{"id":175878,"date":"2024-07-31T11:00:41","date_gmt":"2024-07-31T17:00:41","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=175878"},"modified":"2024-07-31T11:00:46","modified_gmt":"2024-07-31T17:00:46","slug":"why-were-de-emphasizing-multifamily-properties","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/why-were-de-emphasizing-multifamily-properties","title":{"rendered":"Why I’m De-Emphasizing Multifamily, and What I’m Investing In Instead"},"content":{"rendered":"\n

Multifamily<\/span><\/a> properties make up the bread and butter of real estate syndications (group real estate investments). <\/span><\/p>\n\n\n\n

In particular, most syndications available to <\/span>non-accredited investors<\/span><\/a> are multifamily. A guiding principle in our Co-Investing Club is inclusivity for non-accredited investors, not just wealthy investors\u2014and I can tell you firsthand how hard it is to find reputable syndicators who allow non-accredited investors in deals outside multifamily. <\/span><\/p>\n\n\n\n

Don\u2019t get me wrong; they\u2019re out there. We\u2019ve invested in plenty of non-multifamily deals. And we intend to invest in proportionally fewer multifamily deals moving forward. <\/span><\/p>\n\n\n\n

I won\u2019t sugarcoat it: I\u2019ve grown increasingly wary of multifamily. Our investing club meets every month to vet different passive real estate deals<\/span>, and I\u2019ve<\/span> started going out of my way to propose more \u201calternative\u201d types of property or investment partnerships. <\/span><\/p>\n\n\n\n

Here\u2019s why.<\/span><\/p>\n\n\n\n

Regulatory Risk<\/span><\/h2>\n\n\n\n

Tenant-friendly states and cities have continued ratcheting <\/span>up <\/span>regulations<\/span> against owners over the last five years. <\/span><\/p>\n\n\n\n

Take New York State, for example, which <\/span>earlier this year<\/span> passed <\/span>a \u201cgood cause eviction\u201d regulation<\/span><\/a>.<\/span> It <\/span>not only<\/span> enacted rent stabilization rules<\/span>, <\/span>but also<\/span> requires<\/span> landlords to renew all leases unless the renter <\/span>has<\/span> violated <\/span>it<\/span>.<\/span> So when a property owner signs a lease, they no longer know whether they\u2019re committing to the unit for a <\/span>single<\/span> year or 10. <\/span><\/p>\n\n\n\n

New York is hardly alone, either. California and several other tenant-friendly states have done likewise over the last decade. <\/span><\/p>\n\n\n\n

States enacting laws that fit their politics doesn\u2019t bother me. That\u2019s how our federalist model of government works. I don\u2019t have to invest in those states. <\/span><\/p>\n\n\n\n

But federal laws are another matter entirely. <\/span><\/p>\n\n\n\n

Federal regulation and growing political appetite<\/span><\/h3>\n\n\n\n

What worries me is that the <\/span>political appetite<\/span><\/em> for multifamily regulation has increased\u2014not just in tenant-friendly states but nationwide. The <\/span>Biden-Harris Housing Plan<\/span><\/a> announced in July calls for federal rent stabilization, with a 5% annual rent cap. <\/span><\/p>\n\n\n\n

I have no fear that it<\/span> will <\/span>actually<\/span> pass this year.<\/span> That\u2019s not the point. The point is that the now-Harris campaign thinks that it\u2019s popular enough to use as a political rallying cry. <\/span><\/p>\n\n\n\n

Ten years ago, this kind of federal legislation would have been inconceivable. Today, a major political party has confidence that it\u2019s a winning campaign issue\u2014and that confidence <\/span>is probably backed<\/span> by polling. <\/span><\/p>\n\n\n\n

That scares me. What will the regulatory landscape look like <\/span>10<\/span> years from now?<\/span><\/p>\n\n\n\n

You and I can disagree over the specifics as we prognosticate, but we can probably agree on the direction <\/span>in which multifamily regulation is heading<\/span>.<\/span><\/p>\n\n\n\n

