Blog

I moved around a lot when I was younger. And I’m not talking from state to state or city to city—I moved a few doors down from wherever I was living. I never knew why, and frankly, I never asked my parents. All I knew was that I was with my family, so I went wherever they went.

It wasn’t until years later that I realized my parents were fixers and flippers.

Real Estate Beginnings 

We would intentionally move doors down from where we lived because of my family’s familiarity with the area. And it’s here that I eventually learned my first real estate lesson: Buy where you know, not where you think you know.

As a kid, my mom, dad, and I constantly drove around looking at houses. I always thought it was so boring—like, why are my parents paying so much attention to how the yard or the driveway looks? Why are they so obsessed with the trees around the property, or why do they care so much that more than half of the shingles fell off of the roof? Who knew that as I entered my 20s, I would be driving around asking myself the same questions? 

My parents loved to find distressed houses. If it had good bones (and sometimes even if it didn’t—whoops, it happens), my parents thrived on the idea of bringing a house back to life.

How quickly and effortlessly they fixed and flipped houses still dazzles me to this day. Vacant lots? No problem. Dad was in charge of the chainsaw, and Mom pulled the rope to take down a wilted tree. My parents were, and still are, some of the most hardworking people I know.

But you know what made me happy, even as a little kid? How happy my parents were to make a house into a home or a piece of property into an oasis for someone else to start their journey. And it’s here that I learned another lesson, this time a life one: Do what you love, and the rest will follow.

There are two kinds of fixers and flippers. The first are those who outsource the work to contractors, and the second are the DIYers who learn to do everything on their own. 

My parents were the second type. Every day, they were either painting, plumbing, drywalling, sanding—you name it, they did it. Today, even still, my parents have this running joke that my dad is the one who tears things apart, and my mom is the one who pieces it back together.

As I got older, I learned to appreciate the journey my parents went through with each investment they made. You know how, as a kid, you either think, I’m going to follow in my parents’ footsteps or pave my own way? The idea of fixing and flipping became something I wanted to do, too.

My First Auction and the Lessons I Learned

Almost every year, my mom would always cut property addresses out of the newspaper. I later learned that these were the properties my parents would buy at auction.

My first tax auction was with my dad. At the time, I was in my mid-teens and just excited to spend the day with him. And if I’m being completely transparent, I had no idea of what we were getting into.

We ventured over to the Buffalo Library, where the auction was being held. As we walked in, a bid number was assigned to my dad, and we took a seat with hundreds of people in this huge auditorium.

“Alright, kid, here’s what we got going on,” Dad said as he pulled out this stack of papers with property addresses listed from top to bottom. Lesson learned: Always obtain or print out the latest updated property list before you go to the auction.

He pointed to an address that was a minute down the road from where we lived. “The owners owe this much on back taxes,” he said as he shifted his finger down to a dollar amount.

My dad hands me his bidding number and says, “When this property comes up, I’ll tell you when to raise this.” I was pumped. I was not only there but also a participant in the unknown.

Everywhere you looked, you had people of all ages, bags in hand, which I later found out were loaded with cash. Lesson learned: Tax auctions are cash only—no ifs, ands, or buts about it.

“Did you see that 17 Main is up?” a man asked, this morning’s donut still stuck in his grayed-out beard. The woman he was talking to smiled and nodded but didn’t say anything. Lesson learned: Do not discuss the property you’re bidding on with anyone. And, trust me, people will try to pry it out of you.

When it came time to raise my number, I was bidding against five to 10 people. Eventually, those people dropped out, and my little arm was the only one left in the air.

“25k going once, going twice, sold to bidder #5467.” And that was that: A property was sold at $25,000 to some kid in the audience, just happy to be with her dad.

Eventually, we were told to stand in a line that was a mile long and wait for the next available cashier. Lesson learned: When you win the auction, 20% to 25% of your winning bid price is due right then and there, and the rest of the funds are due within a month.

As time passed, my interest in real estate grew, and eventually, I learned about the importance of due diligence, especially when it comes to tax auction properties. You always know the investors who didn’t do their due diligence because tax auction properties that were previously bid on go back to auction. Lesson learned: That 20% to 25% you put down as an initial deposit at auction, you don’t get that back. So, those initial investors kissed that deposit goodbye.

What to Consider at Property Auctions

Here are a few things I tend to look into before heading into a property auction:

• Whether a property is vacant; if it’s not vacant, I’d possibly have to go through an eviction process.
• If it’s a lot without a structure, I want to ensure it is buildable; they just don’t make land anymore, you know? If it’s buildable, it becomes more valuable to buyers.
• I look into the current owners; if they are living, it’s possible that family members could be interested in the property. This is a whole thing and can be a legal nightmare if so.
• I find out whether the property is in a current real estate transaction because the owners wanted to sell before it went to auction.
• Driving by the property is crucial. I study the outside and ask myself if the property has been taken care of. If it’s a nightmare on the outside, imagine what the inside looks like. 
• I also take a look at the neighbors’ property. Do they have no trespassing signs all around their property, garbage in their yard, or are there unnecessary things placed on the boundary lines? If so, this could mean there are property boundary issues, and they are likely to give a tenant or a seller possible issues.

Let’s back up: Say an owner decides to sell before it goes to auction. Not only are the owners pressured to get the home sold and closed on within a short amount of time, but then the pressure is on the buyer to close before the house goes to auction. Yikes.

There is also usually a flat fee that owners can pay to be taken off the list. Some owners wait the day and even minutes before the start of the auction to pay off their taxes.

Lesson learned: As a bidder, you’ll figure out that someone has paid their taxes because the property address is suddenly skipped by the auctioneer. Yay. So, if it’s the only property you went to bid on that day, even more yay.

