There is a lot of chatter around the potential for a real estate market correction, and I am getting a lot of questions like this:
- Are we heading into a recession?
- What is the outlook on multifamily?
- Is now the right time to invest?
To answer these questions, watch the video below (or keep on reading):
If you are concerned about pursuing apartment building investing in the current economic climate, there are a few factors to consider in making the decision whether or not to invest, including the demand for multifamily housing, the capital available for investment, and the impact a market correction might have on your portfolio.
The demand for multifamily has never been stronger. Many millennials don’t have the down payment for a house. And those that do prefer the freedom of renting an apartment, having seen what their parents went through during the recession.
It’s also getting more and more expensive to own a home. The average mortgage in the US is $1700 per month. In 2018, interest rates went up 1%, meaning that an average $1700 mortgage payment increased by $170—putting home ownership out of reach for more people.
Add to that the fact that developers aren’t building any more B or C class properties. The cost of putting up new buildings is very high—$120K per unit!—and the only way to make a profit is with luxury apartments. The good news is, such a high demand for affordable housing makes multifamily recession proof.
Investors are also concerned about a potential interest rate hike. Yes, interest rates are historically low, but they’ve been that way for a long time. And the Federal Reserve has backed off their initial plan to continue raising interest rates beyond the one-point increase initiated in 2018.
But even if interest rates DO go up, the impact on multifamily investments is negligible. During last year’s increase, cap rates remained the same. Prices for apartment buildings were still high. This leads me to believe that investors are still looking for multifamily properties, and they’re willing to put up with slightly lower returns to reap the other benefits of apartment buildings.
The truth is, there is a lot of money out there chasing this asset class. High-net-worth individuals and international investors alike are attracted to multifamily for its low risk profile, low default rate, cash flow and stability. And while I always project higher cap rates in the future when analyzing deals, I don’t think prices for multifamily are going to change all that much in the near future.
If the potential for another economic downtown has you worried, there are ways to mitigate that risk. Err on the side of caution and be very conservative in your underwriting. If you only buy properties that will cash flow from Day One, and you take on long-term debt, you can ride out a recession.
Assume that interest rates will be higher and prices lower at resale and be sure to have plenty of reserves when you close. It’s also a good idea to pull reserves from cashflow for emergencies and capital improvements. These common-sense measures will keep your investment safe regardless of a market correction. And if there IS a market adjustment on the horizon, that will create a lot of opportunity to pick up multifamily properties below value!
While I am cautious about the real estate market, I believe it will remain stable for the next 12 to 24 months. Considering the strong demand for multifamily and its consistent prices, I absolutely believe that now IS the right time to invest!