Multi family bubble- wait or jump in?

55 Replies

@David de Luna So if assuming there is no appreciation, where does a cash flow of only $150 get you? And does that already factor in the NOI-Mortgage? Also, isn't it possible to seek both appreciation and cash flow? Or does one have to choose a path?
Originally posted by @Clarence Johnson :
@Karl B. Hello, what made you pick the Kileen area?

Hello. For me personally, the numbers make sense (I am a buy-and-hold cash flow investor), no income tax in Texas (though property taxes are high), much less traffic and plenty of places to hike. I like towns like Dallas and San Antonio but those markets have a lot of cooling down to do before their cash flow looks good to me.

@John Reardon when you speak of negative cash flow are you accounting for the rent you would be saving that’s now going into the mortgage? I think you need to factor in the financial value of house hacking versus renting and buying elsewhere. That way you can do a straight up apples to apples comparison of investments. That is, separate out:

1) Where you want to live (San Diego)

2) Where you want to invest (could be anywhere in the US)

3) Whether that investment makes sense for your investment goals.

All investment decisions are choices between alternatives with differing cost/benefit/risk. Clarity of goal and personal investment strategy helps reduce the confusing array of choices which cause us to freeze up.

Finally, if you manage the downside risk (e.g. don’t get overly leveraged) then there’s no bad choice just alternatives where some are better, as long as you can choose your exit versus having it forced upon you.

Best of luck!

@Bjorn Ahlblad I live near Vancouver and only reasonably close area that cash flows is Chilliwack and their prices have gotten to a point where its pretty borderline too

John, I lived in Los Angeles for many years, so I can relate to the numbers not making sense. During the last LA bubble, I received calls offering shopping centers for a 2% cap rate. When I bulked at the cap rate, they said it was a good rate - normally it’s 1%.

In my opinion, that’s a speculative purchase, counting on price increases to justify the purchase. 

With that said, even in such crazy markets you can find good deals if you are flexible and/or creative. Just a few ideas: 1) You can find a property that needs renovations to reach full potential and account for the renovation in the purchase price.  If you can, do the renovations yourself to keep the costs down. 2) Find a seller who will offer an installment land contract with terms that enable you to have a positive cash flow. 3) Find private money partners who will defer their returns.

It’s not easy, but it’s possible. Just remember, if it were easy, everyone would do it. 

@John Reardon

A few things I’ve been thinking about.

In many coastal markets, high-end real estate prices have been coming down due to oversupply and decreased interest from money from the East looking for haven assets.

Millennial student loan debt is an issue that threatens to change what we think of as “primary markets.” This generation, who now look to build families in homes, cannot afford coastal regions like previous generations and are moving to the Austins, the Atlantas, the Nashvilles etc. As rates rise I expect this to pick up pace.

MF construction has been on a tear of epic proportions. The WSJ reported the other day of rent price pressures as supply builds to meet demand in many markets. But I think we are a ways from that being the reality in some of the hotter markets where the millennials are migrating to.

Larger MF sponsors I’ve talked to/listened to podcasts from speak of a rash of newbies (“coaching students”) getting into the game and overpaying for assets, particularly in hot markets. This - with a period of rent appreciation as millennial talent flees expensive coastal markets - has caused cap rate compressions that are accelerating the frequency with which MF assets change hands. Strikes me as a kind of “greater fool” game. Eventually these 1970s buildings trading at 5caps will express their inevitable capex requirements. That, coupled with a wave of commercial loans needing to be refid at much higher rates - could provide a bonanza of cheap assets in the coming years.

I’m focusing on single family for a while until the madness created by so much capital sloshing around leads to some blood in the streets. Secondary and tertiary markets, cashflow, section 8 for now. Only doing MF alongside sponsors who've survived downturns before...

@John Reardon

Brandon Turner always says “Every property has a number.” Even if a property doesn’t seem like it will cash-flow at first, try and find that number that will make the deal meet your goals, and make an offer - even if it’s a long shot. Real estate is a funnel, if you make enough offers, chances are one will eventually get accepted.

This is relevant to my interests, thanks for posting.

I've been tracking multis in my area (South of Boston) for the last several years.

Now that I've gotten serious about investing, there doesn't seem to be a single multi that cash flows for me with house hacking. I want to be able to buy and have the rents pay me (at least something) while my wife and I continue to save for a single family.

I keep getting discouraged, but I go back to one primary thought: When the right deal comes up, be ready to pounce.

I'm also considering multis in other areas that aren't too far away from where I live now to determine whether those cash flow better than the ones in my current town. 

For now I am renting for pennies over what I could be spending and getting educated. When I find the right deal, I'll be ready.

