Bullish on Multifamily?

64 Replies

@Ethan Smith I really wish that was the case but history says that Is not true and Multifamily is very tied to economic swings. Funny thing is that if you polled investors 2 yrs ago probably 60-70% would have been predicting pending recession. Today 2 years further into the cycle you can’t find a nay sayer.

Originally posted by @Serge S. :

@Ethan Smith I really wish that was the case but history says that Is not true and Multifamily is very tied to economic swings. Funny thing is that if you polled investors 2 yrs ago probably 60-70% would have been predicting pending recession. Today 2 years further into the cycle you can’t find a nay sayer.

Serge, you and I are in full agreement on this.

When you purchase a REIS report on a property, it shows market vacancy statistics going back 5 years.  So, when I first started downloading them, back in 2013, the vacancy stats included the GFC (Great Financial Crisis) and its aftermath.  And, for the markets I was looking at, in SC, the stats were shocking - market vacancy rates in the teens during the worst of it.

But in the aftermath of the recession, a lot of conflated and selective memory - and gurus with stuff to sell - resulted in a false narrative about apartments and recessions.

Let me unpack what happened.

Before the GFC, during the peak of the housing bubble, two related things happened.  First, government policy, loose money, and human psychology combined to push the home ownership rate to nearly 70% - nearly 5% higher than the "natural" rate of home ownership in the US - about 65% over the long term.

Second, there was a related spike in vacancy at apartments.  That 5% of home owners who never should have owned homes came from somewhere, and that somewhere was apartments.

So, when investors purchased MFRE during the bubble, they were paying inflated prices in the form of low cap rates, but this was mitigated by the fact that vacancy rates were higher, so NOI was lower. The lower cap rates created less of an inflation in asset values because NOI was lower too.

When the GFC hit, unemployment went to about 11% nationally.  This caused physical and economic vacancy in apartments to rise.  Many owners without enough cushion went into default. 

However, as the foreclosure crisis, which many people conflate with the GFC, took hold, apartments were well-positioned to benefit. As people were forced out of their homes or walked away, they had to go somewhere, and that was rentals.  And, as lending standards were made stricter, all those would-be homeowners also had to go somewhere, and that was rentals.

What is VERY important to note here is that vacancy ROSE before it fell.  It rose as the recession took hold, and people lost jobs, and then it fell when economic growth returned, but the foreclosure crisis continued.

What causes a lot of confusion is that, even after the GFC ended and growth returned, unemployment remained high, and the economy still FELT terrible. So, colloquially, people talked about still being in a recession, even though we were not.  Times were tough, and unemployment was still very high, to be sure, but economic growth had returned.

Because of the confusion between what actually happened during the recession (vacancy ROSE) and what happened after the recession, when the economy still felt terrible and people were still struggling but the foreclosure crisis pushed people into renting (vacancy FELL), it became a popular thing to say that MFRE does well in a recession.  And, of course, this narrative was pushed heavily by the new crop of syndicators and real estate mentors that rose as multifamily rose over the last few years.

Multifamily asset values actually dropped more than 30% during the GFC.  However, because pretty much every other real estate asset class fell more, it was commonly and correctly stated that MFRE is more resilient during recessions than other real estate asset classes.  However, doing less bad is not the same thing as doing "well" or being "recession proof." Again, sloppiness with words and analysis led to a self-serving narrative that apartments are "recession proof."

Furthermore, anecdotes abound about individual owners who did just fine during the recession, and no doubt many of them will chime in to deny all the evidence because "I did just fine" in the recession.  What is also important to remember is that, nationally unemployment went to nearly 11%.  Among four-year college grads, unemployment peaked at less than 4%, meaning that it was much higher than 11% for everyone else.  And individual markets did better than others.  If your market was a state capital or dominated by a big public university, unemployment did not go much above 6%. That means there were many markets where it was worse than 11%.

