Investor Sentiments: To Run In or Run Out?



“Be fearful when others are greedy, and greedy when others are fearful.” - Warren Buffet


In the last six months or so, there has been a lot of turmoil in both the stock market and the real estate market. In fact, the stock market is now officially in a bear market. The real estate market is seeing signs of a downturn as well. For example, mortgage applications are now at their lowest point in the last 22 years.


One of the main reasons why both the stock market and the real estate market are both appearing to slow down is because the federal reserve has been raising interest rates in an effort to combat inflation. In fact, the federal reserve just raised interest rates by 0.75% in one go, which is something that it hasn’t done since 1994. Higher interest rates will add further pressure to both the stock market and the real estate market, leaving investors to decide whether they want to run into the market under these conditions or run out.


Reasons to Run In:


1. Multifamily Investments are Historically More Stable and Recession-Resistant


No matter how bad market conditions might be, how high inflation is, or what the federal reserve is doing, people will still need housing. In fact, people will prioritize housing over the vast majority of their other expenses. This is because no one wants to fall behind on their rent payments and get evicted as a result. Because of this, multifamily real estate is one of the absolute best investments that you can make during a recession. Multifamily real estate, and apartments in particular have outperformed every other type of real estate throughout the last 5 recessions over the course of more than 40 years. This means that multifamily real estate is an excellent place to put your money during a recession.


2. You Will Need to Make More to Pay More


As inflation continues to happen, you will have to make more and more money to be able to afford your lifestyle. However, with multifamily real estate, you will get access to an extended passive income stream that can last years or even decades. This passive income stream can help you to fund your lifestyle. Also, rents rise periodically over time, so, multifamily real estate is also an inflation hedge. The average annual percentage yield of a savings account in America is just 0.07%. However, with multifamily investing, you can easily make 4-6% cash-on-cash returns per year or more, not to mention the potential significant gains during a sale. This makes multifamily real estate investing a “no-brainer” when compared to keeping large sums in a savings account.


3. The Principle of Economies of Scale


The principle of economies of scale states that costs per unit of output can decrease with an increase in scale or magnitude. This principle applies to multifamily real estate. For example, if you buy an apartment building with 20 units, this can be much more efficient cost-wise than trying to find and buy 20 individual properties. This is because you will save time and money in research, legal fees, closing costs, etc. In other words, it is much more cost-efficient to buy properties with multiple units than trying to buy and rent out individual apartments, condos, houses, etc. The increased efficiency is one of the main reasons why so many investors flock to multifamily real estate. For those that really want to scale, and do so passively, working with a multifamily sponsor can help you achieve these goals on a much larger scale. Why own 20 doors when you can own 400 for the same price, instead?


Reasons to Run Out:


1. The Promise of Overinflated Returns


During the past two years, both rental prices and property prices have skyrocketed. This was due to a number of factors including high demand - low supply, inflation, supply chain issues, and more. But just because the real estate market boomed in the last several years does not necessarily mean that the returns will not be impacted for investors, especially given inflation. It’s reasonable then that investors should expect returns to be a little lower in the near future and should be more conservative as a result. Be wary of real estate investments promising extremely high returns. Sometimes, unscrupulous sponsors will try to attract investors into a deal by promising significantly higher than normal returns. You should view this as a red flag if you encounter this situation, and carefully evaluate their projections to see if they can be reasonably achieved, as well as their track record.


2. It’s Your Entire Savings


Real estate investments typically require significant capital. For some people who invest in real estate, their real estate investments represent their entire savings. This is extremely risky and not advisable. If you want to get started in real estate investing, but you would have to invest your entire savings in the deals, then you should really think twice before doing so. Real estate investments are not generally considered liquid. This means it can be very difficult to get your money out of them during the holding period of your investment. For this reason, you should only invest extra money that you won’t need to access for the next 3-5 years. Never risk your entire savings on real estate investments. Many people’s savings were wiped out in the 2008 real estate crash who did this. Learn from their mistakes and be wise about the amount of money that you invest into real estate, understanding it’s a “long game” for most multifamily investors.


3. Volatility


Just this past week, there were multiple stories in the news regarding the continued crash of crypto, extreme swings in the stock markets, and of course the Fed’s announcement of the raised interest rates. Some investors enjoy high risk and high reward, but just as we are witnessing this week, sometimes it can also be high risk and high loss. To build long term wealth and financial security, it’s important to be diversified and to avoid having your entire portfolio in volatile, high risk investment vehicles. While it can be tempting to “hit it big”, most investors recognize that a wise financial planning strategy will include conservative and long hold investments, like multifamily real estate. With the current market conditions, volatility is not likely to be helpful in growing your wealth.


Conclusion


All investors, including real estate investors, have to decide how they will react to markets that are cooling off. Some investors see these periods as great opportunities and others see them as risks that are better left avoided.


However, it’s important to not be ruled by fear and dissuaded from your financial goals. If you are looking for ways to seize the current economic conditions, look for investment opportunities that are historically more stable and resistant to recession, like multifamily real estate. Be smart and recognize how you can make your money work for you and grow it better to help supplement your income or plan for your retirement. Lastly, look for opportunities that provide significant growth potential that includes economies of scale. These approaches are generally safer investment strategies, especially during periods of economic volatility, high inflation, and even a potential recession.


Want to Invest with Ellie Perlman and Blue Lake Capital?


If you are interested in learning more about passively investing in multifamily properties, click here to schedule a call with the Blue Lake Capital Team.


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.