Real Estate Agent · Sanford, ME · Member since 2017 · 22 posts · 7 votes
In the area I live the apartment building prices have risen dramatically over the past year. We are seeing a leveling off but I’m waiting for them to decrease to a non inflated price.
What do you guys recommend in the mean time? I don’t want my capitol to just sit and not earn. Any suggestions would be greatly appreciated! Thank you!
Jacob: A common and possibly incorrect assumption is that multifamily prices will fall. Throughout the financial crisis, the default rate on multifamily properties was less than 1%. There weren't many folks who had were forced to sell, and prices didn't globally fall.
Valuations on multifamily property (aka the spread between cap rates and borrowing rates) is currently at record lows. If you want to wait to invest in real estate until valuations are better, consider investing in debt, as it will increase in value as borrowing rates drop (giving you more money to invest into real estate when valuations are better).
@Jacob R. Crosby It depends on if you want access to those funds to buy apartments if/when the market resets. if you're just looking for something temporary look into note investing or being a private lender. If you want to invest in something other than apartments, but still commercial assets look into self-storage and mobile homes. If you want to stick to apartments, but don't like your local prospects, look into some of the better markets for today based on cash flow and downside protection. You can partner with an operator or look to build out your team in that market.
Jacob: A common and possibly incorrect assumption is that multifamily prices will fall. Throughout the financial crisis, the default rate on multifamily properties was less than 1%. There weren't many folks who had were forced to sell, and prices didn't globally fall.
Valuations on multifamily property (aka the spread between cap rates and borrowing rates) is currently at record lows. If you want to wait to invest in real estate until valuations are better, consider investing in debt, as it will increase in value as borrowing rates drop (giving you more money to invest into real estate when valuations are better).
@tyler kastleberg
“Debt will increase in value as interest rates drop?”
I’m having a hard time squaring that idea with the rising rate environment and fed steps. Today’s debt should be worth less as rates rise, yes?
I totally understand that you want to keep your capital deployed and growing. With all that said, I personally am still bullish on multifamily, but I think it is time for caution.
No one knows what will happen over the next few years, but can certainly use information that is available today to gauge what market risks your strategy may be exposed too. As @Tyler Kastelberg mentioned, spreads are very low. With interest rates continuing to rise, it may be reasonable to expect stabilized cap rates to increase a bit as well. In other words, if investors cannot get debt as cheap in the future, they may find it harder to pay such high prices (this is, of course, an over-generalization and does not take some of the finer points about loan assumption). Put simply, strategies that are very over leveraged may not be the best option on a risk adjusted basis.
I am personally focusing on investments that either have a larger percentage cash flow (which are less likely to find) or a value add component that can hedge some of the exit risk.
But, who knows, in 3 years we will probably all be wrong.
You can go risk free on 30 year treasury bonds. 30 year treasuries have a high "duration," meaning their price fluctuates more with a move in interest rates. In the case that interest rates quickly drop, the value of your treasury bonds will dramatically increase while real estate valuations hypothetically stay flat. This would leave you with more money to invest in a real estate asset that has a better valuation.
On the flip side, if rates continue to rise, you'll lose money.
In a prior life I worked for a bond fund -- great experience for real estate professionals who want to better understand market dynamics.
By value add, I mean increasing the Net Operating Income of the property. Multifamily properties (5+ units) are valuated based on the income they produce. If you can find a property that is undervalued (i.e. the NOI can be increased in some way), then you will both increase your cash flow and increase the value of the property when it sells. A value add play would help hedge against some of the market risk, but keep in mind that an aggressive renovation plan also carries risk.
Take the comment from @Sam Grooms as an example. If you find a property where the rents are below the market comparable prices you have a value add opportunity. The next step would be to determine what it would take to raise the rents, and wheter it fits your target investment criteria.
I guess, I would also mention that it is not particularly easy to find a value add play either (I apologize if my prior comment made it seem that way). The market is competitve right now.
@Jacob R. Crosby there are lots of deals still happening around the country in the multifamily space. I see them everyday. Are they good deals? Depends who is operating them I guess. I still think B and C class properties that are cash flowing and room for a 10-15% dip in vacancy are great investments for investors looking to store cash for tax advantages. I echo what @Tyler Kastelberg said about the last downturn. These type of assets are the most insulated from an economic downturn.
BUT there are other really good assets that are worth looking into. Many of my investors are invested in ATM's and its their favorite investment strategy. It still depreciates like real estate and has steady cash flow.
