Multifamily: Are They Still Good Investments?
I had a long, white paper-length essay to answer this question and my publishing team said no way, “It’s a Sunday!”. So here is a condensed answer.
So… are apartment buildings still good investments for individual investors? Yes and no. While they may be good investments, my recommendation is to wait!
Wait until the Fed takes a real pause or even signals they will stop their inflation-crushing rate increases. There will be better times to enter apartment deals as a limited partner investor or as a crowdfunding investor.
If you still choose to invest in something like Origin Investment’s IncomePlus Fund or RealtyMogul’s Apartment Growth REIT, then I suggest asking the following questions:
- What is your 3-year track record of issued dividends? Must be higher than 4% per year because if they are not, then buy a 7 – 10-year treasury bill and sleep easy.
- What is the average leverage (debt) level of your portfolio? If this is over 65%, then forget it.
- What percentage of your portfolio debt is floating rate which can be adjusted higher? If the answer to this question is over 30%, then forget it.
- What is the portfolio average occupancy of your apartment buildings? If the answer is under 90%, then forget it
Below is a graph showing that as of August 2023, apartment buildings accounted for almost a third of those at-risk properties. But that’s a bit misleading since they also are one of the largest assets classes.
While there may be localized pockets of distress, the overall sector remains fundamentally strong.
The paradox of this graph is that there may be plenty of opportunities for vulture investors with cash. According to Berkadia’s analysis, of the $115 billion multifamily loans in 2023 and 2024, approximately 25% will fall into “technical default.” This means that while these properties, can be well-located, well-designed, and well-managed, a bank could ask for more equity cash into the property and these are opportunities for investors with cash.
