Rising inflation and interest rates are causing significant volatility in the market. As a result, many real estate investors are trying to figure out what their next moves should be.
With the Fed raising interest rates, some real estate investors are now concerned that their returns will not be as high. This is because when debt becomes more expensive, it can leave less room for profit in real estate investments. Nonetheless, multifamily investments still generally provide a steady and good ROI, even if the rates are slightly lower than they were prior to the pandemic. Rather than dwelling on negatives and fear, it's important to remain calm and capitalize on the positives of this point in the market. Let's take a look at what these are:
Positive #1: Housing demand will only increase.
There are a number of positives for the real estate market when the fed raises interest rates. For example, when interest rates are higher, there is less demand for single-family housing by individual buyers. This is because many people prefer to buy homes when interest rates are lower to save money on interest throughout the life of the mortgage loan. Less demand for single-family homes means that more people will turn to multifamily housing.
When demand by individuals for single-family housing drops, it can also trigger more institutionals to buy single-family homes. This is because they know that people will still need somewhere to live whether or not they want to buy a home. So, when more institutions buy homes, it puts further pressure on the housing market, causing more people to rent.
42 million households in America now rent their homes and this number is likely to increase because demand for multifamily housing will stay strong during periods of rising interest rates. This makes multifamily property investing a good option for investors even during volatile times.
Positive #2: Volatility creates opportunities.
Since the rising interest rates and inflation are a big challenge for less seasoned operators, it’s very likely that certain assets will become distressed and need new, professional operators to “rescue” these properties. This means deal flow, which has slowed down recently, will likely start to pick back up as the pressure continues. This can present a great opportunity to acquire new assets, improve the operations, and continue to scale out your portfolio.
Along the same line, with debt becoming increasingly expensive, many owner-operators are not able to raise the required capital for financing. This means the competition is thinned out considerably, and will likely help reduce extreme bidding wars. So, not only does the volatility create more opportunities for identifying bargain assets, but the chance of winning these deals is also improved.
Positive #3: Getting creative in managing current assets.
Real estate always presents a challenge of some sort, and this point in the cycle is no different. So, what can real estate investors who already have assets do to get creative in optimizing profits during these volatile times? Let’s take a look:
Increase cash flow by slowing renovations.
Because demand for multifamily housing tends to stay high during periods of rising interest rates, you do not necessarily have to renovate in order to keep occupancy high. In fact, every unit off market for renovations is a unit not generating income. Slowing the rate of renovations can be a key way to still implement your business plan while balancing the focus on keeping cash flow strong.
Use the property to create additional income streams.
Many property owners use their properties to generate additional income streams such as overflow parking for special nearby events, renting unused storage spaces out, leasing extra space as a conference room, etc. Think outside of the box; there might be a way that you can make more money off of your property.
Installing Amazon package lockers.
Simply installing Amazon package lockers can drive up the rental value of a property. This is because tens of millions of Americans use Amazon every year and many of these people who live in multifamily properties want an easy way to order and receive Amazon packages without having them get stolen. So, having Amazon package lockers can make your property more desirable, and you can charge a premium for the service.
Despite the fact that the current real estate market has a high level of volatility, smart investors are taking advantage of the opportunities that exist within this market. If you are trying to figure out what to do during this market remember that rising interest rates tend to increase demand for multifamily housing due to falling mortgage applications. You should also remember that increased single-family home purchases from large institutionals are also a positive for multifamily real estate, because this too will push more people to live in multifamily properties.
Further, remember that you can increase profitability for your existing properties by slowing renovations, finding creative ways to use your building’s extra space, and even by just adding Amazon package lockers. When you face volatility calmly, creatively, and strategically, you can capitalize on opportunities that others might not have seen.
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About the Author
Ellie is the founder of Blue Lake Capital, a commercial real estate investment firm specializing in multifamily investing throughout the United States. At Blue Lake Capital, Ellie partners with both institutional and individual investors to grow their wealth by achieving double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.
A defining factor of Blue Lake Capital’s strategy is founded in utilizing machine learning/artificial intelligence throughout the course of all acquisitions and asset management. This advanced technology enables the company to produce accurate and data-driven forecasting for all assets on a market, property, and even tenant basis. In doing so, Blue Lake is able to lead commercial investments with the full capabilities of today’s technology.
Ellie is the host of REady2Scale, a podcast that highlights the assets, processes, and strategies for the multiple approaches to successful real estate investing.
She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.
Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.
You can read more about Blue Lake Capital and Ellie Perlman at www.bluelake-capital.com.