The Fall of Big-Brand Syndicators<\/span><\/h2>\n\n\n\n

The last two years have <\/span>not been kind to multifamily<\/span><\/a> (more on that momentarily). But in that fallout, it\u2019s become harder to trust multifamily sponsors based on their reputation and track record. <\/span><\/p>\n\n\n\n

The two worst multifamily deals I\u2019ve invested in were with sponsors boasting <\/span>huge<\/span> brand names. They had sterling track records and reputations. Before investing with them, I did what you <\/span>were supposed to<\/span> do: I asked around among experienced multifamily investors. Everyone gave them glowing reviews. <\/span><\/p>\n\n\n\n

Then interest rates skyrocketed, cap rates expanded, rents flatlined, and labor and insurance costs leaped. <\/span><\/p>\n\n\n\n

Warren Buffett famously said, \u201cOnly when the tide goes out do you learn who has been swimming naked.\u201d <\/span>That\u2019s certainly tru<\/span>e\u2014<\/span>a<\/span>nd<\/span> it turns out many of the <\/span>biggest names in the industry<\/span> had been skinny-dipping.<\/span> <\/span><\/p>\n\n\n\n

These \u201cadverse market conditions\u201d have separated the wheat from the chaff in the multifamily space. <\/span>To undermine everything I just said, it\u2019s actually starting to get easier again to evaluate sponsors based on <\/span>how they\u2019ve performed<\/span> over the last two years.<\/span> <\/span><\/p>\n\n\n\n

Even so, the last two years have demonstrated that <\/span>it\u2019s<\/span> not always easy or straightforward <\/span>to vet sponsors<\/span>.<\/span> <\/span><\/p>\n\n\n\n

Other Challenges in Multifamily<\/span><\/h2>\n\n\n\n

All those adverse market conditions I mentioned? They\u2019re still happening. <\/span><\/p>\n\n\n\n

Interest rates remain high, and rent growth has slowed and even turned negative in some markets. Expenses have grown sharply, pinching cash flow on multifamily properties. <\/span><\/p>\n\n\n\n

Because multifamily construction takes so long, projects that were green-lit several years ago\u2014under opposite market conditions\u2014are <\/span>just<\/span> now coming on the market as vacant units. Many housing markets have been flooded with new inventory and are struggling to absorb it. <\/span><\/p>\n\n\n\n

Several <\/span>markets in Texas<\/span><\/a> and Florida come to mind, as does <\/span>Phoenix<\/span><\/a>. Again, that\u2019s made it hard for multifamily operators to cash flow. <\/span><\/p>\n\n\n\n

Housing activists love to lament that \u201cthe rent is too damn high.\u201d That\u2019s not the case in these markets. <\/span><\/p>\n\n\n\n

What Are We Looking At Instead?<\/span><\/h2>\n\n\n\n

Don\u2019t get me wrong:<\/span> We <\/span>still<\/span> sometimes look at multifamily syndications in our Co-Investing Club. But when we do, we often like to work with smaller operators who aren\u2019t interested in building a huge brand name or are trying to sell online courses or teach people how to syndicate real estate. They focus exclusively on finding good deals and operating them efficiently<\/span>. Hard<\/span> stop. <\/span><\/p>\n\n\n\n

Increasingly, however, I\u2019ve been looking to <\/span>diversify away from multifamily<\/span><\/a>. <\/span>I don\u2019t love the regulatory risk, and if you worry about some <\/span>type of<\/span> crisis hitting the US in the coming years<\/span><\/a>, that regulatory risk takes on more urgency.<\/span> <\/span><\/p>\n\n\n\n

I\u2019ve <\/span>been looking<\/span> at the following investments to diversify and reduce or eliminate regulatory risk. <\/span><\/p>\n\n\n\n

Mobile home parks with tenant-owned homes<\/span><\/h3>\n\n\n\n

Moving a mobile home costs a lot of money. <\/span>When people own their <\/span>own<\/span> mobile home and merely rent the lot, it\u2019s far cheaper <\/span>for them<\/span> to pay the rent than <\/span>move<\/span> their home.<\/span> <\/span><\/p>\n\n\n\n

