Buy multi-family in Utah now or wait??

4 Replies

I'm curious what the opinion/prediction of the experts is on mulit-family the next few years. What I have seen in Utah is cap rates coming down from 7% +/- to below 5% in many areas with older properties. The inventory is very low on multi-family and many properties have multiple offers, some don't even cash flow with 25% down. I feel like a lot of the investing is either a) people with cash that need to put money SOMEWHERE or b) people that are willing to take a bigger risk and bet on appreciation alone. I understand that interest rates have been so low and appreciation so great on multi-family the last 10 years in Utah that it has been worth the risk, but at what point do people decide that a 4.5% cap rate on a 4 plex built in 1932 doesn't make sense? Obviously the area is a huge factor but I have seen 5.5% cap rates on four-plexes built in the 80s in C and D areas. I have seen some smaller MFR double and triple in price in the last 8-12 years in Salt Lake county. The rents have increased but not as much as the asking prices.

My questions are these.....does it make sense to buy anything right now just to get a good interest rate? I feel that if you can cash flow that it makes sense on a 30 year fixed, but what about on 5+ unit MFR, you will typically only get a 5-7 lock on your rate. I have a 12-plex under contract and it's a very good deal. I won't discuss specifics until I close on it but let's just say that there is some equity. My question is: Will inflation help counteract the affect of higher interest rates on MFR because rents will inevitably go up or are both factors a negative on the MFR market? If I have equity in a 12-plex, does it make sense to sell it at a 5% or less cap rate now in case this same property will sell at a 6-7% cap rate in a few years due to rates increasing or do I hold forever which is my preference. The risk of that is having my 5.3% interest rate reset at a much higher rate in 5 years and then have a balloon at 10 years. There's a chance I could extend the balloon payment out to 15-20 years, but it doesn't change the fact that the rate will inevitably be higher in 5 years at a rate that could compromise cash flow. If I have a bunch of equity now, do I cash out the equity and wait it out with cash the next couple years expecting MFR values to soften or is that a huge risk because MFR values could hold/continue to climb as inflation could affect rents?

@Chris Potter , If you plan to hold on to the property, get at least a 10 yr fixed rate on the property. There are lenders that offer it, from small credit unions to agency debt. 

"If I have equity in a 12-plex, does it make sense to sell it at a 5% or less cap rate now in case this same property will sell at a 6-7% cap rate in a few years due to rates increasing or do I hold forever which is my preference."

If I'm holding forever, I wouldn't care that the cap rate increases 1-2% in a few years. If you're holding forever, don't try to time the market. Just buy right and hold on to it. If you sell at the 5%, you either have to buy another property at the 5% or wait for the market to drop. If it's the former, it's a wash and doesn't make much sense. If it's the latter, you could be sitting on the sidelines for quite a while, because no one can tell you with much accuracy where the market is headed. 

"Will inflation help counteract the affect of higher interest rates on MFR because rents will inevitably go up or are both factors a negative on the MFR market?"

Generally, yes, inflation and interest rates move together over the long term. Inflation will apply to rents and have a positive impact. That said, higher interest rates will mean an investor has to pay less to be able to still cash flow, having a negative impact. 

"If I have a bunch of equity now, do I cash out the equity and wait it out with cash the next couple years expecting MFR values to soften or is that a huge risk because MFR values could hold/continue to climb as inflation could affect rents?"

I think it's important to clarify two possible future scenarios. One is inflation, which is what you've asked about. The other is a correction in prices and/or downturn in the economy. You don't know which of these will happen. I would not cash out and just sit on the sidelines. Debt is a good thing to have if inflation hits. Cash is bad. However, you'll want some cash to be able to take advantage of a possible downturn in prices. As you can see, your approach would depend on what you think will happen in the market. My issue with that, is no one knows what's going to happen or when it will happen. Instead, buy right and hold onto your properties. Buying right just doesn't mean in price. Get long term debt. Don't max out your LTV. Have sufficient reserves.

Nice job getting the 12 units under contract with equity! It is very competitive right now. 

I am not a mortgage or lending expert so I will leave those questions for others.  

I would  say a few things....

1. I would never buy something "just to lock in a good interest rate" 

2. If I have equity in a current property AND another deal to 1031 into I would consider selling. BUT!!!

3. I would not sell and then hold cash for the next few years while you wait for the market to "soften" 

In my opinion the Salt Lake county MF market shows very few signs of softening in the next two years. 

Most investors in Salt Lake county are working appreciation in their numbers which is part of the reason cap rates have dropped to 5%. That said, deals can still be found in SL county at cap rates >5% for those that are willing to get out there and grind. 

Good luck!

Chris,

I have wondered the same thing with properties in Utah.  I imagine that these properties are still being bought at these low cap rates because:

- People need to put their cash somewhere, and a 4.5 cap is better than a bank account. I also think that the inflation we have seen is pushing this more.

- For those investors that have had property for a while are sitting on a lot of equity and are using 1031 exchanges or cash out refi's/Helocs  to expand their portfolios and increase their cashflow position

Other than these two situations i cant imagine an investor getting themselves into one of these sub 5 cap properties with so many other opportunities to find a better return (out of state, other asset class) unless they are only banking on good appreciation.

Your question, which is the question of the year, is will the increased velocity, and volume of money (inflation) now in the hands of the people keep pushing rents and prices higher?  In some states I think things will probably start to soften, but with all of the population growth and housing shortage in Salt Lake metro, the demand will continue to grow.  It is super hard to say.  I am no expert, nor do i have years of experience.  Just my thoughts based on things I've heard.

I don't see the prices in Salt Lake metro dipping too much unless there is some catastrophic blow to the national economy.

I personally have put my capital on out of state deals that cashflow well, but don't show much promise on appreciation.  I may be kicking myself if things tank and i don't have liquid capital to get some really good deals.

Good questions.  I don't think anybody really knows.

@Chris Potter 5% cap isn't the worst you can do, especially if cap rates are trending down in Utah. I would just buy and hold for life or don't settle for this market and buy elsewhere. I agree with @Rob Hakes It looks like there are loads of folks in Ogden with extra cash to spare that needs to be parked outside a bank account so they may be less concerned about return rates.

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