“The wise man (or woman) invests their money in real estate.” — Andrew Carnegie
What is the best way to invest your money? There’s a secret right now across America amongst the wealthy. One of the best performing investments for the past decade is multifamily real estate, which is just another way to say, apartment complexes. In the past decade, we have transitioned into a country where more people are renting apartments than ever before. Over 42 million people across the US are now renting instead of owning. This has led to a real estate investment which is generating strong, risk-adjusted returns for investors that know about multifamily real estate. It is one of the best investment for the past 150 years.
Over 42 million Americans are renting, higher than any other time in modern history
How did we get here?
There are 2 primary reasons we are seeing more people renting than ever before. The first is a shift in US demographics and the second is Housing supply not meeting demand. Let’s dig in:
A shift in demographics:
This shift is occurring in 3 groups of people: 1) Millennials, 2) Seniors, and 3) Immigrants.
- Millennials: Almost 70% of Millennials are currently renting. Millennials are renting because home prices are too high relative to their incomes, they have taken on record student debt, and they’re delaying marriage and kids. Now this isn’t the worst thing — the apartments they are living in are nice, there are a variety of amenities like a fitness center, pool, and cafe. Not to mention, if your toilet breaks, you just press a button on and app and a maintenance person at the apartment complex will come fix it.
- Seniors: Seniors are downsizing because they don’t need their big 5 bedroom houses anymore. Their kids have grown up and moved out. To maintain a house takes time and effort. Renting an apartment is much more convenient because you don’t have to deal with the issues and upkeep. As this older demographic sells their homes, they begin renting due to the convenience and reduction in space.
- Immigrants: Immigrants come to the US with a dream of building a better life. When they first enter the country, they are not yet qualified for home ownership because they don’t have credit scores and lack documented employment history in the US. Regardless of political rhetoric, the amount of new immigrants entering the US are increasing each year and they turn to renting in apartment complexes as their first living space.
Over the next 6 years, it’s expected that the number of people renting in the US will continue to set records
This leads us to our 2nd primary reason for the increase in renters:
Housing supply not meeting demand
The 2nd reason more people are renting versus any other time in history is that we have seen housing supply fall short of demand. Construction costs are rising, the price of land has increased, and there are tighter lending standards. All of this leads to new construction being limited across the US. When demand outpaces supply, we see an increase in price. In this case, demand for housing is higher than supply, therefore housing costs rise which price people out of the housing market … and these same people will rent instead of buy. This supports our assertion up above that housing prices are too far out of reach for Millennials and Immigrants.
Rising construction costs have stunted housing supply, leading to increased housing prices & housing affordability challenges → 1 of the reasons for an increase in people renting across the US
So, what happens from here?
Now that you have an understanding of why we’ve turned into a nation of renters and my thesis that this trend will continue, let me explain what happens now. Because we have seen an increased demand for living in apartments due to the above reasons, there is an opportunity to create inclusive & high quality apartment communities where residents can live affordably in large cities at a fraction of the cost of owning a home. For example, in Orlando the median price of a house is ~$240k vs the Median Income of ~$60k. In order to purchase a house, you would have to put down your full pre-tax salary for a year. Instead of paying $60k for a down payment on a house and then a mortgage payment every month for the next 30 years, residents are able to put down a $300 security deposit and pay $1,000 a month living in an apartment — a significant decrease in up-front costs and more flexibility in their living arrangements. High quality Multifamily operators have been buying apartment buildings, managing & operating them efficiently, and improving these communities for the residents that call these places home.
As this transition has occurred, investors have taken notice. There has been over $700 Billion invested in the multifamily asset class since 2010. Most of this investment has come from high-net worth individuals & institutional players. As investors look for new opportunities, diversification, and increased yield multifamily has proven to be a strong & resilient asset class. In addition, multifamily provides investors with the opportunity to receive monthly passive income & shield this cash flow from taxes because of real estate depreciation rules. There’s a reason that Andrew Carnegie is quoted as saying, “The wise man (or woman) invests their money in real estate.”
For the past decade, the “gurus” have been telling you to invest in low-cost index funds. I’m here to tell you there’s another secret they haven’t told you about — receiving great returns and passive income through multifamily real estate, all while taking advantages of tax benefits for real estate investors.
Disclaimer: I am not a financial advisor. The content provided here is for informational purposes only, and does NOT constitute an offer or solicitation to purchase any investment solution or a recommendation to buy or sell an investment; nor it is to be taken as legal, business, investment, or tax advice. You should consult your own advisers as to legal, business, tax and other related matters concerning any investment. Furthermore, the content is not directed to any investor or potential investor, and may not be used or relied upon in evaluating the merits of any investment and must not be taken as a basis for any investment decision.