More and more private equity investors are choosing multifamily real estate over other types of private equity investments. The question I will explore here is - why?
There is no question that private equity investors are favoring multifamily investing over other types of investments. If you are operating in the multifamily real estate space, like we are, then you see it every day, just from the number of people competing for deals.
Through my conversations with investors, I have concluded that there are at least two main reasons. First, the risk/return profile that multifamily real estate provides is more appealing to a larger number of investors. More on this in a minute, but I think it is safe to say that the word is out that investing in multifamily can be very lucrative!
Second, and admittedly this is a little harder to define, but I have found that people perceive that many of the other types of private equity investments are often much more complex and require them to do much more homework before they invest, and they just don’t have the time to devote to that.
The Risk/Return Profile of Private Equity Investment in Multifamily Real Estate
It stands to reason that many rational, informed investors want to preserve capital while at the same time earning significantly more on their investments than what can be earned by investing in bank products or U.S. Treasuries or bonds. They know that many investments that are relatively low risk don’t even keep up with inflation.
They are constantly searching for that investment that can really add to their wealth without taking on so much risk that they have difficulty sleeping at night. Many investors look at bitcoin, equities, stock options, traditional private equity (the firms that buy entire companies), you name it, and they see a lot of risk. More risk than they like to take on. They do want to have an allocation in their portfolios for this type of risk, but they usually don’t want it to be the dominant risk type.
So, they turn to multifamily real estate because they see that many experienced real estate investment firms, like KRI, have been able to historically earn much higher returns than they would have expected for a “plain vanilla” multifamily real estate investment. You see, when they dive into the risk/return analysis, they tend to really like what they see.
On the risk side, they view the multifamily real estate asset class as relatively low risk and I believe they are correct. Although it certainly is a functioning business, and, as a result, poses many of the same risks as any other business, the product and service this asset class provides is something they don’t believe will ever go away. It just makes sense. Everybody needs a place to live!
A few other observations about multifamily real estate investing:
- Diversified income stream – residents likely work for many different employers, minimizing exposure to concentration risk.
- Supply and demand – especially in the B/C asset space in growth markets - demand far outweighs supply and we don’t see that changing anytime soon. They aren’t adding new B/C class assets to the housing pool and more and more people continue to migrate to the growth markets like Florida. This sets up an excellent demand/supply scenario.
- Pricing power – generally, the nicer a property is, the more a potential renter is willing to pay to live there. Most people don’t view their homes as a commodity and are willing to pay up for nicer accommodations. This pricing power is essential for a business to maintain its margins.
That’s the risk side of the equation. On the return side of the equation, it is very possible to earn what the professionals call “outsized returns.” Depending on the property and the firm you are investing with, it is very possible to earn 15%, 20%, 25%, even 30%+ annual returns through private equity investments in multifamily real estate.
Now, of course, there are no guarantees here. Please don’t interpret my analysis as implying some sort of guarantee with these types of investments. Instead, my comments are meant to point out that it is possible to get the types of wealth creating returns you crave without taking on the level of risk present in other, more speculative types of investments. This is one of the main reasons multifamily real estate investment is so popular.
Investing in Multifamily Real Estate Is More Understandable
Investors do their homework. I know this, because I talk with investors every day and there is no question in my mind that before making an investment, they work very hard to understand the risks they are taking on and assess the probability that their investment will pay the return they expect it to. This is exactly what they should do.
Multifamily real estate is extremely relatable to investors. Most everyone has lived in an apartment at some point in their lives. As I have said before, investing in multifamily is no different than investing in any business. The difference here is investors can relate to that business and understand the risks much better than other, more complex businesses. As a result, they tend to be much more comfortable with real estate.
It stands to reason then that if an investor can get comfortable with the risks of an investment and realize that they can earn, what they consider to be, extraordinary risk adjusted returns, then they will want to invest. This is exactly what private equity multifamily real estate investing is all about. It is the reason we do what we do, here at KRI.