How Multifamily beats Single Family

How Multifamily beats Single Family

A common theme among real estate investors is the desire to start in single family before scaling up. It is a natural thought process given that many, if not most of us began our careers this way. For me, as a data entry clerk entering and tracking Import bills of lading (job no longer exists…thank you technology) or you as an entry level position in your field.

Real estate is a different animal though. I speak from experience. I have been down the BRRRR path, flipped, wholesaled, lease options, etc. For me, getting into multifamily has always been the goal; however, taking on such large transactions while transacting numerous deals a year seemed daunting. It was not until I divorced the single-family world and went to a 12-step program that it became clear.

4 Reasons the leap from Single Family to Multifamily can be done without the “experience” of single-family rentals or rehabs. And, frankly, it should be seriously considered.

The primary goal of most (if not all) landlords is 3-fold. I am going to touch on all 3 points. First, cash flow. The additional monthly income is necessary for a rental purchase is made. I made decent cashflow on my rentals. I self-managed, had a good communication with my tenants so they were long-term (not always the case), maintained properties to avoid major capex, and utilized the same handy man on my call list. We developed a low budget rental system as one can get (at least I believe so). Regardless, things happen, and tenants are going to have maintenance issues. Factoring these items in, I stayed around 6-8% cash flow annualized.

Investing as a passive investor in a multi-family syndication has similar annualized returns. The difference is, the only communication I am receiving is from the sponsorship team on how the property is performing, any issues that have come up on a macro scale, and how the property is performing vs. projections. The purpose of value-add investing is to stabilize a property: increase occupancy + increase rents. Therefore, the distributions may not be available for the first 3-6 months or may be lower than the projected returns while the capex is being deployed, property management being changed, old leases expired and new leases filed. However, once these items are completed, the passive income is truly passive. It is a check in the mail.

If anyone has ever held a rental for a few years, then sold it, they have realized that cash flow is not where the real gains occur. For the past several years, returns on all real estate have been almost hyperbolic. Cash flow on a property is great; however, appreciation on real estate is what matters. And it is more attractive in commercial real estate such as Multifamily for a number of reasons.

1. Forced appreciation making the property less susceptible to recessionary factors

2. Better terms with lenders who are attracted to these stable income producing assets

Most commercial syndications will offer a 5 year hold with 5-7% cash on cash return and a 1.9-2.2x equity multiplier. This equates to a 190-220% return on principle. What does this mean for the passive deal investor (called a Limited Partner?) This means the same $50,000 investment, a landlord of a single family property could very well do less work and earn more money. The landlord will not likely have zero calls on a property in 5 years, and if decision is to sell, there is work and additional capital to invest to reach top of market potential (again, speaking from experience). It is also advisable to use an agent (I cannot stress enough…speaking from experience) especially if you are in a W-2 position. The financial returns are real; but, so is the time commitment.

No work for me.

The management team has an entire system in place to source, underwrite, negotiate, and complete due diligence on large multifamily deals. The property will have a full management team on staff including onsite leasing agents and maintenance. Therefore, vacancy will be turned, units painted, tenants managed, toilets fixed.

As a landlord, hard money lender, and rehabber (as well as “wannabe” wholesaler), I can speak to the actual TIME commitment to finding deals which make financial sense. It is difficult to FIND the deal and there is a lag time of income in between tenants. By giving up the “CONRTOL” aspect of being a landlord of single-family properties a landlord will go from manager to investor. And, will be glad for it. Investors have opportunities presented to them in exchange for double or close to cash investment, with what equates to 1-2 hours of due diligence. It is a no-brainer. By removing the time component of trying to find a good rental, dealing with tenants and preparing properties to sell, an investor can focus on WHERE to best place available capital next and WHO has best track record.

During the 2008-2009 financial crisis, almost every asset class took a haircut in valuation. Multifamily was not alone in this. Anyone in working world and home-ownership remembers these times and is definitely on edge right now because we are seeing high asset prices (like 2007) and have concerns about a repeat. The similarities and differences are discussion for another article; but, the highlight for this section is that while VALUES of the multifamily (and other commercial sectors) were decreased, it was only temporary. The cash flow INCREASED in this time due to foreclosures displacing homeowners and increasing overall rental demand. Similar results for the self storage market as displaced homeowners needed somewhere to put their “stuff” when downsizing to apartments or smaller rental homes.