On the other hand, you’ve got the owner who allows the property to go to auction, and it ends up selling, let’s say, for $100,000 over the back taxes price. Guess what? The owner gets the surplus amount. So, not only did they not pay their back taxes, but they also got cash for not paying their back taxes, and suddenly they had no mortgage and could go about their business buying another home.

Lesson learned: A tax auction property’s previous mortgage is often forgiven. So, let’s say back taxes are $20,000, the investor purchases at that price, and suddenly, they got a house for only $20,000.

Now, a lot of the time, renovations are needed, so a mortgage or home equity, some sort of loan, is necessary to fix up the home. This means people end up with some sort of lien on the property. Well, unless they have straight-up cash, then, well, cash is key, you know?

Lesson learned: It’s important to study the market values of homes in the investment property area and do a rough financial estimate of the possible work that needs to be done on the property. You don’t want to end up upside down in a property.

My First Investment Property Taught Me All Kinds of Lessons

My first investment property was a few doors down from where a few close family members grew up. It was a small Cape Cod, hidden behind two giant pine trees. The brush was so overgrown that it reached the top of the windows, and, in all honesty, it looked like someone hadn’t lived there for years. This place looked like a disaster to the everyday investor, even to them. 

I remember talking to the neighbors about the property. The electricity hadn’t been turned on for years, which I learned from my dad usually meant the basement was flooded, so everything would have to be replaced.

I found out the owner that lived there never brought their garbage out, so where did that end up? A big part of me was saying, I don’t know if this is such a good idea.

But this type of property, the one that was left for abandonment, was the one I grew up around, the one I was unintentionally taught to bring back to life.

Lesson learned: Don’t trespass. You’re not allowed to step foot on an auction property until you sign the paperwork that it’s yours.

Going into the bid, here’s what I knew: The property’s market value back then was $120,000. The house needed at least $50,000 in work. I could tell just from the outside that the roof needed to be stripped, the wood siding needed to be reworked, and the windows, doors, and everything else needed to be replaced. Again, thank you to my parents for teaching me what to look for.

From there, I determined an amount I was willing to bid, and I wasn’t going over it. Until I did. Lesson learned: Always set a bid limit and stick to it.

Sure, some people have financial wiggle room, great, but at this point, twenty-something me is strapped for cash, and now I had to come up with the few extra thousand I just overbid because I was so anxious and determined to get the house. Shoutout to my competitiveness.

Despite my parents’ look of angst after I proudly went over my limit, I did end up getting the property. “Congratulations, this is her first home,” said the auctioneer. He knew that because I reached out every week to make sure this property was still on the auction list. Again, remember that lesson I said earlier about not telling people? Yeah, that’s the one.

After I signed the paperwork, my house was mine, and you can bet that I drove right over to take a look, my parents proudly following behind me. And I’ll never forget when we walked in.

The basement had five feet of water in it, old photographs and letters floated on top of the water, and when we walked upstairs, paper was everywhere. In the fridge, in the toilet, on the stairs, in the cabinets, the tub, the closets. I was experiencing a hoarder’s house firsthand.

It took us at least a few months to toss out 12 tons-plus of garbage from the property, including old wood floor slabs that warped from the excessive moisture in the house and moldy drywall with flowered tulip wallpaper still stuck to it.

Once the property was ripped down to pretty much the studs, my family, friends, some contractors, and I started to rebuild everything from the ground up. Guess what? I lived in it while flipping it, and I’ll never forget that either, but that’s another story for a different day.

The house is now complete and fully updated, and once I find my forever home, it will become a rental of some sort.

The Next Investment

Flash-forward a few years after my initial investment, and Dad approaches me with a property that is right down the road from a family member. It’s a vacant lot around one acre that sits on top of a hill just overlooking the water. The property is also at the end of a private road that has a paper road leading up to it.

Let me tell you a little tidbit about paper roads: They often don’t exist on a Google Map—or any online map, for that matter. So, an anxious investor might overlook the property because they can’t find it on a map, but I knew better than to just write it off because I couldn’t GPS it.

Lesson learned: Next to each property address on the tax list is an SBL number. If you have trouble finding the property, go down to your local assessor’s office and pull out the county map to find the SBL number and where the property is located.

So there I was, staring at a gold mine of a piece of property in the assessor’s office, hoping in the slightest that some investor wasn’t going to do as much due diligence as I was at that moment.

And they didn’t. I ended up getting the property for a very low amount and more than quadrupling my original investment.

Final Thoughts

When I geek out on tax auction stuff and tell people about it, I usually get four different responses. The first reaction is, “I’d love to go with you next time to check it out,” and they do go, but that’s the end of their interest. The second is, “Wow, that’s amazing,” but they don’t care enough to do it. The third is the person who seems interested but will never act. The fourth are the people who see and act on the value by becoming a tax auction investor.

If it weren’t for listening and living through my parents’ story, I would be stuck in a 30-year mortgage, paying double the amount of what my property is actually worth by the end of it.

So this is my story for the fourth type of person. I know you exist because, at one point, I was you.

Find an Agent in Minutes

Match with an investor-friendly agent who can help you find, analyze, and close your next deal.

Yes, many pundits are still warning about a recession in 2024. 

Here’s one example. Richard Duncan did a Macro Watch fourth-quarter update. He pointed out that between 1952 and 2009, all nine times total credit (adjusted for inflation) grew by less than 2%, and the economy went into a recession. 

ITR Economics also predicts a recession in 2024 based on a few key indicators. They have been over 94% accurate one year out since 1985. 

Passive investing pro Jeremy Roll believes a 2024 recession is virtually certain. He believes we’ll see: 

• Job losses
• Consumer spending decreases
• Stock market decreases (most likely crash)
• Federal Reserve rate cuts. It’s very difficult to predict the amount and degree of Fed rate cuts, but typically, recessions do cause the Fed to cut rates to help stimulate the economy. Based on past recessions, the amount of rate cuts that typically occur during the first 12 months once rate cuts begin is 100-125 bps, with additional rate cuts thereafter.

