“Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.” — Ronald Reagan
Is multifamily investing over?
Are the golden days of amazing interest rates and great cash flow behind us?
A lot of investors would say yes.
We’re even seeing a decrease in interest, particularly for multifamily deals.
Interest rates at the time of this post are 5.75% to 7.25% for bridge debt.
A year ago, the rates were 2.75% to 3.25%.
Things have changed significantly.
So is it over?
Are we all done?
I don’t think we are!
I think there’s some incredible opportunity here.
Now is a really great time to dive into what it means to be a multifamily investor.
Let’s jump into it!
1. Investor Sentiment Has Changed
For a long time, multifamily had momentum.
I know people who raised millions of dollars.
Around April, things started to slow down – at least when it comes to raising money.
It’s getting harder to raise funds because a lot of banks have changed the loan to value requirements.
The downpayment requirements have gone from 20% down to 30% or 35% down.
For those who are raising capital, that can be very difficult.
Investor sentiment is at a 35 year low.
There are many people who are cautious and concerned.
It’s also important to know what’s happening in the market.
What are the opportunities?
What should you do?
A lot of people are saying to sit on cash.
The problem with sitting on cash is inflation.
Shadow stats show that inflation is between 15% to 18%.
By sitting on cash, you’re losing 35% to 40% of your cash’s purchasing power.
With that in mind…
If you’re sitting in cash, I’d be careful how much cash you hold.
The purchasing value of your cash may drop by an astounding 40% over the next couple of years!
We’re in a different environment.
The Fed has created a phenomenal amount of currency from February 2020 to February 2022.
Over 40% to be exact.
But don’t fear!
There are still ways to combat this.
2. Higher Interest Rates and Higher Apartment Valuations
Most people think when interest rates go up, values for apartments go down.
It’s actually much more complicated than that.
There are negative attributes to apartment values and attributes that will increase their value.
I will make the case for both.
There are many negatives.
We’ve got higher interest rates.
The higher interest rates go, the less people can afford.
That will bring apartment valuations down.
You’ve got higher construction costs.
In addition to that, you’ve got labor costs.
It costs more money to employ property management.
That all leads to higher ownership costs.
It costs more to manage and to own.
We’ve already talked about the interest rates – that’s also an expense.
There’s also an expense related to that: interest rate caps.
Most of us who do multi-family deals use short-term bridge debt.
That’s typically two to five years.
There are caps on those debts to make sure the interest rate doesn’t go higher, but those caps are getting more expensive.
All of these things say that the valuation of apartments should be going down.
But there are two sides to every story.
You have things that are inflationary and things that are deflationary.
You’ve got things that cause apartment values to go down.
You’ve got things that cause apartment values to go up.
Let’s look at some positive values:
First is the higher rents.
We do deals in Jacksonville and rents there have gone up 19% in the last 10 months.
Another positive thing is that there is less competition.
There are less people buying apartments right now.
That means you’re getting more income than you’re actually paying.
We’re also seeing incredible demand for housing.
There’s a housing shortage of around 3 million to 6.8 million.
That’s great if you’re an owner or if you invest in apartments!
To help protect our assets, we go for a value-add approach.
If rents are $1,000, you can put $6,000 into renovations and see the rents go up to about $1,550.
That’s a huge upside!
It also creates a margin of safety.
Warren Buffett talks about the importance of having a margin of safety.
Remember earlier when I talked about ownership cost?
As ownership costs go up, that will lead to higher rents.
Apartment value is typically based on two things:
One is the income that comes in, which is rents and other services.
The other is how the apartment is treated by the market.
If values go down, but rents keep going up, it’s basically creating a 40% higher payment.
If that’s the case, more people will need apartments, which continues to drive rent.
As long as rents continue rising, ownership costs will rise.
Valuations for apartments will at least be stable.
They’ll go up no matter what interest rates do.
We’re seeing this with sellers.
Sometimes they see things are performing well and choose to hold the property longer because of that.
This is why I love apartments right now!
3. Your Plan to Hedge Inflation
Lastly, let’s talk about hedging inflation.
I get opportunities to be part of different deals as a passive investor or general partner.
A lot of people invest in real estate debt funds right now are paying 8% to 12%.
I don’t like any of those numbers because they’re below the rate of inflation.
(Remember I said before that actual inflation is 15% to 18%+!)
One asset that actually pays you to hold it and provides true hedge inflation is income property like multifamily.
Another option is investing in ATMs.
We have our ATM machine fund that we’ve invested in over the years.
The cash flow is actually higher than the rate of inflation.
There are other assets like oil and gas.
You want to find investments that have a hedge against inflation.
Rent and inflation really go hand-in-hand.
Multifamily investing is a way you can hedge inflation and get paid to do it.
That’s why I continue to love multi-family.
I hope that you have a plan for inflation.
Don’t simply put money in the bank.
Tell your friends and family members to get into assets that pay you to hold them.
Get into assets where you can get cash as the government prints more currency.
What I love about multifamily is that it’s a leveraged asset.
If you put 20% to 30% for a downpayment and the value goes up by 20% to 30% in the valuations, you’ve doubled your equity.
The fact that you can use leverage and do this even at 7.25% is still an amazing deal.
Now I want to hear from you!
Do you think that multifamily investing is over?
Let us know in the comments.
Before you leave, make sure to check out our special report about inflation investing. It shares the best choices to invest during an inflationary environment.
If you are interested in investing with us, we are happy to answer any questions that you may have. Join our investment club today and we will be in touch.
Disclaimer: I am not your investment advisor. This is for educational purposes only. I am not giving specific advice on what you can do. I am simply giving my opinions.