I am not a fortune teller and cannot state with certainty that multifamily assets are recession resistant; however, what is predictable is the nature of economic effects on the single-family market vs. multi-family market. We are certainly in a unique position in time with inflation, rising rates, gas prices right now; which puts us in a position to want to protect our wealth and become risk averse. However, it is important that in doing so we identify the proper placement of it for protection.

Is Transportation the Canary in the Coal Mine for the Economy?

Is Transportation the Canary in the Coal Mine for the Economy?

In 2021, ocean freight (and domestic trucking) began to become scarce and very expensive. Anyone in the business knows what I mean. Carriers were giving 7 day-14-day rate validity; meanwhile the containers would not depart for 45 days. This would subject the rates to 2-3 potential (and very likely) rate hikes in this period. 

Regardless of the increases in pricing, demand for import containers rose every month from March 2021 through June 2022. Below is a reflection of the price increases from the SCFI and the consistent rise over the past 13 months. 

In this period, consumer goods remained flat. Not much really adjusted with exception to the used car market; however, this was for a different reason. 

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In this period, consumer goods remained flat. Not many goods adjusted with exception to the used car market; however, this was for a different reason. Clients every day would pose the question-when will the rates come down, when will things normalize?!?! My answer was always the same-when demand decreases! See the below chart from freightwaves highlighting the demand, mirroring the price above. With demand rising since March 2021 and remaining high….until June 2022. But then what happens? Why? 

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In Q4 2021, I had the opportunity to sit in on an economist speaking about this very phenomenon. He went into granular detail about the US Economic state at the time and moving forward. One of the key takeaways was the elevated shipping prices we were seeing had not made their way all the way through the supply chain yet. These elevated prices would not be felt by the consumer until earliest Q1. 

These elevated shipping prices have been pushed to the consumer now and it has resulted in a wave of inflationary concerns across the nation. Another added event was Russia’s invasion of Ukraine which is having an effect on food goods and some increase on fuel.

Consumers are not happy about the new prices being passed on to them and it is drastically slowing down demand. Perhaps it is due to the tripling of the fuel + grain increases + transport increases that have caused this sudden drop. The overall decrease in imports is 36% from all countries. Already, ocean prices have begun to fall and the “premium” rates. 

Is this a sign that prices will come down as well? Already, factories are reporting decreased lead time which is a sign that US Purchase orders are decreasing and/or cancelling. Inventory levels are fully stocked here in the US already. If the transportation increases were not felt for 6-9 months, perhaps consumers will begin to see these “REDUCED” prices by Q1-Q2 2023? 

The X Factor in this scenario is the Ukraine conflict and the effect it is having and will continue to have on fuel and food products. However, it does seem logical that at least 1 factor causing inflation is on a downward trend. 

Investing in a Time of Uncertainty

Investing in a Time of Uncertainty

Investing in a Time of Uncertainty

When is the right time to Invest? As my coach and mentor Bill Ham says, we only know when the peak (or valley) of the market was, after it has already passed by. Unfortunately, it is not possible to perfectly time the market for entry and exit. There is no shortage of media discussion of inflation and rising interest rates as hot topics. The seemingly ever increasing cost of living cannot be overlooked when considering investing capital as well.

Interest Rates Then, Now, Moving Forward

Recent years have seen record low interest rates and commercial real estate has reacted positively to it. Nationally, CRE has transacted not only record volumes; but, consistently pushed higher prices (compressing cap rates and yields.) Investors and Institutions seeking safe haven for excess cash have been taking advantage of almost free money in order to provide safe returns. 

As of this writing, Fed Chairman Powell increased the federal interest rate 50 basis points (bps) and announced another increase of 50 basis points this year. The question being asked around the industry/market place is: how will this affect CRE and cap rates? 

In short: no one knows. This action and announcement has certainly thrown a wrench into deals close to the closing table and banks across the country began re-trading to higher interest rates. In some cases, interest rates on loans rose as much as 2%. This can have a dramatic effect on returns if a deal is not fundamentally sound. But for those projects that were already priced correctly, this should have minimal effect on those involved. 

