Why are multifamily real estate investments so attractive to investors? This is the central question we explore on this first ever episode of the Multifamily Investor Podcast.
Listen in as we’re joined by Jimmy Atkinson, Founder of the Opportunity Zones Database, and host of the Opportunity Zones Podcast. Listen in as Scott and Jimmy break down the “what” and “why” of multifamily investments.
- Why multifamily investments are so attractive to institutional investors and others looking for attractive returns, tax benefits, and beyond.
- Why the illiquid nature of many multifamily investments is part of their appeal given the liquidity premium.
- What you need to know about the housing shortage, with some key statistics.
- The different types of multifamily properties, and which are getting the most buzz these days.
- How to get started with multifamily real estate investing.
- A brief overview of the types of multifamily investment wrappers, and which ones can offer significant tax benefits.
Featured On This Episode
- Opportunity Zones Database
- Opportunity Zones – IRS.gov
- 2021 U.S. Real Estate Market Outlook – Multifamily
- Urban Catalyst
Industry Spotlight: Opportunity Zones Database
OpportunityDb (The Opportunity Zones Database) was conceived with the goal of providing world-class tools, education, analysis, and advice to help high net worth individuals, family offices, financial advisors, real estate developers, tax professionals, business owners, and many more navigate the ins and outs of the opportunity zones program’s tax benefits. And specifically, how they can create positive social impact in under-invested areas.
Learn More About The Opportunity Zones Database:
About The Multifamily Investor Podcast
The Multifamily Investor Podcast covers trends and opportunities in the multifamily real estate universe. Host Scott Hawksworth discusses attractive offerings in the space, including direct investments, DSTs, opportunity zones, REITs, and more.
Scott: Hey, how’s it going, everyone? Scott Hawksworth here and welcome to the first-ever episode of “The Multifamily Investor Podcast.” Really excited about this one. And today we’re going to be talking about really the multifamily investment opportunity. And joining me on the show today to help us explore this is Jimmy Atkinson, who is the founder of the Opportunity Zones Database. He’s also a podcaster himself and has a lot of insights in general when we’re talking about these types of investments and things. Jimmy, welcome to the show.
Jimmy: Scott, honored and thrilled to be the guest on the very first episode of “The Multifamily Investor Podcast.” Let’s get it going, man. I’m excited.
Scott: Jimmy, so excited to have you here. The big thing we want to talk about today is the multifamily investment opportunity. And I think you start by addressing the why because I know you’ve been hearing a lot of buzz about multifamily investments, specifically with what you’re doing at the Opportunity Zones Database.
Jimmy: Absolutely, I do. Yeah. So thanks for the intro. I am the founder of the Opportunity Zones Database at opportunitydb.com. And I’m also the host of “The Opportunity Zones Podcast” and we’ll talk a little bit about Opportunity Zones toward the end of today’s episode, and then I think we’ll focus on it a little bit more as one of the biggest, most advantageous investment wrappers for multifamily investing too. But suffice it to say it’s a tax-advantaged form of investing in mostly real estate. But by far and away, the most popular asset class or property type that I see on my platform and among my listeners and among the investors in my network is multifamily. Investors love multifamily. It’s a relatively familiar asset class to a lot of people. It’s very approachable. There’s a lot of different types of multifamily to invest in from the very low end, just picking up a duplex to the very high end, you know, picking up like a high rise class A apartment building.
So it goes from really Mom and Pop type investing all the way to really institutional type investing. So I think that’s one reason why it’s popular. Another reason why it’s popular is supply and demand. That’s a classic case of undersupply and overdemand. The population has grown tremendously in this country throughout its history and particularly in the past several decades. But we have built less and less housing over the past few decades due to a variety of factors. But we’ll get into that I’m sure throughout the course of the episode today, Scott.
Scott: Yeah, absolutely. And I think that, yeah, the housing shortage is one of the big, big things, while there’s so much opportunity in this. And of course, we’ll give you some statistics a bit later here. But then the other side of it is just multifamily investments are considered alts. So they’re alternative investments. And they’re a little different than your sort of traditional trading on stock exchanges or what have you. And they’re actually, they’re illiquid typically. If you have a publicly traded REIT, you know, that can…you can have some more liquidity there. But the illiquid nature also is intriguing to a lot of investors because of the premium and they can expect greater returns and things like that because they’re tying up their liquidity in a multifamily investment. And I think that’s another sort of piece to it why people are so interested in this for their portfolios, right?
