Buying multifamily properties in a downturn market with high rate?
I am wondering in this downturn market with recession ahead combined with rate hikes, is there any investor feels like this is the time to get in the multifamily property purchase? I think I can answer this question somewhat, such as if an investor has high net worth and available cash, this is a good time to buy, then future refinance to a lower rate for better cash flow. I think the ones that cannot get into buying now is probably tied up in their devalued investment (stock, properties etc) that can't sell or cash out an equity loan for downpayment. Is there any other pros and cons of buying multifamily in a recession?
[{"id": "ipmbfuc", "text": "There is a massive shortage of housing, and in many metros crowding exceeds the Soviet Union of the 1950s.  Monetary policy doesn't change fundamental demand. People need homes. Millions of them.\n\nHow we allocate capital to do that is largely a political question.  In the 1970s and early 1980s, major government intervention with subsidized loans or grants for construction of public housing delivered millions of housing units.  We will likely see that again. \n\nThis is the market that separates what are essentially accountants from economists.  If you can only think of how to \"invest\" based on government driven interest rates, you're really just an accountant. \n\nCash is king, but so too is the hard sell to delusional sellers/owners.  You need to educate them, but to do that you have to understand how interest rates and lending are fundamentally political.", "replies": [{"id": "ipo8cds", "text": "There is no housing shortage. US household size is at all time record lows and so is US population growth.", "replies": [{"id": "ipoa6xj", "text": "Yeah. We have a lot of single-family homes and not a lot of families.  But honestly, household size is generally irrelevant and population growth is highly variable based on location.  \n\nWhere jobs are plentiful, housing shortages exist.  Where jobs are not plentiful, this isn't necessarily the case, but it can be.  \n\nUnderstanding demand for commercial real estate is the hardest part of the business, but you have but to get a Costar subscription to see apartment vacancy rates are low pretty much everywhere.", "replies": [{"id": "ipoaosd", "text": "Costar is garbage and so is their data.", "replies": [{"id": "ipobe4c", "text": "Then by all means, tell us what market is multi-housing overdeveloped, vacancies high, concessions are in the months, etc...", "replies": [{"id": "ipobioy", "text": "There are more units under construction than any other time in the last 50 years. It's about to be the entire country.", "replies": [{"id": "ipqnn9y", "text": "Too bad you didn't have a way to short debt!", "replies": [{"id": "ipqol3o", "text": "I have a sizable position in TMV and similar ETFs to hedge the interest rate risk associated with the leverage on my commerical properties. I kicked all my loans out another 5 years in January, so I'm sitting pretty, but you can typically only get 5 year term, 25 year amortization loans for the property types I invest in. So all my loans are going to roll over again in 2027 so I'm carrying a short position on treasuries that will pay out and allow me to pay down principal balances at that time.", "replies": [{"id": "iprcqi9", "text": "You're shorting the sovereign debt of the most powerful empire in the history of mankind?\n\nOk.\n\nOtherwise good post.", "replies": [], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ipmixtc", "text": "If you have flexible capital to hold longer then I do believe it\u2019s a good time to buy, the fundamentals of the space are very strong. The problem is, multi pricing still has not come down to where it should.\n\n&gt; then future refinance to a lower rate\n\nHere is where you can get in trouble. I personally would never underwrite a deal that hinges on interest rates coming back down during the hold.", "replies": [{"id": "ipmlnfk", "text": "The thing, as you noted, is that price hasn't come down to match rate hikes. I looked at deals on [loop.net](https://loop.net) and [crexi.com](https://crexi.com), all looks like bad deals for a leverage position, unless you have 40-45% cash downpayment, the cash flow could turn positive. Is this the norm these days with such big downpayment or is it just in multifamily? Other side of the equation is DSCR, even if cashflow is positive, DSCR may not be 1.25 which I believe is what majority of lender wants. What is your experience regarding downpayment and DSCR.", "replies": [{"id": "ipmqwh0", "text": "Yes lenders are sizing to 1.25x DSCRs still, and the rates they are using to calc that continue to go up. You