Unmatched Stability, Proven Performance and Unrivaled Tax Breaks

Why Multifamily?

Multifamily projects of the kind favored by PCRP Group – large Class “B” and “C+” developments – form an important part of the North American housing economy. Also referred to as “Workforce Housing,” these are the safe, comfortable and affordable apartment buildings where middle-class families, recent college graduates and downsizing seniors hang their hats. For these and many other reasons, these kinds of multifamily apartment developments have provided more resilient, stable and higher returns than other investment vehicles for decades, including stocks, bonds, and other real estate asset classes like industrial, retail or single-family properties.

At PCRP Group, we enjoy taking people through the exciting opportunities to build wealth through multifamily investing. Here are PCRP’s Top Five reasons that multifamily investing outperforms all other asset classes.

1. The Cash Flow Advantage

The cost of building, maintaining and managing any residential property has soared in recent years. The cost of the lot alone – just the land ­– has risen from $32,000 to over $46,000 since the turn of the century, and materials, labor and permits have risen proportionately. Those same costs affect multifamily developments, but these larger apartment buildings have an important advantage. It’s called “economies of scale.” Anyone who has shopped at a Big Box store knows the truth: Whatever you’re buying, whether it’s toilet paper, cleaning products or light bulbs, buying in bulk means saving money. When that bulk effect is applied to housing, the impact is significant, and it applies to maintaining and managing the property too.

universalThis cost-effective approach has major advantages for investment returns. Lower per-unit costs translate into lower rates for debt financing and reduced operating costs for landlords. This also makes the monthly cost of living in multifamily units lower, and in the neighborhoods targeted by PCRP, that means middle class renters see significant savings when compared with the cost of buying or renting a single-family home.

From these factors flow a key advantage for investors: higher net monthly revenue, or cash flow, even after taxes, insurance, debt servicing and other operating costs are factored in. This “passive income” is largely protected from taxation, too (see Section 3). The bottom line: These operating and acquisition costs, spread over 100, 200 or more units instead of one, creates an economy of scale and a powerful tax-advantaged way to build wealth.

2. The Rental Demand Boom

In the wake of the 2008-2009 financial crisis, multifamily rental units have grown significantly as a percentage of American housing solutions. Millions buffeted by the financial fallout of those years chose, for one reason or another, to rent rather than buy, and the trend has continued.

Whether they sold at a loss, or simply got trapped by the higher lending standards that followed the crisis, people of all ages have voted with their feet, furniture and families for the affordability, stability and low-risks associated with multifamily rentals.

Demographically, the trend runs the gamut. From downsizing empty nesters to mid-career Baby Boomers to their Millennial generation children, more and more have chosen affordable multi-family rental properties with amenities that would be out of their reach in the single-family space, including pools, gyms, game rooms and other common amenities.  Forecasts from PCRP and other reputable research institutions, including the US  Census Bureau and Harvard University’s Joint Center for Housing Studies, suggest this trend will continue.

For investors in multifamily projects, these are very favorable statistics. Taken together, these trends will power a consistent growth in the number of people seeking rental units, now more than ever for long-term occupancies rather than as a bridge to homeownership.

3. Passive Income and Its Many Advantages

Most people associate taxation with their earned income, which in the United States is taxed at varied rates that accelerate the more you make. For W2 wage earners, finding ways to lower your tax bill can be difficult or even impossible, depending on where the income is earned.

Passive income, defined by the Internal Revenue Service, is treated very differently. Passive income is classified as income that comes from a business you do not directly manage, or from a rental property. In effect, unlike W2 income, you do not trade your time for money with passive income. It accrues, instead, from an owned asset.

For multifamily investors – “passive investors” who take part in a multifamily project as Limited Partners (LPs) ­– the jobs of maintenance, finding renters and other operational headaches – are far removed. Those tasks are the job of the General Partners (GPs), or in other words, PCRP and its team. But the passive investor gets some very active help from the tax code. Here are some of the tax breaks that passive investors accrue from multifamily investments.

