“Risk comes from not knowing what you are doing.” — Warren Buffett
Single family prices are dropping.
If you don’t believe me, CNN published an article that says they’ve been dropping for 10 months in a row.
This is after years of real estate being on fire.
During the time between February and April, things started to cool off a bit.
Then they started cooling off a lot.
We’re seeing that in the single family market.
I did a video about a 2022 housing crash around a year ago.
People thought I was crazy!
Well, now we’re seeing exactly that.
Some markets are coming down 10% to 30%.
The reason this is happening is interest rates.
Payments go from a 3% interest rate to over 7%.
A payment goes up 41% if you count things like escrow and interest insurance.
A $500,000 house at 3% could be $2,353 a month, including escrow, with 20% down.
At 7%, it’s $3,328.
That’s a 41% increase!
This is actually good news for multifamily investors.
I’m gonna go over everything in three easy steps.
Let’s get into it!
1. Affordability is Down for New Homeowners
Affordability is down for homeowners.
There’s been a 41% increase in the total monthly payments moving from a 3% interest rate to 7% rate..
People still have to live somewhere.
What are the choices?
You can live with mom and dad, or you can stay in an apartment.
We’re seeing continued demand for apartments.
Because of affordability, some of the pricing is going down in single family.
We’re seeing pricing adjust a little bit in multifamily.
Overall, we’re seeing rents rising.
2. Rents Are Continuing to Rise
In Jacksonville, Florida, we have 1,500 multifamily units.
We are seeing rents rise about 20% there in the last 12 months.
There are thousands of people moving to Jacksonville every month, which raises the rents.
This will continue happening nationally in a lot of markets.
Not in markets that are flat or declining, but where the population is growing.
It’s a supply and demand model.
Different studies have come out over the last couple of years showing that we’re short on housing units.
One study shows that we’re short more than 5 million homes.
Another one from the National Association of Realtors says we’re short 6.8 million homes.
This report says 3.8 million.
We’re short somewhere between 3 million to 8 million housing units.
I think this is a very unique opportunity that we need to take advantage of right now.
3. Short Window to Buy More
We have a short window to buy more.
Some people think I’m crazy for saying this.
Jeff Clark talks about the average time between the Fed raising rates and then cutting them.
According to him, the average is about five months (see this chart).
They started raising rates in March 2022.
As of this blog, we’re at nine months of raised rates.
The longest they’ve ever raised rates has been 13 months.
If history has anything to say about the future, they will start cutting rates around March 2023.
They’ll do that because of a financial crisis or problem in the financial system.
They could cut rates due to a recession.
Whenever they do that, we’ll see interest rates get more attractive again.
A lot of this money on the sidelines will pile into multifamily investments.
Bloomberg claims that before the 2020 pandemic, Americans had around $1 trillion on the sidelines in cash.
Now they have about $5 trillion.
It’s gone up 5x!
People are sitting and waiting.
What will happen when that tide turns?
There will be a big flood of money going into assets such as multifamily.
I think we will look back in a year or two and say we wish we had bought more.
Demand is up and will continue to go up.
If you can find a deal that makes sense for you, particularly with a value-add approach, you can see the property value increase.
For example: In Jacksonville, we’re seeing rents go up as we do renovations.
After people move out, we’ll renovate and see a huge increase.
If we do a light renovation for $6,000, we’ll see rents rise from $1,000 to around $1,500.
This chart from Mother Jones shows the correlation between rent and inflation.
They’re almost parallel.
Rent and inflation go hand-in-hand from the 1960s until now.
It’s worth remembering that multifamily properties are different from single family.
In single family, the worth of your house is based on what the houses in the area sold for.
Multifamily is based on income.
Aka: How much income was produced from that property?
This is where the value-add approach really comes into play.
If we can increase the income of the property, we can increase the value.
When you buy a property, you’re buying prices fixed, but your interest rate can be adjusted later.
In summary:
Fewer people are buying homes.
I think this is a really good thing when it comes to multifamily investing.
It gives opportunities for investors to get into buying apartments.
There will continue to be more demand.
The confused mind will wait.
Due to inflation and retail investor opportunities, a lot of investors are waiting.
I think it’s the worst time to wait.
Warren Buffet says to be fearful when others are greedy and be greedy when others are fearful.
If you have a level head and find the right deal that has some sort of value-add component…
I think you’ll look back and say you’re glad you got into a deal at this time.
You should absolutely consider your own situation when making this decision.
Now I want to hear from you!
Will you be investing in multifamily?
How will you take advantage of this unique investing time?
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