also need to be careful with structure and covenants, if they have a DSCR test every year, and rates go up even higher, you might be fine at the time of acquisition but your DSCR could go down by the time you have your first test.", "replies": [{"id": "ipnc469", "text": "Seems like DSCR could be tested but how often is that lead to some type of action or default of loan? Also, do lenders take into consideration of global DSCR or just the property itself? just in case DSCR become lower than the covenant (say 1.25) however the borrower global DSCR is still strong that could guarantee payment.", "replies": [{"id": "ipnwtfr", "text": "Lenders absolutely enforce covenants. I wouldn\u2019t care about global DSCR unless it\u2019s a cross loan", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "ipna3ch", "text": "I have seen prices come down a lot in the multifamily space right now actually. We just had a seller accept an LOI for several million less than whisper pricing.", "replies": [{"id": "ipo772j", "text": "I think (generally) it\u2019s still hasn\u2019t caught up to the cost of capital", "replies": [{"id": "ipoonow", "text": "It depends. Underwriting has definitely gotten a lot more cautious from the buyer side and a lot more work is going into running deals by equity before sponsors commit to them. Deals are still getting done.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ipmlkh3", "text": "It's all about price ...... I'll buy in any market, at anytime, depending on the the price of the asset.", "replies": [{"id": "ipmm0dc", "text": "How often do you negotiate a purchase price? in this market, with seller hanging on last year trend, it seems to make sense to ask for a reduced price?", "replies": [{"id": "ipmmj1p", "text": "I negotiate 5-10 deals everyday ... I haven't come across 1 seller yet that understands that the last few years of market is gone and this is a whole new ballgame.", "replies": [], "depth": 3}, {"id": "ipn00cv", "text": "If you\u2019re not negotiating, you\u2019re buying market deals and probably losing.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ipn1d51", "text": "It's always a good time to buy real estate.", "replies": [{"id": "ipn5t69", "text": "Watch \"Adam Ruins Real Estate\" on Youtube", "replies": [{"id": "ipneu2n", "text": "Just watched several of his videos.\n\n*(It's always a good time to buy real estate).*", "replies": [], "depth": 3}, {"id": "ipnfdtp", "text": "I just watched this to humor you. Not only does he talk about single family homes, but he also gets a bunch wrong. He seriously says renting and owning are no different because paying a mortgage is the same as paying a landlord without noting that the rent pays the mortgage plus the landlord and builds no equity. Like everything on that show, its witty, but lacks nuance and substance. Its like talking to reddit people.", "replies": [{"id": "ipnj6q3", "text": "Interesting.\nHe has writers and fact checkers.\n\nI personally can vouch that his information is right for me (because I'm able to consistently invest and get guaranteed 30%+ returns). \n\nIt makes more sense to earn a profit and pay rent than to tie up my cash in a house. His points about maintenance and property values falling especially as we head into a recession. And, his point about people moving frequently makes sense too.\n\nNonetheless, I'll try to find a video or article that refutes what he's saying. Owning a house isn't always better than renting.", "replies": [{"id": "ipnodl1", "text": "It isnt always better, but the reasons he lists dont hold water.", "replies": [{"id": "ipnpjbs", "text": "Strange.\nThere is another reddit thread that said they do, IIRC. I mean there is math to this.\n\nFull disclosure: I write Proptech software. His math works for people like ME and many others.\n\nI've seen people in the red first hand. I saw others during the 2008 Housing Crisis. \n\nYou're giving me the idea that you've never seen examples of the examples he lists.", "replies": [{"id": "ipnqv8a", "text": "Perhaps we are not talking about the same video. I watched adam ruins everything, why home ownership is a terrible investment.\n\nIn this video he cites being tied down to a property and the fact one still has to pay a mortgage as why its a bad investment. That's ridiculous. I am aware and agree that ownership is not for everyone. If you have a high paying job in a city center where land is incredibly expensive it makes sense to be close to work to maximize earnings and to invest your discretionary income. This is even more enhanced when you have access to high return investment vehicles that most people do not have access to. Those are great reasons to rent over buy, the fact a bank still gets paid when you buy is not one. He also says the bank owns the house in that video which is plain wrong, having a lien on collateral is very specifically not the same thing as ownership.", "replies": [{"id": "ipnxmdy", "text": "He makes a lot of points that are echoed by experts.