  • Debt Servicing Deduction: Passive income investors are allowed to deduct their portion of the interest paid on debt assumed to purchase the property.
  • Repair Deductions: Repairs that qualify for the IRS definition of “reasonable” can also be deduced by passive investors in proportion to their participation in the deal.
  • Depreciation: Passive investors can claim depreciation as losses on their tax returns in proportion to their share of a project’s ownership. The original idea was to account for the gradual deterioration of value that any building suffers over time, amazingly, even though decades of research shows that well-maintained multifamily properties and the land they sit on only get more valuable over time. That appreciation in value will be distributed to investors when the property is finally sold, and it is subject to capital gains. But the monthly income derived from the rental property is passive, and depreciation allows often large write offs to be taken by passive investors and set against their W2 income. In many cases, even high-income W2 earners have found that the tax breaks that flow from participation in a small number of multifamily properties have reduced their overall tax bill to zero!
  • Cost Segregation: Multifamily investors benefit from a tax strategy known as cost segregation which allows investors to depreciate particular components within the property, leading to exponentially greater tax breaks than would be gained through depreciation alone.

4. Income Security, Access and Risk Management

The ability to access large investment projects was until recently reserved for the super-wealthy. Often, minimum investments of $1 million or more were imposed, effectively locking out the average investor and helping fuel the income inequality plague that has dogged the US since the end of the 1970s. The rich got richer, the rest of us watched and worked harder for less.

This is no longer true. Access to the kinds of lucrative, wealth-building multifamily investment deals once reserved for Rockefellers and Carnegies is within reach. With minimum investments as low as $50,000, a democratization of the market has taken place in the past decade. Investors in projects acquired by PCRP and its partner groups, Think Multifamily and Greyson Capital Group, include investors as small as $50,000 and up to $5 million. Investors have the opportunity to share in monthly cash flow, tax advantages, principle paydown, and the possibility of upside appreciation when the project sells. They also know that multifamily as an asset class weathers financial storms better than other real estate classes, particularly in the “B” and “C+” class properties,.

Why? Think about it. Luxury apartments of the kind springing up in cities everywhere are high priced and expensively financed. When a downturn occurs, many will choose to downsize, and their next natural step in a downturn will not be a home purchase, but rather a “B” or “C+” property: safe, a bit less glitzy and slightly older construction (usually 1980s or 1990s). But most importantly, renting for a reasonable price.

Risk is an overlooked factor for some investment groups, but not at PCRP. We rank management as highly as returns and tax strategy. Thanks to multifamily investment’s relatively low bar for participation,  many investors find they choose to spread even relatively small portfolios over multiple geographic markets, lessening the risk of regional setbacks – like the California drought that devastated crops and depressed property values from 2011 to 2017. Combined with PCRP’s strategy of avoiding markets subject to earthquake, flooding and coastal storm risks, and we believe our portfolio of professionally managed properties provides a best-in-class approach to managing the risks of a setback due to regional economic, climactic and natural disasters.

5. Sustainability: Doing Well While Doing Good

Multifamily housing property development is more efficient than single-family constructions, making efficient use of resources like land, water and energy, and generating a much lower carbon footprint and waste per resident.

4241What’s more, modern construction and renovation strategies can produce net gains in environmental health and, by concentrating population, offer opportunities to produce green infrastructure like public transit, parks and pedestrian friendly commercial zones.

Municipal, state and the federal government all offer significant tax advantages to multifamily projects who take steps to improve the energy efficiency and other environmental metrics. In slightly older buildings, including those PCRP Group seeks to acquire, deferred maintenance and obsolete construction methods offer ripe opportunities to “green” while we add value to the property. Furnaces, water systems, electrical, landscaping and other physical plant improved with the environment in mind need not be more expensive than traditional renovations but can lead to tax breaks that improve operating margins even as they enhance residential life.

A greener building is a happier building, and happy tenants renew at higher rates. It’s also a healthier building. Studies show decreased incidences of child hood diseases, depression and mental illness when tenants live in environmentally sustainable environments. Combined with PCRP’s strategy of avoiding areas where climate and other natural disaster risks loom, these factors promote long-term tenancy and position projects to take advantage of the wave of tax incentivized financial rewards which has only just begun.

How Do I Become a Multifamily Investor?

The unrivaled benefits of multifamily housing will continue to power demand for units in safe, affordable and vibrant communities. Our focus on climate resilience and our sharp eye for improving operational efficiencies and adding value to properties – thus justifying rent increases that feed cash flow – create a wealth building opportunity like no other. To begin your journey and learn more, contact the PCRP team at inquiries@pcrp.com