The Resilience of Multifamily Real Estate: Why the ‘Meltdown’ is a Past Chapter

 

Perspective: The Multifamily Real Estate Sector is Still Alive and Kicking—The So-Called “Meltdown” is Already in the Rearview Mirror. Here’s Why You Should Keep Investing

Despite the doom and gloom that has been circulating in the media, the multifamily real estate sector has already weathered the storm. It’s time to continue investing, and here’s why.

Over the past year, if you’ve been listening to the chatter about real estate, you might be under the impression that the industry has experienced multiple catastrophic events. It’s true that the real estate market has faced a number of hurdles in the past year. In certain markets, home prices have dipped after years of unsustainable growth. Swift increases in interest rates have left potential sellers feeling trapped in their homes, leading to a supply crunch and leaving some investors with variable rate loans struggling with slim or even negative cash flow.

However, we continue to invest in real estate consistently, just as we do with stocks, regardless of the latest market fluctuations. Here’s why.

The “Meltdown” is in the Past

Attempting to time the market is a rookie mistake. Even if you disagree with this, consider that the current moment might actually be the ideal time to buy. Paul Moore presents a persuasive argument that inexperienced investors, posing as experts, caused the multifamily real estate syndication market to implode. He suggests that these novices overpaid for properties, overestimated returns, and took out variable interest loans under the assumption that low rates would last indefinitely.

This certainly happened to some extent, forcing distressed owners to sell earlier than planned, potentially at a loss. To me, this sounds like an opportunity. When we consider Paul’s argument, we don’t see a reason to avoid investing in multifamily properties. Instead, we are reminded of the crucial importance of due diligence.

Invest with seasoned syndicators who have experienced various types of real estate markets. Steer clear of operators who don’t underwrite with extreme caution.

Interest Rate Risk is Taken into Account

By now, we’ve all had a reality check that interest rates won’t stay near zero indefinitely, despite the wishes of governments with a penchant for spending. Astute multifamily syndicators factor in interest rate risk when underwriting. They take measures such as purchasing interest rate caps, securing fixed-rate loans, opting for longer loan terms, and setting aside larger cash reserves. Many are actively seeking assumable seller loans or negotiating seller financing.

The topic of interest rates has been on everyone’s lips for over a year and a half now. The time to worry about rising interest rates was actually several years ago when many operators took out variable interest loans without rate caps. By now, no one is overlooking that risk.

You should be focusing on the things that no one is talking about, not the risks that are already on everyone’s radar.

As a final note, high interest rates aren’t entirely bad for multifamily investors. They increase the cost of homeownership, leading many potential homebuyers to continue renting for longer than they might have otherwise. Last year, over 60% of renters couldn’t afford to buy a home in the cities where they live, so they keep renting, driving up demand for rental housing.

Fewer Deals, More Selective Syndicators

As rising interest rates have squeezed cash flow, multifamily syndicators have found it more challenging to find good deals. Many have also found it more difficult to raise capital, given the performance of some syndications since rates began to rise. Underperformance has ranged from discontinuing (or delaying) distributions, issuing capital calls, or even losses.

We’ve spoken with dozens of syndicators over the past six months, and we hear the same refrain again and again: We’re doing fewer deals this year. Raising capital has been harder over the last year. We’ve tightened our underwriting. We’re setting aside larger cash reserves.

Two or three years ago—when syndicators were selling for record profits—was actually not a great time to invest. Today—when everyone’s a more cautious mood after less rosy performances—is actually a better time to invest.

Again, if you believe in trying to time the market, which we don’t.

Timing the Market is a Fool’s Game

Imagine a would-be homebuyer in 2019 who said, “I’m going to wait until the next housing market correction to buy.” First of all, they’d have sat on the sidelines for four years. But even when the correction hit, nationwide home prices are still around 33% higher than pre-pandemic. Don’t get clever. Don’t get smug. The best market analysts in the country can’t consistently predict market movements, whether for stocks or real estate. If they can’t do it, you certainly can’t.

Besides, when you try to time the market, your crystal ball needs to be right twice: the lowest possible entry point and the highest possible exit point. You might luck out and get close to that once but don’t expect lightning to strike in your favor twice.

And by the time it becomes clear what’s going on in the market, the tides have already shifted. Despite the gloomy mood among buyers and sellers, analysts such as the National Association of Realtors now believe the market has entered recovery mode. But by reading the prevailing headlines, you wouldn’t think so.

What to Do Instead: Dollar-Cost Averaging

Every week, money transfers automatically from my checking account to my brokerage account. Once there, my robo-advisor invests it automatically to keep my asset allocation where we want it.

Known as “dollar-cost averaging,” it involves investing consistently in the same assets on a regular recurring basis. You end up mirroring the market’s movements, which may not sound very sexy, but over time you come out ahead of all the “clever” people out there trying to time the market.

It’s the main reason why the average investor underperforms the market at large. We use the same strategy with real estate investments. Every month, we invest in a new real estate syndication deal. While ordinarily, that would take $50-100k each month. This is the precise reason SparkRental launched our Co-Investing Club: to pool funds together to invest smaller amounts in more deals.

Nor are real estate syndications the only option. You can invest in real estate crowdfunding platforms, often in increments as small as $10. For example, we invest small amounts in Groundfloor loans each month.

And, of course, if you have enough cash, you could buy a new rental property each month.

Final Thought: Recession Risk Isn’t All Bad

Often, investors lie awake, biting their fingernails and worrying about what happens if a recession strikes. We don’t.

If a recession struck tomorrow, the Fed would stop raising interest rates. In fact, they’d quickly start cutting rates, which props up real estate markets.

And while home prices do sometimes dip during recessions, rents rarely do. Even in the Great Recession, rents merely flatlined: Average Rent of Primary Residences in U.S. Cities (2000-2023) – St. Louis Federal Reserve

The fact that rents have dipped in some markets this year speaks more to rents overshooting market fundamentals after the government interventions during the pandemic. Rents remained largely frozen during the eviction moratorium, even as home prices exploded. When the moratorium lifted, renters flush with stimulus money went out and bid up those rents, which caught up with home prices. Like home prices, rents overshot the mark in some markets and are now correcting.

While falling rents aren’t a serious threat to most real estate investors during recessions, that doesn’t mean recessions pose no risks at all. Vacancy rates often rise during recessions, as do rent defaults. That still eats into your rental cash flow, even as rents hold steady.

By the time all the pundits start talking about a trend, it’s already well underway. All the absurdly high returns that syndicators were earning in 2020-2022 generated a ton of buzz, and investors flocked to syndications. That made it a not-so-ideal time to invest, as some syndicators and investors found the hard way. But you wouldn’t have guessed that from the mood at the time.

Forget trying to time the market. Just invest slowly and steadily, and accept that occasionally the market will turn against you. Over the long term, you’ll come out far ahead of all the “clever” market timers.

The multifamily real estate sector has proven its resilience time and again, even in the face of significant market fluctuations. The key to success lies in consistent investment, thorough due diligence, and strategic risk management. As we navigate the post-‘meltdown’ landscape, opportunities abound for those willing to look beyond the headlines and invest wisely.

If you have any questions or need further insights into the multifamily real estate market, don’t hesitate to reach out. Contact Intempus Realty is always available to provide expert advice and guidance. Remember, in the world of real estate investment, knowledge is power. Stay informed, stay proactive, and most importantly, stay invested.