There is more to real estate investments that just buying an apartment. While it is absolutely good to plan, it is, however, more important to fully understand what you are getting into so as not to be taken unawares or as some will say – “buried alive in a box.” When it comes to multifamily investments, it is common to find investors attempting to scale up from certain investments like the single-family rentals which are just a common progression, so to say. However, it is increasingly alarming to see how prices paid for apartments are taking a toll on multifamily investment these days.

No such thing as the perfect investment

Before now, most professionals and investors in the industry envisaged an extended, robust investment opportunity in multifamily real estate, which was mainly attributed to the regulatory blunder and demographic trends of the past two decades. But things are quite different now as there seems to be no such thing as the perfect investment. This is simply because it is increasingly becoming difficult to find deals that make financial sense.

Currently, there seems to be an unprecedented rush for multifamily, as virtually everyone is seeking to invest in it. To this effect, prices have skyrocketed everywhere. From the smallest towns to major cities, unparallel pricing on multifamily can be widely experienced. Prices have no doubt being inflated to the extent that sellers are recouping cap rates between the 5 and 6 percent range for properties ranging from duplexes to 200+ units. Even brokers are not spared from the unusual astonishment of having their initial pricing dispelled in the final round of bidding.

To this end, several industry experts are concerned about the current state of things in the sector. Obviously, there is literally no justification as to why investors need to pay these inflated prices which could simply bring no good to the economy but can end up serving as a recipe for future failure.

Don’t pay these inflated prices

In case you are just tuning in, here are some veritable reasons why any concerned real estate investor should desist from paying too much for their multifamily investment.

  • This time is no different: There is simply no reason to pay for properties that are way beyond the market. Several investment gurus like Howard Marks and Warren Buffet didn’t adopt this strategy to become great. Rather, they took advantage of falling prices in 2008 and 2009 to acquire financial assets for themselves. History is always known to repeat itself.
  • Respect your principles: Unarguably, the multifamily is unstoppable. Prices will always go up and down and things will never remain the same forever. However, it is important to understand that no one can come to rescue your marginal deal. So, stop fudging numbers and resetting your principles.
  • Don’t be deceived by good looks: Be wary of any property that an unknown seller is willing to accept much less for. Never think in your heart that you’ve got a great off-market deal.
  • Don’t deceive yourself: it is impossible for a deal bought on-market to provide a total annual return of 18-22 percent and a cash-on-cash return from operations of 9-12 percent.
  • Don’t rely on the influence of international money: be not deceived, your irrationality, 1031 exchanges, and IRAs will not provide you with a ready pool of overpaying buyers.
  • Don’t overlook inflation: there is no need to steadily hold operating costs and believe that rents will rise by 5 percent. Both your operating costs and rent increases can be affected by inflation.
  • You can’t upgrade your property and expect to make an increase in rent without affecting occupancy.
  • Rent won’t continue to climb forever: Despite the economy struggling along, it is important to note that rent increases won’t continue to be on the increase.
  • Don’t think that interest rates will level off soon and then drop back when you plan to refinance your bridge loan.
  • Don’t ignore the marginal cash flow: you can’t make your deal work by banking on a steadily increasing appreciation, as well as a continual compression of cap rates and forgetting the rest.

Take home

Unarguably, there are exceptions to some of the conditions listed above as there are many investors and syndicators who are finding great off-market deals as explained and are making huge returns. What matters most is knowing when to rightly act in the moment.