Commercial Real Estate

If You’re Overpaying for Multifamily, Ignoring Traditional Investing Advice… Stop It!

Expertise: Personal Development, Commercial Real Estate, Real Estate News & Commentary, Landlording & Rental Properties
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Are you old enough to remember Bob Newhart? Yes, he was Will Ferrell’s father in the Christmas classic Elf, but long before that, he was a TV psychiatrist in the ’70s sitcom bearing his name.

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I always viewed Newhart as a kind, understanding therapist, someone I’d visit if in the need arose. Someone I could talk to about my apparent obsession with semi-boneless ham, for example.

But I saw a different side of Newhart in the viral comedy video affectionately referred to as “Stop It!

The video shows Newhart as a psychiatrist who apparently has a single solution to every human problem. In his five-minute therapy sessions, he repeatedly shouts, “Stop it!” in response to every neurotic condition described by his patients.

Now, I doubt that you're afraid of being buried alive in a box, like Newhart's phobic client. But if you're a BiggerPockets reader, you are probably investing in real estate. And if you're doing that, you may be buying or planning to buy apartments.

Related: I’ll Never Buy Another Multifamily Without This $75,000 Tool That Added $1.3M Value in Less Than 12 Months

After all, it's a common progression for those who are trying to scale up from single family rentals and other investments. I write about this extensively in my multifamily book.

As multifamily syndicators in the post-recession era, however, our company along with others has become increasingly alarmed at the prices that are being paid for apartments these days.

When the Perfect Investment Isn’t Perfect at All

I still believe everything I wrote in my book. The demographic trends and regulatory faux pas of the past two decades point to a long, healthy investment opportunity in multifamily real estate. I hope you own some, and I hope you have the opportunity to purchase more.

But the perfect investment is not perfect if you can’t find deals that make financial sense.

The world is running after multifamily. And prices are over the top. This is not just true in major cities like New York and L.A., but in the smallest of towns across the fruited plain.

I live in the Blue Ridge Mountains of Central Virginia, and nearby towns like Roanoke, Lynchburg, Charlottesville, and Blacksburg are experiencing unprecedented pricing on multifamily.

From duplexes to 200+ units, sellers are getting cap rates in the 5 and 6% range. Brokers are even surprised when their initial (usually inflated) pricing is blown away in the final bidding round.

My firm recently bid on an ’80s multifamily asset in a small city near Knoxville. The seller had privately approved the sale at any price of $6 million or more. They probably couldn’t imagine it hitting $7 million, though the broker said it was likely.

It actually sold for almost $8 million with a non-refundable deposit up front—before due diligence.

My friends, this should not be happening. This is a recipe for future failure. Don’t pay these inflated prices.

Stop It!


  • If you're counting on a continual compression of cap rates, ignoring the marginal cash flow, and counting on ever-increasing appreciation to make your deal work… stop it!
  • If you're banking on interest rates to level off now and drop back to 4% by the time you have to refinance your bridge loanstop it!
  • If you feel sure the economy will keep chugging along as it is and that rent increases will continue at 3 to 5% or more every year forever… stop it!
  • If you expect to upgrade a class C or D building and get $100+ rent bumps without hurting occupancy like you can in a class B apartment asset because “multifamily is just so hot now,” then… stop it!
  • If you reason that inflation doesn't equally impact your rent increases and your operating costs, that rents will rise by 5% while you hold operating costs steady… stop it!
  • If you assume you’ll always have a ready pool of overpaying buyers due to the influence of international money, IRAs, 1031 exchanges, and irrationality, then remember that syndicators, banks, and investors were running headlong the other way when deals were half-off in the last recession. So stop it!
  • If you are lying to yourself and promising your investors a cash-on-cash return from operations of 9 to 12% and a total annual return of 18 to 22% on a deal you bought on-market or on Loopnet… then please stop it!
  • If you believe you got a great off-market deal from a broker you barely know and you chalk it up to your intelligence, good looks, or the broker being unaware of the true value, ask yourself why any seller would take much less for their property than they could… then stop it!
  • If you’re bending your principles, fudging a few numbers, assuming your ghetto is about to gentrify, or believing the tooth fairy will rescue your marginal deal because after all, everyone knows that multifamily is unstoppable… then stop it!
  • If you’re willing to overpay for any reason at the top of the market, ignoring investing greats like Warren Buffett and Howard Marks who were gobbling up financial assets while the knife was falling in 2008 and 2009 and historic multifamily gurus like Sam Zell who has sold off tens of thousands of apartment units and you’re telling yourself and your investors, “This time is different,” then go read the book This Time is Different: Eight Centuries of Financial Folly… then stop it!

