Investing during a recession can be scary; like most, you might avoid it altogether. Though, Warren Buffett insists that one should be “fearful when others are greedy, and greedy when others are fearful.”  When looking at multifamily, careful data analysis reveals Buffett may be on to something. The challenge for those of us who are not one of the most successful investors in the world is finding the right investment vehicle while others are sitting on the sidelines.

This article aims to help you make an informed decision on why multifamily can be a good investment during a recession by detailing four reasons this investment type proves successful even during economic headwinds.

Multifamily Recession Resistant?

Investing in multifamily real estate can be one of the best ways to build long-term wealth because of its many advantages. Specifically, commercial real estate, in general, is highly scalable and rewards owners for a variety of reasons. However, how does multifamily as an investment hold up during a recession?

It has not been hard to find an economist or two who talks about an impending recession, and many economic indicators support this assumption. After all, the markets have been seesawing up and down while interest rates are increasing at some of the fastest speeds in history to help curb the highest inflation since the 1980s. Even many large businesses are cutting jobs. Naturally, most people would shy away from investing in this type of environment. While this may be true for most investments, one should not worry too much if they actively invest in the multifamily sector.

4 Reasons Why Multifamily is Recession Resistant

There are a few reasons why multifamily real estate is a safe play, even during a recession. Although they may not all apply to your portfolio, most of them will.

Reason 1 – Hedge against inflation

The very nature of all commercial real estate’s value is tied directly to the Net Operating Income (NOI), or the sum of total income minus expenses. Therefore, it is only natural for rents (income) to increase as inflation occurs. However, it is essential to note that just as income increases, so do the costs or expenses, but it is likely that rents will go up more than the expenses can offset.

Conversely, unlike commercial real estate values based on their NOI, single-family home prices often appreciate during an inflationary period, which puts homeownership out of reach for many people. In turn, this puts more people in the renter pool, increasing renter demand that continues the upward pressure on rents.

Reason 2 – Rates of renters increasing

The renter rate has risen several times in the U.S., and it looks like it is starting to do so again for two reasons:  home prices and mortgage rates. It seems logical that as home prices elevate and mortgage rates surge would create an increase in renters at the expense of homeownership. Joe Weisenthal of Bloomberg acknowledges that the decline in housing affordability due to rising interest rates leads to more demand for rental housing. Several sources cite that over the last 12 months, the average mortgage has increased by $1000. In other words, if one budgeted $2,500 on a mortgage, they could now buy a house that costs $476,425. Whereas in early 2021, that price tag would have been $758,572.

Moreover, according to the Census Department, the upward trend of renters began over a decade ago. For example, the number of renters increased by 12% between 2011 and 2020, compared to a 4% increase in homeowners during that same timeframe.

When factoring that over 20% of Millennials say they will always rent because of a lack of savings, demand for multifamily should continue to rise. In fact, a report from the National Multifamily Housing Council and the National Apartment Association highlights that the country needs 4.3 million units by 2035 to meet housing demand.

Reason 3 – Financing options become better

Although interest rights are high relative to where they were over the last couple of years, interest rates are typically lower for multifamily properties than almost all other types of commercial real estate. This is because lenders are familiar with the points above and, as a result, view multifamily as a lower risk profile relative to office or retail.

Additionally, a wide range of loan options is designed to reduce a lender’s risk and provide better terms for borrowers. For example, an agency loan (Fannie Mae / Freddie Mac) offers phenomenal terms that allow for a lower payment, interest only, longer terms, fixed interest rates, and no recourse, which most conventional lenders would not consider offering. Admittedly, interest rates are higher than they were a year ago, but their terms are nearly unbeatable.

Reason 4 – Tax benefits

Finally, tax benefits make a multifamily investment attractive during a recession when you try to make every dollar count. In fact, inflation and taxes are two of the most significant obstacles to generating wealth. For instance, if you spend more on everyday expenses such as groceries and gas, you have less money to invest. Furthermore, research shows that taxes are usually our most considerable expense.

Even if your income increases due to inflation, there may be associated tax costs as you move into a higher tax bracket. While you cannot control inflation, you can control your taxes, and investing in multifamily is a way to reduce your taxes. Specifically, multifamily allows for bonus depreciation (which is set to phase out in 2027), general expense deductions, the ability to defer paying taxes on your gains via a 1031 exchange, and appreciation tax benefits. The latter may need a little explanation.

If a multifamily property increases in value, the appreciation is not taxable. There may be an opportunity to tap into that equity via a cash-out refinance and reinvest that money into another multifamily investment. Not only do you not pay taxes on the funds from the cash-out, but you would also start receiving tax benefits from your new investment. Talk about a win-win! As Robert Kiyosaki said, “it’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.”

Conclusion

So, is multifamily truly a safe investment during a recession? While nothing is absolute, multifamily does provide some significant protections that allow it to be more resistant than other types of investments during a downturn. Moreover, even if a recession is worse than predicted, multifamily investments are likely to outperform other sectors because of their innate ability to act as a hedge, the increasing trend of renters, solid financing options, and tax benefits. The key is to research the operators and the market and always consult with a financial expert before making investment decisions.
Do You Want To Learn More?

RIZE Equity is a private multifamily investment firm, and we work with accredited investors to help them achieve their long-term investment goals through high-quality multifamily investments in the Southeastern U.S.  If you would like to learn more about our investment strategy, we invite you to visit our website at www.rizeequity.com/invest and schedule a free no-obligation appointment with us.  Also, check out our free passive investor’s guide on investing in multifamily at www.rizeequity.com/passive

About the author: Sean Cullen is the managing partner and Director of Business Operations at RIZE Equity Group LLC, a privately held real estate investment company that helps current/former professional athletes, veterans, and business professionals create generational wealth through smart multifamily investments.