But Does the Economy Even Matter When Making Investments? Buffett Says No

Investing gurus Warren Buffett and the late Charlie Munger have insisted they never based an investment or divestment decision on the economy. They simply sought out solid, undervalued companies with durable products and great management teams.

Though their record shows this is generally true, we know one time when they deviated from this principle. In 2008, Berkshire Hathaway invested $5 billion in Goldman Sachs. This was in September 2008, at the very heart of the financial crisis. 

But they didn’t invest in common equity. They invested in preferred equity. And they made a small fortune from this investment. 

What Are We Up To? 

My firm has been saying for years that we do the same thing in every economy. When multifamily syndicators swung for the fences (and hit it out of the park) in the late teens and early 2020s, we were swinging for singles and doubles. (We cheered them on while they made a small fortune for their investors.) 

When multifamily syndicators swung for the fences (and got into big trouble) a little later in that cycle, we were still swinging for those same singles and doubles. 

But investing in preferred equity is our one exception. 

We are in an unusual window, offering asymmetric risk and return potential. We sincerely believe this is a rare and short window to lower investors’ risk and lock in higher-than-usual projected returns with preferred equity. 

If you’ve been reading my posts for a while, you know why we love preferred equity. Here is an abbreviated list: 

• Immediate cash flow, future upside, and shorter hold time.
• Payment priority ahead of common equity.
• Lower downside risk exposure than common equity.
• No lien, but often gets a personal guarantee from the sponsor.
• Receives depreciation tax benefits (as negotiated). 
• Negotiated control rights in case something goes wrong.
• Negotiated MOIC floor-to-juice returns if taken out early.

Here’s the Takeaway—With a Huge Caveat

I’m going to recommend three assets for your consideration as we teeter on the verge of a potential recession. 

Stick with the basics

In general, I recommend investors do the same thing they would ideally do in a great (or awful) economy: Invest in recession-resistant assets acquired below their intrinsic value (often from mom-and-pop/distressed operators) and now managed by professional operators.

As far as asset types, we like mobile home parks, RV parks, self-storage, industrial parks, and more. 

Look for built-in equity at acquisition

I also recommend acquiring unusual investments with significant built-in equity at initial acquisition. I’m borrowing from Jeremy Roll’s playbook—he taught us about this asset type. 

Recently, we invested in a tax-abated multifamily property. The operator negotiated a complex structure that provided 100% property tax abatement in a high-property tax state. 

This asset was acquired for $80 million. The lender’s appraisal at closing (with the tax abatement in place) was $113 million. The equity invested at closing was $26 million. This equity grew by $33 million (over 126%) on day one, according to the new appraisal. (No, this was not a typo.) 

That type of investment offers nice potential in any market. More importantly, in uncertain markets like these, it provides a wonderful margin of safety between net income and debt payment (long-term, fixed, and interest-only for years, by the way). This margin should be able to absorb financial and operational shocks (like insurance increases, flat rental rates, increased vacancy, and more), but there are no guarantees.  

Invest in preferred equity

Obviously, I’m a big fan. And I’ve discussed why in several prior posts, like this one, another one, and a third.  

Here’s the caveat I haven’t often discussed: We have identified four types of preferred equity: 

• Acquisition (we do this)
• Recapitalization of existing property (we do this)
  • Filling a gap behind new senior debt.
  • Providing liquidity without having to replace the senior debt.

• Development (we haven’t done this, and we don’t plan to).
• Rescue capital (we haven’t done this, and only would in very special circumstances).
  • Buying a rate cap.
  • Refilling debt service reserves.
  • Capital improvements to boost NOI with the hope of refinancing later.

I could write a post on these four types, and maybe I will. But suffice it to say that not all preferred equity is created equal. 

For example, I don’t recommend you get lured by the siren’s song of rescue capital. Sure, it could work out okay. But remember that you’re not looking for the highest returns. You’re looking for the highest risk-adjusted returns. (If you want high returns, why not just play the lottery?) 

Final Thoughts

If a 2024 recession materializes, you may find additional opportunities to buy distressed commercial and residential real estate assets. But don’t count on it being a repeat of 2008. It’s hard to imagine a scenario like that playing out again this time. 

As for us, we’re not holding our breath for these big bargains to pan out in commercial real estate. With over $400 billion sitting on the sidelines, waiting to pounce on these assets, we doubt many of these opportunities will materialize, at least not for most of us.

Get the Best Funding

Quickly find and compare investor-friendly lenders who specialize in your unique investing strategy. It’s fast, free, and easier than ever!

Laurel Durkay, Morgan Stanley head of global listed real assets, joins ‘The Exchange’ to discuss the effects rates are causing on the real estate industry, REITs that cover alternative sectors and more.

Last week, Realtor.com published another version of its ‘‘magic number’’ forecast. The number in question is the mortgage rate number low enough to ‘‘unfreeze’’ the real estate market. 

We know that the market has been in something of a gridlock for over a year now:

• Home prices are very high and keep rising.
• Mortgage rates are high and aren’t showing much of a downward trend.
• There aren’t enough homes to go around, especially those that are remotely affordable.

Something has to give. 

The consensus is that this something is mortgage rates—they’ll have to come down substantially for the housing market to get back to anything resembling normality. 

What’s the Magic Number?

So, Realtor.com asks, what is the mortgage rate threshold that needs to be crossed for buyers to start buying again? Well, the answer depends on who you ask and when. 

Of the 5,000 U.S. consumers surveyed, 22% would consider a home purchase if rates went below 6%. And for 18% of respondents, a rate of below 7% would be good enough. 

Long-suffering millennials and Gen Z buyers are even more resigned to high rates—47% of respondents in the millennial bracket and 37% in the Gen Z bracket would still take the plunge even if rates topped 8%. Basically, buyers in these categories will buy no matter what—if they just manage to save up enough and can find a home to buy. 

