Investors Are Looking for Something Which Provides Consistent Income
In today’s world of investing in commercial real estate [CRE] the multifamily sector has, in general, outperformed most other major CRE sectors. At the foundation of multifamily performance is a well located, stable and essential asset which benefits from the younger generation renting longer and the increasing number of empty nesters downsizing. Couple this with short-term leases [a solid tactic to hedge against inflation], low tenant improvement and capital expense requirements, comparably high NOI cash flow margins and investors should see a solid investment strategic plan in which to invest. And despite the fluctuations in the capital market, Fannie and Freddie debt continues to provide a deep capital pool as well as from direct HUD loans.
As the market remains unpredictable, investors are looking for something which provides consistent income. Having the ability to rent out several units provides real estate investors with multiple opportunities to reduce vacancy rate, increase income and have reliable and ongoing income with tax advantages in one strategic investment.
Multifamily Real Estate Investments Have a History of Solid Returns
Research and historical performance in the multifamily space have demonstrated that unless disproportionate leverage causes you to lose your property, you can expect solid returns that can be enhanced with modest leverage. It also makes clear that debt coverage [the ability to service your debt] rather than loan-to-value [the amount of debt] is the relevant leverage metric for this asset class.
Inflation reduces purchasing power and to hedge against this, investors should seek out assets which can and will grow in value. Increased value when coupled with appreciation in investments such as multifamily real estate provides a strong and deliberate path towards wealth enhancement and cash flows. The increase in income and tenant rents hedges well against inflationary factors and pressures.
Here is an interesting metric to consider. It is said that a 1% increase in inflation is indicative of a potential 1.2% upswing in private commercial real estate excess returns for multi-family investments. Yet, during the same period, a 1% increase in the inflation rate can actually reduce bond prices by 1.5% and is often coupled with a drop in stock prices by 4.2%. *
Where oh where to invest? I firmly believe an investor makes their money when they acquire the property, and that good buy is reflected not only with consistent returns but also at the sale when the true appreciation of the property is shown. Population and economic growth in the Southeast and Texas continue to drive demand for good quality multifamily housing. The region’s warm and sunny weather, low taxes and relative lower cost of living expenses fuels growth. Keep in mind the low cost of living and of doing business will continue to be key drivers of growth in these markets.
WHY INVEST IN REAL ESTATE
- When you buy property at the right price, not overpaying, and with low leverage the intrinsic value is maintained throughout the hold period
- Well managed and maintained assets will appreciate in value with stability, driven in large part by the constant need for housing
- Increased rents/income provide solid tactical basis for exit strategy
WHY MULTIFAMILY
- Income generating asset
- Younger generations are renting longer creating increase in demand for apartment and increased occupancy
- Ability to adjust rent rates more frequently
- Long-Term, fixed rate loans
- Low supply and high demand
Like all investments not all provide the same returns. Each investment provides different opportunities and challenges. Single-family home purchases remain prohibitive, as substantially higher costs of borrowing are likely to increase in the near term as the Federal Reserve tries to combat inflation. Additionally, a potential contraction in the economy, when paired with recently announced and upcoming anticipated layoffs, will likely further sideline would-be buyers, even as prices retreat. While it is true that a worsening economy will impact the rental market, as well, fewer homebuyers mean more renters.
It’s a Good Time for Investors to Take a Closer Look at Multifamily Real Estate Investments
A property purchased with long-term debt with fixed monthly interest is not impacted by interest rate spikes and is positioned to take advantage of rental and property value growth. Multifamily offers investors an incredible opportunity for faster growth in value, excellent cash flow and potential appreciation in value. As we continue to emerge from the pandemic and anxiously wait to see how the economy will shake out, it’s a good time for investors seeking security and scalability to investigate multifamily real estate investments.