Jimmy: Yeah, I think there’s something to that. The liquidity or lack thereof is somewhat of a double-edged sword when you’re talking about most real estate investments, especially if you’re owning directly or if you’re participating in a private placement offering where you can’t just buy and sell very easily on an exchange through your brokerage account. There are also publicly-traded REITs. So we’re not talking about those right now. But the fact that these multifamily investments typically are very illiquid, especially if you own a property directly, I guess we’ll go into the different types of real estate ownership within this investing class in a few minutes. Maybe you can ask me about that, Scott. But typically, let’s just say for instance you’re investing directly in a building, like you just buy a building, you can’t immediately liquidate that building. It takes a while to get the building listed and then to sell it and then go through the escrow process. I mean, you’re probably looking at several weeks if not a few months to actually get cash for the building once you decide to sell.
And David Swensen was formerly…he passed away earlier this year, unfortunately, he was formerly the Chief Investment Officer for the Yale University Endowment Fund. And he really embraced an alternative investment approach. And I don’t know if he coined the term, but he certainly popularized the term, at least with me, of liquidity premium that typical market players overpay for liquidity when they invest in publicly-traded or easily liquidated assets. So the double-edge nature of the sword is you’re not gonna be able to sell a lot of these types of properties very easily. But that can actually behoove you in the long run from making behavioral psychological mistakes of when the market starts to turn down, you get that sick feeling in your stomach, right? And sometimes that ends up with you selling on as we’re nearing the bottom and then buying again as we’re kind of nearing the top, which is really the opposite of what you want to do. So, you know, having it be illiquid and having a built-in longer holding period can actually help out a typical investor.
Scott: Yeah, it can protect you from yourself in some ways. And then if you’re folding that into your overall portfolio, I think that gives you sort of that balance that you might want. I think we’ve really kind of outlined that’s the why. I mean, there’s so many opportunities. And then, of course, there’s tax advantages and things like that that we’ll explore a bit at the end, like you had mentioned, but that’s the why. So I think, Jimmy, the next kind of piece, and you were talking about this is what kind of buildings are we really talking about here? Because it really runs the gamut, doesn’t it? You have small little duplexes and then you have these massive high rises.
Jimmy: Yeah. So there’s multiple, I guess, different dimensions to multifamily real estate that we can go into. We can dissect size of the building but we can also dissect use of the building. I actually do want to go back to the why for a minute, though, because I wanted to expound on some reasons why first, if you don’t mind.
Scott: Go for it.
Jimmy: Because I kind of just touched upon it at a high level earlier. But really the whys are I think they’re really simple. They’re like really simple to comprehend. You know, why multifamily? Everybody needs a roof over their heads, right? Everybody needs a place to live. And multifamily or residential more broadly is really the only category of real estate that you can think of is really truly essential. Retail as we saw, especially during the COVID pandemic and as we’ve seen just on a longer-term due to the rise in eCommerce has become less and less essential over the past decade.
Scott: And now even office space as we saw.
Jimmy: Office space becoming less and less essential. Maybe it’s possible we overbuilt office space in some parts of the country. I would even say hotels or hospitality as a sector. They suffer from economic downturns from time to time, especially pandemic-induced economic downturn where we’re not allowed to travel anywhere, right? And the hotel industry is starting to bounce back but it hasn’t quite gotten back to where it was pre-pandemic I would say. But residential real estate, multifamily real estate really is resilient. It’s resilient against pandemics. It’s resilient against recessions. And then getting back to my point earlier about the housing shortage, we have a housing shortage all over the country. We have just not built nearly enough housing over the past 20, 30 years to keep up with the population demand due to largely a lot of the policies that have been enacted locally.
California is really known for its housing shortage. It might be like ground zero for the housing shortage in this country, and in particular, in the Bay Area. And I actually have a colleague of mine who runs one of the larger Opportunity Zone funds in California. He’s been on my podcast before. His name’s Erik Hayden of Urban Catalyst. And he has a really interesting set of facts and figures that I wanted to share with you and your listeners, Scott.
Scott: Yeah, let’s do it.
Jimmy: He basically said, and this only pertains to the Bay Area or I think Silicon Valley more specifically, but for 30 years straight, the Bay Area has created 6 jobs for every housing unit that’s been built. So just think about that.
Scott: Wow. So there’s six jobs for every…
Jimmy: That’s 30 years straight. So every single year, six jobs but only one new housing unit. And that’s led to some of the world’s most expensive housing is you can pull up Redfin and do a search for housing in San Francisco or elsewhere in the Bay Area. It’s really, really expensive. If the Bay Area wanted supply and demand for housing to hit equilibrium they would have to build…and I think this is actually for Silicon Valley specifically is how he cites it. They would have to build 150,000 housing units in a single year. So if in 2022 they wanted to catch up, they’d have to build 150,000 housing units. Now in history, just to put it into context, that area has never built more than 5,000 units in a single year.
Scott: Oh, my God.
Jimmy: So they literally cannot build housing fast enough. And that’s one of the more extreme cases in the country and in fact in the world.
