Why Multifamily Real Estate is an Attractive Asset Class
Multifamily real estate can be a strong asset class for investors to have in their portfolio. First off it allows investors to profit in numerous ways as summarized below:
- Cash flow – the ability to earn positive cash flow, which is when your monthly income is higher than your expenses and mortgage payment.
- Debt paydown – the renter pays rent to the landlord, allowing the landlord to pay the mortgage, allowing them to increase their equity in the property.
- Appreciation – the value of the property can go up over time through economic forces, and also appreciation can be forced through renovations and operational improvements.
- Tax benefits – the CRA allows real estate investors to reduce their taxable income because of the large annual depreciation expense taken on multifamily properties.
- Hedge against inflation – real estate is a tangible asset that historically has gone up in value when there is inflation in the economy, so it can help protect investors against inflation.
Why Is Multifamily Real Estate a Good Investment?
Investors should be focused on sectors that present strong yields today, combined with a strong outlook for yield and capital appreciation in the future. Multifamily rentals present a strong case for their ability to meet this criterion and to be resilient through a recession.
Supply and demand for residential rentals – The population in Canada is growing and many people are choosing to rent instead of own a home. The supply of residential rentals isn’t keeping up with the growing demand. This results in high occupancy rates and can result in an increase in the value of existing multifamily properties.
Housing is a necessity – A place to live is a primary need for people no matter the state of the economy. Historically, the multifamily asset class has shown that it can perform well even during a recession, and it has continued to perform well during the pandemic.
Work from home trends – Many companies have been forced to implement work from home policies due to the pandemic. Companies may continue to offer more work from home opportunities in the future since it can help reduce their overhead expenses from leasing expensive commercial office space. Work from home trends could increase the demand for multifamily real estate even further.
What To Look for in a Multifamily Real Estate Investment
Before investing in a multifamily property there is a process of evaluation that every real estate investor should go through. There are several different aspects to be evaluated, including the location and the financials. Here is a summary of some key items to look at when evaluating a multifamily property.
- Property in a market with strong population growth, employment growth, and diversity of industries for employment.
- Property close to amenities such as grocery stores, hospitals, and public transit
- Safe neighbourhood with a low crime rate.
- No major structural or foundation damage on the building.
- No major damage or aging in the roof.
- Examine all major systems including electrical, HVAC, plumbing, and fire sprinklers to ensure all are up to code and not outdated.
- Review property management efficiency and cost.
- Review the property’s historical financial statements and ensure a positive net operating income.
- Evaluate current and historical occupancy rates.
- Ensure that the financing on the property results in a strong debt service coverage ratio.
Westbow Capital looks to apply all these principles across numerous markets in Canada. One of the first things Westbow Capital looks for is great cash-flowing properties. Additionally, we like to buy properties that we feel have the potential for positive appreciation in the long run. This can be due to several factors such as a property in a great location, or a property with value-add potential through operational improvements or renovations. This allows our team to leverage our experience in construction and property management.