How to Avoid Overpaying for Multifamily Properties

Updated: Jan 9

How far can they go?

I’m talking about the prices on multifamily properties. I’ve seen investor overpay for properties and I keep shaking my head in amazement. Yes, we all want to get deals, but I will not pay the price for wanting to buy a deal ‘just to buy a deal’.

You see, right now it appears that there isn’t a limit on how high the prices on multifamily properties can go. There are a lot of reasons why prices have spiraled up, and many reasons why they probably won’t slow down anytime soon.

What’s Happening in the Multifamily Market?

Multifamily properties are the “hot buy” now. It used to be single-family homes, purchased, renovated and flipped for a quick profit. Now, people have shifted their attention to multifamily assets because the potential to make money is far greater than a single-family home. It depends, of course, on how astute the buyer is.

Are continually rising multifamily prices the new normal? Ask many experts and they’ll all say, “yes.” Why? Demand is huge. There is a continuous stream of renters entering the market, so occupancy rates will remain strong. In fact, baby boomers and Millennials prefer renting a multifamily unit over buying a single-family home. this is due to a need to downsize, or be prepared to move if their job requires relocation. And if prices continue on the track that they’re on, it means that appreciation, and profitability, will continue to fuel the buying frenzy.

The old “buyer beware” sign comes into play. Yes, multifamily properties are in strong demand, but everyone now knows about them, and the market is becoming artificially inflated. Even seasoned syndicators and investors are overpaying for multifamily properties, because that’s what it takes to land one.

Reasons for Overpaying for Properties

A closer look at multifamily deals can reveal some of the reasons that prices continue to climb, and people continue to overpay.

• 1031 Tax Deferred Exchanges

Just to clarify, a 1031, also called a like-kind exchange, is basically a swap of one investment property for another. While most property swaps are taxable as a sale, 1031’s either have no tax or limited tax due when the exchange happens. The only requirements are you have to designate a replacement property within 45 days, and you have to close within 6 months. If you exchange your investment for another property you don’t have to report any capital gains, and your investment will grow tax deferred. You can do this as often as you like. Ultimately, you’ll have to pay one tax, but by that time it’ll be a long-term capital gain.

How does this impact multifamily property prices? if you use this particular strategy, the seller must purchase a new asset. Because there is a time pressure to designate a new property within 45 days, the seller may be willing to overpay on a new property just to beat the deadline, and not pay capital gains. This pressure can drive up the price of other properties.

• Foreign Investors

There has been an influx of foreign buyers purchasing multifamily properties over the past s