As an active real estate investor, I am always on the lookout for new and exciting investment opportunities. So, I imagine you're curious why I am investing in US multifamily in 2022. Let me explain... There is no doubt that the US multifamily market is heating up, with investor interest growing rapidly. But what are the reasons behind this renewed interest? Despite some recent volatility in the market, multifamily remains a very stable and profitable sector to invest in. In fact, over the past 10 years, returns on multifamily investments have been consistently higher than those of other real estate asset classes. Let’s take a closer look at some of the key factors that are making US multifamily an attractive investment option for investors in 2022.
HIGHER DEMAND – Demand for multifamily housing has been robust within the past several years. In the U.S, annual growth in renter households exceeded 1,000,000 on the average over the past five years, which could be a record amount. According to National Apartment Association; the United States Needs 4.6 million New Apartments By 2030 or It Will Face a Serious Shortage.
The population is increasingly choosing to live in urban areas, which is driving up demand for multifamily housing, what’s more, demand for rental units continues to outpace supply, which means rents are likely to continue rising into the foreseeable future Multifamily property occupancy rates remain high, and rents continue to grow at a steady pace.
FAVOURABLE LANDLORD LAWS – The landlord-tenant relationship is built on two key fundamentals: paying rent on time and fully, if this is not met, the relationship between landlord & tenant will collapse. The tenancy rules in many areas of Canada don't favour landlords and have a tendency to forgive tenants that don't pay rent. The U.S. has a relatively landlord-friendly regulatory environment. Also, the U.S. encompasses a lower level of subsidized/low-income inventory than many other countries and most multifamily properties are owned and operated without restrictions on rents.
HEALTHY CASH FLOW – You can still buy multi-family properties for less than the replacement cost of the building in the U.S. markers. The typical house price in the US is less than half of the Canadian equivalent. Moreover, the rents are quite comparable. Smaller monthly mortgage payments combined with comparable rents make it much easier to find cash flow positive properties throughout many US markets whereas in Canada real estate investors are forced to buy in small, remote markets in search of positive cash flow.
ABUNDANT FINANCING SOURCES – The loan terms, leverage, and pricing are more favorable for multifamily than other property types, however, Canadian investment culture is much conservative as compared to the U.S. The loan terms are longer in the U.S. compared to Canada and attribute this pattern to the more established secondary market in the U.S. which enhances the liquidity of mortgage assets. While nominal rates appear higher in Canada, mortgage spreads are actually lower, due to contract features that raise the cost of default for borrowers and restrict prepayments. Presumably, Canadian lenders can impose these relatively more onerous contract terms due to greater market power and reduced competition
BETTER TAX BENEFITS – The IRS and CRA regulations offer a major incentive for commercial multifamily investment. The property owners are entitled to “depreciate” the value of their asset each year, which reduces taxable income while also reduces tax liability! It's no wonder that maximizing depreciation is one way governments encourage investors in this industry and keep money flowing through business operations. And, one of the ways of depreciation is through a strategy known as "cost segregation" which is NOT allowed in Canada. A cost segregation allows you to review every aspect of your property and accelerate its depreciation. For example, a parking lot falls into the category of land improvements which can be depreciated over 15 years; kitchen appliances fall under personal property with five years of write-off periods. When you divide a property into its components and depreciate them over the shorter period, depreciation expense is maximized. This means that your tax liability can be significantly reduced with this strategy!
The current market conditions provide an attractive opportunity for investors... all of these factors point to continued success for the multifamily market in the years to come. Given all of this information, it's easy to see why I am confident in investing in US multifamily property.
So, if you're looking for a solid investment opportunity, US multifamily should be at the top of your list!
Which investments do you focus on in 2022 and why? Let us know below!
Harry Samby
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