This state of affairs has led to a very dangerous complacency among real estate investors. Many are paying record high prices, with the current good economic news baked in and forecast to continue forever, and justifying these prices on the basis that "rentals are recession-proof." Many of them also seem to be convinced that, in the next recession, there will be another foreclosure crisis that will save MFRE again. However, the foreclosure crisis was a one-time event caused by the preceding one-time event of 5% of the population, which never should have owned homes, being pushed into homeownership during the bubble. Since then, lending standards have been made more strict, and history is not going to repeat itself.

The level of investor complacency you mention is a sign of being very late in the cycle.  It's just when people start to be lulled into a false sense of security that crashes generally happen.  Bubbles take a long time to form and an instant to break.  When they do, the trip down is fast.  We will soon have another chance to test the hypothesis that "rentals do well in recessions."

By the way, a couple of years ago, even I was starting to internalize the "MFRE does well in recessions" narrative, and I felt the need to get some outside perspective.  So, I reached out to my property manager, a man who runs a management company that manages institutional quality assets and serves on the national board of the NAA, who has been in property management for more than 30 years.  I asked him what happens to MFRE during a recession.  He said, "vacancy goes up."  Then we shared a good laugh over people talking about how vacancy goes down in recessions.

As a young guy, I've watched guys younger than me get ahead of themselves for the sake of getting into the game (and they are making good money - for now). I get it, we all start somewhere, but it has to be a deal because anxious behavior will lead to destruction at some point when buying on pure speculation and future projections. The comments that you all (@Jonathan Twombly @Serge S.@Mike Dymski ) have submitted on this forum are invaluable. The typical, "what is a syndication" questions are fine for some (we all start somewhere), but every so often conversations full of wisdom are necessary, like this one. As a new synidcator, one who does not mind "taking the stairs" (studying reports, sifting through historical data, analyzing macro and micro trends, etc.) before making a decision, I find comfort in knowing what I've been telling my group of anxious investors (many of them young athletes) mirrors what you all are saying.  

It's really sad "gurus" are preaching to new investors (and syndicators) that MFRE is "recession-proof" for the sake of increasing their reach, followers, viewers and/or investor database. Thank you all for your wisdom, insight and transparency.  

@Jonathan Twombly well thought out analysis. I would consider myself a student of the the great recession and I take a very similar approach as you describe just substitute PHX for Carolina:) My thought process and investing are greatly shaped by my experience during the GR and other cycles ranging from the dot com crash to the 80s tax code shock. I constantly hear that the next recession will not be like the last and it will not. But take a hard look at why the SFR market imploded, we all know the details. Loose lending, unqualified borrowers, speculation and the notion that RE is a forever high demand, tax preferred and scarce commodity. We learned too late that this was not true last time around.

Now take a hard look at the details of some of the deals being pitched to investors. I am looking hard at LP investment in a syndication and I'd prefer to do so in my market. As such, I am privy to deal flow through both the brokers that are pitching the assets and the mostly syndicators buying these deals. Here is a common theme I see in my market and why I'm shifting away from PHX:

1. Very aggressive rent growth projections on top of 7 + years of above average rent growth. Aggressive post reno rent bumps that are based on future growth projections. These type of projections are a great goal but when they MUST occur to succeed ....

2. Exit cap rate at 50 basis pts against purchase cap rather than 200+ basis points against prevailing market cap. Big difference. 

3. Value add promised completed in 1 year. I've done such value add and although its possible the syndicator must be very experienced here. Relying on the PM to manage this process and budget is a disaster, ask me how I know. Unfortunately you don't find this out on the first 5 units renovated.

4. Inexperienced operators having no issues getting agency debt. Inexperienced operators without so much as a balance sheet of their own securing loans 10x their net worth. Yes you can get a LP to vouch but why on earth would you let a guy who has no net worth to speak of manage YOUR net worth? Think about that for a second; reminds me of the 24 yo Edward Jones Investments kid knocking on my door telling me that I need to diversify in stocks. 

5. Use of bridge debt like its no big deal. Bridge debt has its time and place but it puts your back against the wall especially if used by an inexperienced operator. When IO runs out and LIBOR ticks will the unit remodels be completed and the rent bump in place?  Maybe but how in the hell would someone who never did it be so certain?

