Investing in multifamily real estate may reduce the level of risk in your portfolio because the real estate market does not closely follow the overall stock market. In a bear market your stocks often lose value, but your real estate assets may not since the real estate market typically has its own cycle. But behind this generalization, there are a number of finer points that will make a difference in your property investment strategies.
Property Investment Strategies in Changing Economic Cycles
While the stock market does not have a strong effect on the real estate market, inflation affects both markets. Its effect on the stock market is dependent on many variables and can be unpredictable. With the multifamily real estate market, inflation has much clearer effects. The Federal Reserve Board’s decisions to raise or lower the federal funds interest rate have a strong impact on the behavior of both markets, since that rate can impact the entire economy. That rate is generally raised to avert or offset inflation and conversely lowered to promote economic growth.
The moderating effect of increased interest rates on inflation is seen in both multifamily development and acquisitions. Inflation increases the value of real estate; therefore, the value of a project may rise before it is even completed. At the same time, rising interest rates make borrowing to finance construction more expensive, forcing up the cost of the entire project and counteracting the effect of inflation.
If you are looking to refinance your property, you should consider acting as soon as rates begin to rise. If you refinance when rates are falling, you may miss out on the lower, and thus better, rates ahead. But when rates are rising, it becomes more expensive for an investor to refinance. If you have an adjustable rate mortgage, the cost of servicing it will rise as rates move upward, but will also fall as rates drop. Although adjustable rates can move up or down on a month-to-month basis, typically they start much lower than their fixed-rate counterpart. In other cases, you may benefit most from refinancing to a fixed-interest rate, especially if inflation is expected to continue to rise.
Inflation reduces the value of money. If you have a fixed-rate loan, that rate and your payments stay the same while the cost of everything else rises. Rents may rise at least as fast as inflation. If rents rise faster than your (rising) operating costs, this will likely help improve your bottom line. The local housing market, not the national economy, will ultimately have the most decisive influence on rent growth.
In addition, the multifamily sector may see an increase in demand during an economic downturn, as more people are forced into it from single-family housing or as residents delay leaving multifamily housing because of the economic inaccessibility of single-family housing.
Long-Term Holding as a Property Investment Strategy
It’s clear that inflation often has an overall positive, or at least neutral effect on the multifamily real estate market. But remember, that is a generalization. Timing is important to take full advantage of market trends in any market environment. This is a tall order since it requires the investor to act on circumstances that are expected to happen—that is, to guess the future, which is never a foolproof maneuver.
Also, remember that real estate investing has a long time horizon. A multifamily real estate investor can often weather an economic downturn most successfully by staying invested long term as well as having conservative cash reserves at the property. Holding an asset does not mean inactivity. Asset management is a perpetual process and, in a challenging market situation, the need for professional advice is more critical than ever.
At CWS Capital Partners, we are a fully integrated multifamily real estate investment management firm that offers everything from due diligence and multifamily real estate valuation to transaction support and property management. We specialize in assisting our clients with 1031 exchanges, acquisitions, repositioning, and development. We also own and manage luxury multifamily investment communities in major markets around the country and employ a team of experts who can help you hone your investment strategy.
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The information provided here is for your general informational purposes only. It should not be considered a recommendation or personalized advisory advice. CWS has made this third party information available from authors it believes are knowledgeable and reliable resources. However, its accuracy or completeness cannot be guaranteed and sentiment may change due to legal or economic conditions.
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