The S&P 500 is on course to post its worst annual performance since the Great Financial Crisis. Understandably, many people are looking to protect their wealth and strive toward their financial goals. Others are more focused on setting up additional streams of income.
Working longer hours and picking up side gigs is certainly one option, but investing in multifamily apartments remains an attractive solution for busy professionals. With the right investment strategy, multifamily apartments can provide a steady stream of rental income while providing investors with the potential for appreciation.
In 2023, there will be several factors that make investing in apartments attractive for everyday professionals. However, finding a good deal and putting all the pieces together will prove tricky. High interest rates have created a disconnect between many buyers, sellers, and brokers. To counter this, investors will need a bit of creativity mixed with conservative risk management to foster opportunities that are favorable for all parties.
1. Creative Deal Structures
When it comes to finding deals, being creative is key. Networking with local real estate agents, brokers, and wholesalers can provide great leads and help you stay current on new opportunities as they become available.
Additionally, forming relationships with other investors allows you to bring ideas to the table that you may not have considered on your own — such as joint ventures or syndications — which could lead to unique investment opportunities that wouldn’t normally be available otherwise. The best opportunities require a solution to a problem that others haven't been able to solve. In the current environment, financing is the biggest hurdle investors face.
The Fed increased rates seven times in 2022 from 0.25% to a whopping 4.5%. This has led to a substantial increase in rates for commercial loans. Many brokers and sellers are still fixated on sales comps that pre-date interest rate hikes, but the reality is that the cost of capital has forced pricing expectations to shift. Investors that can leverage creative structures like seller financing, loan assumptions, and/or master leases will have an advantage in 2023.
Finally, the cost of capital isn't limited to loans. Equity structures may need to shift as well. Investing in syndications requires relationships with limited partners. Many have been impacted by the current economy, so investors may need to expand their source of capital. Consider working with private equity, institutions, and crowdfunding platforms. These alternative sources could expand access to capital that extends beyond friends and family, enabling you to access more deals and close faster.
2. Risk Mitigation
Before signing on the dotted line, it’s important to assess the risks involved. The best way to do this is by researching the market thoroughly. You want to understand the macroeconomics of the metro area (MSA), as well as key demographic trends in the submarket.
It's always wise to research markets using various data sources. However, it’s important to note that data looks backward and is not necessarily an indicator of what you can expect moving forward. You'll want to be sure the key factors that drive key trends in a market are likely to be in place going forward. Ideally, you want to focus on markets that are driven by industries that are resistant to economic changes such as healthcare, logistics, and hospitality.
When evaluating a specific property, be sure to look up rental rates, vacancy rates, and rental trends for comparable properties in the area. Take note of any potential red flags such as high vacancy rates or rapidly declining rental rates. Be sure to speak to the property manager and get a better sense of what is happening at the property. This will allow you to devise a business plan to optimize the property's performance.
Conservative investors assume something will pop up at the property and want to be prepared for the unexpected. Holding a proper amount of funds in reserves provides a cushion and some comfort to navigate those situations.
It’s wise to do a thorough inspection of the property you are considering so that you have a clear understanding of any potential repair costs or renovations that may be necessary down the road. Finally, consult key team members like attorneys and insurance agents to help you protect the investment in case of an unforeseen issue.
Investing in multifamily apartments is a good idea in good economic environments as well as down markets. The key is to be creative and strategic to minimize risks and optimize the cost of capital. Creativity will go a long way in aiding your investing approach in 2023.
For busy professionals with less time to execute these advanced strategies, consider investing alongside a group with more experience and resources to find these opportunities. Whether the market is up, down, or sideways, there will always be opportunities for those who can be flexible with their terms.
About the Author:
John Casmon has helped families invest passively in over $100 million worth of apartments. He is also the host of the #1 rated multifamily podcast, Multifamily Insights. Prior to multifamily, John was a marketing executive overseeing campaigns for Buick, Nike, Coors Light, and Mtn Dew: casmoncapital.com