Photo courtesy of Texas A&M University
Migration to Texas has been robust for years. This influx of new people has forced up rents within the multifamily housing market, especially in major metropolitan areas. New arrivals tend to rent because they either lack the means to buy homes or want to get to know an area before buying.
Half Million New Arrivals Per Year
U.S. Census Bureau data, as reported by the Texas Relocation Report 2021, showed that over 500,000 people moved to Texas from out of state in 2019. In fact, since the last census in 2010, Texas welcomed 4.2 million new people for an overall growth rate of 16.4%. For seven years in a row, more than 500,000 entered the state annually. Even after taking people who move away into account, the state gained well over 100,000 people in 2019 alone. 
California and Florida Top Sources
According to the Texas Real Estate Research Center, California represented the number one source of new Texas residents for the previous 19 out of 20 years. Florida holds the number two position in regards to people moving to Texas. Even so, the numbers moving from Florida do not amount to half the number of people coming from California.
As can be expected, the major cities within Texas received the bulk of transplants. Well over half of new arrivals, 60.7%, moved into just four of the state's Metropolitan Statistical Areas. 
Jobs and Lower Cost of Living Attract People
The strong Texas economy has created many new employment opportunities for both Texans and new arrivals. Successful oil and gas, technology, manufacturing, and business services sectors provide plenty of jobs.
Wages are relatively appealing as well. As a whole, Texas has an average personal income of $38,000. Although modest, that number is still $9,000 higher than the national average. In big cities, salaries are much better. For example, the average yearly salary in Dallas is $67,500.
The cost of living on the West and East coasts of the country still exceeds what people pay in Texas. Although rents are rising in big cities, people still enjoy lower prices for transportation and consumer goods. The state does not have a personal income tax either.
Aside from good jobs and a lower cost of living, Texas has some qualities that also attract people, including:
Numerous recreational activities
Multiple large urban areas
Great educational systems 
Texas Rental Outlook Strong As People Keep Moving In
Swelling numbers of newcomers mean strong demand for rental units. Although the pandemic caused some markets to dip in 2020, the rebound in demand and rents has been impressive. The Business Journals reported in September 2021 that:
Dallas-Fort Worth rents rose 9%
Austin rents went up by 10.5%
Houston rents increased by 4.8%
San Antonio rents increased by 6.3% 
These days, the multifamily housing market responds quickly to increased demand. Apartment complex companies track demand with algorithms. If applications from renters jump in one week, then the management company will immediately raise rents.
Builders have been working to provide new housing supply for years. For example, more than 5,000 new rental units have been built around Austin every year since 2014. Record-setting numbers of new units are expected to hit the market in 2021 and 2022. Despite new inventory, the number of people needing homes remains chronically higher than what they can find on the market. 
As a result, the coming years will allow multifamily real estate investors to keep both occupancy rates and rents high.
  https://apnews.com/article/texas-business-census-2020-science-0d436b250dc07111bff4b4f6cdd6682b
Invest in Multifamily Properties With Self-Directed IRAs
People with a sizable sum of money deposited in an Individual Retirement Account may not be aware that they can use that money to invest in real estate, including multifamily housing. The Employee Retirement Income Security Act allows individuals to use self-directed IRAs or solo 401(k) plans to purchase real estate investments.
A self-directed IRA opens up investing opportunities beyond publicly traded assets. People with self-directed accounts can direct money toward purchases of rental properties, house flips, or land. This system is underutilized by the public due to a lack of knowledge, but self-directed IRAs make diversification into real estate possible for retirement investors. 
IRA Custodian Necessary
Many IRAs exclude real estate investing because the accounts are managed by entities that do not facilitate those transactions. For this reason, someone wishing to shift retirement funds into multifamily investments needs an IRA custodian.
Special financial service companies act as IRA custodians that set up self-directed accounts. The custodian then handles the paperwork for the transactions desired by an account holder. The primary responsibility of the custodian is to execute each transaction in accordance with IRA and tax regulations. 
What Is a Solo 401(k)?
A solo 401(k) plan works in a similar way to a self-directed IRA. The Internal Revenue Service calls these savings accounts one-participant 401(k) plans. Business owners who have no employees may establish this type of 401(k) plan, and the single plan participant may decide how to invest the funds. 
Keeping compliant with the many tax rules applicable to this account places heavy paperwork and bookkeeping demands on the person running it. However, advice from a tax accountant or financial adviser may be used. The effort rewards the plan participant with substantial investment flexibility, including real estate investments, issuance of private loans, or purchase of shares in a privately held business. 
