Multi family bubble- wait or jump in?

55 Replies

I am a San Diego realtor and broker. I have been seeking a multi family complex where I can house hack for a couple years now with no luck on anything that remotely makes sense. All the deals I analyze are negative cash flow. Tempted to go out of state to start in investing and continue renting locally. Many believe multifamily is facing a bubble. Best to just wait for a correction or crash in the asset class or move forward if the numbers work? Thanks

@John Reardon I think that MF is in a severe shortage in most areas and perhaps more plentiful in others. Certainly not anything much at a cash flowing price anywhere from Tijuana to Vancouver BC! I am in Western Wa and ready to buy should a decent deal that meets my criteria come along. The only markets that are cooling in MF are those that shot up too fast anyway, and even there it is primarily SFR and not MF. Might MF go down? Sure; and all the more reason to not compromise on your criteria. Al the best!

Thats 2 years of debt paydown and likely appreciation you missed out on, while helping to build your current landlords wealth instead of your own.

To my mind, if you're buy-and-hold then who cares about a bubble. You're buying for cash flow, not appreciation. Bubble or not, everyone needs a roof over their head. Analysis show $150 a door cash flow or better? Make an offer!

Predicting the top and bottom of the RE market is as difficult as predicting the top and bottom of the stock market.  Most investors who attempt to time the market do so poorly.

If you have been looking in San Diego for a couple of years, you have missed some significant appreciation.  There is no guarantee which direction the market will go.  A broken clock is correct twice a day.  This analogy is to demonstrate that some people will correctly forecast a correction but many will not.  San Diego has over 60 years of strong long term market appreciation.  In those 60 years, there have been multiple short periods of RE depreciation.

I have purchased twice near market highs: in 1993 I purchased a SFR for $167K. It fell to ~$140K. Today it is worth ~$520K. In 2004 I purchased an SFR for $741K. It fell to ~$620K. Today it is worth ~$1M. Both purchases look like very good investments today but a few years after purchase they were not looking very promising. Fortunately every market down turn in San Diego in the last 60 years has been fairly short in duration. If you are not overly leveraged, you will not need to sell.

My prediction for the San Diego market is on-going near term rent appreciation (I am sending 4 notices of rent increases this month) but RE appreciation to be more flat than the last 6 years.  As I indicated, most people do not accurately predict the market so who knows how good my forecast will be but I do look at the various indicators in my forecasts (vacancy, unemployment, population movement, available land, cost for new development, etc.).  My forecast is based on more than the past appreciation history.

I continue to look for properties that have a value add, ideally below retail.  I use the value add to obtain the property after refinance with a fairly small amount invested (I usually do not get all of my investment out via the refinance unless getting an assist via market appreciation).  I am financially prepared to withstand a recession in excess of the Great Recession.  So if the market continues to have significant appreciation then I will benefit from the appreciation.  If the market declines, I am in a position to survive it and likely add to my RE portfolio at depreciated prices.

If I were entering the market for the first time today, I would look for value add RE that after the value add were not cash flow negative.  I would have extracted value out via the refinance and be prepared for all outcomes including no appreciation.  Due to the value add, I would not have much of my initial investment still associated with the RE.  If the market were to depreciate I would consider using some of the extracted money to purchase more RE.

Most people who consider out of state (OOS) are looking at the virtually zero appreciation areas.  The areas do not have a history of appreciation and almost universally are in net negative population growth areas.  These areas are declining cash flow areas in terms of real buying power due to inflation alone.

All OOS RE investing requires building a trusted team, gaining market knowledge, having the cost and effort of adequate oversight, etc.

I believe it is possible to succeed OOS (especially not in the low appreciation areas) but it takes work and risk. Similar, I think it is possible to succeed locally but it takes work and has risk (at least short term risk). The days of being able to purchase the worse RE investment on the MLS and still do great I believe are behind us.

Good luck

Cap rates have compressed quite a bit in the MF world in good markets.  MF properties like 10+ units and good markets like coastal regions and the southern US.  Middle america may be cheap with higher cap rates but there is a lack of appreciation and may have more risk.

As others have said, timing the market is near impossible.  If you had a crystal ball and think you can time the market, you wouldn't be asking for advice here.  Instead you have had made your millions and sipping cocktails on a beach somewhere.  :)

The main thing is to keep on looking for deals in good markets with job and population growth.  Do this in a good or bad economy and you will be fine.

All points are quite valid.  However if I buy for cash flow and local san diego mf properties arent cash flowing I dont seem very tempted to purchase for appreciation (especially considering the next few years could be low or even negative appreciation).  What market data are you seeing where cap rates are still strong?  I have a friend investing in parts of ohio and looks very promising.  