Wait. Why on earth would anyone overpay for multifamily or anything else? I tackle this question in a recent BiggerPockets post. This post also explains why my firm is pivoting to add self-storage and mobile home parks to our investment portfolio.

Related: Multifamily vs. Single-Family Real Estate: Which is the Superior Investment?

You Stop It, Paul!

You may say, “You stop it, Paul! I am finding great off-market deals, and my investors really are getting the returns you mocked above! What of that?”

I will readily admit that there are exceptions to the situation I’ve outlined in this post. There are syndicators and investors who are getting great deals. Some are doing better at acquisitions than my firm. There are off-market situations that are profitable and will make investors even more than 20% annually.

Like the badly mismanaged 400-unit Atlanta apartment complex that needs to be completely overhauled and leased up from scratch (way too much risk for me!).

Or the Charlotte-area apartment that had just come out of rent control and was sold for $7 million based on the prior government-prescribed rental income. We missed that one, and I've regretted it ever since. The buyer made several million in a few years, more than doubling his equity.

What I am saying is that these deals are few and far between, and they are mostly being scooped up by professionals—usually apartment syndicators who have been around for a decade or more and have survived one or more recessions.

Like you and I and Buffett, these expert operators can’t time the next market cycle. But they know exactly how to behave appropriately in the moment.

Many of these smart guys and gals are hoarding cash, waiting for that next downturn, ready to scoop up apartments and other commercial assets for half-price.

Will you—or worse yet, your lender—be the seller of these fire-sale assets? I'm writing to urge you not to be that guy. And if you're tempted to do it anyway, then do yourself a favor and just…


Are you finding solid multifamily deals in your market?

Weigh in with a comment!

