Multifamily Real Estate: Long-Term Holds, Tax Advantages, and Predictable Income

Deep Dive

Robert Boucai and James Broyer, co-founders of Newbrook Capital Properties, discuss their multifamily real estate investment platform. Boucai's initial investment experience in real estate general partnerships revealed superior after-tax returns due to depreciation shelters and income growth compared to other investments. This observation led to the conclusion that they needed to create their own optimal solution, as existing general partners lacked certain desired attributes such as long-term fixed-rate financing and sufficient personal capital alignment.

The conversation then shifts to Boucai's career trajectory. He pursued real estate and finance at Wharton, starting his career at Blackstone in 1997. While at Blackstone, he also explored venture capital by investing in technology and telecom startups during the internet build-out, some of which went public. The subsequent dot-com bubble burst led him to recognize opportunities on the short side of the market, prompting him to join a hedge fund in 2001. He worked there until 2005, capitalizing on the TMT bubble's collapse.

Boucai then details the founding of Newbrook Capital Advisors in February 2006. He aimed to build a firm based on best practices learned from both public and private equity, emphasizing standardized approaches, investment committees, and rigorous research. Starting with $9 million in assets under management, the firm grew to $200 million by the end of its first year and currently manages approximately $1 billion across hedge fund and long-only strategies. He notes that common threads across his diverse investment experiences include remaining aware of changing market dynamics and understanding how cycles impact different asset classes.

The discussion moves to the evolution of the hedge fund business. Boucai describes the early 2000s as a "golden era" for hedge funds, characterized by lower competition, less sophisticated data analysis, and the ability to generate consistent returns even in flat markets. He contrasts this with the present day, which features more multi-strat funds and advanced data utilization.

Boucai explains his return to private real estate investing, stemming from his 2020 personal investment performance. He observed that real estate provided better after-tax returns than liquid investments due to tax shelters and income growth. This realization prompted the desire to build a platform focused on long-duration, tax-efficient income from multifamily properties. He highlights that many existing general partners utilize short-term, floating-rate financing and shorter hold periods driven by carried interest, which does not align with his goal of maximizing tax benefits through long-term ownership and fixed-rate debt.

The narrative then focuses on the partnership with James Broyer and the formation of Newbrook Capital Properties. Boucai spent 2021 and 2022 seeking a partner who shared his vision for long-term holds, 30-year financing, investor alignment, and a contrarian approach. He met approximately 50 potential partners before finding Jordan, who led the multifamily business at J R K. This partnership was solidified in January 2022, though the market conditions at the time, with cap rates below borrowing rates, initially presented negative leverage, a factor Newbrook prioritizes avoiding.

Broyer shares his career path, starting in pension consulting after graduating in 2008, followed by investment banking. He found real estate more engaging and joined Boston Capital, focusing on buying market-rate apartment communities. After two years, he moved to J R K Property Holdings in Los Angeles, where he spent 12 years, rising from analyst to president of the investment division. He left J R K due to its evolution into a family business and a desire to pursue an entrepreneurial venture with Robert Boucai, whose investment philosophy aligned with his own emphasis on de-risking assets through longer holds and fixed-rate financing.

Broyer elaborates on the multifamily market in early 2022, noting a significant increase in acquisition volume since 2019, compressed cap rates, and the substantial capital raised by non-traded REITs, which were acquiring a large portion of multifamily transactions. For those employing fixed-rate financing, like Newbrook, the market was unattractive, with values trading above replacement cost and insufficient cash-on-cash returns. By August 2023, a market correction had occurred, with values dropping about 30% from their peak, creating an attractive entry point with limited downside and opportunities to buy below replacement cost.

The strategic focus on multifamily real estate is explained by its relative lack of controversy compared to office or retail. Boucai emphasizes that people always need housing, and multifamily properties consistently have access to lending markets, making them a predictable and safe investment for generating a synthetic fixed-income replacement stream.

The decision to exclusively use fixed-rate debt is further detailed. Boucai reiterates that the tax benefits of real estate, particularly the depreciation shield, are maximized through long-term holds enabled by fixed-rate financing. This strategy provides a predictable income stream, less dependent on fluctuating interest rates, and offers a strong Internal Rate of Return even if asset appreciation is minimal.

Regarding market selection, Newbrook underwrites approximately 100 deals monthly, focusing on landlord-friendly states in the Midwest and select Sunbelt markets. They look for compressed markets with positive rent growth trends and prioritize deals where approximately two-thirds of the projected return comes from cash flow, as opposed to appreciation-focused strategies that rely on floating-rate debt and shorter hold periods.

Boucai describes a specific deal in suburban Charlotte, North Carolina, acquired in June 2024. The asset was 96.5% occupied, achieving significant rent increases on new leases and renewals. Purchased around a 6% cap rate with eight years of financing at approximately 4%, it offered 200 basis points of positive leverage from day one. The property has experienced 13% rent growth in 16 months, with only 20% of units renovated, indicating substantial potential for further rent increases.

The renovation process involves an upfront capital allocation of $12,000 to $20,000 per unit, with 70% dedicated to interior upgrades like kitchens and bathrooms, and the remaining 30% to amenities such as fitness centers and pools. Interiors focus on durable materials like wood plank flooring and stone countertops to reduce long-term capital expenditure. Typically, 10-20% of units are renovated annually, with a focus on enhancing the resident experience to drive renewals and upgrades.

Portfolio diversification involves focusing on the Midwest and Sunbelt, avoiding states like California and New York due to potential regulatory restrictions and higher taxes. The goal is to operate within 10-12 landlord-friendly states, ensuring geographic diversity over a long-duration hold.

The exit strategy anticipates selling during a compressed market period, ideally when interest rates are falling or when market conditions allow for a premium sale, either as a portfolio or a larger transaction. However, they underwrite for selling in a buyer's market, believing their strategy will provide an attractive outcome regardless of exit conditions.

The competitive landscape for multifamily is described as less crowded than in previous years due to the number of overleveraged investors sidelined by floating-rate debt. Newbrook