How about a good air bnb property in san diego? Winters in Maine?? haha
You're correct, debt decreases in value as rates rise. The decision to invest in debt is dependent on your view of where rates will settle. If your view is that rates will continue to rise, then investing in a stabilized 5.5% cap rate multifamily building is hard to justify as interest rate moves are typically a leading indicator of cap rate movement.
You can become a short term lender to a crowd funding operation.
However waiting for prices to level off you may never achieve your goal. I hear this on BP often and think what many fail to account for is that when/if prices do contract will you be prepared mentally to buy something that is percieved to be loosing value?
Try not to let your beliefs get in the way. If you analyze it and it makes an acceptable return NOW later it most likely will improve due to appreciation and rent growth. If you are able to force appreciation many times you can make up the gap of paying market rates.
@Jacob R. Crosby the biggest mistake I made in my early investing career was that I always thought everything was over priced. As a newer investor, I compared everything to pricing from the very bottom of the crash. As I became more seasoned, I realized that properties were trading for 30-40% of their intrinsic value at times, but many of them were trading for all cash as financing was tight. Now financing is easy, but deals are tight.
As others have said, you have to be willing to "create" deals in this environment. The value add component has always been a part of my investment strategy, but in today's market you are no longer able to buy on actuals and then drive the NOI up to get to our new value. Most investors are realizing this, and are forced to buy a little over what the property is worth in order to have the opportunity to drive up the NOI and increase values.
For short term solutions, you can get into notes either on your own or through someone else's fund, or become a private lender - tons of debt opportunities locally and virtually. I'd suggest to stick to the first position to be conservative. For longer terms, explore other markets - outside of your immediate reach and you maybe surprised about what you'll find there.
Bottom line, do your own due diligence on various strategies to pick what works best in your case.
You could be sitting on the capital for a long time. We may see some rocky times or a leveling off or we may see the prices to continue to grow. Job wages seem to be starting to pick up, more cities, counties and states are enacting higher minimum wage and more companies are announcing they are paying higher minimum wage. If that trend continues, then expect rent prices to increase further, which will cause NOI to increase. Even at a higher cap rate, you will be paying more.
You also have the demand factor. Take the younger and older generations, which make up a massive part of our population. They are continuing to prefer apartment style living over houses.
The other big factor is now real estate in the US is a widely accepted investment class for everyone all over the world. You have foreign money, pension funds, etc, that see the safety of US real estate as well as the high returns compared to their alternatives.
I can't predict the future, but I do know that real estate always eventually will go up in value.
@John Warren when you buy properties over what they are actually worth, how do you know any changes you make will increase the NOI enough so that you are profitable?
@Jacob R. Crosby what size apartments are you looking at? My recommendation is to look in other markets that are offering more yield. If you don't want to spend the time doing all the research and building a team in a new market, maybe invest passively in a syndication.
@Chris Herrera you are right that it is vitally important to know exactly how much you can drive the NOI. I already own a 9 unit apartment building in the Berywn, so I am very confidant on how much I can get for rents after rehabs are completed. I don't think I would have been confident on a deal like this if I was an out of state investor, etc. Local knowledge of the market is critical!
@Jacob R. Crosby I would suggest looking outside your market and maybe into one that you know someone in. They can help be your boots on the ground and get you up to speed and ultimately minimize risk.
@Jacob R. Crosby . I'm not sure what type of price range you are talking about. Have you thought about pooling resources to acquire/control larger assets?
These are all great responses! Thank you all for the information!
Hi Jacob, did you end up investing?
I just bought a 4plex in Springvale neighborhood of Sanford Maine, seems like it will work out very nicely.
I was lucky to get into Biddo early with a 3 unit but now the market there is unaffordable, so I'm really liking the prospect of Sanford. I'm not super familiar with the town but worked near Smittys commuting from Arundel for several months about 10 years ago and it seems like it's got better since then in terms of general condition of buildings and roads etc. Seems like it's on an upward trend? But it's a bit hard to find much actual data on it.
I think Sanford needs something for the community to come together around. More parks and beaches and ice skating at the ponds maybe? It's a beautiful area and I plan to invest a bit more, can't beat the prices.
@Chris Herrera this is a great question. When you over pay based on the current NOI it is because you have to know that you can operate the property at a much higher level. Essentially, my business plan when I buy tells me what kind of NOI I can expect, and then so it is less important to me how the current owners are operating. This is more so true in the value add space though, because you can't do this with stabilized assets. If you over pay on a yield play you will lose every time.