The COVID-19 pandemic has caused an impact on people’s finances around the world. Many people may think it may not be the best time to invest in multifamily during a pandemic. But they have it wrong.
If you are financially stable and have a decent amount of savings, you can still increase your revenue, even during a pandemic.
MREX’s CEO Nikolaï Ray explains that investing in multifamily during, after a pandemic or even through a recession is good as the one key thing about multifamily properties is that everyone has to live somewhere.
Is 2021 the year to invest in multifamily real estate? There are a few people who have taken this opportunity. Here are the reasons investing in multifamily properties, despite these uncertain times, can be one of the smartest investment decisions you can make.
Compared to single-family investing, multifamily rental properties avoid big value swings and produce better cash flow. It can also offer you an element of diversification to your rental income. Plus, multifamily has proven through data to be a great hedge through tough times.
“It is affected but not as affected as other types of investments. It’s a very stable investment,” says Ray.
If you are looking to invest your money somewhere, invest it somewhere that is safe. The value of properties, whether it is a condominium, land or housing development units, will remain constant. Properties are tangible assets, especially multifamily. Although market conditions can swing, demand for multifamily properties will be stable, even during a pandemic.
“Multifamily property investment could be like say owning grocery stores,” explains Ray. “The last thing that will fall, let’s say in an extreme situation like an alien invasion or if society falls apart, would essentially be apartment buildings and grocery stores.”
Another reason multifamily is a stable asset is that you are usually locked in for long-term interest rates or long-term loans.
For example, let’s say you just bought a property, and you have locked in a three per cent and a half loan for 10 years. If inflation hits us, like many people think it will, inflation is usually countered by higher interest rates. Thus, if interest rates go up, let’s say to six per cent, that does not affect you negatively if you locked in a 10-year loan at three and a half per cent – in fact, it makes your property even more attractive through interest-rate mismatch arbitrage. It makes your property and your investment more valuable because you have a three and a half per cent interest rate for the next 10 years.
It’s what we call a mismatch and in this case, this is a helpful mismatch in your favour. Plus, if there’s inflation, rents are usually going to increase, so your bottom line will possibly increase but your cost of debt which is mostly your biggest cost is not increasing.
“Essentially you have more cash flow,” explains Ray. “If interest rates are rising, people are going to have trouble buying properties, buying houses.”
Therefore, there will be more people renting. If more people are renting and there are higher interest rates, fewer properties are being built so there’s pressure on demand because there just is not enough supply.
Better Cash Flow
Multifamily properties generate monthly cash flow, and this is one reason it is popular among investors.
As an investor, you want cash flow. Thus, if your investment does not give you that if there is a lack of cash flow, this is an issue. Multifamily real estate is strong for cash flow.
During a pandemic, people rarely think about moving out. With all the social interactions posing a potential threat, people prefer to spend as much time as possible in their homes. This is a plus for investors, as if the property has good tenants, chances are you won’t have to find other tenants. Instead of investing your time in finding tenants, you can invest your time in purchasing a multifamily property that has a positive cash flow.
But the lower the interest rate for the same amount of money you are being lent by your financial institution as an investor, you are also getting more cash flow because your loan costs less.
But sometimes, you can also get a higher loan to buy more expensive properties. However, this has an unpleasant side to it because interest rates are not a driver of values in multifamily but are an influencer. They influence the values and the prices because if everyone has low interest rates, and it’s cheaper to leverage, it becomes more helpful to buy a property.
“That creates more demand and then inflates the prices of the assets which ends up cancelling out the advantage of the low-interest rates,” says Ray.
Lower Interest Rates
To help mitigate the financial impact of the pandemic, markets are shifting and central banks lowered interest rates and applied quantitative easing. The Federal Reserve cut rates to a target of 0.00-0.25 per cent. It is the lowest rate since the financial crisis of 2008 and a low rate can save you a lot of money over the lifetime of the loan. Because the lower interest rates, the cheaper the cost of loans are.
For multifamily investors, low interest rates are beneficial because multifamily is a heavy leverage asset, which is usually leveraged between 55 to 85 per cent loan to value. It means that 55 to 85 per cent of the money used to purchase a property is leverage from a financial institution.
Also, since interest rates are lower—which means lower monthly payments—you will have more revenue each month with lower loan expenses. But you will still have to meet your financial institution requirements to qualify for a real estate or commercial loan.
Discounted Prices on Properties
Many people have been on tight budgets since the start of the pandemic, especially renters. A lot of them have lost their jobs and as a result, they are looking for a good way to come back from this crisis. Well, if you ever thought about investing in multiple properties, now it’s the time.
You may think, why invest in the middle of a pandemic? The answer is simple: some investors and property developers are selling properties for discounted prices.
Whether it is the uncertainty of whether tenants will pay their rents or a reduction in cash flow, some investors think it is best to sell at a discounted price because it is tough for them to afford every property in their portfolio. They will want to sell fast and thus at a lower price.
Rents have gone down in many markets so take advantage of the current situation. After acquiring your multifamily property and bringing up its value, you can raise the rents. As many notable investors have said, when there is blood in the streets it’s time to buy!