Earlier this year, the Fed was only providing guidance of potential increases, and as many as 7. The good news is, with this announcement, the market has clarity on what to expect moving forward. Providing clear guidance on what the market can expect gives the banks an understanding of what the cost of capital will actually be vs. what it is now.

Will this increase yield/increase cap rates?

As of this writing, there has not been much of a shift (disclosure: I focus primarily on the Houston market-however, the firms we transact with are national and have national data.) Common sense says that as the cost of capital rises, prices will be forced to come down. This would normally be true, and certainly it could cause the volume of offers to slow down (as well as seller demands i.e. early Hard Money, etc.) Other market factors come into play however, such as, housing demand/ shortage/pricing as well as overall demand for Multifamily Housing. Another factor to consider is the amount of capital in the market looking for a place to earn yield.

In the past 18-24 months, the US has printed $4 Trillion and other countries have printed $6 Trillion. This is $10 Trillion of excess capital looking for yield. These facts could and likely will keep the market in high demand. 

In terms of Houston as a market, numerous factors make this a capital attraction such as continued job growth and large employers entering into the market further driving population growth. All of these things drive demand for the product.

Effects of Inflation on Assets

Inflation is a big concern right now as well as rising interest rates. But, consider this. Buying ANYTHING now has a timestamp at that date in time. If inflation is 8.5% (likely higher) then inflation will eat the cost of that purchase down over time while the asset appreciates. Example, if you bought a house for $100,000 5 years ago, the balance on that mortgage is accelerating small as the value of the dollar diminishes.  On a Multifamily investment, investors typically see a 14-19%IRR. Compare that to the 4-5% loan rates and it is easy to see why the institutional money is chasing after commercial real estate.

Invest now or wait?

If you are looking for the right TIME to invest, consider this. Historically speaking, interest rates are STILL at an all time low. Without getting into an economical / political discussion, it is difficult to rationalize rates exceeding 6% given the current debt that the US Holds and its inability to pay this debt if interest rates continue to rise. Or, rising interest rates in election years, etc. 

2 surefire ways to lose money is to: sit on the sidelines or, invest in deals with bad fundamentals. 

If the deal has strong fundamentals, it should cash flow in any environment. If the deal requires consistently improving market conditions to perform, this probably is not something to consider putting capital into and may not actually have an end buyer. 

The former of the two is also not advisable in this highly inflationary environment. Savings accounts will lose value because of inflation and it is prudent to find a vehicle to beat inflation and not rely on policy changes or tax code which inevitably will take years to take effect if our fearless leaders are actually making the right decisions. Take control of your own money and do not let your capital escape you. 

Investing in Real Estate vs. the Stock Market

Investing in Real Estate vs. the Stock Market

Investing in Real Estate vs. the Stock Market

Of the two types of investing, investing in stocks and shares seems on the surface to be more accessible to many than the world of property investment.

So, why would you consider investing in real estate?

Both types of investment have their pros and cons but the beauty of investing in property lies in the low risk, stability, and predictability of the investment.

When you add incredible tax advantages, hedge against inflation and control of investment to the list of positives then choosing to invest in tangible bricks and mortar over stocks and shares makes much more sense.

Let’s take a brief look at some of the pros and cons.

Stocks and Shares – Positives and Negatives

Negatives

1. Volatility

During a dip in the economy, you may be subject to the disappointment of diminishing funds as the profitability of the company drops.

Stock prices experience extreme short-term volatility, depending on the day’s events. Most smart traders do not react to these volatile market cycles but take a long term approach; however, the unpredictability of stocks can take its toll emotionally.

2. Risk

Stocks are volatile by nature because they depend greatly not only on the economy but also on the performance of a company and more importantly on the performance of the flawed individuals that run those companies.

If a company goes bankrupt then the money that you have invested in those stocks is completely dissolved.

This is a bigger risk than many are willing to take; many investors prefer to have their capital tied up in an investment over which they have a greater degree of control.

Negative publicity can also affect stock prices unexpectedly and in this day and age of instant news and of fake news, the volatility goes through the roof.

For example, on January 29, 2013, Audience ($ADNC), a voice processing company, found itself in muddy waters, literally, after a Twitter account named @MuddyWaters published a tweet about a false report in which the company was being investigated by the Department of Justice. The tweet set the company’s stock into a 25% drop. Muddy Water’s published a tweet after, clarifying the hoax.

