Why do passive investors prefer to invest in multifamily real estate?
Numerous reasons:
And there are many more!
There are entire books devoted to this topic. In this article I will focus on the first two. As I write this article, interest rates are very low and although they are likely to rise, experts tell us that they are not likely to increase a lot. Because of that, passive investors are hard pressed to find ways to earn a decent return on their investment.
Everybody needs a place to live. Kind of hard to argue with that, right? Because of that, multifamily real estate has been able to stand the test of time and consistently provide excellent returns to passive investors, even during times of economic slowdowns.
How does real estate generate such great returns? Mostly because it is a real, hard asset that everyone needs, and they want. The “want” part of the equation is key here. Successful real estate investors know, and understand, the emotional side of the renter business. They know that if they differentiate their property from others and truly provide a living experience that is better than their competition, they will be able to charge more for their apartments. When this happens, they will have the necessary pricing power to continually increase the cash flow of the property which translates into excellent returns for the passive investors.
So, because we have a relatively low risk asset (everyone needs a place to live), and we are able to consistently increase our prices because we are able to differentiate ourselves, the result is the ability for passive multifamily real estate investors to earn excellent risk-adjusted returns.
This leads me to the second reason on my list – cash flow!
A HUGE reason passive investors love to invest in multifamily real estate is cash flow. Multifamily real estate consistently provides cash flow to investors as long as it is managed properly.
Here’s how it works.
The revenue from a multifamily property is usually derived from a very diverse source of renters (they usually work for different companies who operate in different industries). The expenses associated with running a multifamily property are fairly predictable, and, with a few exceptions, are fairly stable. The result is the ability for the management team to manage the property in such a way as to generate net cash flow from the property.
Cash flow is always “King”! Because passively investing in multifamily real estate will likely always generate cash flow, I’m sure it will always be a favorite of passive investors!