Executive Summary
If most of your net worth was created by company stock, whether through an IPO, a tender offer, or years of equity compensation, your financial risk is likely dominated by a single factor: equity beta or the stock market. Even after diversifying out of a single company's shares into an ETF or mutual fund, a portfolio of public equities still rises and falls with the same tide. This paper makes the case that private multifamily real estate is one of the most effective complements to an equity heavy portfolio, for five reasons:
- Low correlation to equities: Private real estate has historically moved almost independently of the stock market, with a correlation to public US equities of roughly 0.07, far below the ~0.57 correlation between public REITs and public US equities. ¹
- Inflation protection: Apartment leases typically reset annually, allowing rents to keep pace with rising costs. During high-inflation periods from 1994–2022, apartment rent growth averaged 5.9% per year versus 2.5% in low-inflation periods. ²
- Tax-advantaged income: Stabilized multifamily assets have historically generated a healthy premium over treasuries or municipal bonds providing mid-single-digit annual cash yields, much of which can be shielded from current taxation by depreciation. ³
- Appreciation potential: Multifamily values grew about 5.3% per year from 2002–2024 which is roughly 1.8 percentage points above inflation and supported by a structural U.S. housing shortage. ⁴ Additional appreciation potential can also be generated through value add or opportunistic investment strategies.
- After-tax efficiency: For most high-net-worth investors, tax strategies such as depreciation, refinancing, 1031-exchange, and step-up-in-basis tools can turn a good pre-tax return into an exceptional after-tax one. One analysis found tax-aware private real estate delivered 8.1% after-tax returns from 1986–2020 which is ahead of public equities (7.6%) with less than half the volatility. ⁵
For taxable investors whose wealth is concentrated in the stock market, we believe a meaningful allocation to private multifamily real estate is one of the most direct ways to reduce portfolio risk without sacrificing long-term, after-tax wealth creation.