Scott: And, Jimmy, I would even expand because I’ve got a little fact in figure here for you…
Jimmy: Yeah, please do.
Scott: …when you go beyond just the Bay Area. Because we were talking too about it’s just construction not really keeping up with demand, construction of new housing in the past 20 years fell 5.5 million units short of long-term historical levels. And this is according to a National Association of REALTORS report. So, again, what this is meaning is this is beyond just even that area. That’s like, you know, on the extreme end. But when you look across the U.S., the demand for housing, we just aren’t building enough.
Jimmy: Yeah, it’s absolutely true, Scott. And, yeah, you rightly point out and I think I pointed out earlier, the Silicon Valley example I just cited from my friend Erik Hayden who develops in San Jose, that’s a very extreme case obviously. But to some extent that holds true throughout the United States. And there’s some areas in the United States that may be overcapitalized a little bit, but by and large, especially if you look at growth markets, you’re gonna find it darn near impossible to be able to argue with anybody that multifamily is not going to perform well. If the population is rising, chances are multifamily or residential housing units has just not kept up with demand over a very long period of time. And so that’s one of the reasons why I say it’s a resilient asset class. It’s resilient against pandemics. It’s resilient against recessions. People need a roof over their heads.
Scott: Yeah, Jimmy. So my big question, then the next question because I think we have really hit the why, which is the why of why we even have this podcast, right? But then I think there are just all different types of multifamily units out there. There’s mixed use, which is pretty exciting to a lot of investors. There’s all sorts of things going on. So kind of want to break down what type of buildings are we really talking about? How did this all segment out?
Jimmy: Yeah. So, yeah, I remember the question now. Thank you. By the way, you’re exactly right. We are so enthusiastic about this asset class that we launched a new website and a new podcast dedicated to talking solely about this one particular asset class. That said, it is a really broad asset class. And like I was starting to say before, there’s many different dimensions across which you can slice and dice the multifamily real estate market first is in terms of the size of the buildings.
You have low rise, mid-rise, high rise, you know, you can even think of what may be more traditionally like almost a single-family home that split into a duplex that I guess that’d be kind of like on the smaller end of things, a duplex or a townhouse. And then from there, you get like a three-flat walk up or you can go mid-rise that might even have an elevator in it, you know, maybe something in the five to nine-storey range or somewhere around that area, then you can have your really huge high rise buildings with dozens of storeys and more of like a condo-type building.
But then, beyond size, you can also break it up in terms of how the structure is used. So, there’s just your traditional apartment building where everything in it is an apartment or you can have rent to own or like a condo type building as well. So those are just 100% residential buildings. But then you also have within that category you’ve got, well, what type of residents are living there. So, then you’ve got on one end of the spectrum, senior housing, which I think is a property type that has a lot of momentum behind it because the population…
Scott: I mean, with all the baby boomers.
Jimmy: Yeah, yeah, our population is getting all that. And more empty nesters are downsizing and going from single family home living into a multifamily more manageable type space. So, there’s all these buildings and communities that are organized around older residents. And by the way, these aren’t nursing homes. I’m just talking about a community that’s designed around the needs of seniors or grandparent-aged folks.
Scott: Down here in Chicago, I used to live in a high rise down in the city and there were multiple senior communities that were in high rises around where I lived. So, these buildings are everywhere and certainly in metro areas.
Jimmy: Yeah, yeah, absolutely. And I think it’s becoming a more popular property type. And then on the other end of the spectrum, you’ve got student housing. So these are oftentimes put very close to college campuses if not on college campuses or right adjacent to college campuses and they cater to the needs of those types of residents. But then moving beyond buildings that are 100% focused on residential, you also have mixed use. And mixed use can encompass a variety of different uses. When we’re talking about mixed use multifamily or mixed use residential, there’s always some sort of residential component where somebody can go and live there permanently. But what we oftentimes see is mixed-use residential/retail where maybe it’s an apartment building with several storeys but the ground floor might be retail. Maybe you’ve got Starbucks and a restaurant and drycleaners, a handful of other types of retail establishments on the ground floor. And that’s commonplace in any type of urban area or densely populated area.
And then you’ve also got mixed-use residential/office where maybe half approximately of the building is multifamily residential and the other half is office space. And then I’ve also seen mixed-use multifamily/hotel where it might be a hotel like a Ritz Carlton typically does this or Fairmont Hotel is another flag that does this a lot where part of the hotel has also permanent residences and can be considered to be multifamily/hotel. So those are a few different types. I don’t think that’s a fully exhaustive list but those are some of the most common ones that I’ve seen.
Scott: Right. And those can be attractive too to investors just because it does have those kind of two components. It’s not just residential, you can have that sort of retail side or office space or what have you, right?