@David de Luna I like what you said sir. I’m a buy and hold investment guy. Also thanks for the information on about how much to make off each door.

Originally posted by @John Reardon :
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

If you're going to house hack, since you're going to live in one of the units, you will have NEGATIVE cashflow. The minimum criteria to house hack is IF you end up paying less vs. renting and by the time you factor in the loan paydown you are actually breakeven (meaning you are essentially living there for free), then I would say GO FOR IT.

@Ryan Severance   Anything inside RT 128 is going to be VERY unlikely to cash flow.  You might have better luck looking further south.

Plymouth, Middleboro, Wareham, Taunton, Fall River, New Bedford are all targets to consider. 

You are located in Southern California and some discussion of that market can explain what you are facing.  There is a housing shortage in parts of California, including San Diego.  There are several reasons, including short supply, difficulty in adding new housing stock, and foreign investment into that market.  Plus rents surged in the last 8 years and interest rates (were) low.  San Diego also has favorable demographics;  it is a region where wealthier and more educated people congregate.

You may not face a crash, but instead a slowdown in transactions and investment appreciation for a few years.  I don't see a scenario where the rents are going to be depressed in an area that needs more rental stock.

Now, from my memory, real estate investments in California never really cash flowed, as compared to other parts of the country.  But there was an appreciation component, due to the reasons listed above.  People made a lot of money on their assets, at least on paper.

So in an appreciating market, the pricing of these assets are not illogical.  The market dictates this, as people are paying high prices for these investments.

The downside for you is that it is very difficult to enter the market in San Diego as an apartment investor.  

Investor sentiment these days is that the multi-family market has reached the top pricing of the business cycle and probably is in slight decline.  Part of that is fear of overbuilding, which isn't the case for San Diego.  Part of it is interest rate increases. 

Yes, @Brian Ploszay is correct that in the Southern California market there is such a housing shortage that rents continue to rise especially in the areas where there is not rent control.  

Similar to the rest of the country there will be a slow down and appreciation may not be as high compared to previous years, however, it will still be stronger than the mid-west.

The mid-west cash flows the West and East Coast appreciate.  It all depends on what your strategies and goals are to achieve wealth.

Ultimately, having properties in both the mid-west and West Coast can and is a positive for investors. I've completed refinances and HELOC's on my properties in the Los Angeles market so I could buy cash flowing assets.

At this point I'm looking for additional properties in Los Angeles that I can appreciate 10-20% in two years and repeat the process.

Hi John,

One of the benefits of multifamily over SFH's is that the valuation is a function of the Net Operating Income and prevailing cap rates. The net operating income is simply income minus expenses and therefore there are steps that you can take to protect yourself in a downturn. Here are ten things that I think you could do:

1) Only buy if the property is cashflow positive as this gives you the flexibility to hold on to it if you are not in a position to sell due to an unfavorable market

2) Focus on properties where there are value-add opportunities since this will allow you to increase income or decrease expenses to force equity and improve cashflow

3) Focus on strong markets that have got the economic fundamentals to reduce the risk of a drop in your income i.e. population growth, wage growth, jobs growth, more demand than supply

4) Avoid class A properties as people will move towards less expensive options in a downturn

5) Lock in longer term debt now while it is still possible to do so

6) Use less leverage to reduce your expenses and also maintain adequate cash reserves

7) Be conservative in your underwriting, it may take you longer to get a deal but it will be a deal that you are happy to be in

8) Recognize that real estate as an asset class represents diversity in a balanced portfolio of stocks and bonds. It's better to have some real estate than none.

9) Be aware that in a market that is turning there will be people who are very eager to sell their properties, this will mean opportunity

10) Plan for a range of exit options in case selling isn't an attractive option


@Ryan Severance

Ryan how far away are you willing to go? I have friends who house hacked in Pawtucket, RI. 1 hour south of Boston. We actually get many Boston commuters since there is a train next door in Attleboro, MA.

@Donald Cespedes - $150 a door means after EVERY obligation is satisfied each month - my cash flow on my investment. In a perfect world - you buy something that BOTH appreciates handsomely AND provides nice cash flow. However, depending on where you buy, you may not get both. I'd love to buy more in the bay area, but I'm lucky to get what I get with what I own here. I want to grow wealth faster so I'm buying out of state (OOS) where property appreciates sometimes 1 or 2 percent, but the rents are creating great cash flow. I'm a buy/hold investor so I'm cool with that. BTW, $150 will only get me to look a little closer. It's my rock bottom line. Currently doing about $250 a door and that's my actual target. If the property is appreciating at a good clip - like here in the bay area - then I'll consider less per door because I'm making money on the appreciation. If in a low/no appreciation area, then I know I've got little coming when I sell so the cash flow must be closer to $250 than $150. BTW, there's still deals with BOTH great appreciation and great cash flow in the bay area. I just closed on a duplex in the East Bay a few months ago. Just gotta go thru a lot of analysis to find that needle in the haystack (not really that bad, but just not falling in your lap any longer). Anyway, that's my story and I'm sticking to it. 

