We see the negative headlines almost every day. Inflation remains stubbornly sticky, there's a story on layoffs seemingly every day, interest rates are high and, if you're an investor in multifamily real estate, rents are under pressure while many markets have a lot of new inventory set to come on the market.
The economy looks very unsure of itself and there's not real consensus on what the near term outcome will be, so it begs the question: "Is now a good time to invest in real estate?"
Despite the economic news, we're continuing to stay active in the market. In fact, we even launched the new Blue Lake Multifamily Fund. I've said before that I still believe in real estate, particularly multifamily, as a great long term investment and I continue to feel that way today.
That's not to say we're bidding on every opportunity and there are a lot of factors to consider when looking to purchase property. Let's look at some of them.
Supply & Demand
Just like any market, basic supply & demand has a major impact on multifamily real estate. The basic need for housing makes the industry somewhat recession resistant, and with an ongoing housing shortage, demand is strong. Even when economic conditions are challenging, people will always need a place to live, as they cannot adjust their housing needs in the same way they can adjust their consumption of other goods and services.
Looking forward, there are a lot of new units ready to hit the market this year. That extra supply will have an impact on renter retention and actual rents, of course. When you focus on Class B properties, like we do at Blue Lake Capital, we feel that new units coming on the market can help in the long run. The ability to apply a value add strategy and upgrade slightly older units will ultimately pay off by allowing rents to rise while remaining below the overall market.
Additionally, the lack of supply has impacted residential real estate and kept prices on single family home high and unattainable for many people. As you can see here, despite all the news about rising rents, the gap between the cost of home ownership and rental costs is at the highest point since just before the great financial crisis. Comparatively speaking, renting is still the best option for most people.
The bottom line is that, for the areas we focusing on, people are still moving in droves to states with good weather, favorable taxes, and strong job growth. Providing more people with more housing options across the spectrum will pay off for owners long term.
Don't Try to Time the Market
Right now, whether it's in residential real estate or multifamily, there seems to be a lot of hesitation to buy real estate because people don't want to make a mistake and buy at the wrong time or get locked into rates at the peak.
It can be easy to forget given what we see in the recent low interest rate environment but it's important to take a long term view on real estate.
No one knows exactly wha the multifamily real estate market will look in one, 3, 5 or 10 years. That's why it's so critical to make sure you are purchasing a property that fits your business model, that you conduct all due diligence, that the numbers work, and that the property is right for you and your strategy.
It would, of course, be fantastic to always be able to time the market and get in at the perfect time, but it's more important to always be active, have a strong set of guidelines you follow, and be ready to move when you see a deal that works. You may not get in at the absolute peak or trough, but you'll beat a lot of those who are sitting on the sidelines waiting for that perfect moment.
Risks in Today's Real Estate Markets
There are always risks involved when investing in real estate, and it's especially important to be aware of them in today's economy. Two of the current risks include:
• Rising Interest Rates:
It feels like every time we've reached a peak in interest rates, a new report comes out showing that inflation remains high or, in some areas, continues to rise. That's encouraged the Fed to continue their hawkish approach and could push them to bring rates even higher than they were projecting just a few months ago.
High rates obviously have a major impact on real estate investments, the cost of borrowing rises, make it more difficult to maintain positive returns. Normally, we'd expect to see asking prices come down as rates rise but inventory has remained relatively low so far and prices have remained high, causing a gap between buyers and sellers.
At some point, we'll start seeing more inventory hit the market, sellers will have to adjust their expectations, and we'll be able to more effectively underwrite good deals.
• Economic Uncertainty:
The volatility in today's markets can certainly have an impact on real estate investments; everyone's been experiencing rising cap rates which lead to pressures on NOI.
This has really reinforced the importance of focusing on operations and on attracting and retaining quality tenants to keep vacancy rates at a minimum. It's a challenge right now, so you need to make sure you or your firm have adequate capital and reserves in place to help withstand any fluctuations in the market.
Taking the Right Precautions
Understanding the risks in the market will help you come up with a plan to alleviate or avoid them. Some of the things you want to think about as a real estate investor today include:
• Conservative underwriting:
We've discussed the need for conservative underwriting before. We've always taken a conservative approach when making underwriting and rent growth projections, and now we're even more conservative. You can't assume the ability to push rents like were could a year or two ago; it's important to be realistic in your growth assumptions and
• Increased reserves:
It's always wise to have enough reserves to cover any unforeseen expenses when purchasing a property. Now, with the added uncertainty in the economy and potential pressures on renters that can hit your bottom line, it's definitely wise to make sure you have ample reserves to get through this economic phase.
• Securing the right debt:
Over the past several years, rates were held low and it was common practice to acquire floating rate debt. Some, but not all, would invest in a rate cap, and many investors were able to hit their target equity multiple in a fraction of the time they had projected.
Not today. Now, the standard is fixed rate debt and most of our models project holding the assets for longer than we had recently. It's important to really consider what you'll need to do to protect your investments and your investors.
While nobody knows exactly what's going to happen in the multifamily. real estate market in the next year or two, I believe the future outlook for real estate remains bright. if you or your syndicator keep a long term perspective and have a good handle on your operations, it will continue to provide a steady stream of passive income. Eventually, prices will stabilize and begin to appreciate again, especially if you're focusing on strong demographics in your target markets .
Focus on the fundamentals, be willing to buy deals that pencil, and stay active in the market. By doing those things investors can ensure they're capitalizing on the right opportunities that will lead to long term success.
As always, Be Bold, Be Great and Keep Pushing Forward!
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About Ellie Perlman
Ellie Perlman 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.