Is It A Good Idea To Buy Multifamily Right Now?
Is it a good idea to invest in multifamily real estate right now? That’s a version of a question that I get asked a lot. Some people think it’s crazy to invest right now and others believe buying right now has it’s advantages. Although I can’t predict the future here’s what I’m seeing happening as of the time this blog post.
The Balance has Shifted
Before COVID getting a deal under contract involved a lot of risk. The good deals required hard money sometimes on day 1. This means an investor might have to write a check for a portion of the purchase price before they were able to do proper due diligence on the apartment complex. Seller’s were able to ask for this as a way to ensure they weren’t getting their time wasted by tire kickers. Buyer’s were taking all of the risk by tying up capital with no guarantee to close. They could lose it all if the deal wasn’t exactly what they anticipated it to be in terms of returns and business plan.
That balance has shifted. Seller’s aren’t able to ask for the hard money down day 1 quick close types of transactions. This makes it easier for those operators trying to acquire properties. They can put earnest money down and back out of the deal if something goes wrong in due diligence. This is an advantage to buying now vs. before COVID hit. Put that in the positive column for buying multifamily right now.
Debt is Tough
Right as COVID swept the country debt became next to impossible to get. In fact, a lot of lenders pulled back the reigns completely and took a wait and see approach. That’s started to loosen up and the agencies (Fannie and Freddie) are now lending money with some caveats. For one, they are requiring high reserves coming into the deal. In our most recent transaction we were required to bring 6 - 18 months of principle and interest reserves depending on the option we chose. Each option had different interest rates and leverage.
Speaking of leverage that is another challenging part of debt right now. It’s not uncommon to see investors needing to come to the table with 35% equity. Before COVID I was seeing 90% leverage with bridge loan options. Banks just simply don’t want investors to be over-leveraged in the short term. But what’s good for the bank is good for the investor to some extent. Coming to the table with plenty of equity reduces risk should there be a big downturn. That creates capital preservation. Let’s put this into the negative column because more leverage does create better returns.
Many Seller’s Are Still Asking for Pre-COVID Valuations
I haven’t seen a deal out there where the seller didn’t want the same valuation that they would have asked for before COVID. And it’s justified to some extent. That’s both good and bad news for the investor. The good news is that valuations have not decreased because for the most part everyone is still paying rent. Buyer’s are waiting on the edge of their seat for these monthly rent collections to dip so they can justify lower valuation but guess what? They remain steady and thats a testament to the multifamily asset class. Renters are taking stimulus money and prioritizing rent payments. But the deals that everyone thinks are supposed to happen haven’t come to fruition. That could change as stimulus money runs out.
In Conclusion….a Deal is a Deal
Anyone waiting on the sidelines for an inevitable multifamily crash could be disappointed if that day never comes. The government has shown signs that they will continue to help tenants pay rent. So for now I say if the numbers work on a deal pull the trigger. But proceed with caution. Make sure plenty of conservative underwriting is taking place on rent projections, vacancy (both physical and economic) and cap rate reversion. Make sure you understand the risk and guard against it and KEEP THAT CAPITAL MOVING!