6. LOW DSCR. This combined with a bridge loan and a heavy capex value add ... need I say more. 5 years ago there was not a bank that would look at a 1:1 DSCR, today no problem. Who needs cash flow anyways?

7. Relying on revitalization/gentrification. Remember that if an area needs "revitalization" it means its a bad area, that simple. If your relying on industry or a company coming to save the day talk to some veteran operators about how long that wait can take. Also take a hard look at what happened to that block/street/neighborhood during the GR. Odds are that area reverts to a POS in the next downturn. 

8. Operator gets lured to a secondary one trick pony market in search of a higher cap rate. These markets get left for dead once primary markets stumble. 

9. Post rent bumps put property directly in competition with class A which is sensitive to oversupply and concession. And thats where the dominoes fall. Don't let anyone tell you this can't or won't happen. It does and will happen especially in hypergrowth markets.

I could go on and on but my point is that all of the above is in fact similar to the SFR collapse. Its happening all over again just this time with a different cast of characters. There are a ton of ways to mitigate all of the risks above but thats a whole different story.


@Larry Caper don't fret my man, no shame in sitting on the sidelines and learning from others mistakes. 

In 1999 I went to work in M&A for a big 4 accounting firm in the Silicon Vally doing IPOs for "development stage" corporations. That means a company that has nothing but words on paper and a few employees. I watched my clients (people 5 years older than me) come to work post IPO in Ferraris and I was enraged that I was 5 years late to the party. I figured I was just as smart as them so why couldn't I do the same. So what did I do? I invested my year of savings into the companies that had the shiniest buildings on my way to work off the 101. Oracle, Liberate, Neoforma, Cisco, etc. Tech was "revolutionizing" the world I wasn't going to miss my chance. This was early 2000 and 2 margin calls later I was broke as a joke. I never invested in stock again and learned a hard lesson. 

Fastforward to 2004-2006 and tech was back. ALL my colleagues were flush and buying RE with Arizona being the preferred spot. Population growth, RE always grows, booming industry, CA business moving, etc. EXACTLY same pitch as today. But this time I actually ran the numbers, visited the state and was not buying the hype; the numbers simply did not work. It made no sense and I wasn't interested. I sat it out while they were building portfolios.

Fastforward again to 2008-2009 and the world is coming to an end. Precisely because I was patient and learning from others mistakes, I was ready. I knew how to underwrite an SFR investment. I knew what a good deal looked like. I was ready to roll. I'll be the first to admit that anyone could have bought anything back then and look really smart today. Thats an obvious and simple premise. Whats not obvious or simple is the work I put in before that moment to be ready.

Its the same with multifamily today. Sit back and enjoy the ride. Don't follow the herd, watch as the heard gets swallowed and be ready to buy the carcass. Knowledge and effort are a young man's net worth. There are a few truly talented professionals out there that will be just fine. Study those guys and contrast to the others. The truth is in the delta.

Originally posted by @Serge S. :

@Jonathan Twombly well thought out analysis. I would consider myself a student of the the great recession and I take a very similar approach as you describe just substitute PHX for Carolina:) My thought process and investing are greatly shaped by my experience during the GR and other cycles ranging from the dot com crash to the 80s tax code shock. I constantly hear that the next recession will not be like the last and it will not. But take a hard look at why the SFR market imploded, we all know the details. Loose lending, unqualified borrowers, speculation and the notion that RE is a forever high demand, tax preferred and scarce commodity. We learned too late that this was not true last time around.

Now take a hard look at the details of some of the deals being pitched to investors. I am looking hard at LP investment in a syndication and I'd prefer to do so in my market. As such, I am privy to deal flow through both the brokers that are pitching the assets and the mostly syndicators buying these deals. Here is a common theme I see in my market and why I'm shifting away from PHX:

1. Very aggressive rent growth projections on top of 7 + years of above average rent growth. Aggressive post reno rent bumps that are based on future growth projections. These type of projections are a great goal but when they MUST occur to succeed ....