@John Reardon Don't invest in things that do not cash flow.  Although some people are able to find deals it is also important to look at the overall trends.  Go to www.BarryApartmentReport.com and go to reports.  If you click on the 2019 - CCIM Apartment Presentation (January) report and go to slide 65 it will show you where the majority of cities are in respects the investment cycle.  I think the stock market is difficult to time but the Real Estate cycle is much easier to time because it moves so much slower.  When there is no spread between what you can borrow money (via commercial loan) and the cap rate then I feel the market is nearing over-valuation.  Also, although rates have dipped since October the Fed will raise in the second half of 2019.  Longterm I agree with the people above that real estate is solid overtime and is one of the best asset classes to own.  

Originally posted by @John Reardon :

All points are quite valid.  However if I buy for cash flow and local san diego mf properties arent cash flowing I dont seem very tempted to purchase for appreciation (especially considering the next few years could be low or even negative appreciation).  What market data are you seeing where cap rates are still strong?  I have a friend investing in parts of ohio and looks very promising.  

 I live in the San Francisco Bay Area and it's crazy here as well. almost nothing cash flows here in the MF world (10+ units).  It's good to look at secondary and tertiary markets 1-2 hours from city center and see what's available, given that there is population and job growth in those smaller markets.  Yes, it's attractive to buy $50k/unit apartments in middle america when prices locally in California are $150k/unit but there are reasons why it's cheap out there.

Below is a map I pulled from a presentation showing SFH appreciation, ADJUSTED FOR INFLATION, and you can clearly see the division. Yes it's SFH and not MF but typically MF trends behind SFH but with less volatility. Not saying invest in only appreciation. Quite the contrary. Invest in good solid markets, where cash flow is possible and value add can be done to improve your odds and mitigate risk as well as lock in appreciation. As oppose to do all this value add work and there are no appreciation gained because the sales and rental comps do not support it for that market.

@John Reardon I would advise against waiting. There is more equity and cash in America right now than ever before. The only way that the markets go down is if the Fed decides to continue raise interest rates or if economic policy changes.

Originally posted by @Garrett Hawk :

@John Reardon I would advise against waiting. There is more equity and cash in America right now than ever before. The only way that the markets go down is if the Fed decides to continue raise interest rates or if economic policy changes.

 I wanted to added a note about folks waiting for a correction - if you are looking to get into MF (16+ units) and commercial properties, lenders will ask you: Do you have any experience?  Do you have a track record and acquiring good assets and managing them?

Not, yes I managed my duplex that I live in 1 of the units. They will want to see that you had experience in buying commercial deals and managing them.  The kicker is that this will be even more evident in a downturn because credit will be tight and money will be drying up as lenders are not deploying capital as much as they were during the good days.  In other words, you just cannot show up to a party and expect to buy 20+ unit MF left and right and be able to find good debt for it.  Yes, you can buy 1-4 units since they are residential loans, etc but MF and commercial deals require experience and a solid network of brokers and lenders to close on them.

@John Reardon I agree with your concern about San Diego... if it doesn’t cashflow, don’t buy it. Looking at less expensive markets where you can get good cashflow properties and preferably out a bit more down so you’re not as heavily leveraged... you’ll be safe during any correction. Keep in mind also that loan defaults in the US are at all-time lows, incomes are rising, and the percentage of renters in the US is still going up. Many people could choose to buy a home, but they just prefer to rent... if a recession comes, the number of folks who rent will likely go up even further. Good luck.

What kind of action do people in your position take when they want cash-flowing deals? They look elsewhere. To secondary and tertiary markets. Luckily we live in the US, where you have over 20,000 cities to choose from. 

This is how you do it.

1) Do tons of market research, analyze deals, and decide on a city you want to invest in

2) Start building relationships in that city. Agents, brokers, other investors, wholesalers, etc.

3) Analyze more deals in your city

4) Drive or fly to your city. Connect in-person with people who you started building relationships with online.

5) Launch a marketing campaign

6) Be patient but keep pushing forward. Optimize your marketing at every chance you get.

7) A deal will eventually fall into your lap. Jump on it and there you go!

Originally posted by @John Reardon :

All points are quite valid.  However if I buy for cash flow and local san diego mf properties arent cash flowing I dont seem very tempted to purchase for appreciation (especially considering the next few years could be low or even negative appreciation).  What market data are you seeing where cap rates are still strong?  I have a friend investing in parts of ohio and looks very promising.  

 Question? Would you rather get $200 a door in Ohio right now and it stay static for the next 20 years....or would you rather have minimal cash flow right now, but grow to cash flow $2000 a month in 10 years time?

I dont know if thats realistic or not in San Diego....but a decade ago I purchased a home here in DC that had free cash flow of about $200, and today I get $1600 a month.

While you say you dont care about appreciation (which I cant comprehend why someone wouldnt, as thats how you get rich), do you care about rent growth? With rent growth that comes in part of appreciating markets comes fat more cash flow (with patience) than you will get in an actual cash flow market.

John, 

A majority of the deals in Southern California will be negative cash flow initially, however, if you willing to be patient the appreciation will kick in quickly and you can either re-finance the property or sell it for profit.

As @Russell Brazil mentioned why miss out on the pay down and appreciation opportunities?  