Asking the Right Questions

However, there is an elephant in the room with this ‘‘magic number’’ forecasting: It’s not asking the right question. And because it’s not asking the right question, it’s not precise enough in its choice of respondents. 

First-time buyers, daunted and discouraged as they may be by the new reality of high home prices and high rates, will not give up on their perception of homeownership as a dream worth striving toward. But first-time buyers also hold no power in the current real estate market dynamic. The people who do are existing homeowners who aren’t selling. It’s these people who are worth asking for the ‘‘magic number’’ that may give them enough confidence to move and finally release inventory. 

As it turns out, there is a different survey that talks to the right people. John Burns Research and Consulting surveyed existing homeowners last year and found that ‘‘71% of prospective homebuyers who plan to purchase their next home with a mortgage say they are not willing to accept a mortgage rate above 5.5%.’’

Note that the question isn’t about what existing homeowners could afford (all respondents had household incomes of above $50,000) but about what they are willing to accept. And the majority of them, 62%, believe that ‘‘a historically normal mortgage rate is below 5.5%.’’

This perception is factually inaccurate. According to Freddie Mac records going back to 1971, the long-term average mortgage rate is just under 8%. So, first-time millennial buyers actually have more realistic expectations than existing homeowners. 

That, of course, is because 80% of existing homeowners currently have mortgages with a below 5% rate, and a third are on rates below 3%, according to Zillow. It’s more than understandable that many of them have no desire to sell and lock themselves into the current rates (which were at a 7.9% 30-year average as of this writing).

Will the Market Unfreeze Itself Anytime Soon?

The reality is that we are a long way off from the ‘‘magic number’’ of 5.5% that would theoretically release all the inventory that sellers are holding on to. Of course, some people will sell anyway, for one pressing life reason or another. 

Recent research by the Haas School of Business shows that while a 1% increase in mortgage rates reduces moving rates by 9%, once ‘‘the benefit of refinancing exceeds its cost, moving probabilities become unrelated to’’ mortgage rates. 

All that said, the incentive to move has to be pretty high, e.g., a large salary increase. And even then, low mortgage rates often trump wage increases: People tend to stay put if their current fixed rate is low enough.

So, what could truly unfreeze the housing market? One solution could be more portable mortgage products, where a mortgage can be transferred to a new property with the existing rate. Another solution could involve making typical fixed mortgage terms shorter like they are in many other countries. Otherwise, we may see a deeper, longer-term freeze: a 25% decline in existing homeowners moving by 2033, according to the Haas study.

Make Easier and Smarter Financing Decisions

Deciding how to finance a property is one of the biggest pain points for real estate investors like you. The wrong decision may ruin your deal.

Download our What Mortgage is Best for Me worksheet to learn how different mortgage rates impact your deal and discover which loan products make the most sense for your unique position.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

Carly Tripp, Nuveen Real Estate Head of Investments, joins ‘Closing Bell Overtime’ to talk pending home sales dropping in January.

Dave:
Hello everyone and welcome to the BiggerPockets Podcast. I’m your host Dave Meyer, and my friend Henry Washington is here with me today. Henry, good to see you.

Henry:
You as well my friend. Glad to be here.

Dave:
Do you invest in multifamily?

Henry:
I guess the technical answer to that is yes, I invest in small multifamily, so my largest multifamily unit, I have two or three different eight-unit buildings, but I don’t have a building above eight units.

Dave:
But that’s technically multifamily. And just for everyone listening, the traditional cutoff is at four units, and that might sound really arbitrary, but it’s actually not. It comes from lending. Anything that is four units or fewer is considered residential property, and so you can get a traditional mortgage on those types of properties. Anything five or above, usually, you’re going to have to get a commercial loan. So, that’s why we make that designation. And today, we’re actually going to be talking about the big ones. We’re going to be talking about five plus properties and what’s going on with rent there because the commercial market with these bigger properties and the residential market actually perform really differently. Oftentimes, one market’s doing well, the other one’s not. And that’s kind of what we’re seeing right now. The residential market is doing its thing, it’s chugging along, but multifamily, there are a lot more question marks right now about what’s happening and what’s going to happen in the near future. So, we are going to bring on an expert to talk about this.

Henry:
Today’s episode we’re going to be talking to Kim Betancourt, who is the vice president of Multifamily Economics and Strategic Research at Fannie Mae. And she’s going to go over the ins and outs of this asset class and talk to us about what she sees in terms of rent growth, in terms of vacancy, and many other factors that could play into how multifamily is going to do over the next several years.

Dave:
All right. Well said. With that, let’s bring on Kim Betancourt, vice president of Multifamily Economics and Strategic Research, that is a cool title, at Fannie Mae.
Kim, welcome to the show. Thanks for joining us. We are going to jump right into sort of the macro level situation going on in multifamily. Where are we with rents as we’re recording this at the end of February 2024?

Kim:
So, it’s a little too early yet to get rent data for January, and clearly, for February. But where we were at the end of the year, at the end of 2023 was that on a national level we had seen negative rent growth. So, rents were estimating declined by maybe 66 basis points, ending the year at just under 1% year-over-year rent growth. And so what does that mean? Well, normally rent growth tends to be between 2% and 3% on an annual basis. As you can guess, it usually tends to track inflation, sometimes slightly above, maybe slightly below, but somewhere in that range.
So, as you can tell last year, even though inflation was up, we definitely saw that decline in rents. Again, that’s at a national level. It really does depend where you are. I’ve been saying that this is really a tale of two markets. So, in some places there was rent growth and in others, there was negative rent growth. For example, it’s estimated that rent growth was maybe negative by over 3% in Austin just in fourth quarter of last year alone, but was positive in other places like St. Louis and Kansas City and some other places. So, it really does depend where you are. Primarily, it is in markets that seem to have either undersupply, so not enough supply, rent is higher. Oversupplied, a lot of new units coming in online, rent growth has been lower.

