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
Real estate professionals and investors classify multifamily properties according to their potential investment returns and associated risk. The classes are A, B, C, and D with A being the best rating and D being the lowest. Many factors, including location, age and condition of building, and local market rental rates, shape the class assigned to a particular property. 
Although A and B classes demand higher prices and rents, C and D classes do not necessarily equal undesirable investments. By and large, the asset classes communicate what to expect and what will be necessary to succeed. These classes also mean different things in different markets due to the huge influence of location on revenue and real estate value. 
Classifying multifamily real estate requires assessing a combination of hard numbers that can be documented and less certain factors about the future, like appreciation.
Frequently used variables are:
Desirability of location
Residents' income levels and credit worthiness
Local crime rates 
Other issues can influence classification, but the classes mostly adhere to the following guidelines.
The primary features of Class A real estate are:
Building is 15 or fewer years old.
Units have great amenities.
Tenants have high incomes.
Location appeals to high-earners.
Building is professionally managed.
Rent is high.
Vacancies are low.
No major repairs or upgrades needed any time soon. 
These properties come with high price tags but should appreciate and present little risk to investors.
In general, these are the characteristics of Class B properties:
Buildings may be up to 20 years old.
Tenants have moderate income.
Rent is at a medium level.
Buildings are in good condition but maintenance and upgrades are on the horizon.
Overall, investors view the risk as higher with Class B buildings but not excessive. The opportunity to add value by investing in renovations is often present.  Lower property prices make them accessible to more investors as well.
At this point, the shine is off a building because:
Building age is beyond 20 years.
Renovations are obviously needed.
Location may not demand high rents.
Tenants have lower incomes. 
Class C buildings have lower prices. The investment risk is higher but revenue generation could be good. 
Although investors can and do earn revenue from Class D properties, they present many challenges, including:
Building age is above 30 years.
Crime impacts location.
Tenants have low incomes and low creditworthiness.
Vacancies are high.
Rent collection can be a recurring battle.
Building condition is poor. 
Acquisition costs are low and can immediately provide equity to an owner. The investor may also avoid the cost of major renovations in an area where low-income tenants cannot pay for better apartments anyway. Despite these positive attributes, the investment presents higher risk. 
Adding Value Through Repositioning
To reposition a property, an investor increases the Net Operating Income either through collecting more revenue, lowering operating expenses, or both. When successful, a higher NOI results in greater appreciation. 
Any class of property could have the potential for repositioning with the right market forces and property characteristics. Even a Class C or D property could rise to a Class B rating if the building is in a neighborhood that has suddenly become desirable to higher income tenants.
As with all things real estate, success comes down to understanding local markets and spotting properties that can be repositioned successfully.
   https://www.realtymogul.com/knowledge-center/article/what-is-class-a-class-b-or-class-c-property
  https://retipster.com/class-a-b-c-d-properties-explained/#
  https://www.biggerpockets.com/blog/2016-07-06-multifamily-real-estate-value#multifamily-valuation-how-to-calculate-value-in-multifamily-investing
Real estate investing plays a critical role in portfolio diversification far beyond simply being a different type of asset. Investors can acquire a real estate company's publicly traded stock or invest in privately held real estate either directly or passively. A private investment in real estate, like multifamily housing, will be largely insulated from the forces that influence public stock markets. As a result, private assets are particularly well suited to reducing investment risk through diversification.
Public Markets Offer Limited Diversification
Buying publicly traded stocks in different types of industries and companies might look like diversification. However, diversity means more than investing in different things within a single market, and the public arena forms only part of the investment universe. For example, the managing director of investment consulting at Ascent Private Capital Management at U.S. Bank called the S&P 500 a single egg basket in a March 2021 interview for Barrons. 
Furthermore, the current state of public securities in the United States has actually become less diverse. The New York Times reported in 2018 that the number of publicly traded companies on U.S. stock exchanges had fallen by 25% since 1976. 
Declining numbers of publicly traded companies mean that the remaining companies have consolidated their influence over markets. Within the S&P 500, the tech giants Alphabet, Amazon, Apple, Facebook, and Microsoft comprise almost 25% of the whole index.  An increasingly consolidated environment promotes asset correlation.
The Threat of Asset Correlation
Asset correlation describes the process of how stocks or assets behave in relation to each other. Assets moving up or down together within a public stock market demonstrate positive correlation. Negative correlation occurs when one asset goes up when another goes down. Asset activities that show no relation to each other are non-correlated. 
According to Modern Portfolio Theory, an approach recognized with the Nobel Prize in Economics in 1990, risk goes down when investments are diversified among non-correlated assets. The absence of correlation among investments can potentially lead to higher returns over the long term. 
Private Real Estate Has Low Correlation With Public Markets
Returns from private real estate investments consistently display little to no correlation with public securities and bonds. For this reason, they have a strong potential to increase risk-adjusted returns for investors previously invested mainly in public stocks and bonds. 
Private Real Estate As an Inflation Hedge
Real estate can demand value increases in relation to inflation. Because rent and property value have a greater ability to rise in relation to inflation compared to other assets, real estate can help a portfolio keep pace with inflation. 
Multifamily properties keep up with inflation as new tenants sign new leases or existing tenants renew leases at elevated rent levels. This gradual process protects investors' revenue over the long term. Additionally, inflation generally adds to the appreciation of an asset should it eventually go on the market at a higher price. 
Institutional Investors Seek Alternative Assets
Passive real estate investing offers individuals a way to replicate the alternative asset diversification strategy leaned on by institutional investors. Investors at that level embrace private assets as a way to limit exposure to public market volatility. According to a 2020 survey of institutional investors by the Natixis Center for Investor Insight, the majority of respondents turned to alternative assets to mitigate public asset fluctuations caused by the pandemic. Additionally, 71% of institutional investors were attracted to the higher returns possible with private assets. 
Passive investment in multifamily real estate connects people with the advantages of private equity while shielding them from the day-to-day work of property development and management. After completing the investment transaction, the investor gains quarterly cash disbursements from rent collection and the eventual sale of the appreciated property.
  https://www.barrons.com/articles/future-returns-investing-beyond-the-s-p-500-01617126920
  https://www.thebalance.com/what-is-asset-correlation-2894312
  https://www.bankofsingapore.com/research/the-role-of-real-estate-in-a-diversified-portfolio.html