Despite setbacks and uncertainties, multi-family investors can plan for the future by staying informed and open to the possibilities of change in the coming months.
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As we find ourselves in uncertain financial times, I believe that caution is particularly important when formulating investment strategies for the coming year. Certainly that is the approach I prefer.
Past performance is the main determinant of financial planning: examine how things have developed in the past and move forward accordingly. But this year in the real estate investment business and the multifamily business, it’s unwise for anyone to think that rents will continue to grow as fast as they have for the last year or two. In fact, it seems that there is already a bit of a slowdown.
I don’t think it’s negative income growth, but it will return to the pre-pandemic norm. It has been a double digit rental percentage growth over the last year. Just projecting with everything that’s going on, it’s going to be closer to 3 or 4 percent in most markets. That makes a dramatic difference in the process, in terms of where you think you’ll be next year.
The other part of the investment equation is the use of debt. When there is long-term debt on existing assets, no adjustment is necessary. Same for loans, if you were able to get them in the last year in the 3 percent range, and if they are fixed and long-term.
But people should keep the current interest rate environment in mind if they have loans that are due or need to be refinanced now or sometime in the next year.
The same if they have made new acquisitions. Those in that boat may expect a much higher interest cost, or debt-servicing cost, than in the past.
Advice and strategy
Rod Khleif, real estate investor, mentor and coach, gave an introduction to the current investment environment in a Forbes post, noting that historically high inflation rates have led the Federal Reserve to raise interest rates to a rate not seen since 2018.
He cited other evidence of trouble, including a bearish stock market, the specter of layoffs and revised earnings forecasts for several companies. In addition, he noted that mortgage applications were at their lowest level in 22 years.
While these are certainly uncertain times, it is not comparable to 2020, when the pandemic first hit the US. At that time there was even a certain degree of panic, a feeling that we had never seen anything like it. And we didn’t. But the multifamily sector not only survived; prosperous.
With the current economy, I have a feeling, at least in my mind, that we’ve seen this before. Those of us who have been in business a while have seen the cycles. We have seen the ups and downs. It’s manageable.
It just requires adjustment and recalibration, rather than just burying your head in the sand and assuming that everything is going to continue as it has for the past two years.
Planning for 2023
With that in mind, here are three tips to help solidify your 2023 multi-family investment plan:
No plan is foolproof: Any projection of where you will be one year, two years, or three years from now is wrong, 100 percent of the time. Fortunately for all of us in the multifamily business, it has gone bad in recent years. But knowing that expectations don’t match reality, you must be prepared to make adjustments as you go. Who knows how long the interest rate environment will stay high? I don’t know. It depends on which economist or what day of the week you read someone in The Wall Street Journal.
Keep calm: None of these developments represent an existential threat or a major disruptive event for the industry. It’s just a correction. The fundamentals of the business remain very strong.
Keep things in perspective: Having followed my father and grandfather into the real estate business, I learned about the ebbs and flows of the economy and never let them unsettle me. I was recently discussing with someone the fact that the interest rate for a multifamily purchase is five, which some people think is very high, compared to when it was three. Being a guy who had been around, I said, “I remember when I got a commitment from the bank years ago, and they agreed to provide us with debt and a 7 percent interest rate. And I was high fives, thinking, it’s unbelievable how cheap this is.” We managed to survive that very well.
The bottom line is that multi-family real estate investors should formulate their plans with their eyes wide open, knowing that they will most likely have to revise those plans in the coming weeks and months. Yes, there are some worrying economic trends. But the sector remains on a solid footing, and looks set to continue to be so.
Michael H. Zaransky is the founder and CEO of MZ Capital Partners in Northbrook, Illinois. Founded in 2005, the company deals with multi-family properties.
Source: news.google.com