Updated: Dec 6, 2022
There's a lot happening right now in the real estate arena, and I want to share with you what we're seeing at Blue Lake Capital as sponsors and owners of multifamily properties across the United States.
We've been actively buying and selling assets in different parts of the cycle, including when Covid hit, which was a very interesting time. During the pandemic, a lot of groups were on the sidelines waiting to see what was going to happen. At that time, we continued to bet on multifamily real estate and that was a bet that paid off for us and for our investors.
The economy we’re in today is very different, meaning there are different factors that you'll want to look for in deals now that you didn't necessarily need to look for three or six months ago, but we still feel that now is a great time to invest in multifamily real estate.
Why are we buying assets right now?
Since we’ve been keeping our deal flow active, this is a question we’re getting from time to time.
Real estate is cyclical, and we’re in a period where interest rates and the health of the economy are on everyone’s mind. We’ve explored this before.
This is probably not a popular opinion, but I actually think we are already in the midst of a recession, at least according to the classic definition of negative GDP growth over two consecutive quarters. (The professional economist don’t agree, at least not yet, since they have yet to formally announce that we’ve entered a recession.)
Whether or not we’re in a recession. when we look at real estate, we see that it's still performing, specifically multifamily. It’s an asset class that remains strong and, from our view at least, is still a very solid investment. Of course, not all real estate investments are successful, but many of them are.
Inflation has been stubbornly high, but we’ve been able to make improvements, push rents and make sure that our income is in line with inflation and our assets keep cash flowing.
How are we evaluating real estate deals in today’s markets?
One key with keeping up with inflation is to understand that it’s more important than ever to choose the right location.
At Blue Lake Capital, that’s been our strategy from the get-go. We stay away from Class C assets and weaker areas that could be more severely impacted by a long economic downturn. These types of properties might work well on paper but, at least for us at Blue Lake, we feel they tend to underperform in the long run.
Location was a major factor when considering Stonebrook, which we are purchasing right now. Stonebrook is located in Mebane, just outside of the Research Triangle in North Carolina. This gives the asset a potential tenant base consisting of a lot of tech workers, medical professionals and affluent retirees.
Those are very strong communities from which we can attract quality tenants. Incomes in both areas are strong and, in the case of Vinings, we have million dollar homes in adjacent neighborhoods. We are confident that our tenant base will be attracted to nicer amenities and can afford higher rents as we make improvements to the properties. (Current rents in the properties are under market and we are planning a number of improvements to help support higher rents.)
The bottom line is that location has always been critical in real estate, but in a recessionary environment where things are kind of volatile, it’s even more important. You want to invest your money where you have stability with a strong tenant base.
Another factor to consider: what other investment options do you have right now?
The stock market has been incredibly volatile in 2022, and bonds haven’t been acting as a safe haven either. Bitcoin and other cryptocurrencies have suffered in this “risk off” environment. Short term treasuries have been paying higher yields but are still significantly trailing inflation. There’s a lot of cash on the sidelines, keeping money to wait to see what happens, but that money is losing purchasing power rapidly, as inflation remained over 8% as of September.
Finally, and not insignificantly, 100% bonus depreciation starts to phase out after 2022. It will go from 100% now to 80% in 2022, and 60% in 2024.
Unless there are changes, the bonus percentage will decrease by 20 points each year over until it eventually phases out completely, so this is the last year to take advantage of one of the most significant benefits in real estate.
· First and foremost, while we may or may not be in a recession, investing in multifamily real estate can help preserve your capital and be a hedge against this very high inflationary market that we're in.
· Historically, every time we've been through recession, we tend to see a lot of real estate investors suddenly stop investing. That’s going to create opportunities. If you stick to fundamentals, if you can adjust your business model to consider today’s markets and if you have a high surety of closing, you can win quality deals and grow your portfolio.
· Location, location, location. Now, more than ever, you want to be where the tenant base is strong, where they will continue to pay their rents and keep occupancy high.
· 100% bonus depreciation is being phased out, 2022 is the last year to take advantage of the full tax benefit.
I'm not an economist or an investment advisor, but when I look at what to do with my money, how to grow it and how to create passive income, I still feel that real estate is a solid investment.
Profits and cash flow are one thing, but keeping the value of your principal along with the tax benefits are unique things that investing in real estate can do for you.
Be well, be strong, and keep pushing forward!
Invest with 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.
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.