Henry:
Do you feel like the slight rent growth decline is due to such a big steep rise in rents after the pandemic? We’re just coming down off that high.

Kim:
It’s partly that. It’s also partly this new supply I’m talking about. So, some of the data that we’ve seen, it shows that, for example, rent growth on new leases has actually been declining. Instead, where the rent bonds have been coming is for people that are renewing their rents. And I believe what that’s due to is that people came in 2021, 2022, they remember getting really sock with rent increases when they changed apartments. And so, what they’ve probably thought is, “Hey, you know what? I’m going to try to stay where I am, even if that’s going to cost me maybe 2% or 3% or 4% of an increase, that’s probably better than what I remember paying.”
Not realizing that actually in a lot of places, especially in a market with a lot of supply, they probably could have not paid as high of a rent increase, but it’s because of that new supply. Again, it depends on what market you’re in. Some markets have seen a lot of supply. We actually estimated that more than 560,000 new units were added last year, which is much higher than we’ve seen last year or the year before 2022, it was about 450,000 new units. And before that, it was under 400,000. So, it’s been definitely increasing.

Dave:
Kim, I’d love to dig into that a little bit. For those of our audience who might not be as familiar with the sort of construction backdrop that’s going on in the multifamily space, can you just give us a little historical context?

Kim:
Yeah, sure. And actually, it’s important to remember the timeline is very different for multifamily new construction versus single family. So, in a lot of times, single family, those properties will go from a hole in the ground to a house that’s built in the matter of a few months. But in multifamily it tends to be a much longer timeline. Now, again, depending what kind of property where you’re located, but on average is anywhere from 18 months to three years, and it’s a little closer to the three years usually. So, that’s a much longer timeline.
So, a lot of these units that are coming online, they were started a long time ago. So, a lot of multifamily builders, they’re having to figure out in the market where they are, when they’re going to be coming online, what are the demand drivers. So, that leads to part of the issue in multifamily where you’ll see that certain markets may get out over their skis in terms of supply, but then what happens is the market self-corrects and you’ll see that just in a few years, a year or two, then that market might actually be undersupplied again. So, it can be more volatile than you’ll see on the single family side. They can sort of turn that on and off a lot more quickly than in the multifamily space.

Dave:
And so, given that timeline, which is super important context for everyone to understand, it sounds like we’re still working our way through this glut of construction that could have started 12, 24 months ago.

Kim:
Right. So, not only are we working through it, but actually there’s still not enough housing, believe it or not, being built to meet the expected demand. Part of the issue is that there’s more than a million units of multifamily rental underway, and that sounds like a lot. But in reality, we still have a housing shortage. The problem is that there’s a lot of new supply in about maybe 20 metros, and within those metros it’s concentrated in a handful of submarkets. So, that’s part of the issue is that it’s not evenly distributed. It’s sort of bunched in these markets where there’s been migration, and job growth, and demographics are very important for multifamily. That’s because the person most likely to rent an apartment is between the ages of 20 and 35.
Lots of people rent apartments, but that’s the majority of folks that rent apartments. And so, when builders are looking at where they’re going to build, they’re looking in metros that have a much younger population. So, for example, Austin has a very large younger population, not only because of the university, but they’ve got tech jobs, it attracts a younger demographic. So, there’s been a lot of building there and especially because they’ve also seen a lot of migration in terms of job growth, especially in the tech sector. And so, that was a market that was terribly big, but over the past few years saw a lot of people coming in, so builders have been really building. So, yeah, so there’s definitely an oversupply and I just want everybody to understand that, yeah, there’s still a lack of affordable housing in a lot of places.
When I talk about oversupply, I’m just talking about when you count up all the units, it’s mostly in this higher end, the more expensive units, but that’s getting built. And of course, I sometimes make the joke, it’s a shame we can’t build the 20-year-old building because that is what tends to be more affordable in a lot of places. But when we’re building new, it does tend to be more expensive and the owners are charging the higher rents. So, you’re absolutely right though about it depends on the market, depends where you are because when we talk about certain markets, we never look at states because a state is big, it’s very different. We’re looking at these different metro areas and they’re not necessarily cities even. They are sort of the metro area because the metro will draw people from a wider radius for jobs and lifestyle, things like that.

Dave:
Kim, thank you for explaining that because something that’s sometimes confuses me and maybe it confuses some other people, is that we hear that there’s this national housing shortage. At the same time, we hear there’s an oversupply. And that sounds contradictory, but when you explain that so much of this is just mismatch, both in terms of class where it’s like they might be really high end properties where what we need is class B or class C properties, and in terms of geography, where we might need housing in the Midwest, but it’s getting built in the Southeast. So, that is super helpful. Thank you.

Kim:
Right, and even in the metro that I’m talking about, it’ll be in a handful of submarkets, so that can also be an issue. Maybe we need it a few miles away, but it’s all being built sort of in the same neighborhood, the same submarket. So, that’s another issue as well.

Henry:
All right, we are getting into the dynamics of supply and affordability, but there’s more to come. After the break, we’ll talk about the demographics of who is renting and why, and what Kim anticipates we’ll see in terms of rent growth over the next few years. Stay with us.

Dave:
Welcome back, everyone. We’re here with Kim Betancourt, vice president of Multifamily Economics and Strategic Research at Fannie Mae. And Kim is taking us through the ins and outs of the multifamily space. So, let’s get back into it.

Henry:
So, what I wanted to ask was most of the new construction is around this A class, and that’s where a lot of the units are getting added, but there has to be some sort of trickle-down effect, meaning that if we’re throwing new A class out there, then that gets oversaturated, then technically what they can ask for rent will be less. How does that impact B and C class in affordability there?

