1031 exchange without having to actively manage that replacement property. And active property management can bring its own challenges and headaches. So, for folks that are interested in getting that exposure but they don’t necessarily want to spend all that extra time actively managing it, you can have that benefit there.
Jimmy: Yeah. And, you know, and I know, there’s also some tax advantages to REITs, which are very popular wrapper, you know, to access multifamily real estate. But I think the two that you mentioned, specifically those two wrappers, Qualified Opportunity Funds, and Delaware Statutory Trusts, to me, those are the cream of the crop that offer the very best tax benefits, especially QOFs. I could probably talk about those and how good of a deal they are for investors for a long time, but I think most of our listeners have heard me give that speech before. So, I want to move on and talk a little bit about trends. We’re speaking now in January of 2022, I think this episode might be released in February of 2022. But, Scott, you’re very familiar with the multifamily market, and especially with funds of various kinds. What do you see as trends as we’re launching the year and maybe thinking forward towards the latter half of the year? Obviously, asset prices are very elevated. Do you see that trend continuing? What’s your outlook for 2022 in this space?
Scott: Sure. So, to start off, I mentioned at the top the housing shortage that we’re seeing here in the United States that’s continuing. And that is going to be a trend that is simply not going to change anytime soon. The fact is, is that we aren’t building enough homes to meet the demand. In fact, I got a little factoid here for you. On average, the U.S. built 276,000 fewer homes per year between 2001 and 2020, compared to the period between 1968 and 2000. So, it is just not pacing with demand at all. And in fact, construction…here’s another little factoid, construction of new housing in the past 20 years, fell 5.5 million units short of long-term historical levels. And that’s according to the National Association of REALTORS report. So, what you have here is a real imbalance, and what that creates is opportunity. And, Andy, you were talking about price appreciation for these assets, that is going to continue. And even though there has been cap rate compression, that is not deterring investors because the fact is, is that multifamily properties, multifamily investments are so resilient, and investors are still very interested in getting in on that.
Some other trends to look at, vacancy rates. That’s something that’s really big when you’re evaluating a potential multifamily investment. And low vacancy rates, of course, imply high demand for additional housing units. And as of 2020, 9.7% of housing was vacant, which was down almost 2% from 2010. So, vacancy rates are going down. So, again, that kind of feeds into that fact of, “Hey, there is a housing shortage and people need homes.” Another trend that I really see continuing is this population migration. And when you’re looking at multifamily investments, you’ll see a lot of new builds happening in different areas of the country, a lot of activity happening in the southwest. And that really creates even more opportunity because populations are shifting there, you have job growth, you have the need for workforce housing, and other types of housing that really, again, drive more opportunity. I think a lot of this too, has been driven by the environment we’ve had with the COVID-19 pandemic. And sort of the response to that you have a lot of folks who are maybe wanting to move to different areas of the country where things are a little more open, where maybe things are a little sunnier and warmer. So, you have that happening too. And I look to that to also continue, especially as we’re sitting here in January, as of this recording.
And, you know, here in Chicago, there’s still lots of uncertainty about will things shut down again, what will happen, so there’s a lot of people that are voting with their feet, so to speak, kind of tied to that is metro area growth. And again, we see particularly high demand for multifamily in metropolitan areas which are seeing significant growth. So, of course, that connects to, again, more opportunity. And then when you look at COVID-19, again, and not to beat a dead horse with it, but I do think it has impacted so many things, and multifamily is no exception. People now, we’ve had this sort of work-from-home revolution, so to speak, that’s happening. And more and more people have really reevaluated their homes and their living spaces because office space, there’s a lot of people that are saying, “Okay. Well, I’m not even going to come into the office, but one to two times a week, if at all.” And so what we’re seeing is more people wanting better living spaces, larger living spaces, and many of them do want to live in metro areas, still. I’ve got another little fact here. A recent industry report predicts that 36.2 million workers or 22% of Americans will be working remotely by the year 2025, and this is an 87% increase from before COVID-19.
So, we’ve created this whole new trend where you don’t necessarily have to go into the office. And, in fact, maybe you can have a job in one state, in one city. You could have a job in Chicago, but you’re working remotely and you’re living in Phoenix. And this has really created, again, massive opportunity. And it’s a trend that I look to see continuing. And then lastly, and Andy, I know you came on our show and we talked a lot about this, the inflationary landscape that we’re in. And I’ve mentioned it at the top multifamily does help act as that hedge to inflation, it can really create a lot of benefits there. And so I see that trend continuing. I actually have one last factoid here, I can tell I’m thrown a lot of numbers. But CPI was 13.5% during 1979, which was the worst year since 1947. And the dividend income from REITs, traded through the stock exchange averaged 21.2% that year, and total returns amounted to 24.4%. So, that was more than preserving for REIT investors, the purchasing power that they had lost to inflation. So, that’s just an example right there of how multifamily really presents resilience across many, many factors.