  1. Ambiguity

Accurate stock analysis calls for a great deal of study. Even many honest experts admit that they are barely scratching the surface when it comes to accurate in-depth analysis.

When you invest in stocks you effectively own a portion of the company that you are investing in. If that company manages to thrive then the value of your stock rises and you win. When the company struggles, you lose.

Positives

1. Passive Income

The entire process of investing in stocks can be automated.

Of course, when it comes to investing in property, you don’t have to be the one dealing with tenants’ problems. When you invest in a property deal that is syndicated by someone else then this means that your real estate investment income will effectively also be 100% passive. You are several steps removed from the day to day management of the property.

2. Liquidity

Buying and selling stock is a relatively straightforward and speedy process with low transaction costs. No tangible asset is being exchanged so the transaction is quick and inexpensive. The process of actually buying and selling stocks is obviously much more straightforward than buying and selling a property which often takes two or three months or more.

3. Diversification

Due to the relative ease of buying and selling stocks, it stands to reason that it would also be fairly simple to spread your capital across different stocks. This is a way to combat the volatility of the stock market where the prices of individual stocks fluctuate daily. Clearly, it would take a much greater investment of capital to diversify your real estate portfolio in the same way.

Real Estate – Positives and Negatives

Real estate is a tangible asset and as such for many investors, feels more real. A great appeal of this type of investment is its stability.

For many millions of people, this kind of investment has generated consistent wealth and long-term appreciation.

Real estate investment provides a very consistent and stable rental income. Having a home is a vital necessity for all people, and as a result, rental investors are relatively protected even during economic downturns.

Negatives

1. Lack of liquidity

With property, you can’t just sell it at the end of the trading day. You can’t go back on your decision to invest in a property at the click of a key on your keyboard.

It may be necessary to hold the property for several years to realize the anticipated big returns.

It’s interesting to note however, that most stocks dividend yields hover around 4% or less annually.  When you invest in a multifamily real estate deal, you start receiving income almost immediately. Investors are getting distribution checks every month from rental income and routinely the average annual returns even after fees, inflation and taxes, are above 10%.

2. Lack of diversification

If you’re putting all of your money into real estate you might be limiting your diversification.

In contrast, with stocks, by means of an index or mutual fund, you can have easy diversification.

However, diversification can be achieved in real estate investing; well-qualified advisors can help you to spread your investments across different communities and different types of property.

This is another advantage of syndication.

3. Transaction Costs

As we have seen, stock trading has much lower transaction costs than real estate.

Real estate is a longer-term investment and transferring property is expensive. There are title fees, attorney fees, agent commissions, transfer taxes, inspections, and appraisal costs.

Real estate is a tangible asset and as such for many investors, feels more real. A great appeal of this type of investment is its stability.

For many millions of people, this kind of investment has generated consistent wealth and long-term appreciation.

Real estate investment provides a very consistent and stable rental income. Having a home is a vital necessity for all people, and as a result, rental investors are relatively protected even during economic downturns.

Positives

1. Cash Flow

Property investment provides an opportunity to invest for cash flow which means buying a rental property for the income it generates each month.

With skillful management, this cash flow income can be increased significantly after your investment.

The passive income from your real estate investments can dramatically improve your quality of life.

Rental properties give a steady source of cash that keeps up with inflation.

With smart investment advice, real estate investing will bring a consistent stream of passive income.

Many investors are often able to earn cash flow completely tax-free.

2. Tax Advantages

The government gives many tax advantages to those that effectively help them with their responsibility to provide suitable housing for the populace. Owning real estate brings many tax advantages, not least of which is depreciation.

Depreciation is a key tax advantage with real estate investment.

Real estate investors earn back the cost of depreciation over a period of time after the initial purchase.

Because you are depreciating an asset that increases in value, you receive a tax credit accordingly.

This tax credit is received in addition to property maintenance and other costs that you can take away from the rental income you receive.

When you add in ‘bonus depreciation’ and ‘1031 Exchange,’ the tax advantages are truly extraordinary.

3. Hedge against Inflation

Depending on the type of securities you hold, Inflation can be problematic. Real estate investing serves as a hedge against inflation. The value of the property is tied to inflation as replacement cost goes up and the rent of the tenant is adjusted upward.