Kim:
No, it’s a really great question, and what that is called filtering. So, as the new stuff comes online, then the older properties that were class A, in theory, now become class A-, B+, B, and the class B becomes class C. And you’re absolutely right, the affordability does move in tandem with. What has disrupted that in the past, when interest rates especially were lower, was a lot of properties were getting purchased as value add. You might’ve heard about that. And so, what would happen is people would buy those properties and they would fix them up and turn them from class B to class A or A-, and class C to class B+, that type of thing. There was quite a lot of that going on. And so that sort of also eroded the amount of class B and C already existing out there.
So, that’s been sort of an issue that we’re trying to sort of catch up with. But now, let’s just talk about our new supply. So, our new supply comes online. We have been moving down a little bit, but because there isn’t enough across the country, when I was talking about that housing shortage, it hasn’t really been enough to move a lot of that supply into the class B and C. On top of that, those rents have also been increasing, so not as high as the class A, but they’ve still been increasing. And actually the delta between class A rents and class B rents has been widening over the past few years. Sometimes we think back to the great recession, and what happened was class A rents fell during the great recession, which was 2009 to 2010, we saw those rents drop. And so, what happened was they dropped enough and the differential between a class A and class B wasn’t so great that some people were actually able to do what we call the great move up.
So, people who been in class B moved up to class A because they could afford it now, same with class C to class B. We’re not having that now because again, that delta between the rent levels of class A and B have really widened out over the past several years due to inflation, higher building costs, the increases in the time to bring properties to market and demand from demographics has really pushed up that differential, especially between class A and B. The other thing that we’ve been seeing is that a lot of folks that would normally be moving into that homeownership, first-time homeowners, that age has gotten older over the past few years. So, now it’s currently at around age 36. But we’ve got a lot of people that are still in that younger cohort as well as gen Zers that they’re in rental now.
Some of those older millennials would like to buy a home, but they’re not necessarily able to buy a home for whatever reason. In many places, there’s not enough supply, interest rates are higher. And a lot of people that have mortgages, especially baby boomers, of which I’m one, we got a really low interest rate when we could refinance a few years ago. So, there’s a big portion of folks out there of homeowners out there that have 4% or 3% or lower mortgage rates, they’re not selling. So, everybody’s kind of like in this holding pattern, but the demographics keep adding people to forming households.
So, especially as we have positive job growth, those people tend to form a new household. So, it’s sort of think about it as sort of bunching up and what’s happening is people are getting stuck in rental longer, and we tend to call some of those renters renters by choice. In other words, they could technically afford to buy a home, but for whatever reason, they are not. And so, instead they’re renting a little longer. And so, that’s also been putting a lot of pressure on supply. Because in the past, a lot of those folks would’ve maybe moved into home-ownership or even renting single family homes, and instead they’re staying in multifamily a little bit longer.

Henry:
Yeah, I mean that makes sense definitely with people who have the lower interest rates, they’re not selling. And it’s interesting to see the average age of someone who rents now going up because more people are now choosing to rent. And so, I would assume that that correlates to vacancy and that vacancy would typically now be a lot lower in these buildings. Is that what you’re seeing across vacancy rates?

Kim:
Well, vacancy rates have inched up because of this new supply. So, as we add that extra supply and it’s taking a while to get people in there, it does push up the vacancy rate. But when you look at the vacancy rate for class B and C, that’s really tight. So, you’re exactly right. That has not been rising nearly as fast as it is for the class A.

Henry:
Okay, so class A vacancy is going up because we just keep adding new supply, but the people in the good old faithful B and C, they’re just locked in, and so you’re seeing lower rates there. Is that what I’m hearing?

Kim:
Yeah, those rates are pretty tight. They’re not moving much, and so that creates a lack of that affordable housing for a lot of folks because people just aren’t moving out if it’s a rent that they can afford.

Dave:
Kim, as we talk about rent trends and what’s going on right now, can we talk a little bit about what you’re expecting for the future? Do you expect this softness of rent to continue as we work through the lag? And how long might this softness continue?

Kim:
Yeah, that’s the million-dollar question everybody asks. Yeah. No, I mean, we are expecting that rank growth will be subdued again. This coming year in 2024. Might improve slightly because we are expecting job growth to be a little bit better than what we had originally been expecting. So, right now we think job growth will be about 1% this year. And we, in the multifamily sector, we tie very much the performance of the sector to job growth. And that’s because, again, a lot of jobs, you start a new job, especially if you’re a young person, you start a job, you tend to form a household when you start that job. Now, it could be with roommates, it doesn’t matter, but you form a household. Then, as the job growth continues, then what might happen is you get a better-paying job and then maybe you don’t live with roommates, you get out on your own.
So, we’re always taking a look at job growth because that forms that household, that first household. Usually a first household people don’t run out and buy a house when they get their first job, they tend to rent. So, we do focus on that. So, that’s been where we expect to see this type of demand. And so, therefore, we’re expecting that rent growth will be a little bit better in 2024 than we did see in 2023, despite the fact that we have a lot of this new supply still coming online. So, that’s the plan, but it’s not great. We’re still thinking 1%, maybe 1.5%, but it’s probably going to be closer to 1% this year, very close to what we saw last year. Now, that said, come 2025, as we start to see that this new supply has been delivered, we’re not adding that much more new supply, then we’ll start to see that rent growth start to pick up.
So, we do expect it to be a little higher in 2025, and then by 2026, it could really start to see some momentum because we’re not putting online all this new supply, and we still have the demographics that I’ve been talking about, the gen Zers, they’re still going to be in that sweet spot of renting that age for rental, and now all of a sudden we don’t have a lot of new supply coming online. So, as that supply that came online last year and this year gets absorbed by 2026 in a lot of places, we could start to really see rents get pushed because there’s not enough supply.