2. Exit cap rate at 50 basis pts against purchase cap rather than 200+ basis points against prevailing market cap. Big difference. 

3. Value add promised completed in 1 year. I've done such value add and although its possible the syndicator must be very experienced here. Relying on the PM to manage this process and budget is a disaster, ask me how I know. Unfortunately you don't find this out on the first 5 units renovated.

4. Inexperienced operators having no issues getting agency debt. Inexperienced operators without so much as a balance sheet of their own securing loans 10x their net worth. Yes you can get a LP to vouch but why on earth would you let a guy who has no net worth to speak of manage YOUR net worth? Think about that for a second; reminds me of the 24 yo Edward Jones Investments kid knocking on my door telling me that I need to diversify in stocks. 

5. Use of bridge debt like its no big deal. Bridge debt has its time and place but it puts your back against the wall especially if used by an inexperienced operator. When IO runs out and LIBOR ticks will the unit remodels be completed and the rent bump in place?  Maybe but how in the hell would someone who never did it be so certain?

6. LOW DSCR. This combined with a bridge loan and a heavy capex value add ... need I say more. 5 years ago there was not a bank that would look at a 1:1 DSCR, today no problem. Who needs cash flow anyways?

7. Relying on revitalization/gentrification. Remember that if an area needs "revitalization" it means its a bad area, that simple. If your relying on industry or a company coming to save the day talk to some veteran operators about how long that wait can take. Also take a hard look at what happened to that block/street/neighborhood during the GR. Odds are that area reverts to a POS in the next downturn. 

8. Operator gets lured to a secondary one trick pony market in search of a higher cap rate. These markets get left for dead once primary markets stumble. 

9. Post rent bumps put property directly in competition with class A which is sensitive to oversupply and concession. And thats where the dominoes fall. Don't let anyone tell you this can't or won't happen. It does and will happen especially in hypergrowth markets.

I could go on and on but my point is that all of the above is in fact similar to the SFR collapse. Its happening all over again just this time with a different cast of characters. There are a ton of ways to mitigate all of the risks above but thats a whole different story.

 This is such a great analysis. 

It happened in 2008 and it will happen soon as well: reversion to the mean. 

What goes up must come down. What goes down must come up. 

I prefer to invest when reversion to the mean runs in my favor, not the other way around. 

Many people investing now require the Law of Gravity to be repealed and the Law of Attraction to be enacted in its place for them to succeed. 

I’ve got to get you on my show. Please PM me if you are interested.  

Originally posted by @Larry Caper :

As a young guy, I've watched guys younger than me get ahead of themselves for the sake of getting into the game (and they are making good money - for now). I get it, we all start somewhere, but it has to be a deal because anxious behavior will lead to destruction at some point when buying on pure speculation and future projections. The comments that you all (@Jonathan Twombly @Serge S.@Mike Dymski ) have submitted on this forum are invaluable. The typical, "what is a syndication" questions are fine for some (we all start somewhere), but every so often conversations full of wisdom are necessary, like this one. As a new synidcator, one who does not mind "taking the stairs" (studying reports, sifting through historical data, analyzing macro and micro trends, etc.) before making a decision, I find comfort in knowing what I've been telling my group of anxious investors (many of them young athletes) mirrors what you all are saying.  

It's really sad "gurus" are preaching to new investors (and syndicators) that MFRE is "recession-proof" for the sake of increasing their reach, followers, viewers and/or investor database. Thank you all for your wisdom, insight and transparency.  

 To echo @Serge, being on the sidelines is okay. After selling everything last month, I am. 

Remember, cash is an option on opportunity.  If all your cash is in deals bought with the rest of the herd at the top of the market you have none to use when the real opportunity comes. 

People in this business act like cash has cooties or something and they don’t want it around. I think they are misguided.  

Originally posted by @Matt Millard :

Absolutely Not...mobile home parks yes!

