Investing in Oil and Gas vs. Multifamily – Key Differences

At Investream, we’ve talked a lot about multifamily investing and still have it as part of the core of what we do. We’ve also diversified and aren’t afraid to pivot to other investment strategies when the time is right. Today, we wanted to talk about one option – investing in oil & gas.

So, how does investing in oil and gas stack up to multifamily investing?

Comparing Beginning Stages

In multifamily investing, most early-stage value comes from improving existing properties (value-add) or building from scratch (ground-up). With value-add, you work to add amenities and increase the revenue of a property before exiting. Ground-up development allows for complete control of a project from start to finish, improving the likelihood of positive returns.

For either type of project, you start with market analysis, which helps you decide:

• Where to build
• What areas are relatively affordable (e.g. suburbs)
• Which areas have the right demographics and economic drivers in the market and submarket to earn a good level of rent
• How land costs, rent, and construction costs will compare to income from the property

When investing in oil and gas, geology and discovery are performed to determine whether a field is a good area for potential drilling. This includes conducting geological surveys, understanding where the oil is, and drilling once or twice to prove the potential. You can learn more about the steps involved in oil and gas investing in our blog.

Comparing Risk Levels

Rents tend to increase gradually over time in multifamily investing, leading to property value appreciation. This appreciation translates to a relatively stable investment with predictable returns.

While vacancy rates and economic downturns can disrupt some of the gains, multifamily investors also have the potential to hold through tumultuous times and exit at more advantageous moments. Real estate investments are historically resilient.

Active investors also have risks and responsibilities related to management. You’ll have to address maintenance, tenant requests, and contribute to other property management costs.

Investors can see higher risk from this and the possibility that drilling will not result in productive wells. Exploration and production can be expensive and risky. You also have to time out your projects with the global demand forecast and decide where you think oil will be in the next 5-10 years before starting something new.

Investing in oil and gas is riskier, but also comes with greater reward. Oil prices are generally high but can fluctuate significantly based on global supply and demand. These fluctuations can be driven by geopolitical events, economic slowdowns, and alternative energy development. Because of this volatility, investing in oil and gas requires a strong understanding of market cycles and commodity trends.

When You Find Good Projects

Once a ground-up multifamily project is deemed to be promising, it’s time to buy the land, secure the land, build a team, and hire a general contractor. With oil and gas, you secure the land via a lease and hire a service company to drill and finish the wells. In both cases, you are putting a team and framework together to execute the deal.

What Happens Next?

After you acquire an existing property or create the units for a ground-up development opportunity, it’s time for a lease-up process. You want to make sure that 80-85% of units are leased and that occupancy is as high as possible. The next buyer after the apartment is running smoothly tends to be institutional money or private equity, entities that are interested in placing capital in a cashflow property. These buyers are not looking for analysis or marketing troubles.

When investing in oil & gas, you want to have a proven reservoir that’s flowing with cash flow on the production side. After that, a bigger company tends to come in and develop the field further. The exit phases of oil and gas investment go from small operators, to medium, to larger operators.

Tax Deduction Benefit

One of the biggest differentiators in oil & gas investing is the tax treatment. Investors can take depreciation from drilling and development and apply it against active W-2 income, something not available in most other asset classes, except for a few agricultural projects.

If you’re weighing investing in oil & gas versus multifamily, we’d be happy to walk through which deals fit your goals and risk tolerance. Join our community to explore upcoming opportunities and get a personal consultation.