Are There Still Multifamily Deals Out There (& Should Investors Prepare for a Crash)?


The investing landscape has changed drastically over the past few years. As we have progressed deeper into this current real estate cycle, the phrases that I hear often are: “The low hanging fruit is gone” and “Cap rates are compressing.” We actually have to put in effort and time to look for attractive deals.

Gone are the days of looking at the MLS or Loopnet and picking out deals. The 100-10-1 rule is back with a vengeance (research 100 deals, 10 are actual deals, and you close on one). Jake and I favor this type of market because most investors give up looking since it is laborious and time-consuming. But I promise you, if you stay persistent, you will land your next deal.

Are We Headed for a Market Correction?

Now, is the current market heading towards a major correction? The only way to tell is to analyze current data. Let’s begin with cap rates and the risk premium. The national average cap rate is currently 5.6%, not lofty by any stretch of the imagination. The secondary markets have a cap rate that is a bit higher, but not by much. Risk premium is simply the difference between investing in real estate and an investment that is considered “risk-free.” I use the Ten Year Treasury Note as a barometer for a risk-free investment, which stands at roughly 1.5%. Therefore, take the cap rate of 5.6 and subtract the T bond of 1.5, and the risk premium is 4.

Obviously, there are other benefits to investing in real estate. But there is also a ton of work and risk involved. Each investor has to decide for himself if a risk premium of 4 is justifiable for all of the effort to invest in real estate. The old timers will hearken back to 2006-07 when cap rates were hovering in the 5 % range. We all know what happened next. The smart money left the building, and most of us were left holding the bag (me included).


Positives and Negatives of the Current Market

There are two positives to this narrative. Interest rates are ridiculously low and appear to be stuck there. Rates were not increased in June, and the Fed chairman used the economic uncertainty and Brexit as two excuses for postponing a rate hike. It appears rates will maintain this level for some time. Once rates begin to rise, all bets are off.

The next set of figures that I would like to discuss is the number of new units being delivered to the market. There is a prediction that 240,000 new units will come on-line this year, mostly A-class assets. The market is definitely flowing between the expansion and hyper-supply stage. (Click here to read about the four stages of a market cycle.)

Related: The Real Estate Market: How to Analyze and Predict Cycles

This can be seen as a positive and a negative. There is demand for new apartment housing, but at what point will supply overtake demand? It is your job to understand the market you invest in. For instance, the city of Nashville is booming and expects to add over 2,000 units in the second quarter. There will be a point when owners will have to begin offering concessions or dropping rates to entice renters. We invest in the east part of the state, and although there is new inventory coming onboard, it is nowhere near the levels of Nashville. We are not too concerned with new inventory because we cater to B to C tenants who can’t afford the lofty rental prices of the newer A assets.

A Nation of Renters

With all this new supply, how will the market react? I have written that the United States is quickly becoming a renter nation due to the demographics and the cost of housing. Young people can’t afford to buy, older people are downsizing, and the allure of homeownership has been waning the past few years. It will be very interesting to see how the market reacts to the new inventory being built, but my guess is that the older properties will suffer less than the newer assets.

This leads me to my next two metrics: occupancy rate and rental rate growth. Occupancy rates currently stand at 96.5%, very close to an all-time high. Rental growth has been on a tear the past few years, although it has slowed down the last 12 months. Rent growth was 4.7% for 2015, and several markets saw double-digit growth. Just ask Portland, Oregon or Seattle, Washington tenants what they are paying for rent. How long can this last? As long as demand outstrips supply. Once again, real estate is market specific, and understanding the dynamics and the overall picture of your market will tell you whether your market is about to enter a correction phase.

Foreign Investment

Let’s look at another measurement: foreign investors. A large part of the expansion in multifamily has been fueled by foreign investors, namely the Chinese, the Europeans, and Latin America. For 2015, foreign investors purchased $7.3 billion in multifamily assets, compared to $5.6 billion thus far in 2016. When the rest of the world is in turmoil, the United States becomes the safe haven for investment. Will that trend continue? I think it will.


Sales Volume

Finally, a look at sales volume in multifamily real estate shows a 5% year-to-year increase from 2015. Most experts were expecting a much bigger slow down in sales. My opinion is that investors are looking for a return on their capital, and multifamily real estate is the new flavor. Commodities such as gold and oil had their massive run up. Next, it was the stock market. Now, the money appears to have been rotating to the real estate market these past few years.

Related: How to Calculate the Value of Multifamily Real Estate

What does this all mean for you? I still think there are deals out there that make sense. We just purchased a B asset in our market at an actual 8 cap and are negotiating another purchase in the same neighborhood. But it is taking longer to locate these deals. My advice is to stick to your buying criteria and be willing to walk away if the numbers don’t work. As my partner Jake likes to say, “Patience, persistence — but willing to walk away!”

Your Task

Educate yourself on your market by asking brokers these important questions. Develop a strict “buy” set of benchmarks (cash on cash, cap rate, etc.) that you will adhere to. Assess the level of risk you are willing to assume, and begin to analyze deals. Do not listen to the naysayers that there are no deals left. Finally, be patient and persistent, but willing to walk away.

Investors: What are you seeing in YOUR market? Do you agree with this assessment?

Let me know your thoughts with a comment!

About Author

gino barbaro

Gino Barbaro is a father of six and the co-founder of Jake & Gino LLC, a real estate education company focused on multifamily investing. He has grown his portfolio to 674 units in three years and is the best-selling author of "Wheelbarrow Profits".


  1. Jonathan Makovsky

    Thanks for the great contribution Gino! You did a great job covering so many moving pieces of the multi-family real estate puzzle.

