Interested in Multifamily? – Market Forces to Consider

I remain firm on my outlook that it’s a great time to buy. I will provide the caveat that I think it’s a great time to buy good deals. I think with the extended bull market and impressive real estate run we have seen, paired with the increasing amount of content coming out about how low-cost, and risk-free, and low-effort real estate is that people have a terrible idea of what a good deal is. It’s almost to a point where I would estimate that the general ‘real estate investor’ thinks a good deal is when the seller says “Yes”. I’ve seen C class properties marketed at 2% cap rates (cap rate measures the unleveraged return on investment) that have actually sold! Come on now. With the potential softening of prices and difficulty filling units I think we are headed for a small correction so conservative underwriting, to me, is key right now.

Let’s talk about some key points that can help you prepare for success and avoid catching the falling knife if you are just getting started or looking to scale your multifamily business:

  • To pick up on conservative underwriting, now would probably not be the time to maintain 2-3% rent growth in your pro forma. Collections are already becoming tough (and expected to get worse in coming months) paired with historically high unemployment. It suffices to say that if people can’t work, they can’t pay rent. I would be very cautious if a deal depends on rent growth to meet returns. I’m naturally conservative so I plan for worst case scenario and still like to see positive returns and always offer based on my conservative numbers. Don’t be the person that gives someone a great deal because you get foreclosed on or have to sell at a loss. Be smart up front, do your homework on your market, and run your numbers conservatively – especially if you are investing with other people’s money.

  • Right around Labor Day the CDC announce that residential evictions are being put on hold until the end of this year for those affected by covid-19. All tenants have to do is show paper work documenting that they have been affected by the virus and it initiates their eviction force field. Many tenants are taking advantage of this, not to say there aren’t those who truly need it, but some landlords are really suffering. This is causing the number of those in forbearance (currently over 4 million) to rise. The tenants aren’t paying, so the landlords can’t pay, and so the lien holder can’t pay to those who back the loans, leaving trail of people affected due to gross nonpayment. As someone looking to purchase a property, this affects you because if you have tenants who can’t pay, you will be in a bind to execute your business plan. Plan ahead.

  • Another topic to touch on for those operating multifamily properties is the vacancy factor. This one isn’t all doom and gloom but it is important to touch on. The multifamily market has seen both positive and negative forces with regards to vacancy. Bad news first. Vacancies are taking longer to fill. I have seen this myself in my portfolio. Rental listings are sitting longer and the time on market has grown. This could be because people don’t have the lease up costs like first month’s rent and security deposit available or because people are beginning to move back with mom or someone else. The number of millennials moving back in with parents since the pandemic is already in the millions and expected to grow. This is concerning because millennials have been expected to be one of the driving demographics in multifamily apartment rent growth (as are baby boomers). But on the flip side, people are staying in their units longer as time of occupancy is increasing. This could be due to the uncertainty of where to go or the associated risks with moving and becoming more exposed to the virus. Either way people are staying put which helps to keep vacancy and turnover costs down.

  • On a high note (depending on how you look at it) the number of renters is expected to rise. Forbearance continues to rise and the number of people facing eviction is predicted to be 40 million – 40 MILLION! What is to come is a lot of people who may lose their homes and enter the rental market. And current housing demand is not predicted to be met until 2030! That means throughout this whole next market cycle there will be a shortage of supply and an influx of potential new renters (unless everyone displaced moves in with mom and dad or grandma). There will be big opportunity for those who can deliver affordable housing in the coming years. This is maybe the number one reason why I believe now is a great time to buy, but pair that will all time low interest rates and easy access to capital… go find a good deal.

So what does all of this mean for you? It means there is going to be massive opportunity but there are some definite landmines you will need to learn how to navigate and become a prepared and informed buyer before taking the leap. I think action is the most important aspect, however, don’t go in blind guns a-blazing and be the next person on the forbearance list. Take this list as a starting point to begin your journey. Data driven decisions with some guts to act make the best investments – go make it happen!

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