Why We Still Like Multifamily in Challenging Environments (June 2022 Insights)
With inflation at a 40 year high and interest rates on the rise to cool its jets, it's a good time to revisit how we expect our most popular niche, multifamily apartments, to perform and how our operators are preparing.
The Strong Case for Investing in Apartments Remains Unchanged
Rising cost of homes and increasing interest rates for mortgages price new homeowners out of the market, keeping them renting longer.
There's a nationwide housing shortage due to supply chain challenges and rising costs.
Post COVID, lifestyle choices and a more mobile workforce favors renting not owning.
Apartment leases are typically one year and every month leases expire so we have an ability to raise rents.
In 2009, the bottom of the last major financial crash, only 1 in 200 apartment owners were delinquent on paying their debt. Compare that with single family homeowners which was close to 1 in 25.
Planning for Changes - Operators
Rising Interest rates may have an impact on cash flow but rising rents may offset some of that impact.
Plan for an upwardly increasing interest rates and purchase caps so rates can't go beyond a certain level.
Use lower leverage to reduce the debt payment caused by higher interest rates on new deals.
If a recession occurs, renovation plans may be put on hold to conserve cash. Focus is to keep occupancy high by managing the property well, keeping resident satisfaction high and rental rates moderate.
We expect to turn properties in 2-3 years but we plan for 5 years to get us through downturns should they occur. We won't sell in a downturn.
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