Can you shed more light on your take on mobile parks? I started buying multifamily 6 years ago and although being a pain to manage so many tenants it turned out to be the best investment in terms of the low LTV invested and valuation (up 50%) and probably 200% cash on cash. Can mobile parks qualify for low LTV on a loan or build wealth like multi family?

Originally posted by @Will Wu :

Can you shed more light on your take on mobile parks? I started buying multifamily 6 years ago and although being a pain to manage so many tenants it turned out to be the best investment in terms of the low LTV invested and valuation (up 50%) and probably 200% cash on cash. Can mobile parks qualify for low LTV on a loan or build wealth like multi family?

I'm not a mobile home park operator or investor, so take this with a huge grain of salt.  Short answer is:  yes, mobile home parks are a great investment for the long run.  I've had many discussions with people like Kevin Bupp about this on my podcast.  The supply of mobile home parks is dropping and the demand for affordable housing is rising.

Short term, however, I think mobile home parks are in the same situation as every other asset in the Everything Bubble. If you look at where mobile homes are on Green Street's Commercial Property Price Index, they are about 200% of their previous peak.  Now, certainly some of this results from the fact that mobile homes used to be an overlooked, disfavored investment.  But some of this is bubbly for sure.  For comparison, Multifamily is about 140% of its previous peak, and I think most people would agree that MF is overpriced right now.

I feel the same way about mobile homes that I feel about multifamily:  long-term bullish, but short-term bearish.  The long-term fundamentals support these asset classes. However, buying right now is a dangerous game and you need to know what you are doing or invest with someone who does.

US population now: 327 million. 

US population estimates for 2050: Range from 380 million to 420 million depending on the number of migrants allowed to move to the US within calculations. 

Taking this one simple idea into consideration all these additional people need places to live and multifamily properties are the most affordable solution to the problem of growth. Cycles with happen with cap rates, interest rates being one of the big drivers in that discussion. But the fundamental problem of people needing a place to live doesnt change. 

Originally posted by @Joel Florek :

US population now: 327 million. 

US population estimates for 2050: Range from 380 million to 420 million depending on the number of migrants allowed to move to the US within calculations. 

Taking this one simple idea into consideration all these additional people need places to live and multifamily properties are the most affordable solution to the problem of growth. Cycles with happen with cap rates, interest rates being one of the big drivers in that discussion. But the fundamental problem of people needing a place to live doesnt change. 

This is why I am long-term bullish on multifamily.  But I am short-term bearish on the asset class.  Just because an asset has good long-term prospects does not mean that the price is attractive right now and that now is the time to buy.  You can lose your shirt overpaying for an asset with great long-term prospects, despite what the gurus say.

One of my best friends is one of the best stock value-investors in the world.  He recently told me he has waited ten years to buy a stock he liked, because it was always overpriced.

Hopefully, we won't have to wait ten years for multifamily assets to be appropriately priced again. But the idea is the same.  You buy when you can build in a margin of safety in the price, and you don't buy when you can't.  Doing anything else is just hoping that the asset will keep going up. That's a bad bet at the end of a ten-year bull market, when prices are at all time-highs, and the major risk is to the downside.

@Jonathan Twombly , Just wondering, Jonathan - Did you spend any time thinking about your tax hit before you sold? Or does it not even come into the equation for you? I know stock investors don't think about the taxes so much as portfolio repositioning. But it's hard as a real estate investor to not compare to the 1031 option. Is it different as a syndicator versus personal investments? Interested in your perspective.

Originally posted by @Jonathan Twombly :
Originally posted by @Joel Florek:

US population now: 327 million. 

US population estimates for 2050: Range from 380 million to 420 million depending on the number of migrants allowed to move to the US within calculations. 

Taking this one simple idea into consideration all these additional people need places to live and multifamily properties are the most affordable solution to the problem of growth. Cycles with happen with cap rates, interest rates being one of the big drivers in that discussion. But the fundamental problem of people needing a place to live doesnt change. 

This is why I am long-term bullish on multifamily.  But I am short-term bearish on the asset class.  Just because an asset has good long-term prospects does not mean that the price is attractive right now and that now is the time to buy.  You can lose your shirt overpaying for an asset with great long-term prospects, despite what the gurus say.

