Multifamily Real Estate During Tough Times

What happens to multifamily real estate during tough times? Is it a good time to buy multifamily property right now? If so, where do you find good deals? Discover the answers to these questions and much more as you discover the ins and outs of multifamily real estate during tough times:

Why It’s Tough Times for Multifamily Real Estate

There are four obstacles facing multifamily investing is facing right now:

• High Interest Rates: When interest rates climb, it has a direct impact on net cash flow. When crunching the numbers on deals right now, the mortgage payments are wiping out the cash flow and killing the deal. Investors have had to walk away from deals that two years ago would have been great, simply because the interest rates for the financing are cancelling out the cash flow. This is the reality and it looks like they will remain high for awhile. I have a video called Thriving When Rates are Rising where you can learn how rising interest rates affect multifamily real estate investing and the steps you can take to thrive during these tough times.
• Increasing Operating Expenses: Everyone who owns multi family knows that in the last twelve months, operating expenses have increased significantly. Insurance, property taxes, labor costs, and contractor and building supplies are through the roof. Just like high interest rates, increased operating expenses means decreased cashflow.
• Climbing Cap Rates: In some markets, cap rates are going up and when market cap rates go up, property values go down (see a detailed explanation here: When Cap Rates are Lower than Interest Rates)

5 Factors for Understanding Multifamily Markets

Multifamily markets vary from state to state (and even within a state) so you shouldn’t assume that what’s happening in other markets applies to your own market. Instead, you need to analyze your own market by understanding how these 5 factors impact your area:

1. Interest rates: Markets are reacting differently to higher interest rates, so you need to understand how this is playing out in your own market.
2. Cap Rates: Cap rates in San Francisco differ from cap rates in a small city in Oklahoma. You need to know what they are, how they are changing and how these changes are affecting market dynamics.
3. Rents: Rents are another variable in the market. For example, rents in San Francisco have dropped over the last year while small towns in Oklahoma have increased by 40%. So what you can get in terms of rent will vary considerably from market to market.
4. Jobs: A crucial metric to know when analyzing a potential multifamily investment is employment data because this can make or break you in multifamily.
5. Landlord/Tenant Relationship: An often-overlooked market dynamic is understanding how “landlord friendly” your market is. This is important because it can affect whether you can raise the rents and much the tenants will tolerate. It’s also an indicator of how hard or easy it will be to deal with them, especially when you want them out.

Determining Multifamily Expenses Accurately

Many novice investors falsely assume that the total operating expenses for a 12 unit property in one market will be about the same as any other. They often ask us for “rules of thumb” on how to estimate multifamily expenses. However, in reality, there can be drastic differences in expenses from one market to another. You need to know the correct costs for your market to accurately evaluate a deal. This is yet another reason why having a nationwide mentor is essential. For our mentees, we are able to provide information on real world operating expenses for properties in their general area thanks to our detailed up-to-date financials on multifamily deals all across the country. During tough times, you must be able to accurately determine your operating expenses to even have a chance at making a good decision.

3 Ways to Invest in Multifamily Real Estate During Tough Times

Even during tough times, you can buy very productive multifamily deals, as proven by our Real Deals. How do we do it?

1. Creative Financing

Creative Financing is an essential skill for multifamily investors during tough times. When you apply creative financing techniques, you get to create your own deal and therefore can negotiate lower-than-market interest rates and/or terms. With decreased debt service, you have a distinct advantage over your competition and cash flow deals better than they can. Creative financing also allows you to purchase distressed commercial real estate when banks won’t. Distressed multifamily can have huge upside but if you don’t know how to apply the right creative financing technique for that particular deal, you won’t be able to reap the rewards. Creative financing is also a great option if you don’t meet all the requirements for a conventional loan or you don’t have enough money for the down payment.

Creative financing also can overcome the problem of a stubborn seller that won’t budge on the purchase price. Some seller expectations are still high even though the numbers are coming up short on cash flow. What do you do? Most people just walk away, but if the deal has potential, you can try to do something creative. In this scenario we teach our Proteges to respond to a stubborn seller with, “I’ll give you your price if you give me my terms”. Usually the seller will ask, “What are your terms?”. And then our Protege lays out the terms we have taught them. You can learn more about creative financing techniques and the 4 step process we teach our Protégé students in my training Creative Financing Commercial Real Estate (Master Lease, Seller Carry, Sale Leaseback, Seller Equity Participation).

2. Off Market

Instead of working with a Commercial Real Estate Broker, looking through LoopNet, Crexi or even the local MLS, focus on off market multifamily properties by contacting property owners directly. We find most of our deals this way and it is a solution to overcoming high property prices. You have a better chance of getting an acceptable purchase price by going direct to the property owner because an agent isn’t mediating between you and the seller. A seller of an on-market, listed property already has a set purchase price in mind because the broker has told them what their property is worth, even if it should sell for less. And most listed properties are priced so high that any potential upside is taken away.

So if you want to find a deal at a reasonable price with value-add potential, dealing directly with the seller is key. It also increases the chances of structuring the deal with creative financing. Brokers will block you from dealing directly with the seller to maintain control and they aren’t open to creative financing. But when you go direct to the property owner, the potential to do creative financing increases exponentially.

3. Location, Location, Location

Even during tough times, multifamily real estate is extremely market dependent whereby one market may be hot seller’s market while another may be a buyer’s market with lots of opportunity for investors. For example, Dallas Texas has historically had a reputation of being a great market for multifamily investing. However, recently, cash flowing deals are hard to find because prices are high, rentals rates are maxed and operating expenses are high (taxes and insurance costs) while cap rates are increasing and therefore values are dropping slightly. Meanwhile, there are parts of West Texas with acceptable prices, rising rents, lower expenses, increasing values, and cap rates that are still compressing. As the old real estate saying goes, “Location, location, location.”

Key to Multifamily Real Estate in Tough Times

The most important key to successfully navigating through tough times with multifamily real estate is to hire the right mentor. There are 5 Things to Look for in a Commercial Real Estate Mentor and we meet all 5 requirements. Get your mentor here: Commercial Property Advisors Protege Program