multifamily investment properties - Red Pill Kapital, LLC

The economy is currently enduring a significant downturn, having recorded two consecutive quarters of a decline in the country’s GDP in July 2022 and also demonstrating a significant decline in productivity. The FED is purposely increasing the midterm interest rates to reduce historic inflation, it is not yet actually doing quantitative tightening per se, but is quelling economic by reducing consumer confidence. The FED is unlikely to recover until the 3rd or 4th quarter of 2023. For many, this is the textbook definition of a recession, and the signs are everywhere. There’s a bear market, consumer and small business confidence is in tatters, high inflation, and rising interest rates.

While the National Bureau of Economic Research refuses to call it a recession, many are feeling the heat, and the real estate industry is no exception. The Federal Reserve’s 20-year-high rate hikes have jacked up mortgage rates, putting the skid on a hot market. The last time consumer confidence in the housing market was this low (17%) was in 2011. The annual price appreciation rate dropped from 19.3% to 17.3%.

Two of the biggest real estate companies, Redfin and Compass, laid-off workers, with the Redfin CEO citing a 17% decline in expectations back in May 2022. Even REITs, traditionally investors’ safe haven, are taking a beating, with the S&P REIT index plunging 23% as of July 2022.

While the real estate industry may seem calamitous at the moment, it is often said that wealth, like energy, can’t be destroyed; it transfers. There’s a reason why real estate is touted as having produced 90% of the world’s millionaires. All you have to do is join the dots, follow the money trail, and you will be fine recession/downturn or not. Please keep reading to learn how to go about it.

How to Prepare for a Turbulent Real Estate Market

There is a lot of uncertainty in the markets, so real estate investors need to prepare for anything that comes their way. That means getting your house in order, including:

1. Reduce debt

The average American is $90,460 deep in debt, but that doesn’t mean you have to sink to such depths. Huge debts will dent your credit score, diminish cash reserves you can use to improve your quality of life, eat into your emergency fund, and obliterate your ability to save or invest. Settle debts with higher interest rates and keep away from them. It would be best if you only kept debts with more prolonged and lower interest rate payments. Similarly, only sign up for debt whose investment will yield higher returns.

2. Diversify your investments

If you’ve just started investing in real estate, it is essential to diversify your investments because not all real estate forms perform the same. It means having a mix of hard assets in different industries that will help you weather any storm that may come your way. For instance, don’t just invest exclusively in commercial office blocks. Try malls, single-family units, multifamily units, REITs, or others.

3. If you have the money, try a hedge fund

True, getting into and maintaining a hedge fund is costly, but it is one of the best vehicles during a downturn. Most hedge fund managers will employ different techniques such as derivatives, leveraging, and especially short selling, where you will make a profit if the value of an asset falls, which is perfect during an economic downturn.

4. Study about returns

Since the market dictates that we watch the pennies, you have to assess the return promised by each deal before making a decision. For instance, you must be smarter in evaluating whether to pay off debt or invest. For example, instead of increasing payments towards offsetting the mortgage, you would be better off investing that money elsewhere, especially if the returns are much higher than the inflation rate.

5. Take advantage of opportunities to sell your home

Median home prices hit a record high of 440,300 in July 2022, the Fed continues to jack up interest rates, leading to higher mortgage rates, and the supply of homes is still lower than expected. Now might be the perfect time to sell your home if you wish to make the most out of the market. Since there’s little supply, there’s little competition, but you have to act fast before the spiraling mortgage rates lock out all potential buyers.

6. Think long-term investment

It’s easy to get caught up in the excitement of a good investment opportunity, but it’s essential to keep things in perspective. You could lose money if you lose your head and make an impulsive decision. Instead, take time to consider all options before making any moves.

7. Curb appeal

If you have a home that needs some work before it’s ready to sell, now is the time to get started. Although home repairs can be costly, they add value to the property.

HomeLight research suggests homes with good landscaping fetch between 5.5% and 12.7% more than poorly landscaped ones. There’s even an instance where a new $20,000 worth of curb appeal returned $200,000 more for a home they had bought a year earlier. It would help if you considered painting the walls in neutral colors, manicuring the lawn, and replacing old and broken stuff and appliances.

8. Build relationships with other realtors

You don’t always have to compete, especially in a low-supply environment. Instead, team up with other realtors to create a network of peers for the common good. That should improve your craft, get referrals, and serve your customers better as you exchange valuable input from each other and find the best deals for your clients.

9. Make use of technology

Instead of requiring clients to make a trip to view the property, you can provide virtual reality tours to help save some money. Additionally, you could use customer relationship management (CRM) platforms to keep track of listings and customers to ensure they get the best service.

There are plenty of real estate platforms and apps that make it easier to market listings to a broader audience. Some even utilize AI to match buyers to their most preferred listings, making it easier to find suitable homes.

Wrap up

Whenever there’s an economic downturn, you should note that wealth doesn’t disappear; it just transfers. It may not be transferring to another visible entity, but may be transferring in time, or it may be transferring in nominal currency (for example, the US$ is increasing in value compared to the Euro, and although US$ denominated Real Estate prices are declining, they are increasing against the Euro). Your job is to follow the trail to ensure you maintain a profitable real estate business.

Some ways you can achieve this include diversifying your real estate portfolio, reducing debt, trying other forms of investments such as hedge funds, making use of technology, and opting for investments that provide the best returns.