In many states, it\u2019s also easier to evict a nonpaying renter from a mobile home lot than <\/span>it is from<\/span> a residential unit. <\/span><\/p>\n\n\n\n

We\u2019ve invested in five mobile home parks in our Co-Investing Club, and they\u2019re all performing great. <\/span><\/p>\n\n\n\n

Retail and industrial<\/span><\/h3>\n\n\n\n

Commercial tenants\u2014businesses\u2014don\u2019t have the same legal rights as residential tenants. Plus, many commercial tenants have customized the space <\/span>exactly<\/span> to their needs. They\u2019ve invested a lot of money into the unit, so nonpayment only happens in <\/span>the most<\/span> dire circumstances.<\/span><\/p>\n\n\n\n

The retail and industrial properties we\u2019ve invested in<\/span>, while few,<\/span> have performed well.<\/span> <\/span><\/p>\n\n\n\n

Land<\/span><\/h3>\n\n\n\n

I love land investing. <\/span>You don\u2019t have to worry about many of the <\/span>risks of multifamily<\/span><\/a> such as repairs, renovations, regulations, contractors, housing inspectors, <\/span>or<\/span> property managers<\/span>. Or<\/span> tenants.<\/span> <\/span><\/p>\n\n\n\n

Some land investors <\/span>simply<\/span> flip parcels<\/span><\/a>, buying them at a discount and selling them at <\/span>full<\/span> market value.<\/span> Others offer installment contracts, where the buyer pays them off over five years <\/span>or so<\/span>. <\/span><\/p>\n\n\n\n

Because they don\u2019t take legal ownership until they\u2019ve paid off the lot in full<\/span>, the land investor doesn\u2019t have to foreclose<\/span>.<\/span> They <\/span>simply<\/span> retract the defaulting renter\u2019s right to use the land.<\/span> And then they get to sell it all over again for <\/span>full<\/span> price. <\/span><\/p>\n\n\n\n

To date, our Co-Investing Club has only lent money to land investors (which has gone well). We\u2019re currently talking to several of the largest land investors in the country about partnerships, however. <\/span><\/p>\n\n\n\n

Flip partnerships<\/span><\/h3>\n\n\n\n

This month, we\u2019ll <\/span>be entering<\/span> a private partnership with a small <\/span>house-flipping<\/span><\/a> company. We\u2019ll provide the bulk of the funding<\/span>; <\/span>they do all the work of flipping the house<\/span>; <\/span>we split the profit.<\/span> <\/span><\/p>\n\n\n\n

\u201cIsn\u2019t flipping risky?\u201d<\/span><\/em><\/p>\n\n\n\n

As a single deal? Yes, some flips lose money. As a business? It\u2019s just a numbers game. <\/span>This particular company has a 93% win rate on <\/span>their<\/span> flips, and <\/span>they do<\/span> 60 to 70 a year.<\/span> <\/span><\/p>\n\n\n\n

We\u2019ve worked with this company <\/span>before,<\/span> and love what <\/span>they\u2019re doing<\/span>. The owner not only offers a \u201creturn floor\u201d of 6% <\/span>in the event<\/span> this flip doesn\u2019t go to plan\u2014<\/span>he<\/span> backs it with a personal and corporate guarantee. <\/span><\/p>\n\n\n\n

Spec homes<\/span><\/h3>\n\n\n\n

Over the next <\/span>couple of months, we\u2019re planning<\/span> to invest with another company that builds individual spec homes to sell at a steep profit.<\/span> This company buys a dilapidated <\/span>home<\/span> on a large lot, demolishes it, and builds two to three new homes <\/span>on the lot<\/span>. The local housing authority loves <\/span>it,<\/span> as a way to add housing supply. <\/span><\/p>\n\n\n\n

Our partnership with them will look similar to <\/span>the <\/span>partnership<\/span> with the flipping company. The owner will sign a guarantee for a minimum return, even if the partnered project loses money. <\/span><\/p>\n\n\n\n

One thing I love about both these partnerships is that they\u2019re <\/span>short-term investments<\/span><\/a>. We don\u2019t have to commit our money for years on end\u2014we\u2019ll get it back within 12 to 16 months in the case of spec <\/span>homes<\/span> and four to six months in the case of flips. <\/span><\/p>\n\n\n\n