Real Estate Investment Process
After investors identify desirable real estate deals, they initiate the transactions through the IRA custodian. This act keeps the asset purchase within the IRA so that it technically holds the property and can qualify for tax advantages. Investors must be able to fund the transaction completely with IRA funds because out-of-pocket payments toward property improvements violate tax regulations. A third party must handle the property repairs and management.
Any rental income generated by an investment must go back into the IRA. Additionally, the IRA must receive proceeds from the property sale. People who reach retirement age and want to cash out the assets cannot sell the property to themselves. They must sell it, have the IRA collect the money, and then withdraw from the account. For people who want to continue investing through the self-directed IRA, they can receive proceeds from one property and then look for a new investment. 
Self-Directed IRA Benefits
In general, IRAs function as tax shelters that allow investments to grow without being whittled down continually by taxes. A self-directed IRA holding rental properties can defer taxes on rental income. Careful tax planning, often with professional guidance, is necessary to maintain compliance and enjoy tax benefits.
Real estate investing with IRA funds also introduces the chance to increase returns. Many IRAs unfortunately only pay very modest returns. Switching funds into a self-directed account can unlock the higher returns possible through multifamily housing investments. As a tangible asset, real estate has presented investors with a historically stable place to earn money over the long term. 
   https://www.credit.com/blog/how-to-invest-in-real-estate-with-a-self-directed-ira-is-it-the-best-option/
Debt is a four-letter word when people promise future earnings in exchange for items that depreciate and produce no cash flow, such as a personal vehicle or vacation to Italy. In contrast, multifamily real estate is an asset that can appreciate and produce revenue. A loan for multifamily housing uses debt as a lever to unlock earnings that exceed the amount owed to a lender. For this reason, the term leverage is synonymous with debt. 
Mortgages As Good Debt
Residential mortgages make it possible for people to own homes without waiting years or decades to save enough money to buy them outright. Similarly, multifamily property investors can begin building wealth via mortgages without waiting years to amass the funds necessary to pay six or seven figures for an apartment building or duplex.
Even Debt.org, an organization dedicated to helping consumers overcome debt problems, describes mortgages as good debt. A mortgage enables a person to leverage earnings into a place to live and future wealth. 
Monthly mortgage payments also build equity in a property. The portions of each debt payment applied to principle grant borrowers a greater and greater share of ownership as time goes by. 
Equity combined with appreciation increases returns on the investment. Although property values can get rocky, they almost always trend upward over time. Even modest appreciation of 2% on a $200,000 property for one year results in a property value of $204,000. As a result, the equity percentage becomes a percentage of a higher dollar amount. 
Higher Rates of Return Compared to Zero-Debt Real Estate Purchases
A closer examination of returns for multifamily real estate investors clearly shows how leverage can produce impressive gains. Instead of paying cash on a $200,000 property, an investor could put down 20% ($40,000) and obtain an 80% loan ($160,000).
As described above, appreciation should kick in the first year. In this example, 3% appreciation increases the property’s value to $206,000 in one year. If the buyers had paid all cash, then appreciation would only yield a gain of $6,000 on the entire $200,000 or 3%. However, a leveraged investment would experience the same appreciation, but the investors would document a $6,000 gain after only putting in $40,000. The appreciation on invested money then equals 15%.
Substantial advantages are also evident on the cash flow side of the investment equation. Although a property without debt would produce a higher cash flow, the actual rate of return on a leveraged investment rewards investors well while not requiring them to tie up six figures in a single property. 
If the hypothetical $200,000 property yields $2,000 a month in revenue minus operating expenses of $600 and a mortgage payment of $936, investors collect $464 a month on a $40,000 investment. This amounts to $5,568 in a year, which equals a rate of return of 13.92% on $40,000.
Mitigating the Risks of Leveraged Real Estate
Unexpected downturns in property values and occupancy rate fluctuations can threaten returns on leveraged properties. Risks can be controlled by leaving enough cushion between total cash flow, expenses, and debt payments.
Before investors act, a professional assessment of a real estate investment is in order. A realistic look at its future prospects protects against unrealistic expectations about appreciation or a property’s potential in the market. For real estate leveraging to remain in the zone of good debt, overly high mortgage payments must be avoided so that fluctuations in revenue remain manageable and have little potential to undermine long-term returns. 
  https://www.biggerpockets.com/blog/good-debt-real-estate
Investors of all stripes have to concentrate on two things: making money and limiting tax bills. Multifamily real estate investing has the ability to accomplish both goals. The U.S. tax code favors real estate investors in a number of ways.
