Updated: Jan 9
You’ve read it in the news, and heard it from just about everyone involved in real estate investing. Multifamily properties are hot, and considered a good investment. Prices have risen; sometimes buyers are paying more than the seller’s asking price in order to grab the deal away from other bidders.
More importantly, it currently appears that there is really no end in sight to the rising multifamily market. There are two forces that are fueling this growth: Millennials, who are postponing single-family home purchases due to high prices and limited home availability, along with substantial student loan debt, and baby boomers who are choosing to sell their current home and rent instead of buying another property.
The baby boomers are doing this for basically the same reasons that Millennials are doing it - high single-family home prices, and limited product on the market. In addition, many retiring boomers simply want to downsize and use their home sale funds for other purposes, like travel, family vacations and spending on their grandchildren.
Three Main Risks Involved with Multifamily
I am a huge believer in multifamily and its solid state in the market. As you would imagine, there are risks involved in any type of investment. Despite solid cash flow and potentially significant property appreciation, there are also still risks involved in investing in multifamily properties. Because of what many investors are calling the “multifamily buying frenzy,” many investors are throwing caution to the wind and investing without regard to conservative property buying protocols. The good news is that you can mitigate many of those risks fairly easily.
One risk that comes into play is when some investors hear that a particular market is “hot,” and don’t do the necessary due diligence regarding vetting the market in addition to the actual property. This means their capital is tied to a single market, and if the market tanks, their investment will be going right along with it.
Another risk is the economy. Right now, the economy is sailing along at record levels, as it has for the past 10 years. Should the market become problematic and unemployment levels increase, people may not be able to pay their rents, which would result in higher vacancy rates. That would severely impact cash flow and operating income. Some experts think that Class A properties are being overbuilt in primary markets, which could have negative impacts down the road.
In addition to the economy, the real estate market itself can present risks. Remember the “buying frenzy” term used to describe investors buying multifamily properties above their asking price? Well, if the market slows, investors and sponsors might not be able to earn their projected returns.
Another risk comes up with vacancy rates due to competitors. Everyone is working hard to gain new tenants and keep vacancy rates at optimal levels, and if there’s a competitor near your multifamily property and they’re offering renovated or newer units, you may lose some tenant, which will impact the cash flow and net operating income.