How Multifamily Real Estate Investing Can Strengthen Your Business Portfolio
Last Updated: September 30, 2o24
Steve Nabity
September 30, 2024
How Multifamily Real Estate Investing Can Strengthen Your Business Portfolio
Entrepreneurs and business owners who have built businesses from the ground up tend to have a significant portion of their wealth invested in their businesses. After all, these businesses have enabled entrepreneurs to generate wealth. However, diversification is recommended to unlock the next phase of growth and strengthen the overall portfolio. In order to preserve and grow wealth further, a few things need to happen. Firstly, the wealth created needs to be invested prudently across a range of asset classes to manage risk. Secondly, the existing business should be nurtured to grow steadily and deliver increasing cash flows which can sustain the wealth creation process. Lastly, taxes should also be optimized so that the maximum amount of hard-earned wealth stays in the hands of the business creators.
Multifamily investing can achieve all of these goals. In this article, we will discuss how multifamily real estate investment can generate steady cash flow, build significant wealth over the long term through appreciation, and help achieve some degree of portfolio diversification. We will also touch upon how to invest in multifamily real estate by leveraging professional expertise. Lastly, we will summarize what steps you can take to get started on your real estate investing journey.
Generating Steady Cash Flow
Revenue is vanity, profit is sanity, and cash is reality. Whether its business owners, entrepreneurs, investors, or Robert Kiyosaki, everyone is looking for cash flow. Therefore, investments that can sustain regular cash flows year-after-year are perceived to be desirable. Bonds and fixed-income investments are often made with the goal of receiving regular cash (coupon) payouts.
Real estate offers a good option for anyone looking for regular and steady cash flows. Multifamily real estate, in our opinion, is the best sub-segment within real estate because you have multiple rent-paying tenants. If one does not pay, you still have the others. With single-family real estate, that is not the case. Multifamily provides some level of diversification and hence, risk management.
Regular cash flow also means more options on what to do with those cash flows. They can cover property operations expenses like repairs, maintenance, or utilities. They can be used to pay down debt and increase equity. They can also be reinvested in the property to upgrade the units or set up value-add services like covered parking or package locker facilities. These investments can then bring in additional income, further bolstering the cash flows generated from the property. Higher net operating income of a property also pushes up its value leading to capital appreciation.
Building Long-Term Wealth
Generational long-term wealth gets built over a long period. The process is gradual and cumulative. However, building long-term wealth requires some careful planning and decision-making. To build generational wealth, there needs to be a source of regular uninterrupted cash flow and a significant capital appreciation event (or maybe a few events). Multifamily real estate can be that source of yield and capital appreciation. It can provide relatively inflation-protected income.
When we say planning, we mean not just investment planning, but also tax planning. Real estate offers several tax benefits including depreciation, accelerated depreciation, interest payment deductions, and capital gain tax deferral using the 1031 exchange.
Building generational wealth also requires investing in themes that are long-term in nature. Urbanization and housing are such long-term megatrends. The demand for housing remains robust while rental housing is also expected to perform strongly in the future. Ongoing urbanization will involve people migrating and looking for affordable housing options. This will likely be a key driver of the demand for multifamily housing.
Preserving and growing long-term wealth requires risk management. Risk can come from various sources. Systemic risk can come from markets and macro factors. Credit risk can come from tenants not paying their rent. Concentration risk can come from skewed asset management where too much is invested in one or a few asset classes. Real estate provides diversification and can be a relatively low-correlation asset class compared to stocks. Multifamily properties provide tenant diversification and lower the risk of not receiving rental income.
Below is a picture of Luxe Apartments, a 94-unit property in Nashville that Skyline Point Capital invested in.
This property has delivered regular cash flows to our investors post its acquisition in 2021. We plan to hold this property for about 5 years and then realize capital gains from its sale. Our investors will likely get regular cash flow and a capital appreciation at the end which will help them build long-term wealth while enjoying tax benefits and other benefits that multifamily real estate offers.
The Power of Diversification
Why did the investor start gardening? Because he heard that diversification was all about planting seeds in different areas. We don’t expect you to plant different trees or plant them in different areas. But, we would like to demonstrate why it makes sense to “plant” your investments in different asset classes.
Every asset class has its own risk characteristics. You don’t want to be in a situation where you invested heavily in something specific and that something experiences a major negative event. Such concentration in exposure can lead to large drawdowns which might be psychologically difficult to accept.
Ideally, you want a portfolio where other asset classes don’t move in the same direction as the one going through a downturn. That way, the downmove gets balanced out. Asset classes with low correlation are necessary to build a diversified portfolio.
Imagine you have a portfolio of investments where stocks make up 30-odd percent of the total value, gold makes up 5-10%, bonds make up another 20-30%, and real estate makes up the rest. Within real estate too, the investments are spread out across industrial assets, some multifamily, and some retail. Now if Silicon Valley Bank goes bust the next morning, stocks might take a hit, bonds too. But, gold may be steady or even spike while real estate investments could also continue to generate rental income. This is what we mean by the power of diversification.
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Leveraging Professional Expertise + Finding The Best Opportunities
Skyline Point Capital has made 15 investments across different sub-segments of real estate. Our portfolio properties are located in multiple states as we want our investors to enjoy the benefits of geographical and asset class diversification.
You can find out about our next investment by joining our Founders Investor Club. This is not some mailing list. Rather, we only send out deals that we are currently underwriting and are looking to invest in ourselves. These are institutional-grade real estate investment opportunities that are vetted by our team. Being part of the Investor Club allows you to get a feel for the type of investments we are looking at.
Having closed several deals over the past few years, Skyline Point Capital has the expertise and network needed to source, underwrite, and close transactions across our focus markets. Over the years, we have honed our process of analyzing different submarkets, sourcing the right opportunities, putting together the right team to manage the property once we have acquired it, and having the foresight to execute our exit strategy. Yes, we have our exit strategy mapped out before we invest.
Real estate is a lot about location. We look at factors such as economic growth, population and demographic trends, rental demand, and other market parameters to select the best places to invest in multifamily real estate. You can find out more about our investment philosophy by scheduling an introductory call.
Real estate is a great asset class to generate, preserve, and grow your wealth. However, there are many nuances, local laws, regulations, and other hoops to get through. It may be a good idea to leverage professional expertise rather than go solo.
Conclusion Multifamily Real Estate is a Smart Decision for Entrepreneurs and Business Owners
In summary, real estate is an asset class with several benefits. Multifamily real estate is even better as it gives you tenant diversification and scale economies. Investors can enjoy tax benefits, diversify their portfolios, generate regular cash flows, earn capital gains, and build generational wealth. Real estate is an asset class that has a low correlation compared to popular investments like stocks.
Skyline Point Capital is more than just a multifamily real estate investment company. It has worked with numerous business owner and entrepreneur clients and invested with them across several properties in different locations. Our team is passionate about finding the right deals for our investors and acquiring them with a business plan in mind. Building long-term wealth requires patience, time, and the ability to objectively evaluate investment opportunities whenever they present themselves. If you want to learn how to invest in multifamily real estate, we highly recommend you check out our free ebooks and other learning resources here.
Once you have gone through those resources, come back to us with any questions or comments that you might have. We will be happy to speak with you, talk about real estate investing, or just investing in general.
We also encourage you to join the Founders Investor Club to stay in the loop on deals that we are currently looking at.