At this time in my life I'm required to live in Los Angeles so there is no reason why I shouldn't take advantage of the pay down and appreciation opportunities that present themselves.

In San Diego I would imagine that you can find a multi-unit that provides appreciation of 12% in the first year, 14-16% in the second year and 18-20% in the third year. 

@Paul Choi mentions multi family of 10+ properties but you don't have to target that type of multi family if you're just wanting to get into something to "house hack".  

Target something where one, two or three of your renters pay a majority of your mortgage and then rely on the appreciation over the next few years to purchase bigger and better opportunities.

I'm a new investor at 24 but I am currently under contract now on a duplex outside of Philadelphia in Delaware County. So to answer your question; The market will have it's ups and downs but we can't always predict them. If you run the numbers and the property cashflows, and the market takes 4-5 years to "burst", that's 4-5 years of cash flow and tenant paid mortgage. Property value might decrease slightly but are you in the game for the short term or long term? Historically real estate increases in value, but a safe investment isn't hoping that the property will only appreciate. Cash flow will keep your property afloat in good and bad economic times if purchased at the correct price.

Worker harder to find a deal. Network. I am lazy and tend not to network but I'm trying to enter a new market (Killeen/Temple/Harker Heights area) with a FHA-loan (already pre-approved) for a 4-unit and it's tough.

I know I'm going to have to network and find off-market deals in hopes of finding a property that works for what I'm looking for. 

Definitely consider other markets but also start turning all stones over in your market as well. 

I know the amount I'll pay has gone down -- even if the market hasn't followed.  My cost of funds from local banks went from 4.5% to 4.75% to 5 REALLY fast.  Then zoomed to 5.25, 5.4, then 5.6% in a few months.  Insane.

on $5-$10m deals that = some serious real $

Originally posted by @John Reardon :

All points are quite valid.  However if I buy for cash flow and local san diego mf properties arent cash flowing I dont seem very tempted to purchase for appreciation (especially considering the next few years could be low or even negative appreciation).  What market data are you seeing where cap rates are still strong?  I have a friend investing in parts of ohio and looks very promising.  

 Ohio as a state is the 47th highest growth rate (3rd lowest) according to the 1st site listed when doing a google search.  This is not good but a vacancy rate of 8.3% for 2018 is pretty good.  We know it has a poor historical appreciation rate.  The job outlook varies significantly by city.  

I would avoid any city that has a negative growth rate regardless of the initial cash flow because the cash flow is likely to decrease as supply increases and demand decreases which is an inevitable scenario when there is a negative growth rate.  Pick a city with positive growth rate and good employment prospects.   If it had limited buildable land, high new construction cost, historically outstanding appreciation, great climate, cultural diversity then that would be bonus (but then it would be San Diego).

Good luck

@John Reardon

John, I 100% agree with you. There is a multifamily bubble and It will pop. I hear MF at every corner and smart money and retail are irrationally chasing these assets at prices that do not make any sense.

It’s a great time for mf builders and turn key rentals companies, but many investors will get wrecked when prices come down to sustainable levels as the interest rates rise.

Another thing that people overlook is the stock market which is due for a massive correction. As interest rates climb more pressure will grow on all assets. IMO the best that could happen to CA is no appreciation (inflation adjusted) for the next couples of years.

Lower priced cash flowing markets may still have room for growth as they receive out of state money, but what will happen to these investments would a recession occur is hard to tell.

You mentioned Ohio which like Texas are extremely sough after by OOS investors, however the high property taxes (2-3%) are a deal breaker for me. These states do not have state tax but for oos investors I believe the benefits are negated as you’d have to report these incomes into your CA returns.

Some cities like Philadelphia, Charlotte or Houston for ex. are still great value though

There are deals in every market but now is a time to focus on buying a lot lower than most believe they can acquire for.  

@John Reardon agreed with most of the input here. If the areas of Ohio are doing well where your friend is investing take a trip out to his/her market. If you like the numbers you see online and what you see in person, leverage that friendship you have with them and go in as a partner on a deal or two and use their resources. That’s a quick way to get a feel for the market with less risk and you get access to their (presumably good) local connections.

@John Reardon I think you’re doing it right, meaning you’re waiting for the right deal and not taking part of FOMO. I wouldn’t say to hold off and wait for a bubble to burst, just counting your conservative approach and wait for the right deal. Network with others on BP and see if you can find someone worth partnering with.

I have never understood the "buyers market" / "Sellers market" when it comes to real estate and what people do w/in those. 

ie. I have seen the ups and downs and there seems to always be a reason for people to "wait". 

Wait for what? If the market is filled with overpaying investors then you will need to hustle to find the deal that will work. If the market is filled with empty rentals then you have to hustle to find renters or end buyers (if you flip)

I have done 100's of deals and its very rare the deals just fall in my lap, and the market seems to change right when I am getting into my groove. 

The world owes you a living, but you have to get out there and earn it. 

No matter the market, there is ALWAYS ways to make money in Real Estate, its just how much time, energy, imagination, and information you are willing to put into it.

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