Right now is an exciting time for real estate investors. Demand is at an all time, and although some things are changing, the outlook is bright for multifamily investors.
Those who can foresee economic shifts and act upon them, stand to set themselves up very well financially while enjoying great portfolio performance. Here’s what’s happening, what’s coming next, and the types of opportunities to look out for.
The Cliff & Renter Tsunami
Unless the country makes a massive shift to long term basic guaranteed income, government subsidized housing vouchers for all, and indefinitely suspends foreclosures, millions of Americans and homeowners are facing a financial cliff.
This is the point where the aid stops and the wave of bills and debt collections hit. Many have had a break on mortgage, car, and credit card payments. At the same time, they’ve also enjoyed stimulus money from the government. Many may have had more disposable income through the first half of 2020, but when the bonus income and bill deferment end, some will find that they can never catch up. Few may be able to conjure up 3 or 4 months of back mortgage payments to meet forbearance agreements. Most of those who had savings have burned a big hole in them.
That means a fresh tsunami of renters coming to the market; renters who will probably have to continue renting for at least a decade.
This is helpful to apartment building owners and landlords who will have more tenant applications than empty units, and will enjoy high occupancy rates and more cash flow and returns.
On paper, many of these renters will look much different than how they did 6 or 12 months ago. Many have gone from 700 plus credit scores to the 500s to low 600s, just because they’ve used their credit cards to stay afloat. Their credit balances are high, even though they may have never missed a payment. Others may have fallen behind on a mortgage through no fault of their own.
Landlords must take the new level of tenant quality into account when it comes to approvals. Applying some common sense, landlords should be able to see those who can still be good risks, even if they don’t have breathtaking credit scores. In fact, many of these renters will prove to be the most loyal to good landlords. They know it will be tough to move again, and don’t want to lose good apartments.
Opportunistic & Value Added Multifamily Investing
Some dynamics of the multifamily market are changing. Others aren’t and probably won’t.
For example, recent underperforming assets can yield great discounts for those acquiring new multifamily assets, as can apartment buildings a little further out than investors may have gone two years ago. Yet, these same assets could all be among the best performers for the next phase of the cycle.
Big funds desperately need yields, cash flow, and long term hard assets. Think banks, pension funds, insurance companies, sovereign funds and funds of funds. They don’t do well at, or have the stomach for, acquiring these properties to renovate or do turnarounds to improve performance. Though once another investor does that work, they are happy to pay a premium for an asset that is working like a machine.
There is a brief window of opportunity to find the best deals in this space, and then either hold or pass them on to larger funds for great premiums in the near future.
How will you do it?