The economy has witnessed some major meltdown events over the past couple of months. With the sudden collapse of Silicon Valley Bank, continuous rise in interest rates, high inflationary environment, and a strong prediction around a recession, there has been a string of shockwaves across the financial market. Given the economic uncertainties that continue to grapple investors, it is crucial to have a contingency plan in place.

In today’s blog, I will tell you how I have been able to beat the financial crisis in the past and continue to sail safely through the shifting economic times with Multifamily Investing. Multifamily Investing is a powerful investment vehicle that serves as a hedge against inflation and provides the advantage of steady, long-term returns in the following ways:

1. Increase in Rental Demand

Multifamily real estate is a need-driven asset, as shelter will always be a necessity and not a luxury. This has a positive impact on multifamily rental demand which tends to soar higher during inflation. 

With inflation, home prices get exorbitantly high and the rising interest rates increase the mortgage rates. This discourages prospective home buyers making them want to stay in the rental properties longer, driving up the demand. With a firm occupancy rate during an economic crisis, rental income provides stable returns to its investors.

2. Increase in Rental Price

Inflation tends to increase operating expenses due to skyrocketing renovation costs, maintenance expenses, and mortgage rates to name a few. To keep pace with the inflationary environment, landlords increase rental rates with every lease renewal. As rental demand outpaces supply, and shelter continues to stay a necessity, tenants do not hold back from paying the increased prices. This rental increase drives up the property revenue, which raises net operating income and increases the cash yield for multifamily investors.

3. Tax Benefits

By taking advantage of a variety of tax deductions offered to multifamily investors, total returns on real estate investments are further enhanced. 

Investors can leverage the power of depreciation tax benefit, which recognizes that multifamily apartments are physical assets that wear down with time and theoretically lose value. With depreciation tax savings, investors can write off this theoretical loss of value from their taxable income. Depreciation value can be enhanced on paper with a cost-segregation study, wherein different elements of the apartment are accounted for separately, thus accelerating depreciation to the shortest time possible, thereby reducing taxable income.

Another major tax benefit that comes with multifamily investment is the 1031 exchange, where the profit gained after selling an asset can be made tax-free by investing those capital gains in buying another property.

Additionally, there are a variety of other deductions, such as legal fees, closing costs, mortgage interest, and so on, that investors can take advantage of to maximize their tax savings and keep more money in pocket.

4. Cap Rate Compression

Cap rate measures the net operating income of the property in relation to its purchase price. When demand and property prices rise proportionately with inflation and growing demand, the cap rate goes down and this is termed cap rate compression. Multifamily investors can take advantage of cap rate compression by selling at a higher market price and make massive profits on its sale or refinance, thus procuring additional value to hedge against inflation. 

Multifamily Investing Pitfalls During Inflation and Overcoming Those with Conservative Underwriting

Despite the numerous benefits multifamily investing has during the inflationary period, it is not without certain challenges. A few of them are:

1. Increased operational cost
2. The delayed and costlier construction
3. Increased debt cost

Most of the challenges can be overcome with rising rental rates that outpace inflation impact. By focusing on generating a strong cash flow while limiting operational expenses can help mitigate inflation impact on multifamily investing.

Another major investment strategy that acts as a safeguard during inflation is Conservative Underwriting. Conservative underwriting involves making underwriting assumptions that are supported by historical data and projecting returns that are based on a reasonable assumption of variable factors like cap rate, rent increases, and so on.

To avoid any critical miscalculation before investing in multifamily deals, I adopt a conservative approach during underwriting. By being aggressive with my assumptions, conservative underwriting helps me keep a safety margin and ensure our portfolio keeps performing even during stressful times. 

The Bottom Line

Multifamily investment offsets the impact of inflation through rental growth outperformance and multifamily asset appreciation. It not only safeguards your capital from inflation but provides additional capital benefits as a result of inflation.

With multifamily syndication, you can greatly ease your multifamily investment journey by being able to invest in larger properties and benefit from the returns without being actively involved in day-to-day management activities. I thoroughly believe that strategic analysis of the market coupled with a smartly planned hold period will help you make the right investment decision that will prove to be profitable and rewarding during economic downturns.

If you are looking to invest in multifamily properties, let me help you grow your portfolio and achieve your financial goals.