By Gurpreet Singh Padda, MD, MBA

Like any other investment, multifamily properties pose some risks for their investors. It’s not as risky as investing in the stock market, but considering the amounts involved, a multifamily investment can easily eat into your finances if it goes bust.

So, how do you minimize risk to commercial real estate investment? This article highlights the best 10 tactics you can employ to mitigate the risks of purchasing and maintaining a multifamily unit.

1. Assessing the Competitive Set

That involves assessing the risks associated with the submarket or the property’s geographical location. In real estate, a competitive set refers to the group of properties that compete with your property for business.

An investor uses the competition to benchmark a property’s performance before purchasing. Carry out an analysis of properties comparable to what you’re interested in investing in.
Using this information, you can identify factors like occupancy rates to determine whether the property is profitable or not. Alternatively, consult property owners and managers within a competitive set to gain valuable information.

2. In-person Property Tour

Now that things look good on paper, it is time to take a closer look at the property. Plan to view the property in person and ensure your tour includes the units, common areas, and amenities.
For common areas like hallways and the lobby, consider the cleanliness and general condition.

As for the amenities, look at their layout within the property. Is it organized? Consider the advantages or disadvantages, if any, of the design of the amenities within the multifamily property.

As you inspect the units, look at them from a renter’s perspective. If you rent out the units within the property, what is lacking, or what needs improving?
Consider factors like how spacious the units are, the cabinets’ finishing, and whether it has a balcony or outdoor deck. These ‘extra’ touches are what would make a renter choose your property over another one.

3. Know Your Residents

After inspecting the property’s physical aspects, it’s time to scrutinize who lives there. Please pay attention to how they use the property and its amenities. This inspection will give you an overall feel of the general resident profile.

Additionally, an in-depth analysis will provide an income profile for your residents. You can also get detailed information on the residents, such as their employment background.

Later, after purchasing the property, you should conduct criminal background checks on current and future tenants. This will prevent any scuffles or illegal activity on or near the property.

Law enforcement will hold you responsible for renting to a criminal, even unknowingly.

4. In-person Tour of Competitive Properties

The next step is to inspect the properties in your competitive set. Go through the same process of reviewing common areas, amenities, and units. Managers or property owners will grant access to the property. Be honest about why you’re there.

Let them know that you want to tour the premises and any available units. Consider the same attributes you did with the property you wish to purchase, then compare the differences. Look at what other properties have that yours does not. On the other hand, look at what is missing to capitalize on.

5. Conducting Inspections and Determining Capital Costs

Even if you are a seasoned investor who understands the ins and outs of properties, it is still necessary to call in the experts when analyzing a multifamily property. Third-party professionals need to conduct a thorough assessment of the property.

These experts will consider factors that you may not even think about, such as the building’s age, the condition of the roof, drainage issues, and the quality and conditions of mechanical components.

Using the analysis from these specialists, you’ll be able to determine capital costs needed soon or over an extended period. You will also need to factor in repair costs that are a part of capital costs.

6. ‘North, South, East, West Analysis’

Go back to your prospective property and conduct a North, South, East, West multifamily analysis. It is a process that involves placing yourself in a tenant’s shoes. Look at the property from their perspective.

Walk-in from all directions. If possible, drive in from all directions too. Doing this will give you a feel of what it is like to live on the property. As a resident, what do you find most appealing about the property? What don’t you like?

Is the distance from the store convenient? Is it a generally safe neighbourhood? Looking at the property from a resident’s perspective offers you the opportunity to have an objective look at its weaknesses.

7. Building a Budget

This is one of the most important aspects of commercial real estate investment criteria. If you are new to investing, you may place all of your focus on the operating expenses. Instead, you want to develop a budget that factors everything about the building from scratch.

The budget can include factors like the staff. Ensure you look at service contracts to understand what services they provide.

Additionally, create your version of an operating budget based on gathered information, and compare it to the actual running budget the property currently has in place. The budget will help you determine what the net property income is.

8. Opportunities for Revenue Growth

Looking at the net property income, you can determine whether there are opportunities for growth with the same revenue. You can compare rents and determine whether the rate is fair or there’s headroom to raise the rent.

Also, the local market determines the rates you apply and whether there is potential for a new supply of properties in the area.

9. Evaluating Supply Threats

At this point, you should already have a clear picture of your competitors. In addition to looking at existing units, you need to scrutinize any multifamily properties coming up in your submarket. This is because these new units may end up competing with yours.

More multifamily properties will affect the amount of revenue your property brings in. If you’re in a larger market, you won’t feel the impact, but the effect is more prominent in a smaller submarket. This might prove to be a hectic task to monitor so you would need the help of the best commercial real estate investment company to assist you throughout the process and bring the best deals to boost capital gains.

10. Market Stability versus Volatility

Look out for a stabilizing factor for your property. For example, perhaps the property is located near a university. Students need housing, and it is unlikely that a university would relocate out of the blue.

Another stabilizing factor is whether a city is a state capital or not. Such factors help indicate how stable or volatile a market is over the long run.

Final words

Have all of these factors in mind as you consider investing in a multifamily property. Be diligent with each step to ensure your property remains profitable even in the face of recessions. Also, make sure to avail all the tax benefits you are eligible for such as the 1031 Exchange Process. That is the best way to minimize risk while saving more when making a multifamily purchase or a sale.