Why Now is ‘THE’ Time to Invest in Multifamily Real Estate!

If you know me, you already know that I'm typically excited to share my insights with others. However, I've been somewhat hesitant to disclose my thoughts on this particular subject.

The reason?

I'm convinced that we're standing on the brink of the most exceptional opportunity to invest in multifamily real estate, and I didn't want to reveal all my secrets prematurely.

At first, it was just a hunch that things were lining up as I suspected, but I needed more time to verify my personal theory.

**Disclaimer: I don't have a crystal ball. Circumstances can change, and this isn't advice, but this is precisely what I'm preparing for personally.

Bear in mind that this isn't a short read, but I'm confident that investing 15 minutes will provide one heck of a return on your time investment.

My real estate journey began in 2009, during the housing crash. I started as a mortgage broker and then began investing in single-family homes. I was young, enthusiastic, and ready for this new chapter, but everywhere I turned people told me I was crazy.

Some literally laughed in my face when I told them what I was doing.

But, their skepticism only strengthened my conviction that I was entering the market at the perfect time.

It is easy to quote Warren Buffett and say, “Be fearful when others are greedy, and greedy when others are fearful.”

But, it is something totally different to actually execute that quote in real life.

In the early days, I had drive and enthusiasm but hadn’t yet cut my teeth with real-life investment experience.

When I made my first $20k from a house flip, it felt like striking gold. I wanted to flip more houses and see more of those paychecks. But, in retrospect, my haste cost me—those properties I sold for a quick profit doubled in value over time, leaving me with a huge opportunity loss.

By taking my $20k pay day right away, I left another $100k on the table.

As the years passed, I gained insight from my hands on experience, but more importantly, I learned the vital principles of finances and investments.

Not only did I leave money on the table with my lack of patience, I also paid more to Uncle Sam than I would have if I held them for the long term.

In 2018, I looked back at my early investing years and calculated the millions of dollars that I left on the table due to lack of patience and lack of investment knowledge.

In that moment, I told myself that I would be 100% prepared the next time a golden opportunity like that presented itself.

Whether it's divine intervention, preparation, luck, or a mix of everything, that time has finally come.

The Multifamily Debt Cycle: A Tidal Wave of Opportunities

In 2020, when I was actively researching and buying multifamily properties, the market seemed reasonably priced. Rents were steady, cap rates made sense, and building equity involved the traditional approach: renovate units, increase rents, and cut costs through better management. It was all about putting in the effort and enjoying the benefits. 

But then COVID struck, stimulus checks poured in, and everything changed. People suddenly had free money to spend, prices soared, and cap rates became irrational.

With banks providing seemingly unlimited funds, almost anyone could get a loan for multifamily investing. (Does this sound familiar? Like the lending practices before the ‘08 housing crisis.)

During this time, we found a few worthwhile deals that needed extensive renovations. However, competing for turn-key properties wasn't an option, as loans were readily available for anyone keen on multifamily investments.

Simultaneously, I was assisting my family in investing their self-directed IRA funds, which involved attending webinars with syndicators raising money for multifamily projects. Out of the 100 or so webinars I attended, we didn't invest a single dollar. The reason? Each investment hinged on everything unfolding perfectly.

If you've ever purchased a property, you know that "everything going perfect" is riskier than it is realistic. These investors assumed rents would keep increasing, cap rates and interest rates would stay low, and their predictions extended three years into the future.

While I couldn't foresee what would occur, I knew we wouldn't invest in projects that relied on everything going seamlessly to reach their goals.

So, what's the connection to the present?

Most of the webinars I attended did close their deals, mainly through bridge loans and some regional banks. They locked in rates for 2-5 years and projected exit cap rates in the low 4s. Now, as these deals near maturity, they'll need to sell or refinance their properties.

The expected massive payday is here, but the economy looks nothing like they had imagined during their webinars.

What does this mean for us now?

As many deals struggle to meet their overambitious projections, new opportunities are emerging. The turning point in the cycle when the market switches from favoring sellers to favoring buyers is fast approaching.

The Shift in Real Estate Investments

Investments in office buildings have taken a significant hit, inevitably dragging down the overall commercial real estate market. This downturn, however, unveils unique opportunities as investors seek alternative real estate assets for safety. In my opinion, three main options have emerged as top contenders: warehousing, assisted living, and multifamily.

For years, office spaces were reliable investments, and banks were eager to lend to investors. But then COVID fast-tracked the remote work era, and suddenly, once-attractive office spaces became undesirable. Office investors now face considerable challenges, with some already defaulting on loans.

Interest rates have nearly doubled, rents have fallen, and occupancy rates are abysmal, making refinancing these properties unfeasible. The only remaining option is selling, but who wants to catch a falling knife?

So how does this situation affect multifamily investing?

1. Lenders become increasingly cautious: They must reevaluate their lending portfolios and identify their exposure to properties that will struggle to service loans. Stricter lending practices slow down the commercial real estate market and halt loans to borrowers without an established track record or liquidity to weather difficult times. With fewer buyers in the market, sellers must reduce their prices to attract those who remain.

In 2021, submitting an offer required at least $100k in non-refundable earnest money on day one. Now, brokers are contacting potential buyers months after offers were due, attempting to generate any interest. The market has shifted dramatically – a year ago, buyers significantly outnumbered sellers; today, the reverse is true.

2. Investors redirect their funds: Many investors who once favored office spaces now seek alternatives. They still have money to invest and need the growth and tax advantages of real estate, but they're steering clear of office properties. Instead, they're focusing on long-term, stable asset classes like multifamily, as well as future-oriented assets like warehousing and assisted living.

If you can invest in warehousing during the Amazon-era

OR

an office building during the remote work-era,

where would you put your money?

