“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” — Paul Samuelson
Is multifamily investing over?
Multifamily apartments will be here for a very long time.
It’s a great investment to jump into.
Unfortunately, we are seeing some headwinds.
We’re seeing higher rates, investors not wanting to invest, and rumors of capital calls.
What should investors do?
What are the options?
Let’s go over the current state of multifamily in three easy steps.
1. The Benefits of Multifamily Investing
What are the benefits of multifamily investing?
This might sound a little basic for some of you, but it’s important.
The first benefit is cash flow.
You typically get great cash flow from multifamily deals.
Next, you get tax benefits.
As a reminder: We’re talking about multifamily syndication, particularly for active and passive investors.
There’s an inflation hedge built in.
As prices rise, you can typically temper them with higher rents.
In this chart we can see that rents and inflation tend to go hand in hand.
This is different than single family where you can raise prices as inflation rises.
Another amazing thing about multifamily deals is that you can use leverage to buy them.
Typically, you’re putting 20% to 40% down.
With leverage, you’re using someone else’s money for the majority of that cost.
Whether you’re an active or passive investor, you get to take advantage of that.
Let’s say you put 25% down and the property appreciates by 25%.
You’ve doubled your equity!
Multifamily can also be a passive investment.
If you’re a part of a larger deal, you’re not the one running the show.
You can get great returns.
I found they’re even better than single family investing.
As a bonus, you don’t get those headache calls asking you how to handle the investment.
Even if you have a property manager, you know single family isn’t truly passive.
Something always comes up that needs your attention.
People can invest in multifamily passively and reap all of the benefits.
Multifamily also has a great risk profile.
It’s much less volatile than the stock market.
We see the stock market swing up and down all the time.
You don’t see that in multifamily real estate.
There’s incredible demand for multifamily.
Several articles have come out recently that say we’re short 4 to 8 million apartment units.
This number is expected to rise because of population growth and development slowdown.
We see this often in affordable housing.
Typically, working class housing is not what’s being built.
Instead, they’re building Class A luxury apartments.
The stuff we do at Bronson Equity is more value-add.
We buy older properties, renovate them, and see a lot of positive growth from that.
To me, multifamily really is the bread and butter.
If you haven’t invested passively in any deals, I think multifamily is a great place to start.
2. The Risks and Challenges of Multifamily Investing
What are the risks and challenges of multifamily investing?
Every investment has risks.
I invest passively beyond what we do in our Bronson Equity portfolio.
I always try to break it down to one or two primary risks.
If this doesn’t go well, what will cause a loss or cause things not to perform?
Right now, we’re seeing higher interest rates.
We’re seeing higher costs as insurance rises.
In some markets, labor and material costs have gone up 30% to 50%.
Some operators are struggling.
My friend Ken McElroy has said that 2023 is the year of operations.
I think that’s true.
If you can reduce expenses, find great staff, and perform the plan you set out to do as an operator, then you can really thrive!
Newer operators who don’t have as much experience could have some struggles.
It really comes down to executing the business plan.
What do you do as a passive investor?
How do you check this?
There are a few ways.
One is to have someone on the team who has 10 years or more of experience with your asset class.
That person can see a problem before it comes.
There’s really no substitute for experience.
The next thing you can look for as a passive investor is prior performance.
What is the operator’s track record?
What are the issues that have come up before?
What have they learned from that?
These are all very important questions.
3. Is Multifamily Investing Right for You?
If you want to know if multifamily is for you, you need to think about risk tolerance.
It comes down to your risk profile.
I had a call with an older investor and they asked: “Where’s the cash flow in this deal?”
They had a few deals with paused cash flow in response to interest and insurance costs.
This caused them to be very conservative in their investments.
That’s a completely fair stance to take!
Right now, cash flow is very tough in multifamily deals.
Unless you’re in a deal that’s been around for a while, people will usually have some sort of cash management going on.
A lot of times people have interest rate caps.
This means that interest will never go above a certain amount.
Most of our Multifamily deals have loans where rates won’t go above 6%-6.5%.
If investment opportunities don’t utilize caps, they could have other major issues.
It’s a little more challenging to find deals that pencil.
We’re seeing creative investors being a little more cautious recently.
Over the years, I’ve seen multifamily be a great long-term strategy.
It’s produced a lot of appreciation.
I’ll be honest—the cash flow right now in some deals hasn’t been great.
I believe rates will stabilize at some point soon.
We have seen rates continually rise, but the Fed is doing a pause.
There are also some indications that they may drop rates soon.
When we get that first drop, I think a lot of money will flood into multifamily, particularly in lending as well as investors coming back in.
There’s a lot of money on the sidelines waiting.
There will come a time where it’s very favorable to own properties.
We will see the demand, higher rents, and better lending trends.
Right now, we’re experiencing an in-between time where it’s hard to get deals to pencil.
But if you have a good operator, you can do things well.
If you want to, you can even get started with other deals.
We’ve started doing other deals because of the current multifamily market.
We have gone into ATMs, oil and gas, and car washes.
Diversifying your portfolio is also great practice in general.
Now I want to hear from you!
What’s something you love about multifamily?
Let us know in the comments below.
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.