Operational Tax Advantages
Like any other business, landlords have operational expenses. Any individual multifamily property owner may deduct taxes, insurance, and maintenance costs. Real estate investments orchestrated through a limited liability company or partnership have access to additional expense write-offs, including advertising, office space, travel, and professional services. 
Depreciation describes reduced value over time attributed to wear and tear on a physical asset. The tax code recognizes that even the sturdiest building materials degrade as the years go by and require maintenance or replacement.
In the view of the Internal Revenue Service, real estate owners of residential property, including multifamily housing, can expect 27.5 years of usefulness or profitability from their investment. For this reason, rental property owners can calculate annual depreciation by dividing the property's value by 27.5. For example, a $600,000 property experiences $21,818 (600,000/27.5) in depreciation each year. In this scenario, if a hypothetical tax bill of $90,000 is owed before depreciation, it would be reduced to $61,182 (90,000 - 21,818).
As a result, depreciation represents one of the largest tax advantages of investing in multifamily real estate. Of even greater importance is the fact that a property that appreciates in value still qualifies for depreciation tax benefits. 
A method known as cost segregation accelerates tax cuts related to depreciation on multifamily housing by factoring in shorter lifespans for fixtures, cabinets, and appliances. Federal tax code acknowledges that these items wear out faster than a building, which allows the building owners to write off their depreciation in 7-year periods.
The depreciation of the fixtures, appliances, and cabinets may then be added to the building depreciation deduction. This reduces tax liabilities even more. The result is a boost to cash flow in the near term, which could increase profits or allow for more upgrades. 
However, the IRS only accepts deductions for cost segregation if the builder owners pay for a cost segregation study. An outside party, like an engineering firm, would need to inspect the buildings and prepare a report about the value of certain segments of the building that are expected to depreciate more rapidly than the structure itself. For this reason, the expected benefits of cost segregation must have a greater value than the cost of the study to be worth pursuing. 
The IRS taxes different forms of income at different rates. The three income categories are ordinary, investment or portfolio, and passive. Passive income is defined as income earned without active participation or the trading of time, and it is taxed at the lowest rate. Real estate investors who have managers take care of all or the vast majority of day-to-day tasks often qualify as recipients of passive income from rents because they are passively collecting earnings. 
Taken together, all tax strategies available to multifamily real estate investors improve returns on investment. To achieve the greatest tax advantages, investors rely on careful accounting of the purchase, operating expenses, revenue, and proceeds from a sale.
  https://www.managecentralfloridaproperty.com/tax-benefits-real-estate-investing.html
Positive Net Migration to the Sunbelt Driving Up Apartment Demand
Multifamily real estate investors can find strategic advantages when they put on a demographer's hat. Population trends, specifically net migration to a state or metropolitan region, offer clues that can unlock value. Net migration refers to the total gain or loss a state realizes after adding and subtracting people who moved in and those who moved out. A location with a positive net migration has a higher chance of increased housing demand. 
Greater demand for a product, in this case apartments, translates into better returns on investment. For example, the Dallas Morning News reported on July 6, that out-of-state migrants to the Dallas Fort Worth area produced a surge in apartment leasing in the second quarter. Demand caused rents to rise by 7% in the DFW market compared to the year before. The article quoted the RealPage chief economist as saying that upward pressure on rent for luxury apartments created room for middle-market properties to raise their rents as well. 
The DFW market example highlights the growing markets in Sunbelt states, like Texas. Other warm states with strong economies are experiencing notable increases in population due to people shifting their lives away from major population centers on the coasts.
Why Do People Move?
Before digging deeper into the importance of net migration when evaluating a multifamily real estate deal, the reasons that people move bear consideration. Jobs are an obvious example. Greener pastures in thriving cities and suburbs will motivate recent graduates and those dissatisfied with their employment situation to move.
Housing affordability attracts migrants. People living in high cost of living cities, such as Seattle or Los Angeles, may choose to leave high rents behind in favor of less costly housing in Texas or Arizona.
Lifestyle factors play a role in some migration. Retirees may want a warmer place to live, or young professionals may want access to suburban schools when they wish to start families.