After graduating with an engineering degree and then an MBA from Ohio State, Paul entered the management development track at Ford Motor Company in Detroit. After five years, he departed to start a...
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    Nick B. Investor from North Richland Hills, Texas
    Replied over 1 year ago
    Very good advice, Paul! How do we convey this message to the “institutional” and foreign investors?
    Paul Moore Investor from Lynchburg, VA
    Replied over 1 year ago
    Nick. I’m afraid the market correction is all they will listen to. Thanks for the comment!
    Audrey Ezeh Real Estate Investor from Las Cruces, New Mexico
    Replied over 1 year ago
    Fantastic post Paul. Thanks!
    Paul Moore Investor from Lynchburg, VA
    Replied over 1 year ago
    Thanks Audrey. Very kind of you.
    Costin I. Rental Property Investor from Round Rock, TX
    Replied over 1 year ago
    Good article, resonated a lot with my thinking. A lot of this applies to SFRs too. And I wonder what would be your recommended thresholds for all those parameters (cap rate, cash flow, C/C ROI, etc.).
    Trevor Hatchard Rental Property Investor from Newport Beach, CA
    Replied over 1 year ago
    Costin, I would also love to know recommendations for those parameters!
    Christopher Smith Investor from brentwood, california
    Replied over 1 year ago
    I have several properties I aquired in the 2010 to 2013 time frame which I was personally concerned then about paying too much). Fastforward to almost 2019 and I am getting probably 3 letters a week from folks wanting to buy those properties from me now at current nose bleed pricing levels. Really makes me wonder just what are they thinking? I wouldn’t buy at these levels absent stone cold sober numbers showing a clear rock solid path to sustained profitability, which seems highly improbable at today’s pricing except in the most extraordinarily rare circumstances.
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied over 1 year ago
    Pretty much anytime you’re “ever-increasing appreciation to make your deal work” you’re asking for trouble. When that becomes widespread, it usually means we’re in a bubble.
    Paul Sammons Rental Property Investor from Little Rock, Ar
    Replied over 1 year ago
    Thanks for the article Paul! Great meeting you at the Deal Maker Live event as well! We’re down here in the south and seeing the same phenomena. Sellers are even expecting these prices as well! Even on buildings that no one else is bidding on we are running up against sellers with expectations beyond what operations can support. It’s absolutely ridiculous! I’m in Michael Blank’s coaching program and have been fixated on multifamily for quite some time. I can’t even imagine switching my focus, but if the bubble doesn’t burst soon I’m going to have to. There’s nothing like the allure of a well maintained apartment building in a good area. It’s downright seductive and that’s probably why so many people are jumping in over their heads. They are acting on emotion instead of common sense. thanks again, Paul
    John Barnette Investor from San Francisco, California
    Replied over 1 year ago
    Greed vs. Fear. The cycle will always move forward. These are very raw emotions and desires..almost needs that will always influence human decision making. Way more than we choose to admit. Guess where in the continium we are now? How about 2006? 2009? 2012? The real estate cycle, stock market cycle, personal spending, etc. All flow to the same underlying GvF. I was fortunate to acquire my first building…an 8 Plex from a long term owner/manager who was transitiining out via a 1031 into a Delaware Statutory Trust passive investment. We we’re both doing a 1031 and timing, pricing, and motivation lined up well. We were both in “neutral emotional state” of the greed vs fear.
    JL Hut Investor from Greenville, Michigan
    Replied over 1 year ago
    Your post brought back a lot of great memories. My Dad loved Bob Newhart, It was about the only thing that would make him laugh out loud. Your post was also full of good advice as usual. Now everyone wake up and listen to Paul, you will be glad you did. Need I say more? Well, I will add a few more words. The few of you who know the hard fought lessons learned during the semi-boneless ham debacle, it is time to put what we learned together into action NOW! We survived that incident, surely if we put our shoulders together and push forward we can make it through the perilous times that lie ahead. Join me brothers, for wisdom will cast out fear as we march forward into the future. Long live SEMI-boneless ham. JL
    Paul Merriwether Investor from Oakland, California
    Replied over 1 year ago
    Interesting article … yet I’m the new guy to multifamily investing or at least looking to enter the market … maybe!!! You are complaining about 5 & 6% cap rates!!! I smile at that!!! Bay Area cap rates are at 3.5!!! The following is from National Real Estate Investor Title: Cap Rates Inch Higher for San Francisco Apartment Buildings Oct 23, 2018 >>> Investors are accepting cap rates that average around 3.5 percent for buildings in class-A locations—for example, a 1920s rent-controlled building in a prime neighborhood like Pacific Heights. That’s up from cap rates that were close to 3.0 percent a year ago, according to Kochavi. There are few newer buildings available for sale in the city. Cap rates average 4.0 percent for apartment properties in class-B locations and 5.0 percent for class-C locations. “Sales are closing at an average cap rate of just 3.6 percent, which ranks lowest among all U.S. markets,” says Jesse Gundersheim, market economist for research firm the CoStar Group. <<< OK … YES it's the Bay Area … however it's real estate!!! And when today's investor's find it hard to swallow low cap rates as 3.5 they come to YOUR MARKETS and love the 5-6% cap rates!!! This isn't real estate of old, it's today's reality of a national & global market place in real estate!!! Loopnet makes it easy to find hot deals, and wholesalers, bird doger's add to the mix. I visited a buyers site today that said they are ALWAYS willing to buy real estate that meets their criteria. They stated the areas, the formula, etc and asked you to email, they would get back to you in 24 hr's and close with ALL CASH in 10 days upon agreement of terms. There's no bubble NEVER has been IMO in real estate. Yes, we had a crash … due to banks and greed on Wall street. Wasn't due to over pricing, subprime loans or any of that. GREED and a failure of insurance entities to back up their claim they'll pay should there be foreclosures. Going back more than 70yr's in the Bay Area real estate market we've averaged approx 6% appreciation in SFR. With today's online future value calculators we can predict the approx. value 30 – 60 yrs into the future. Why not do it with multifamily. In fact my first apartment in 1971 I rented it for $187/mth fully furnished a 1 bd, 1 bth. Today that unit is now a condo conversion, however today it would rent for approx $1800 a 5% yearly appreciation rate since 1971. STOP IT!!! NOT GOING TO HAPPEN!!! Thanks for the post!!! Thought provoking!!!
    Quito Keutla Real Estate Agent from Renton, WA
    Replied over 1 year ago