Henry:
Yeah, we’ve talked a lot about the supply and demand and rent growth taking a slight dip, but just because rent growth has come down a little bit, that doesn’t necessarily mean that people can afford the rents of the places that they are. Where are you seeing affordability in terms of these rent declines?

Kim:
Yeah. No, that’s a very good point. And like I was talking about earlier about the class B and C, even though their rent growth has declined, their incomes have not necessarily grown, especially from the rent growth that we saw in 2021. So, we saw that that rent growth really escalated in 2021, and it was still elevated in 2022. And even though wages have increased, we’re still playing catch up, right? Inflation was up and rents were up 10% or higher in a lot of places. I don’t know anybody who got a 10% increase in wages. So, people are still playing catch up. And then remember that we’ve also had inflation. So, it’s not like they’re not just paying more rent, they’re paying more for food and other costs. So, there is still this pressure, especially on that class B and C component, because the wage growth, while positive is not enough to offset the increases we’ve seen over the past few years.

Dave:
But in theory, if rent growth stays where it is, then affordability should come back a little bit given the pace of wage growth right now, right?

Kim:
It should, but again, we’re expecting that because of the supply that we’re probably only going to have another year of this subdued rent growth. And I’m not sure that the wage increases are still going to be enough to offset that increase that we have had in ’21 and ’22. But again, it does depend where you are.

Dave:
Yeah, all this with the caveat that this is regionally variant, but I do think that’s really important for investors to note that they’re just expecting rent growth to slow down for a year. I think everyone’s wondering where valuations and multifamily might go because cap rates are starting to go up, but the one thing that could offset cap rates going up is if rents and NOIs start to increase over the next couple of years. So, I think there’s maybe a bunch of multifamily investors here hoping that you’re correct there, Kim.

Kim:
No, I totally understand that. And I would say most of the data we get from our vendors and lots of other multifamily economists are seeing the same trends. So, we’re actually a little more conservative. I know that some are expecting rent growth to really sort of pop later this year and next year. We’re taking a more conservative view. And it’s because of that tying of demographics, that job growth, and then that household formation. I always think of that as the three legs of the multifamily stool in terms of demand.

Dave:
Got it. And before we get out of here, Kim, is there anything else in your research or team’s work about multifamily, specifically from the investor perspective that you think our audience should know?

Kim:
Yeah. No, if you put on your investor hat, as you were talking about earlier about cap rates and valuations, I would say trading has been very thin when you look at the data. So, price discovery is still sort of… We don’t really have price discovery for multifamily just yet. I do think that if we start to see interest rates come down, that that might spur some of the folks on the sidelines to say, “Okay, at this interest rate, at this cap rate, I can make that work.” But one of the big reasons that I’m not concerned too much about the multifamily sector overall is because of the power of demographics.
We have these people, we have the age group that rents apartments. And so, this is just a timing in terms of new supply and where it’s located. But overall, you cannot deny the power of demographics. And as long as we continue to have positive job growth that leads to those household formations, we’re going to start to need more multifamily supply over the longer term. And that is actually my bigger concern, that we are not going to have that necessary supply, and it’s going to be here sooner than we think.

Dave:
Well, thank you, Kim. We appreciate that long-term perspective. It’s super helpful for those of us who try to invest and make our financial decisions on a longer timeframe. For everyone who wants to learn more about Kim’s amazing research, you should definitely check this out if you’re in multifamily. We will put a link to it in the show notes and the show description below. Kim, thank you so much for joining us. We appreciate your time.

Kim:
Sure. No, it was great. Thank you so much.

Henry:
And if you’re listening to this conversation and wondering what does this mean for me? How should this impact the deals I’m going after? Stick around. Dave and I are about to break that down right after the break.
Welcome back, investors. We just wrapped up a heck of a conversation with multifamily expert Kim Betancourt, and we are about to break down what this means for you.

Dave:
Another big thanks for Kim for joining us today. Before we get out of here, I just wanted to sort of help contextualize and make sense of what we’re talking about here. Hopefully, everyone listening understands that rent growth and vacancies are super important to anyone who’s buying multifamily and holding onto real estate over the long term because that impacts your cashflow and your operations. But what we were talking about at the end was really about multifamily valuations and growth. If you’re familiar with multifamily at all, you know that one of the more popular ways to evaluate the value of a multifamily property is using something called cap rate.
So, the way you do that is you take the net operating income, which is basically all of your income minus your operating expenses, and you divide that by the cap rate, and that gives you your valuation. And the reason this is so important is because the way that NOI grows, one of the two important factors of how you grow the value of multifamily is from rent growth. And so, that is one of the reasons why multifamily was growing so quickly over the last couple of years is because rent growth was exploding and that was pushing up the value of multifamily. Now that it’s slowing down, we’re seeing NOIs flatline. And at the same time we’re seeing cap rate goes up, which not to get into it, that pushes down the valuation of multifamily, which is why a lot of people are talking about multifamily crash and how risky multifamily is right now.
And so, if you sort of zoom out a little bit about what Kim just said, she was basically saying she expects this to continue, that NOIs are probably not going to grow much over the next year, but she thinks after that they might start growing again, which is probably good news for multifamily investors, many of which are trying to weather a difficult storm right now with high interest rates, rising cap rates, stagnating rent. So, just wanted to make sure everyone sort of understands what this means for prices in the multifamily market.

Henry:
It’s also great information for prospective multifamily buyers who are looking to jump into the market and potentially buy some of these B and C class properties that are going to become available, especially with the new A class coming on board. But if you’re going to try to get a bank to underwrite your deal, you’re going to have to forecast, hopefully, long-term and be conservative with that. So, understanding or having an idea of where you think rent growth is going to go, or I should say a more realistic idea of where you think rent growth is going to go, will help you have more conservative underwriting and hopefully keep you out of trouble if you get into a property and it’s not producing the results that you need in a short-term fashion.