Secured notes and debt funds<\/span><\/h3>\n\n\n\n

While our passive investing club typically <\/span>looks for<\/span> 15% or higher annualized returns on our equity investments, we accept 10% to 12% returns on fixed-interest debt investments\u2014if the risk is low<\/span>, that is<\/span>.<\/span> <\/span><\/p>\n\n\n\n

I mentioned that we lent money to a land investor. That\u2019s a short-term investment, a year or less, paying 11% interest. The investor bought a 500-acre ranch and is simply subdividing it into smaller ranches with 10 to 50 acres apiece. <\/span><\/p>\n\n\n\n

There\u2019s no construction, <\/span>no contractors, no tenants, and no<\/span> inspectors.<\/span> The sponsor already did a perc test, knows the utility access, and confirmed with the local housing authority that the ranch can <\/span>be subdivided<\/span>. They\u2019ve used this business model many times over. <\/span><\/p>\n\n\n\n

The only risk is that the economy crashes into <\/span>such<\/span> a terrible recession within the next year <\/span>that<\/span> the price of ranch land <\/span>drops<\/span>.<\/span> <\/span><\/p>\n\n\n\n

Is it risk-free? No. <\/span>But the risk is <\/span>pretty<\/span> low, and the returns are solid.<\/span> These types of asymmetric returns are <\/span>exactly<\/span> what we like to see. <\/span><\/p>\n\n\n\n

We also invested in a note with the flipping company I <\/span>mentioned<\/span> at 10% annual interest. The kicker: <\/span>Any of us<\/span> can terminate our note at any time with six months\u2019 notice. <\/span>It\u2019s backed<\/span> by a lien under 50% loan-to-value ratio. <\/span><\/p>\n\n\n\n

Final Thoughts<\/span><\/h2>\n\n\n\n

I hated being a landlord in <\/span>Baltimore<\/span><\/a>, with its extreme regulation and anti-landlord atmosphere. While I\u2019m no longer a landlord, my wariness around rental regulation has lingered. <\/span><\/p>\n\n\n\n

I\u2019m also sick of the anti-landlord rhetoric. People love to hate landlords, making them an easy political scapegoat for regulation. <\/span><\/p>\n\n\n\n

With so many other ways to invest in real estate\u2014even residential real estate\u2014multifamily <\/span>just<\/span> seems to come with higher risk than many <\/span>of the<\/span> alternatives.<\/span> <\/span><\/p>\n\n\n\n

How often do <\/span>you see<\/span> multifamily sponsors offer a personal guarantee on a return floor? <\/span>Almost never<\/span>, but I can find private investment teams willing to make them. <\/span><\/p>\n\n\n\n

That\u2019s my mission: to find <\/span>that<\/span> sweet spot of investment partners big enough to consistently earn high returns with low risk<\/span>, but who are<\/span> small enough to still be interested in partnering with our investment club.<\/span> <\/span><\/p>\n\n\n\n

It\u2019s a fun way to invest, going in on these partnerships with a group of other investors. And because we all go in on them together, we can each invest $5,000 at a time while keeping the collective investment high enough to attract these partners.<\/span><\/p>\n\n\n\n

\n \n\n
\n
\n \n\n

Get More Time to Scale<\/p>\n\n\n\n

Find trusted property managers and get everything you need to make confident hiring decisions.<\/p>\n\n\n\n

\n Find a Property Manager<\/a>\n <\/div>\n\n <\/main>\n <\/div>\n\n
\n \"find\n <\/div>\n <\/div>\n<\/div>","protected":false},"excerpt":{"rendered":"

Multifamily has had its problems, and while Brian is still looking at some deals, he’s turned his attention to these other assets.<\/p>\n","protected":false},"author":158586,"featured_media":172945,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[7357],"tags":[],"class_list":["post-175878","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-multifamily-real-estate-investing"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/175878","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/158586"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=175878"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/175878\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/172945"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=175878"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=175878"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=175878"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}