Can You Still Make Money Investing in Multifamily?
For those who have been in the real estate business for more than a few years, you know that interest in multifamily investments have gone up dramatically. The cause of this interest can be traced back to a number of things.
After the financial crisis of 2008-09, many Americans that owned their homes lost them and had to drop back to renting. Along with that, millennials were getting into the workforce and either staying in their parents' homes or renting an apartment. These two factors arguably created more demand on multifamily housing from tenants. On top of all that, the financial crisis made banks and builders skittish to get into new construction projects, so the development of multifamily housing was stunted for several years.
So now we have a product, multifamily housing, that is viewed to have a large spectrum of consumers, along with a low supply of new builds of the product in the US. Add all this up, along with historically low interest rates, and you have significant upward pricing pressure on the multifamily market. And I haven't even mentioned the demand from overseas for stable places to park capital with returns, or the novice investors that attended a few seminars and now want to get in on the party.
Whatever the cause, the result is historically high multifamily housing prices and low cap rates in most areas of the U.S. So, the question is, how do buyers still find deals that make financial sense?
As a buyer, I've found that in this market it's rare, if not unheard of, to see a great deal that will cash flow easily for sale at a great price. The market is just too hot for that deal to not get bid up on price. A good friend of mine said, "In this market, you don't buy great deals, you make great deals." The way for buyers to make deals work is to find a way to increase revenue and decrease expenses, to increase the property performance over time. In short, with the right business plan and team, many deals on the market can be turned into cash cows.
The savvy buyer will look for deals in the smaller markets also. We do look at deals in the major metropolitan areas of the U.S., but we also shop the smaller markets. You don't have to be in the hottest cities in the country to see high demand for your rentals in this market. The smaller markets may have deals with fewer interested buyers, allowing you to pick up a deal with higher yield potential and less competition.
As a buyer, there is some freedom in admitting that not every deal on the market will be a good one. Deals will get bid higher than their value in the majority of cases, but not all the time. To be successful in today's market, a buyer needs to be very thorough—not only in the search for the right opportunity, but in their research of the data to create and execute their business plan, and eventually bring that deal to profitability.
About the Author: Matt Faircloth
Matt Faircloth is the owner and founder of the DeRosa Group, which he founded with his wife in 2005. DeRosa focuses on investments in residential and commercial real estate and is active in several states in the U.S.. Matt is a regular contributor to BiggerPockets.com and author of Raising Private Capital, also published by Bigger Pockets. He is a regular public speaker on the topic of passive real estate investments and has been featured on many podcasts and radio shows.