Jimmy: Yeah. It diversifies your real estate portfolio within one asset, within one building, which is somewhat unique or interesting at least.
Scott: Yeah. So these are the types of multifamily assets that you can find out there. Going back, though, it’s really important to, you know, we were talking about the why, now we know the types. What are some other benefits when we’re talking about multifamily? And I think a lot of excitement around the tax benefits based on the wrapper of some of these investments. And that’s one of the whole reasons that I brought you on because one of these wrappers is qualified Opportunity Funds. We’re going to explore more of that in episode two. But I wanted to just kind of touch a little bit more on the tax benefits that can come with these types of investments.
Jimmy: Yeah, I think for the purposes of this episode, Scott, I’d almost like to save the tax benefits for episode two. Just to touch on them very quickly, the bottom line is real estate investing can be very tax efficient. And then the wrappers themselves can add additional layers of tax benefits, whether that’s through a qualified Opportunity Fund that invests in Opportunity Zone properties or through a Delaware Statutory Trust or 1031 exchange or just the REIT structure itself can be highly tax-efficient as well. And let’s just stop there as kind of a brief teaser, and we’ll get into the mechanics of how they’re tax-efficient and potential tax benefits or tax mitigation strategies using some of these wrappers on the next episode, I would say.
Scott: Yeah, and the only other thing I’d tease too is of course with direct investment with any kind of real estate you have other benefits like depreciation and expense write-offs and all these kinds of things. So there’s a lot there. Okay, we’ve covered the why, we’ve covered what’s out there. How do you get into this?
Jimmy: Yeah, good question. People who are listening to this podcast, they’re either real estate investors already and they know how to get into it or maybe they want to explore other avenues for getting exposure to real estate or they may be new to the entire alternative investing universe or real estate investing universe and they want to know how to get started. So with multifamily, in particular, I would say there’s three main ways that you can invest into multifamily real estate. One is the most direct way, it’s literally buying a property, you go to your real estate agent and you use him or her to purchase an apartment building or a duplex.
Scott: Congrats, you’ve invested in real estate.
Jimmy: Yeah, you invest in real estate by actually purchasing and directly holding real estate. So that’s the most active form of real estate investing. You may not have any partners to share anything with so you get to kind of capture a lot more of the value there. But, of course, it’s a lot more work, it’s a lot more effort. Yeah. And then the second way is, and this is probably the easiest way to invest in real estate is to invest in a publicly-traded REIT, a Real Estate Investment Trust, and that acronym is R-E-I-T. It’s pronounced REIT. And this is the easiest way to do it because you can just log on to your brokerage account where you can trade and invest in stocks and bonds and ETFs and mutual funds and you can just find a REIT or a REIT ETF. And you can buy a REIT that specifically is a residential REIT that focuses on multifamily.
Scott: And that’s pretty liquid.
Jimmy: And very liquid. You just buy it and then that’s it. You’re done. You have exposure to real estate. And that has its pros and cons of course. But maybe we can get into that on another episode that’s focused on REITs. But that’s probably the easiest way. Okay, and so then in the middle is the third way you can invest in multifamily real estate is to invest into a private offering that is not publicly traded on an exchange. You can’t just buy it through your brokerage account but you aren’t just buying the real estate directly.
So, examples of these are crowdfunding platforms will often allow you to purchase shares in a fund that invest in real estate or there’s other types of private placement offerings that aren’t necessarily crowdfunding offerings but may only be open to accredited investors. This is also kind of the universe where you’ll find Delaware Statutory Trusts to invest in, DSTs, which are essentially fractionalized 1031s. And also Opportunity Zone Funds or qualified Opportunity Funds. And then you also have private REITs on here as well, which are they have the same REIT structure but you can’t really buy and sell them and exchange, they’re privately held. So those are essentially the three different avenues for gaining exposure in your investment portfolio to real estate and in particular, multifamily real estate.
Scott: Boom. I mean, I think that really breaks it all down. And we’re going to talk more about this in future episodes of each of those individually, what’s exciting about them. But I think really, Jimmy, I think we’ve answered the why, we’ve answered the what, and we’ve at least touched on the how.
Jimmy: I agree. So what next, Scott? Maybe we can tease episode two?
Scott: Yeah. Episode two is going to be all about talking about these wrappers and more specifically the qualified Opportunity Funds because I know that multifamily is especially exciting for a lot of these areas. Just kind of the nature of it, right?
Jimmy: Exactly, man. Hey, I’m looking forward to it.
Scott: Awesome. Thanks so much for joining me today, Jimmy.
Jimmy: Thanks, Scott. It’s been a pleasure and, again, honor and a privilege to have been your first guest. Looking forward to seeing where this podcast can go.
Scott: To the moon.