Dave:
Very well-said. Well, thank you all so much for listening. We appreciate it. Hopefully, you learn something from this episode. We’re going to be trying to bring on more and more of these experts to help you understand some of the more actionable recent trends going on in the real estate market. So, hopefully, this information from Kim was helpful. Henry Washington, as always, it’s always fun doing shows with you. Thank you for being here. And thank you all again for listening. We’ll see you for another episode of the BiggerPockets Podcast very soon.

There is no right or wrong way to invest in real estate. All that matters is that you’re comfortable with your strategy and positioned to generate a positive return on investment (ROI). However, it never hurts to compare all your options—and that means taking a closer look at short-term vs. long-term real estate investing. 

Short-Term Real Estate Investing

Short-term real estate investing involves buying property to quickly sell or rent for a profit within a short period, typically less than a year.

Types of short-term real estate investments

There’s no shortage of short-term real estate investments to consider, including:

• Fix and flip: This strategy involves purchasing properties in need of repairs, renovating them, and selling them for a profit.
• Vacation rentals: Investors buy properties in popular vacation destinations and rent them out to tourists on a short-term basis.
• Multifamily rentals: Investors purchase apartment buildings or other multiunit properties to rent out the units on short-term leases.

Some of these may work for you, while others don’t. Even so, it’s important to compare the details of each to determine the best path forward.

Pros of short-term investing

Now, let’s examine the benefits of short-term real estate investing:

• Potential for higher returns: Short-term investments can yield a significant profit in a relatively short period, especially with strategies like fix and flip.
• Flexibility: Short-term investing allows investors to adapt and pivot strategies based on market conditions and personal circumstances.
• Market resilience: By capitalizing on immediate market trends and demands, short-term investments can be less affected by long-term market fluctuations.
• Cash flow: Vacation and multifamily rentals can provide steady cash flow through continuous short-term leases.
• Diversification: Investing in short-term real estate can diversify an investment portfolio, reducing overall risk.

Cons of short-term investing

While there are many benefits, there are also some drawbacks: 

• Higher risk: Short-term investments often involve higher risk due to market volatility and potential for unforeseen expenses in projects like fix and flips.
• Increased expenses: Short-term strategies, particularly fix and flips and vacation rentals, may incur higher operational and renovation costs.
• Time commitment: Managing short-term rentals or overseeing renovation projects requires significant time and effort, which can be a drawback for some investors.
• Market dependency: Success in short-term investing can heavily depend on current market conditions, making timing crucial and sometimes unpredictable.

Real estate can be a short-term investment if you know what you’re getting into and have a concrete strategy to guide you. 

Long-Term Real Estate Investing

Many investors find a long-term strategy ideal. This involves purchasing property to hold for an extended period, typically years, to benefit from rental income, appreciation, and tax advantages.

Types of long-term real estate investments

Here are three of the most common types of long-term real estate investments:

• Buy and hold: This strategy involves purchasing properties to rent out over a long period, benefiting from steady rental income and property appreciation.
• Commercial real estate: Investors buy commercial properties, such as office buildings, retail spaces, or warehouses, to lease to businesses over the long term.
• Residential rentals: Investors purchase single-family homes or multifamily units to rent out to tenants, aiming for long-term income and property value appreciation.

Pros of long-term investing

There are many benefits of taking a long-term approach to real estate investing:

• Stable cash flow: Long-term real estate investments can provide a consistent, predictable cash flow through rental income, offering financial stability.
• Appreciation potential: Over time, real estate values tend to increase, allowing investors to benefit from property appreciation when they decide to sell.
• Tax advantages: Owning property for the long haul offers various tax benefits, including deductions for mortgage interest, property taxes, and depreciation.
• Inflation hedge: Real estate investments can serve as a hedge against inflation, as rental rates and property values tend to rise with inflation.
• Leverage opportunities: Long-term investing allows investors to leverage their capital, using mortgage financing to acquire properties and increase potential returns.

Cons of long-term investing

There are several potential drawbacks of long-term real estate investing:

• Capital intensive: Long-term real estate investing often requires significant upfront capital investment for property purchase and maintenance.
• Liquidity issues: Real estate is not a liquid asset, making it challenging to quickly convert properties into cash without potentially selling at a loss.
• Management responsibilities: Owning rental properties comes with ongoing management responsibilities, including tenant relations and property upkeep.
• Market risk: Long-term investors are exposed to market fluctuations that can affect property values and rental incomes over time.
• Regulatory and tax changes: Investors may face challenges such as changes in local regulations or tax laws.

Comparing these pros and cons of long-term real estate investing will help you decide which option is best. 

Choosing Which Is Right for You

There’s no rule saying you can’t be involved with both short- and long-term real estate investing. However, it’s typically best to focus on and master one type before moving on.

Key factors to consider

Here are the most important factors to consider when choosing between short- and long-term real estate investing:

• Market and timing: The choice between short- and long-term investing depends on current market conditions and timing; short-term strategies might favor rapidly appreciating markets, while long-term investments benefit from stable growth over time.
• Investment goal: Personal investment goals and the time required to reach these goals should come into play.
• Risk tolerance: Risk tolerance is critical in deciding between short- and long-term real estate investing, as the former involves higher risks and potential for rapid returns, whereas the latter offers more stability and lower risk over the long run.
• Financial circumstances: Your financial capacity and access to capital greatly influence your investment strategy.

These factors are likely to move to the forefront when making a decision, but also take into consideration any detail that could impact your personal life and finances. 

Final Thoughts

There’s a lot to think about as you compare short-term versus long-term real estate investing. Use all the information available to make a decision that puts you in a position to succeed.

Find an Agent in Minutes

Match with an investor-friendly agent who can help you find, analyze, and close your next deal.