    Another trend that I am keeping an eye on is the impact that rents have with home-ownership at a 50 year low – hovering around 62.5%, whereas approx. 10 years ago it was at an all-time high at 69%.

    It is certainly possible that the home-ownership percentage stays low, especially with with income growth being stagnant, student-debt continuing to rise, millennials postponing starting a family, and other factors. However, if the trend reverts back to the 50 year average around 65.5%, it will be interesting to see what that does to rental prices, especially considering the hyper-supply/expansion that you mentioned.

    Keep up the great work Gino and I look forward to your next article.

  2. Joel Owens

    Where I live which is more of an affluent area homes cannot be built fast enough for the demand. I can see lower income areas where people can’t treat a house like a piggy bank wanting to rent instead of own.

    The reason class A apartments are being built so much is because typically the incomes are over six figures with each tenant. So even if they pay 2 or 3k a month rent they might be at 15% income to rent ratio. The middle income earners making 40k to 50k a year are in trouble as rents are pushing 35 to 40% of their income and they are starting to hit a ceiling where landlords will have a hard time pushing rents. Over decades in most markets vacancy historically is 10%, rent growth 2 to 3%, and opex is 50%, 60% if an older building and landlord paid utility. They are still deals out there people just do not need to buy multifamily on short term bubble projections because everyone is doing it. Some of my friends are waiting with millions for these purchase to feel the pain in a few years and scoop up the properties that were overpaid for.

    • gino barbaro

      The other reason class A is being built is to justify the cost. No one is going to build class C property at what it costs to build and then rent out at an inferior rate. These guys building the A product are flipping to REITS. That party is coming to an end just like several years ago

      • In my town, they are building a lot of class A,and selling them (not renting them). They get favor few takers. One building with 60 units has been standing mostly empty for years. They could sell them if they reduced the price, but they won’t do that either. I do not see the supply and demand principle working very well.

  3. Great article. I don’t have a crystal ball (and I have five kids); so, I try to invest in stable cash-flowing investments that perform similarly in up or down markets (and you can do that without sacrificing appreciation potential). During ’08 and ’09, many stock portfolios got killed but many real estate investors’ mailbox money kept coming in no differently than before the crash….many actually experienced rent increases due to more demand. Many investors invest in real estate because they want to control their financial future and not be controlled by market whims; so, they invest accordingly and just watch the pundits debate market forces. My hat is off to you and Jake for the courage and hard work to uproot your families and move to markets where you can control that future (and live with us rednecks). As usual, a well written and spot on article.

    • gino barbaro

      Hey Mike,
      I beat you with six kids. One of the only things I know is that the cost of living in NY is unsustainable. Too few paying for too many and the too few are starting to leave. I follow your strategy and try to limit my downside risk, this being learned from the many mistakes I have committed. The key is to buy right.

  4. Brandon Turner

    Gino – very timely article. I just got off the phone with a commercial broker and we talked about a lot of this stuff. Definitely getting tough – but that’s when the tough get going! (Sorry for the terrible cliche!! ) 🙂

    Another outstanding article. Keep it up!

  5. leo Khmelniker

    Another awesome article Gino!

    Another incentive for investors is the lending appetite for interest only arrangements. Some lenders will offer 3-4 year interest only arrangements – allowing investors to manipulate the cash on cash return and compress cap rates

    • gino barbaro

      That’s a great point Leo. We just got 12 months interest only on our last couple of deal, and going forward that looks like the norm for us. We love it because we reposition the asset, force the appreciation, cash flow better or use the principle for repairs, and then after twelve months we refinance. Just remember, once the 12 months are up, if you can’t refi, time to pay up. The I/O is a great incentive, but don’t buy if you need I/O for the deal to work

      • Your comment relates to the tactics of buyer’s agents. Buyer’s agents have a fiduciary duty to see to the best interests of their client. Yet buyer’s agent talked people into interest only and negative amortization loans to bring down the house payment to an affordable amount. If the buyer balked, the agent told them not to worry, houses always appreciate, and when the balloon payment or the reset comes due, all you have to do is refi based on the equity from appreciation, or you can sell, pay back the loan and take home some nice change. Then the agent tells himself he fullfilled his fiduciary duty because his client wanted to buy a house, and he helped him buy a house.

        Congress keeps talking about banning interest-only loans because they are so dangerous for most retail buyers. However, these loans are a very useful tool for the person who understands and has the discipline to use them wisely. I think if Congress wants to make any new laws, they should make a law that clarifies the agent’s fiduciary duty, and imposes penalties for failing to fulfill it.

        For example, if you want to get a refund anticipation loan (another dangerous loan) from HR Block, you have to sit through approximately 5 different screens explaining why the are dangerous and a bad idea. If you insist, you must sign a paper attesting that you understand the preparer’s explanation of the risks. Buyer’s agents should have their client’s sign a similar paper for interest-only and negative amortization loans.

  6. Michael Nicholson on

    Great info Gino! Another thing I have noticed, are billboards advertising no money down homes again. I know it’s a little different this time since most of those billboards are from investors who do rent to own deals, and not the no doc loans before the last crash.

    Also in chorus with what you are saying about this still being a great time to find deals die to other people stepping out, I totally agree. I am a wholesaler so I do a lot of direct mail, and the fact that a lot of people are doing direct mail in my market only means that they are doing my work for me and shortening the time it takes for me to get a call. Everyone I have talked to on the phone mentions that they have received numerous mail pieces and that mine happened to be the 10th, 11th, or 12th.

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