Why Invest In Multi-Family Real Estate: A Case Study of Returns Based on Mid-Term and Long-Term Time Frames

November 18, 2020

As part of Essex’ 30th Anniversary celebration we are examining how Chicago’s multi-family real estate market has changed through the years. Essex’ President, Doug Imber, offers his take on how values have evolved over the past three decades. The following Case Study illustrates how multi-family investors with longer-term strategies are frequently rewarded the greatest.

Why Invest In Multi-Family Real Estate: A Case Study of Returns Based on Mid-Term and Long-Term Time Frames

There is no doubt that quick flips or short-term investment strategies can be extremely rewarding. But they are hard to continuously replicate. Throughout my career, it has seemed apparent that the investors who created the most substantial gains were the ones that resisted the temptations of short-term rewards and instead played the long game. As one sage investor told me at the beginning of my career, “Buy and wait. Don’t wait and buy.” Now with some benefit of hindsight, I can say that those words held true. Below are two of countless illustrations of this approach.

In 1992 Essex sold 2827 W. Burling Street, a 33-unit corridor building located in Lakeview, for $680,000, or $20,606 per unit. The buyers were a hands-on couple. The husband managed the property at night after working his full-time job, and his wife paid the bills and kept the books, all while raising their family.

Twelve years later Essex sold the property for them for a price of $2,150,000, or $65,151 per unit. Over the 12 years, the owners realized and annualized 26.3% non-compounding, unleveraged (105.2% leveraged), rate of appreciation. While there were no recessions during this period of time, there were a variety of challenges facing the nation, including terrorist attacks such as the Oklahoma City Bombing and 9/11; the invasions of Iraq and Afghanistan; government shutdowns; and Y2K, to name just a few.

From a longer-term perspective, Essex is currently under contract to sell 107 apartments on Wrightwood Avenue, in Lincoln Park, on behalf of a family that has owned the property for 53 years. The sellers acquired the property in 1967 for a price of $340,000. Based on the current contract price, the sellers realized an annualized 79% non-compounding, unleveraged (316% leveraged), rate of appreciation. For 53 straight years!

Of course, the number of impactful events over the past half century are too lengthy to cite here. Suffice it to say that there were countless micro and macro changes.

It is useful to look at how other investments fared during this same period. Fifty-three years ago, when the owners purchased the Wrightwood property, the DOW Jones Industrial Average was at 879. On November 17th, 2020 the DOW reached 29,783. In other words, the DOW increased 33,500% or 61% per year, non-compounding, during the same 53 year period.

It is worth noting, that these comparisons do not address cash flows, dividends, capital improvements or tax consequences, and instead they merely compare appreciation levels. Nevertheless, it illustrates how long-term holding through a variety of economic cycles can lead to amazing returns seldom realized in short-term holds.

Which leads to the question that all investors ask: Will past performance be a predictor of future results? It is the same question the Wrightwood owners must have asked themselves during the tumultuous 60’s, the Great Recession or countless other challenging times. And it is the same question we all ask ourselves during the days of Covid and increased government regulations.

Looking back helps show us how far we have come. And hindsight is always clearer than predictions. But if the past is a window into the future, what will returns look like over the next 12 years or 53 years? Hopefully Essex will be there to assist. But during these challenging times, keep the long-term in mind.

Since 1990, Essex Realty Group, Inc. has served Chicago’s investment real estate market as a top multifamily real estate brokerage firm. Contact us to learn more about our recent Chicagoland multifamily and mixed-use property sales and talk to a Chicago multifamily broker today.

Tagged in this post: Doug Imber