Lower taxes contribute somewhat to migration. This could be particularly true for people with higher incomes. Additionally, high-earners who run companies may relocate their headquarters to connect with tax advantages. 
Current Population Trends
Public and private sources supply data about migration that investors can analyze for greater insights about the best places to buy property. The U.S. Census, U.S. Post Office, Bureau of Labor Statistics, and even an annual survey by the U-Haul company about one-way truck rentals build a picture about who is moving where.
An April 2020 report from CBRE Econometric Advisors cited postal data that confirmed that the Sunbelt, specifically cities in the Southeast, continued to enjoy positive net migration. CBRA also noted that renters who moved tended to remain renters where they landed. 
The publication GlobeSt confirmed that mutifamily investors had certainly taken notice of migration to non-major metropolitan areas in the Sunbelt. In 2020, almost 70,000 residents of California moved to Arizona, Nevada, Utah, and Idaho where the cost of living is lower. As a result, emerging Sunbelt markets received record-setting investments in multifamily real estate. Non-major metros received 75.8% of apartment investments in 2020. 
How Strong Net Migration Equals Profits
Strong net migration is a good indicator that demand will be high for apartments. This demand improves occupancy and quickly enables rent increases. Good occupancy and rent growth could also make the real estate appreciate rapidly.
  https://www.tacticares.com/blog-feed/real-estate-investment-state-net-migration
Although 2021 is not shaping up to break records for investors, multifamily housing broadly remains a source of stable returns. Many opportunities remain considering the persistently high demand for rental housing and low interest rates. Vacancy rates are poised to head downward, and rent growth will come out of negative territory. Multifamily real estate inventory will remain behind demand. Demographic shifts on the horizon indicate stronger market growth in the suburbs.
Vacancy Rates Peaking This Year
According to Fannie Mae's Multifamily Economic and Market Commentary from January 2021, vacancy rates should peak mid-year. Market analysts estimate that the national vacancy rate will hit 6.5% and then gradually improve heading into 2022. 
Higher vacancy rates clustered among Class A real estate as young professional left urban areas during the pandemic. In contrast, Class B and C housing vacancies remained stable due to their greater affordability. 
Slow Rent Growth
Multifamily real estate investors can expect minimal rent growth in the coming year. Rent growth dipped approximately 0.75% in 2020 compared to 2019. As 2021 progresses and society regains normalcy, rents could recover slightly by the end of year. Fannie Mae predicts rent growth to either break the zero mark or nudge upward by 0.5%. 
Within urban markets, Fitch Ratings anticipates that rents will recover and grow within two years after the shock of the pandemic. At this point, suburban markets, especially in the Sun Belt, continue to outperform urban multifamily real estate. 
Multifamily Real Estate Inventory
Builders will attempt to meet the demand for multifamily real estate in 2021. Surveys by the National Apartment Association indicate that roughly 300,000 to 400,000 new units are planned for this year. 
However, new construction will likely fail to eliminate the rental unit supply problem. Revenue dips and higher expenses for building owners in 2020 have depressed somewhat the rush to build new units.  Additionally, supply and labor shortages continue to force builders to delay new construction. 
From the perspective of investors, more multifamily properties owned by individuals may come on the market in increasing numbers this year. Data provided by CoStar show that individuals, often called "mom and pop landlords" own over one-third of affordable rentals. Their modest resources have increased their financial strain during the pandemic as their tenants became delinquent on rent in higher numbers. As of October 2020, the National Leased Housing Association reported that 89% of individual landlords had suffered revenue declines.  Such an environment could produce more motivated sellers than usual and thus yield additional opportunities for investors.
The strongest markets for multifamily real estate investors appear to be shifting to the suburbs. This is mostly due to Millennials entering midlife, which typically involves a shift from urban living to suburban living as people desire more living space and start families.  Although many people in that midlife age group will desire single-family homes, low supply could realistically keep them renting apartments.
The potential does exist right now that immigration may increase. Immigrants have long been prone to renting. The Joint Center for Housing Studies reported that 83% of recent immigrants rent. 
Recovery will largely define the coming year for multifamily real estate. Although property values remained strong through the pandemic, rent growth will be slow for a while. Investors should also keep an eye on the developing demand in suburban areas.
   https://www.fanniemae.com/media/37966/display
  https://www.cbre.us/research-and-reports/2021-US-Real-Estate-Market-Outlook-Multifamily
    https://www.naahq.org/news-publications/2021-apartment-housing-outlook