Nov 46 min read

Why Multifamily Investing is the ‘Goldilocks’ of Real Estate for High-Net-Worth Investors

For high-net-worth individuals looking to diversify their portfolios, real estate presents an excellent opportunity to balance risk, reward, and tax benefits. However, not all real estate investments are created equal. When comparing single-family homes, commercial properties, and multifamily investments, it becomes clear that multifamily investing hits the sweet spot—the "Goldilocks" of real estate, offering the perfect balance for sophisticated investors.

Let’s explore why multifamily investments are the "just right" choice, providing a middle ground between the volatility of commercial properties and the limited upside of single-family homes.

Single-Family Homes: Too Small to Scale

Many investors start with single-family homes because they are familiar and typically require a lower upfront investment. However, for high-net-worth individuals, single-family homes quickly become inefficient for growing wealth over time.

1. Limited Cash Flow

With a single-family rental, your cash flow comes from just one tenant. If that tenant leaves or doesn’t pay rent, you lose 100% of your rental income until the property is re-leased. This leaves single-family properties vulnerable to vacancies and can disrupt steady income, especially in markets with high tenant turnover.

Difficult to Scale

To generate significant cash flow or achieve economies of scale with single-family properties, you would need to own and manage multiple homes, each with separate tenants, maintenance needs, and locations. Managing a dozen single-family homes can quickly become cumbersome, requiring much more effort than overseeing a multifamily property where all units are in one location.

On the other end of the spectrum, commercial properties—such as office buildings, retail centers, or industrial spaces—offer the potential for large returns but come with a higher level of risk and volatility, especially in times of economic uncertainty.

Commercial Properties: Too Volatile

1. Economic Sensitivity

Commercial real estate is closely tied to the overall economy. For example, during economic downturns, office vacancies can spike, or retail spaces can remain empty for extended periods, leading to major cash flow disruptions. In the post-COVID era, many office spaces are still struggling to recover, and shifting consumer behavior continues to challenge retail spaces. This economic sensitivity makes commercial real estate a riskier investment, particularly for investors who value stability.

2. Larger Capital Requirements

Investing in commercial properties often requires a much larger upfront investment than multifamily properties. Additionally, financing options can be more restrictive for commercial real estate compared to multifamily investments. This high barrier to entry makes commercial real estate less attractive for investors looking for a mix of growth potential and security.

Multifamily Properties: The "Just Right" Middle Ground

Multifamily real estate sits comfortably between these two extremes, offering a balanced approach that blends consistent income with growth potential, scalability, and tax advantages.

1. Stable Cash Flow

One of the biggest advantages of multifamily investing is the ability to generate stable, diversified income. With multiple tenants under one roof, the impact of one vacancy is much less significant than in a single-family rental. The consistent rental income from multiple units provides a reliable stream of cash flow, even during economic fluctuations.

Multifamily properties tend to have lower vacancy rates compared to commercial properties, especially in desirable markets where housing demand is strong. With rental housing being an essential need, the risk of extended vacancies is much lower than in the office or retail space.

2. Scalability

Multifamily properties are far easier to scale than single-family homes. For example, owning a 20-unit apartment building allows you to generate rental income from 20 units, all under one roof. This centralization of tenants and units means you benefit from economies of scale, with fewer properties to manage and more cash flow potential per location. You can add more units to your portfolio faster and with less effort than acquiring individual homes scattered across different neighborhoods.

3. Lower Volatility

Compared to commercial real estate, multifamily properties offer lower volatility because the demand for rental housing remains relatively constant, even during economic downturns. People always need a place to live, which makes multifamily real estate a more secure investment during recessions or periods of uncertainty.

For example, during the 2008 financial crisis and the more recent COVID-19 pandemic, multifamily properties remained one of the most resilient sectors of real estate, as the need for affordable rental housing remained strong.

4. Tax Benefits

Multifamily investments offer significant tax advantages that help investors preserve and grow their wealth. The biggest benefit comes from depreciation, which allows investors to write off a portion of the property's value each year, reducing taxable income. In many cases, this depreciation can completely offset rental income, making it tax-free in some scenarios.

Additionally, high-net-worth investors can use 1031 exchanges to defer capital gains taxes when selling one multifamily property and reinvesting in another. This allows for the continual growth of wealth without the immediate tax burden, something that’s much harder to achieve with other asset classes.

5. Appreciation Potential

While cash flow is a primary reason for investing in multifamily properties, they also offer strong appreciation potential over time. As rents increase and operating costs stabilize, the value of a multifamily property can grow significantly. In hot markets, appreciation can be substantial, providing an additional boost to the investor’s returns.

Why Multifamily is the "Goldilocks" of Real Estate

Multifamily investing is the perfect middle ground for high-net-worth individuals who want the best of both worlds: consistent income like single-family rentals and strong appreciation potential without the extreme volatility of commercial properties. It provides a “just right” mix of scalability, stability, and tax benefits that can grow wealth steadily over time.

Single-family homes may be too small and challenging to scale.
Commercial properties can be too volatile and risky, especially in uncertain economic times.
But multifamily properties offer a balanced approach, providing a dependable stream of income and the opportunity for long-term wealth creation.

For investors looking to build a diversified portfolio with a focus on both growth and stability, multifamily real estate is the perfect vehicle.

Conclusion

Multifamily investing stands out as the “Goldilocks” of real estate investments, offering high-net-worth individuals a balanced approach to wealth creation. It provides stable income, scalability, tax advantages, and the potential for significant appreciation, all while avoiding the pitfalls of single-family rentals and commercial properties. If you’re looking for a smart, reliable way to grow your wealth while maintaining a diversified portfolio, multifamily investing may be the "just right" option for you.

Are you ready to explore multifamily real estate as the next step in your investment journey? Reach out to our team to learn more about the opportunities available.

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P.S. If one of your priorities, like mine, is building and preserving your wealth through multifamily real estate investments, click here to download my new eBook: The Ultimate Guide to Creating & Preserving Your Wealth.

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If you are an accredited investor interested in learning more about passively investing in multifamily properties, click here to complete our investor form and schedule a call with our Investor Relations team.

About Ellie Perlman

Ellie Perlman is the founder of Blue Lake Capital, a commercial real estate investment firm specializing in multifamily investing throughout the United States. At Blue Lake Capital, Ellie partners with both institutional and individual investors to grow their wealth by achieving double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.

A defining factor of Blue Lake Capital’s strategy is founded in utilizing machine learning/artificial intelligence throughout the course of all acquisitions and asset management. This advanced technology enables the company to produce accurate and data-driven forecasting for all assets on a market, property, and even tenant basis. In doing so, Blue Lake is able to lead commercial investments with the full capabilities of today’s technology.

Ellie is the founding host of REady2Scale, a podcast that highlights the assets, processes, and strategies for the multiple approaches to successful real estate investing.

She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.

Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.

You can read more about Blue Lake Capital and Ellie Perlman at www.bluelake-capital.com.

*The content provided on this website, including all downloadable resources, is for informational purposes only and should not be interpreted as financial advice. Furthermore, this material does not constitute an offer to sell or a solicitation of an offer to buy any securities.