Summary

Investing in multifamily properties brings excellent returns with low volatility and many other financial advantages.

A great advantage of investing through syndicates rather than making a self-directed investment is that you get to leverage the investment company’s expertise. 

With a syndicator, you can bank on the knowledge and skills of several real estate professionals. 

Many investors don’t have the time or inclination to learn every aspect of owning and managing real estate investment, for example, negotiating purchase agreements, financing a purchase, negotiating leases and managing the property.

We look forward to supporting you in your desire to expand your wealth and reach your goal of financial freedom by means of multifamily real estate investment.

Multi-Family Property Classifications and Your Investment Strategy

Multi-Family Property Classifications and Your Investment Strategy

Multi-Family Property Classifications and Your Investment Strategy

What is meant by the multi-family property classifications A, B, C, and D? In investment terms which of these property types are classified as core assets and which can be considered core-plus assets? If you are looking to pursue a conservative investment strategy or if you prefer a more aggressive one that has the potential to deliver a higher yield in which class of multi-family property should you be looking to invest? All these questions and more will be clearly answered in this article.  

Classification – Class A

Class A multi-family properties are buildings that are less than 10 years old. If they are more than 10 years old, they will have been extensively renovated. The fixtures and fittings will be of the very best quality. The amenities will be comprehensive and of a luxury standard. While Class A properties tend to generate a lower yield percentage, they can grow exponentially and they tend to hold their value even in major economic downturns. In terms of their investment profile, they are considered to be core assets. An article on multi-family investing at millionairedoc.com explains why Class A apartment buildings, with a ‘core asset’ risk profile, offer a lower yield percentage:- “Owners purchase these properties using lower leverage, therefore with lower risk.  REITs and institutional investors purchase these assets for income stream.  The lower risk profile results in lower returns in the 8-10% IRR range.” A property in the Class A category would not likely have a “core plus” risk profile unless it were slightly downgraded in some way perhaps by a less favorable location, housing type or a number of other factors.

Classification – Class B

Class B properties are older than class A properties. Usually, class B properties have been built within the last 20 years. The quality of the construction will still be high but there could be some evidence of deferred maintenance. The fixtures and finishings will not be as high quality and the amenities will be limited.

Classification– Class C

Class C properties are built within the last 30 years. They will definitely show some signs of deferred maintenance. The property will be in a less favorable location and it will likely not have been managed in an optimum way. Fixtures and finishings will be old fashioned and of low quality. Amenities will be very limited. Both Class B and Class C properties can be candidates for a ‘value add’ investment strategy. By bringing deferred maintenance issues up to date or by upgrading the property by means of an interior and/or exterior renovation there is an opportunity to increase the tenant occupancy and receive a higher return on your investment. In his article, ‘what are the 4 investment strategies?’ Ian Ippolito explains why pursuing a value add investment strategy is a higher risk:- “Much of the risk in value-added strategies comes from the fact that they require moderate to high leverage to execute (40 to 70%). Leverage does increase the return, but also increases the risk, and makes the investment more susceptible to loss during a real estate cycle downturn.”  

Classification – Class D

Class D properties are generally more than 30 years old. The property will be showing signs of disrepair and will be run down. The construction quality will be inferior and the location will be less desirable. The property may be suffering due to prolonged and intense use and high-level occupancy.
Both Class C and Class D properties can be candidates for an ‘opportunistic’ investment strategy. Because these properties require major renovations they are the highest risk investments but they can also yield the highest returns.

Summary

In overall terms, the US multi-family real estate market continues to give excellent returns for well-informed investors. This article has clearly explained how different types of multi-family properties are classified. The article has also given an overview of how each class of property fits the different types of investment profiles. We trust that this information will assist you in assessing your multi-family real estate investment goals. For further assistance please connect with our team.
Why Multifamily Investment Makes Sense