\n\nPerhaps we just disagree about the math and legal concepts. \n\nI am, and would rather be, the bank (lender) on a property rather than the borrower.\n\nThe fact that I can run the numbers, foreclose, or prevent the sale of a property is superior to me saying I \"own\" a house (and have less rights and legal power).\n\nDue to the math, risk, and my investment ability, I'd rather be the lender (and rent) rather than the borrower (and \"own\" a property with less equity than the lender).\n\nCash is king.", "replies": [{"id": "ipny5zl", "text": "Fair enough. I prefer to be in the equity seat, but I am a private equity person so there is a bit of bias.", "replies": [], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}, {"id": "ipnqid6", "text": "https://www.npr.org/sections/money/2019/04/30/718348115/is-buying-a-house-overrated", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "ipuaeky", "text": "You have to be a mental midget to listen to that idiot.", "replies": [{"id": "ipza7n6", "text": "The show has writers and fact checkers.\n\nThe facts he lists have merit.\n\nYou are relying on a logical fallacy.\n\nAre you able to articulate a better argument?", "replies": [{"id": "iq191h6", "text": "If you listen that guy you are a dumb dumb.", "replies": [{"id": "iq1ehfn", "text": "Why?", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ipn4slf", "text": "I'd give it until Q2 2023 to let the impact of the rate hikes really take hold in pricing. Right now there's a big and growing bid/ask spread which is slowing deal volume to a crawl in most major markets but price drops haven't fully materialized yet.", "replies": [{"id": "ipnsl09", "text": "I agree with this. I think there's going to be some distress as well as people can't refi their high leverage floating rate debt", "replies": [{"id": "ipntkex", "text": "Yeah those are going to be another shock to the market. Now is when buyers will get in trouble by jumping the gun on what appear to be deals relative to last year's pricing but in reality are just data points on a steep downward price trend. Purchasing power and returns have dropped 25%-30% all things being equal since Jan 2022. All of that might not get priced in since institutional investors especially have longer time horizons and medium term fundamentals are strong, but I wouldn't start buying until I see at least 15-20% drop.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ipny2j5", "text": "Multifamily is still trading at cap rates below available interest rates, so no now is certainly not a good time unless you like negative cash flow.", "replies": [], "depth": 1}, {"id": "ipomior", "text": "Don\u2019t buy until cash flows are positive", "replies": [], "depth": 1}, {"id": "ipoo622", "text": "Way too soon. Wait to it\u2019s a full sale buyers market again.", "replies": [], "depth": 1}, {"id": "ipotaqw", "text": "Always a good time to buy CRE.", "replies": [], "depth": 1}, {"id": "ippxz91", "text": "MF market is floundering. Let the buyers backed by already allocated pension funds finish their buying spree then give it a quarter for sellers to realize the drop then another two quarters for sellers to realize this isn\u2019t a temp dip. Quite a few folks with short term debt that\u2019s going to start feeling some pain. Couple this with rising expenses (insurance) and flattening rents I\u2019ll only be looking at deals with OPM for at least the next year.", "replies": [{"id": "iprpkvq", "text": "Rent will probably flatten, wth NOI being the same, maybe less due to increase in expense, CAP rate would need to come up. What do you see next year in term of CAP rate increase? Say, with rent flatten and Fed rate hikes, do you expect 1% increase? Is there a resource that CRE professionals look at to track CAP rates across the country (website, subscription)?", "replies": [], "depth": 2}], "depth": 1}, {"id": "ipv10hm", "text": "There's deals in every market, but we haven't seen cap rates expand on stabilized assets enough to pencil. If there aren't sizeable levers for us to pull (either to increase income and/or increase operational efficiencies) then we're likely passing.\n\nIt's definitely a time where being creative, consistent, and patient will uncover some great gems, you'll just wade through a lot of crap to get there.", "replies": [], "depth": 1}, {"id": "ipxfnzz", "text": "We\u2019re seeing a lot of seller credits (work on lending side) so maybe negotiate?", "replies": [], "depth": 1}]