Even within otherwise strong metropolitan areas, not all street corners are created equal. Local market knowledge at a granular level is still everything in real estate. A multifamily community that offers easy access to employers, better schools, lower crime as well as shopping, dining and healthcare services is likely to be perform much better than a community in the same general market that is not close to these elements. Sometimes, a distance as small as a mile between two properties can make all the difference in how they perform. Financial advisors should make sure the sponsor has strong boots-on-the-ground understanding of the markets where they are investing.
This level of understanding takes time, effort, and human resources—which speaks to the value of finding a sponsor with experience and scale who can effectively identify, acquire and manage multifamily investments that are positioned to perform well in both good and bad economic times.
3. Is the sponsor maximizing the tax advantages of commercial real estate for its investors. In addition to acting as a hedge against inflation, one of the advantages of investing in real estate is the tax benefits it offers. These include deductions from depreciation as well as tax deferral from 1031 exchange investments.
It is essential that sponsors complete cost segregation studies in order to calculate and maximize depreciation, sheltering investors’ taxable income and decreasing their tax burden on these investments. In a nutshell, cost segregation studies identify all property-related costs that can be depreciated over five, seven and 15 years as opposed to those portions of a building that must be depreciated over 27.5 years. This can double or triple the depreciation deductions an investor can take during the first five years of ownership. It is surprising how few sponsors actually avail themselves of this valuable opportunity to defer taxes.
1031 exchanges also offer tax benefits—most importantly, they allow investors to defer capital gains taxes on properties sold if they purchase a like/kind property within a specific time frame after the sale. These transactions have specific, often complex rules that must be followed—including how long an investor has to complete a purchase, which properties qualify as like/kind, how much debt and equity the replacement property must have, etc. Understanding and investing according to these rules enhances the value of the capital invested and enables investors to avail themselves of one of the major advantages of investing in real estate.
As people increasingly turn to multifamily real estate as a stable alternative investment category, financial advisors and registered investment advisors must stay current on what makes for a wise investment strategy in the sector. By assessing a deal sponsor’s integrity and competence, investment strategy and facility with CRE’s tax advantages, FAs and RIAs can help clients achieve their financial goals through multifamily real estate investment.
Larry Jacobson is president and CEO of The Jacobson Company.