Why Multifamily Investment Makes Sense

Why Multifamily Investment Makes Sense

Multifamily Market Overview

The demand for rental accommodation continues to significantly outpace supply. The current status quo is that rental housing supply is falling short by hundreds of thousands of units each year across the United States. This situation, according to The National Multifamily Housing Council and The National Apartment Association, looks set to continue for many years to come. Current demographic preferences reveal a trend at both ends of the age spectrum for renting as opposed to owning. The younger demographic are finding it more challenging to get the financing for property ownership and the baby boomer generation favor downsizing and the increased freedom that allows. The result is that the demand for rental property is increasing. The combination of these two market factors gives a strong positive indication for sustained revenue growth in the multifamily sector.  The conditions look set to remain positive for multifamily investment in most locations for the foreseeable future. Let’s take a look now at four more reasons why investing in multifamily makes good financial sense.
Why-Multifamily-Investment-Makes-Sense

#1 Economy of Scale

The basic meaning of the economic term, ‘economy of scale’ is that there is a fundamental cost-saving benefit to being bigger.

To quote Investopedia, an ‘economy of scale’ is an advantage “that arises with increased output of a product. Economies of scale arise because of the inverse relationship between the quantity produced and per-unit fixed costs.”

How does this concept apply to the argument that multifamily investing is more advantageous than investing in single-family property?

To give a simple example, if you have been collecting 10 rents for 12 months from your multifamily property and then the roof needs fixing, that’s a much better scenario than collecting 1 rent for 12 months on your single-family property and then the roof on it needs fixing.

The rationale applies even more if you add more single-family properties to the equation. The cost of managing 10 individual properties, which could be spread across multiple states, and the cost of hiring different contractors to care for each one would be punitive. The cost would be much greater and the management less efficient and less cost-effective than caring for one multifamily property of 10 units in one geographic location.

#2 Greater Control of Property Value

With a single-family property, you are almost completely at the mercy of market forces.

If you need to sell in a down market your hands will be relatively tied. The value of your property will be determined by what other properties have sold for in the local area at that time.

A multifamily property is perceived somewhat differently because of its commercial nature. It is managed and run as a business and therefore a significant part of its value is determined in the same way as a business. This means that the value is much more in your own hands.

Businesses are valued largely on their profitability and, in a similar way; a multifamily property’s value is determined by its net operating income.

Something as straightforward as adding a laundry facility or some paid parking are two examples that can very positively affect the profitability of your multifamily property and in turn, its value.

With a multifamily property, there are many more ways that you can bring your management and entrepreneurial skills to bear to increase the value of the property independently of the surrounding property market.

In a nutshell, you have the ability to raise the value of your multifamily property by decreasing expenses and increasing income.

#3 Positive Cashflow

In addition to the ideas mentioned previously, namely,
adding laundry facilities and paid parking, there are lots of amenities that could be added to your multifamily property to keep a positive cash flow.

In addition, the old adage of not having all your eggs in one basket applies here also. A tenant vacancy in a single-family rental property will bring your cash flow to a grinding halt. In contrast, if one of your units in your multifamily property is vacant, the impact on your cash flow will be minor because you will still be collecting rent from all the other units.

#4 Tax Benefits

One of the great things about supplying housing for the populace is that in doing so you are helping the government fulfill one of their important responsibilities. Not surprisingly, in return, the government offers you certain tax advantages.

One of the most significant tax advantages for multifamily property owners is something called ‘depreciation deduction,’ in effect it can allow you to deduct a large amount of the income your property generates. For details on how it works, take a look at the following Investopedia article, How Rental Property Depreciation Works.

Another way multifamily property tax laws benefit you is that you are permitted to use some of the cash flow from the property itself to pay down the mortgage.

It is permissible to collect revenue but show a much smaller amount of income on your taxes. This allows you to take a portion of that rental income and use it to pay down your debt on the property, which will steadily increase the equity.

With the help of a good tax advisor, you may find that there are many other legitimate ways to capitalize on the tax deductions and incentives and even grants that the government makes available to multifamily property owners.

Summary

In the present fluctuating economic climate multifamily properties are tangible assets that represent a sound focal point for your investment and wealth creation strategy. 

Due to shorter lease terms that give room for regular increases in rent, multifamily assets represent less of a risk than other commercial real estate investments.

The prevailing demographics are also favorable. The steady increase in the number of professionals in the workplace, families, and empty nesters looking to downsize and simplify their lifestyle means that focusing on the multi-family market makes sense.

Multifamily is and will continue to be a solid strategy for investors looking to achieve financial freedom by means of strong investment returns that are attractively low risk.