In other words, you wouldn't invest in a fax machine company when artificial intelligence is the future.

Though the shift in funds hasn't fully taken effect yet, the stage is set for investor dollars to flood into alternative assets.

Whether it happens in 6 months or 2 years, billions of dollars will eventually flow from office spaces to other asset classes. This shift will create a situation similar to 2021 and 2022, where more money looks for investments than there are available opportunities. As we saw two years ago, a surge of money into a specific asset class pushes cap rates down and prices up. 

Timing the market

Wise investors know that you can’t time the market.

Yet, marketing and emotions tell us that we should always buy low and sell high.

Unfortunately, historical data shows that most investors sell right before markets go up, and then buy right before the market falls.

Brokers were getting multiple offers on multifamily properties right to the end of 2022.

Now, here we are 6 months later: rates have doubled, banks are failing, and the economy is barely hanging on.
Why would someone buy high if the obvious advice is to buy low?

Enter FOMO (Fear of Missing Out), a relatively new term that describes a centuries-old principle.

It's an innate instinct within all humans to follow the crowd, as life is instinctually safer within a group than alone.

But, this article says now is the time to buy multifamily…

So, am I saying time the market?

Not at all.

It is always a great time to buy multifamily, but

Now is the BEST time in a long time.

There are only 2 ways to avoid the consequences of mis-timing the market:

1.     Fight all of your natural instincts and resist your urge to follow the crowd.

Although this sounds like a great theoretical option, it's virtually impossible to put into practice.

So, the only real way to avoid these emotional decisions is option #2

2.     Completely forgo the idea of timing the market.

So, how does that work?  

We simply adapt our strategy based on current market conditions. There are opportunities to buy and sell in every market; it's just a matter of executing the most effective strategy for the current market conditions.

In a buyer's market, for example, it's crucial to be cash-heavy so you can quickly execute deals.

Being equity-heavy isn't ideal, as tightened lending restrictions make accessing equity more difficult.

You position yourself to effectively execute your investment strategy in the current market conditions.

From the beginning, our investment strategy has been to buy every property at a 15-20% minimum discount of current values. This provides a safety margin when we buy in a high market, a solid return when we buy in a sideways market, and grand slam deals when we get to ride the wave from a buyer’s market to a seller’s market.

We then stabilize the property and generate cash flow while waiting for the right time to refinance and lock in long-term, low interest rates.

Interest Rates in a Volatile Economy

The news is filled with conflicting information about whether we're in a recession or not. However, one thing is certain: the immediate future is going to be bumpier than it is smooth. We've already seen a few banks fail, lenders are tightening their restrictions weekly, and inflation continues to chug ahead despite the Federal Reserve's rate increases.

Something has to give, and sooner or later the economy will ‘break.’  

Even the Federal Reserve acknowledges this, referring to the situation as a "soft landing."

The U.S. economy operates on a rollercoaster of a system, built on debt and a population that generally lacks financial literacy of how debt works within the system. Due to this lack of understanding, when the economy falters, the Fed often has to step in as the population’s financial advisor.

Historically, the Fed's primary weapon during tough economic times has been cutting interest rates.

Understanding how the rate cuts work in the economy would take a lot longer than just reading this article.

Simply put, the Fed does whatever it can to encourage banks to lend and people to borrow. Although we can't predict how low the rates will go, it's a safe bet that the rates will be lower at the end of a recession than at the beginning of one.

So, how does this benefit multifamily investors, especially those focused on long-term investments like us?

When it comes to recovering from a recession, we know that lowering interest rates is basically the only weapon that the Federal Reserve is willing to use.

We don’t know when, but we do know that rates will drop.

When these rates drop, it brings more buyers to the table, which forces values to rise.

It also allows us to lock in our long-term fixed-rate mortgages.

Even if we're currently paying higher rates than we'd like on properties, we won't be stuck with those high rates forever. Whether it takes 6 months or 4 years; when rates drop, we'll be ready to refinance, locking in 10-year fixed loans at the new, lower rates.

Moreover, lower interest rates typically correlate with higher property prices, creating the perfect recipe to maximize appraised property values, pull out capital tax-free, and lock in our new rate for the next decade.

In the past century, the longest recession was the Great Depression, which lasted 43 months. However, that was before the Federal Reserve had the power to control interest rates and before FDIC insurance on deposits existed. Since then, the longest recession has been the 18-month downturn during the 2008 housing crisis. Regardless of whether the current recession ends in 2 months or 43 months, the truth is that tough times don't last forever.

The buying opportunity that a recession offers is rare, occurring maybe only a few times within an entire lifetime.

As interest rates drop, we will be well-positioned to capitalize on the situation, solidifying why we believe right now is the perfect time to invest in multifamily real estate.

Multifamily investing requires a long-term mindset, and patient investors recognize that the cyclical nature of the economy presents opportunities for those who are prepared to capitalize on them.

I have no doubt that some people will read this and disagree, but I also have little doubt that those opinions are based on emotion, not logic.

Whether I am wrong or I am right…

Whether it happens in 3 months or 4 years…

One thing is true:

People literally laughed in my face when I started buying single family properties in the midst of the “Great Recession.”

The years following that laughter was a period where home values rose 130%.

The greatest increase in value in US history.

Had I let emotions guide my decision when I started and chose not to invest, I would have missed the greatest opportunity for wealth creation in my life….

Until now.

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*This article is my opinion. It is not financial advice, nor is it an offer to sell a security. Anyone interested in investing must first schedule a call with our team and review our private placement memorandums before investing. All investors with Grand Vision Capital Group must be accredited investors. If you are interested in investing, you can schedule a call with our team here.