Why I Chose Multifamily Investing
I did all the right things. I taught myself English, moved to the USA, got my MBA from NYU Stern when I was 24, got myself a hedge fund job through networking, got my CFA certification by 27. Everything was going according to plan and I loved what I did (distressed debt investing). I was young, smart, aggressive and hungry. Being ambitious as I am, I totally expected to become a portfolio manager one day and then eventually start a hedge fund of my own, naturally… Only it didn’t work out that way! Somewhere along the way, “life happened” – as they say.
I ended up working for three different funds (was a partner at one of them); the job was a lot of fun but there was always something. The first fund had to downsize during the recession, the next one was shut down by the partners, and the third one faced redemptions. At that point I was well over 30 and it was becoming painfully clear that becoming a high flying portfolio manager at a cool hedge fund probably was not in the cards for me.
Everyone around me was saying that those hedge fund jobs are too risky anyway and I should find something more stable where I can “build a career”. That’s why I decided to go work for a large bank. I knew in my gut it probably would not be a great cultural fit for such a free spirited person like me but decided to conduct an experiment and see if it worked. Well…let me tell you: it didn’t! I felt completely suffocated by bureaucratic and hierarchical organization I found myself in. After some time, there was an inflection point when I realized I am in unsustainable situation.
I wanted more. I wanted to live my life on my own terms and not depend on a paycheck paid by somebody else. That’s when I decided I needed to get out and go out on my own. I was DONE being an employee. I didn’t want to report to anyone, I hated taking orders, I didn’t want to ask permission to take a day off and I also didn’t like paying over 40% of my top line earnings, before expenses, in taxes anymore. I began thinking about my next step: how can I be on my own, gradually build wealth and actually enjoy the process? After many months of agonizing soul searching, a friend/mentor mentioned multifamily investing to me and it just CLICKED. Real estate was always there, sure, but I never seriously considered it. I liked the complexity and intellectual stimulation of distressed debt investing and real estate seemed too easy in comparison…But now all of a sudden, instead of thinking of real estate as “too easy” I started to realize that it is just more analyzable – and it’s a good thing! And is just as intellectually stimulating and fun as distressed debt. And importantly for me, you CAN be your own boss from Day 1 – if you hustle. And “Hustle” is my middle name. So why am I so fascinated by multifamily investing? Here it goes, my top 5:
- Analyzable. I love the fact that multifamily real estate is analyzable and more predictable than other investments. You know what your revenue is – # of units x rent – vacancy. Easy! There’s data to stress test it and see how much occupancy you can lose before you turn cash flow negative. You know the expense items and can analyze and adjust them; there’s data to support that analysis. Not everything can be predicted BUT you definitely have more data/control over what you earn. You have historical data on cap rates, vacancy rates, rent growth, etc. that can be used in stress-testing. In the past I invested in metal & mining companies, oil and gas companies, retailers, supermarkets, telecom companies, paper companies, tobacco companies, casinos, restaurants, you name it. I can tell you with confidence, from my own experience, it is much easier to analyze an apartment building than any of those (especially commodity plays). And your learning curve is so much steeper! If you are investing in the same market you just doing the same thing over and over and over again and keep leveraging all the relationships and knowledge you gained on your prior deal. And you have direct control over the asset and can take measures to increase revenues/reduce expenses.
- Attractive returns. When I was looking for high yield bonds to invest in, with a relatively safe credit profile – I would murder (figuratively speaking!) for 8-9% return (YTM). Stocks – annual returns are uneven, but long term expectations are ~8%. With multifamily (I’m talking Class B/C value-add projects), with the similar risk profile you often get IRR of 16%+ (and in the past years – it was often much higher). Yes, real estate is less liquid than stocks and bonds, I get it – but I’m happy to sacrifice liquidity for such a dramatic difference in return potential combined with better downside protection and asset control. A stock or bond price can go to $0. Not so with the stabilized apartment complex with a long term financing in place (that’s important!). Yes, the price can decline, even dramatically so, but it is not $0 and if you don’t have refinancing needs during the downturn, you should fare relatively well.
- Tax benefits. Because you can use depreciation to offset your income and strategies like cost segregation, you apples-to-apples after-tax return is even better with real estate! Many apartment owners end up paying 0 or very little in taxes during the holding period. When the asset is finally sold, the capital gain and depreciation recapture taxes could be (depending on how the investment was made) deferred by rolling the proceeds into another “like-kind” investment through a 1031 exchange. How great is that?!
- Consistent cash flow. Since the day you buy an apartment complex, if you are buying stabilized properties (our plan) and underwrite them conservatively – you are cash flowing on Day 1. Buying cash flowing assets greatly mitigates the investment risk.
- Asset control. You and your property management firm decide when to raise rents, when to renegotiate that contracts, when to downsize landscaping expense, when to make capital improvements, etc. Not every expense is variable and of course, there is always potential for unexpected expenses (that’s why having reserves is important). Still…on a relative basis, you have more control vs when you invest in IBM. Or even a smaller company!
So here you have it. As many others before me, I realized that multifamily is so powerful and just a much better vehicle to build wealth. Now you know why I started SunSail Capital and why apartment buildings investing is my next big love!