One of my best friends is one of the best stock value-investors in the world.  He recently told me he has waited ten years to buy a stock he liked, because it was always overpriced.

Hopefully, we won't have to wait ten years for multifamily assets to be appropriately priced again. But the idea is the same.  You buy when you can build in a margin of safety in the price, and you don't buy when you can't.  Doing anything else is just hoping that the asset will keep going up. That's a bad bet at the end of a ten-year bull market, when prices are at all time-highs, and the major risk is to the downside.

 Agree 100%. These are the times where we need to maximize the real value of our assets, clean up deferred maintenance, pay down debt, and put ourselves in the best position to strike when things make a bit more sense.

However, even in boom times there are deals to be had, although there are far fewer and potentially not the types of deals you wish you to be doing. There is always a way to keep forward progress!

@Serge S. and @Jonathan Twombly you're absolutely wrong! This time around it will be different! LOL and J/K of course. I love your analyses and judgments on the subject. :)

We're kissing 200 frogs to find one deal right now.  Last year my goal was 2,000 units acquired and we were only able to score ~800. Obviously, this wasn't due to lack of available capital. 2019 will likely be more of the same.

I'm still floored to see operators with 1.0DSCR on bridge financing.

Most of our debt in 2019 will be long term, low leverage agency and HUD223(f).

We're starting to line up opportunistic equity relationships for when the deal to frog ratio goes to 1:50.

The best part of this biz is somebody, somewhere is screwing it up! 100% confident there will be more of those "somebody's" somewhere down the road.

For most investors, it's less binary and more complicated than being all-in or all-out of the market.  Trying to predict and time the market and move millions of net worth in and out is challenging, at a minimum, and impossible according to some.  Many investors have been predicting a crash for the past five years...and others have made six and seven figures profit during that time period.  Idle cash can be costly.

Some investors who make changes pivot and take what the market bears rather than moving all into cash.  That is what I have been doing...reallocating capital from value to cash flow plays, always adding value, investing in stable locations, being prudent with debt terms, and holding additional liquidity.  I also pivoted to investing more with others...those who have full time staff dedicated to deal flow...lots of it.  We can't control the market but we can control how we interact with it.

Originally posted by @Robert C. :

@Jonathan Twombly, Just wondering, Jonathan - Did you spend any time thinking about your tax hit before you sold? Or does it not even come into the equation for you? I know stock investors don't think about the taxes so much as portfolio repositioning. But it's hard as a real estate investor to not compare to the 1031 option. Is it different as a syndicator versus personal investments? Interested in your perspective.

These are syndicated deals, so I returned investments and cash to investors.  They only pay capital gains tax on the gain itself.

In my view, it is not worth overpaying for deals by 20% or more in order to save 20% on taxes.  Purely tax-driven investments are usually bad investments.

It is also hard to do 1031 with syndicated deals.  There are a lot of theories about how to do this floating around now, but they run the risk of getting sideways with the IRS.  Just not worth doing in my view.

By the way, not a single investor asked why I was not pursing 1031s. They wanted to capture their gains and pay some tax to keep the rest, rather than double down at the craps table overpaying for assets.

@Jonathan Twombly , Thanks for the response. I definitely agree it would be stupid to purchase a property based on a baked in perceived tax benefit. And it makes sense that with syndications, as you are saying, your investors are happy to get their money off their table with great returns. 

After the fact though, when you already own an asset and considering a sale, I have to admit I struggle with the mental trap of being an individual investor sitting on large capital gains (I know, cry me a river, right??). When you live in California, skipping the 1031 means at 35%-40% total tax bill when you include state taxes and depreciation recapture, so it becomes a real cost-benefit puzzle to cash out. In talking with RE investors who choose to cash out versus hold, I'm always curious how they rationalize the decision either way.

I know some people say "use this opportunity to sell some assets in worse neighborhoods", but I also disagree with that sentiment. If you ask me, if you're someone who is worried about an impending crash and wants to take cashout, you should really be selling on a LIFO principal - sell the most recent assets that are inherently more risky due to the timing of purchase. 