    Thanks for the post! I’m new to the multi family space and am taking the time to learn. As I’m a believer in buying for cashflow, I will stick with the numbers and leave the emotions at door. I’ve mad plenty of mistakes back in the last crash and don’t want to repeat it ever again.
    Charles Connolley
    Replied over 1 year ago
    I just wanted to add that after spending a good two years searching for deals in the South Chicago suburbs, asking prices are all over the place and trying to get it for a lower price isn’t always a good move if it’s already priced low. I’ve missed out on deals with that type of thinking, and my last two deals were full asking price.
    Blaine Johnson Rental Property Investor from Pocatello, Idaho
    Replied over 1 year ago
    I see this happening now in my area as well. 10 months ago I was able to get a 4-plex for $12K under asking and at sub-4 interest. The next one, a month later and right next door, was 22k higher than mine. These are identical builds done at the same time originally. But mine was already much improved and modernized in comparison. I had first option, and in hindsight, am very grateful I did not take it. The examples continue with every sale I have looked at and followed since.
    Brian Ploszay Investor from Chicago, ILLINOIS
    Replied over 1 year ago
    I’ve held the same attitude for a couple of years now. Most smart capital realizes that the cycle is mature and they are not expanding. Few people predict that a major correction is imminent. One metric that is interesting is the volume of multi-family sales has been down for two years in my market, suggesting overpricing. Further, many of the buyers are out of state, looking for better yields than they can achieve on the coasts. In many instances, they don’t fully understand the market nuances. Part of the price run-up, especially a couple years after the last crash, was warranted. Interest rates were low, combined with rising rents and a trend of lower home ownership. Apartments were golden. That’s all priced in now. Buying properties today at low cap rates will most likely will result in disappointing returns, if interest rates continue to rise, as predicted. I expect 2019 to be a boring year for many real estate investors. Sit tight and focus on improving your current portfolio’s performance.
    Marlina Eckel Rental Property Investor from Cotati, CA
    Replied over 1 year ago
    Great post, thanks for writing!
    Marlina Eckel Rental Property Investor from Cotati, CA
    Replied over 1 year ago
    This is a great article. Very informative and timely.
    Douglas Andrew from New York, New York
    Replied over 1 year ago
    Good general advice, but maybe a little bit over the top?…. While this is a perfect time to be a vulture as fear sets in for novice investors who purchased what were reasonable valuations in 2014/2015/2016 ( at 3% interest only) and will probably need to refinance between 4 and 5 % and pay interest & principal in 2 years , or, possibly will not be able to refinance at their current debt level and will be in distress… yes, those are the properties all of us want to take advantage of….But I am always making the comment to unsophisticated vultures… don’t discuss cap rates with me, they are meaningless pricing metrics,..they have nothing to do with asset values… let’s talk about discounted cash flow analysis, with a reasonable wacc and IRR, taking into account the residual value of your building in 10 years. For me, in Manhattan, I expect to come close to doubling the value of a 5 or 10 million dollar asset in that time frame (=/-). That is why I am hedged in Manhattan and not the middle of the country. The cap rate may give you a good indiction of risk (For example I expect 6% for retail and multi family anywhere outside of the coast city’s even before i run a true valuation), but many potential investors lose out on reasonable opportunities because they think a “3.7% cap rate (snapshot)” is too high for a building in Manhattan even before they run a valuation ( if they run one…). That may be true in Kansas, but not in Manhattan, especially when you PV the residual values and cash flows. Even with very conservative rent growth for the next few years. The bottom line is, look at your market, historically, then look at the future … what is happening there? ( for example opportunity zones in NYC are sucking up a good portion of investor money and very little new rental development happening over the next few years in mainstream Manhattan, rental demand will drive rents up ) and then what will happen when the recession hits and the stock market melts down next year (or this year). Will the fed drop rates? Will mortgage rates hold steady at these historically low rates over the next few years? Where will you put your money? I guess your message, and the message I am trying to convey here is, look at true valuation using reasonable parameters. You are not going to get a property at a “big discount ” if the seller is not in distress, they will just recapitalize or hold until the next cycle up….can you pay a little more for a property that has low comparative risk and a reasonable valuation over a 10 year horizon… yes. If you don’t, you may miss out on a good opportunity.
    Kevin Olson from Danvers, Massachusetts
    Replied over 1 year ago
    Thanks for the post Paul! It’s interesting to hear and definitely a hot button topic. I agree, the balance of growing a portfolio and sitting on the sidelines until the time is right. Always enjoy.
    Scotty Ball Investor from Gainesville, Georgia
    Replied over 1 year ago
    Great post from my wise friend! We’re definitely seeing this phenomenon here in the north ATL area. Crazy prices are being paid with syndicate and foreign money. While I’m not a market timer, I tend to believe we’re near the top end of the wave on this cycle and prices will have to correct soon. Blessings to you and yours Paul!
    Paul D Smith from Minnesconsin, USA
    Replied over 1 year ago
    Isn’t this just a supply and demand problem? The only thing to correct it will be an increase in the supply of units, or a decrease in the demand from investors.
    John Barnette Investor from San Francisco, California
    Replied over 1 year ago
    Always need to analyze with a demand and supply analysis. Not just the geographic area but also property type or rental category. I am in San Francisco. There have been thousands of new apartments added. Mostly at the high end. Demand is not equal. Thus prices for that type of unit peaked in 2015. Same happening in NYC. However there is the opposite demand/supply dynamic for basic class b/c single family home. Zero supply addition and increasing demand.
    Jeff Bartlett
    Replied over 1 year ago
    What resource would you recommend to learn more about mobile home parks + self-storage?
    Paul Moore Investor from Lynchburg, VA
    Replied over 1 year ago
    Hi Jeff. These increasingly popular arenas are harder to find info on. For Storage, I would go to Scott Meyers – the Self Storage Academy. For mobile home parks, I would get the book by Jamie Smith or check out Frank and Dave’s Mobile Home Park Academy, or the podcast/academy from Kevin Bupp. My company has shifted focus and is investing in these two asset classes now and we’re excited about how recession-resistant and profitable they are. I hope that helps!