@Michael Tripp

Appreciation based real estate has cycles.  California has most likely crested in valuations.  This is probably not the best time to rapidly expand one's portfolio in that State.   I don't think the high values are sustainable.  

PS -I grew up in the Los Angeles area and still have family there.

@John Reardon

We live in a similar market in downtown salt lake.

We decided we would rent for a few years and keep our rent low (680/month) vs buying a 400k home for us to live in.

With the money we saved and down payment monies, we have been able to secure three out of state SFH.

People say renting is bad but if you can keep that cost down and use the money that would be for down payment to build a portfolio of BRRR properties, I believe you come out ahead vs buying your own home.

Those saying "who cares about a bubble" are cheating themselves. Equity provides the ability for you to use it to gain more properties, that can gain you more cash flow and equity. Why would buy a property for more than you should?  Stick by your criteria!

"While you're there pondering whether the glass is half empty or half full, I've already drunk the water."

Yes it's competitive right now and many apartments are trading at crazy cap rates. But why would it be any easier in the future?

When things cool off and brokers start having to make calls, what makes you think they'd be more likely to go with an unproven newbie then vs. now? Their criteria doesn't change; they want the highest price possible *given they have* execution certainty. They're still going to call their proven buyers.

Furthermore if you can go from being a poser to being an owner in today's climate, doesn't that put you in that much better position to succeed later?

I don't think the question is about "when should I start?" but rather "do I have the time/persistence/desire to do this?" If the answer today is no, chances are the answer tomorrow will still be no.

John, I debated some of this before I bought my first apartment building in May '18.  I did my second deal in November and I can tell you what I have learned in the last 8-9 months of actually owning the buildings was worth any offset of future price pressures.  My thought process was I would be in better position when a down turn did hit because I owned and brokers/sellers would take me more seriously.  I saw owners with apartments in a stronger position when a correction hits because they will be the first to hear about new properties available.

No one can predict what a market will do in the future, all you can do is protect your downside risk. 

Time is the investor's best friend. If you can acquire an asset and hold onto it for 20+ years, odds are pretty good you're going to make money, especially in real estate. 

The key is to never be in a position where you are FORCED to sell. How do you do that?

  1. Invest for cash flow first! That doesn't mean you invest ONLY for cash flow. Cash flow is what's going to keep you alive, appreciation is what's going to build wealth. If you own a property that's negative cash flow and the market turns sour, you might not be able to hold on until it recovers. Some people are ok buying a negative cash flow property because they predict it will appreciate quickly and that time and the market will take care of the cash flow. See point 2 below.
  2. Don't go in under capitalized. If you stretch to get into a property and put every last dime you have into buying it but you don't have anything leftover for repairs/rehab or other inevitable unforseen expenses, you're one bad month away from being forced to sell. Go in with a healthy reserve that allows you to weather the unexpected.
  3. Invest with long term, fixed rate debt. How long do you plan to hold this property? Do you have a business plan to acquire it and add value by forcing the appreciation? (i.e. rehabbing, raising rents, cutting expenses) How long is that going to take? If your loan is due in 5 years and you expect your business plan to take 5 years to execute and something unforseen happens that makes executing your plan in 5 years impossible, you'll be faced with a situation where you're forced to sell or to refinance at terms that are not going to be favorable. Did you buy using an adjustable rate mortgage? It's unlikely interest are going anywhere but up for the foreseeable future. If the debt service (mortgage payment) is begins rising faster than your cash flow, you could be forced to sell.
Originally posted by @Charlie MacPherson :

@Ryan Severance  Anything inside RT 128 is going to be VERY unlikely to cash flow.  You might have better luck looking further south.

Plymouth, Middleboro, Wareham, Taunton, Fall River, New Bedford are all targets to consider. 


Thanks for the tip. 

My main problem is that I work long hours in downtown Boston and my wife is currently attending (for the next 4 years) the University of New Hampshire at least 4 days a week for her PhD, so those areas are tough for me, especially New Bedford, Fall River and Taunton.

Middleboro and Wareham are nice and I love Plymouth - my wife and I got married at White Cliffs - but their southern location just doesn't seem to lend itself to our lives.

I guess if that's what it takes, maybe I'll consider it.

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