This stuff really messes with your head sometimes! Ha.

@Serge S.

What suggestions might you have for someone like my husband and I (husband finishing grad school in May) who want Multifamily to be their retirement plan and ultimately their wealth building tool?

Originally posted by @Serge S. :

@Ethan Smith I really wish that was the case but history says that Is not true and Multifamily is very tied to economic swings. Funny thing is that if you polled investors 2 yrs ago probably 60-70% would have been predicting pending recession. Today 2 years further into the cycle you can’t find a nay sayer.

 Interestingly enough, the data shows many hidden issues right now with our economy. We are CLOSE to a recession. I am new to this game, and want to buy, but am cautious. To be honest, Not quite sure what I should be looking for at the moment. 

@Robert C. There are multiple ways to defer capital gains without using a 1031 exchange. You can setup a Deferred Sales Trust to convert the gain into a note with whichever terms you choose. You can make interest payments with the principle to yourself and pay ordinary income tax rate on that distribution and if your doing it right your ordinary income tax rate should be 0. You can invest in multifamily or whatever you want with that money with the specific distributions getting capital gain treatment in the year distributed. So if you play it right, you put the money in the DST and distribute to yourself via interest and investments over time to match the carry forward depreciation from your multifamily cost segregation. When you start running out of depreciation, rinse and repeat with another purchase. This is a great strategy to save a doomed 1031 exchange.

Thats just one option. Another is an monetized installment sale and yet another is opportunity zone investing. Multifamily/Commercial RE gets the most preferred tax treatment in the code,  nothing beats it if used appropriately. Especially so after the Trump Tax Reform and in all honesty I believe this is a very big driver of todays multifamily prices. I'm pretty sure many of the goodies handed out get repealed only question is when. When your tenant's FICA income tax is higher than the landlord of a 200 unit building that story gets out. 

Originally posted by @Joel Florek :

US population now: 327 million. 

US population estimates for 2050: Range from 380 million to 420 million depending on the number of migrants allowed to move to the US within calculations. 

Taking this one simple idea into consideration all these additional people need places to live and multifamily properties are the most affordable solution to the problem of growth. Cycles with happen with cap rates, interest rates being one of the big drivers in that discussion. But the fundamental problem of people needing a place to live doesnt change. 

Absolutely agreed and I am the biggest advocate and benefited from investing in multifamily. I have nothing to gain from any correction and sincerely hope we continue this run. If the market tanks I'll probably go down with it. But when I'm sitting on 50% LTV, 1.5 DSCR and cash reserves then falling rents and high vacancy means I'll have a bad year on that investment. Maybe 2-3 bad years with the nice side effect of new buying opportunities. A little different than the guy whos bridge loan is called in the year NOI is half of where it needs to be.

@Serge S. great thread and good timing!  As a former apartment syndicator who moved on to MHP, I can add some perspective from the mobile home park lens.  Just for the record, the same thing is happening with MH/RV parks, where deals with little to no upside are trading at cap rates that don't make any sense. 

I believe MHP has the ability to weather a recession better than other real estate, but regardless of that ability, an acquisition still needs to make sense or you are just taking on market risk.  At some point, the market will flatten out and any aggressive assumptions will come back to bite you in the butt.  Especially in this market, I would exercise caution related to location and underwriting.  Assumptions that cap rates and interest rates will go up, value-add will take longer, and rent growth/vacancy will flatten out are smart assumptions to keep underwriting conservative. Of course, that means it will be tough to find deals, but as long as you have a sound deal flow strategy, I believe there are deals to be had in any market. As @Ivan Barratt mentioned you'll just have to sift through 100 deals to find the one that makes sense.  

@Jack Martin I watch MHP investing in AZ, are you buying in state? I remember as little as 5 years ago there was quite a spread between MHP cap rates and C class MF. Today maybe 2 pts max? I agree that MHP will be a stable long term asset class.

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