Jimmy: Awesome answer there, Scott. A lot of trends for us to unpack from your last response there. But suffice it to say, multifamily very durable, very resilient asset class for all the reasons that you cited. And then, you know, maybe second, most importantly, or possibly, more importantly, that is identifying the right markets. And so that goes into what you were saying about those demographic shifts that were already underway before the COVID pandemic hit, the shift of populations to the south, and to some of the sunbelt states, and areas of the country. And I think we’ve only seen that trend accelerate, as people are, as you put it, voting with their feet maybe they want to get out from under the thumb of the government that’s too restrictive in places like Chicago, or New York, or Los Angeles, and head to Phoenix, or head to Nashville, or head to Tampa, or head to Texas, right, stats, so. You also mentioned cap rate compression. We experienced quite a bit of cap rate compression in 2021 driven in large part because of interest rate declines, but also heightened rental rates. So, what do you see for cap rate compression in 2022, Scott, making a prediction? Do you think we’ll see more of the same? Or do you think we’ll get some decompression, some cap rate expansion?
Scott: I see more of the same, personally. I just think that the supply of cash I was just reading today, there’s more talk about well, will the government do some more stimuluses now that we have this new variant, or whatever? And I think that that is going to continue to impact cap rates. And you’re going to continue to see investors, not necessarily shying away because of that, because, again, you know, you were just talking about that resiliency. That’s not going to change the shape of the overall environment where multifamily investments, and I’m a bit of an evangelist, as you can tell, are still a fantastic opportunity.
Jimmy: Good. Good to know there, Scott, thanks for your prediction there. We’ll keep an eye out on that. Well, I want to turn our attention now to your latest project that, as I disclosed in the intro that Andy and I, the hosts of the show are also co-owners in, just to make that clear. But tell us a little bit more about multifamilyInvestor.com, and what was the story behind why you co-founded it with us?
Scott: Yeah. Well, I mean, I’ve known you guys for quite a long time, and we’ve worked on various projects. And I just think that investor portfolios can benefit so greatly from a significant allocation to multifamily. And in my background, I’ve been podcasting for…oh, I’ve been podcasting for? Probably about six years now on a variety of subjects. But my latest one was all about financial technology called “PayPod: The Payments & Fintech” podcast. And I just thought that, you know, Jimmy, I’d seen what you guys have done with the “Alternative Investment” podcast, and Jimmy, you know, the Opportunity Zones podcast. And this was just this perfect storm for launching a show about multifamily investing. So, that was kind of the background to it, and that was back in November 2021 we launched it. And we also have kind of introduced this wrinkle where it’s not just audio, it is video. So, we are going to have more shows available on YouTube. So, if you want to see my face and the smiling faces of my guests, you can, of course, listen there. And then we’ll, of course, also have the podcast available on all the major podcasting platforms, your Spotifys, all of that.
And we’ve already got a great backlog of episodes. Jimmy, you were on a couple episodes where we talked opportunity zones and multifamily. Andy joined us, and we chatted about the macroeconomic cases for multifamily, we talked about inflation. And Andy, you really… I already was predicting, “Hey, I think inflation is going to continue,” and you really sold me, “Yes, I think so.” And then we also had an episode where we talked about tax lien investing in multifamily, which is a great way to gain multifamily exposure. And we’re gonna have some upcoming episodes where we’ve got sponsors who are developing properties all over the country, talking about their projects, we’re gonna talk about workforce housing, and really covering as many aspects of multifamily so that any investor who’s considering it or even actively investing could find something to take away and find an opportunity that maybe is pretty attractive for them. So, that’s kind of the story behind it. And, of course, it’s all at multifamilyinvestor.com where we have links to resources and we’ve got a downloadable guide for someone looking to just get into it. So, there’s a lot of content we’re producing.
Andy: Absolutely there, Scott. And I took a look at your queue of guests that you have lined up to appear on that video podcast over the next few weeks. It’s an impressive lineup you have, and I’m looking forward to seeing what you chat about with your guests and the different topics that you cover in the future. So, for our listeners out there, as always, they can find show notes on the AltsDB website for today’s episode at altsdb.com/podcast, and you’ll find links to all the resources that we discussed today with our guest, Scott Hawksworth, and we’ll be sure to link to MultifamilyInvestor.com, as well as the multifamilyInvestor.com podcast. You can learn more about that podcast at multifamilyinvestor.com/podcast. And as Scott mentioned, of course, it’s a video podcast, so we have presence, not only on Google Podcasts, Apple Podcasts, and Spotify but we also have a YouTube channel as well that I would highly encourage all of our listeners here to subscribe to, and, of course, we’ll link to all those from the show notes page for today’s episode. Scott, it’s been a pleasure speaking with you today. Have a good one, buddy. We’ll talk to you soon.
Scott: Thanks. You too.