Investing does not stop during inflationary periods. Investors become more cautious and look to take advantage of better deals. It has been a decade since the Great Recession of 2007-2008, when some investors looked away from stocks and bonds and moved into commercial real estate. Since then, multifamily investing has soared due to the ability to manage some of the risk, while still obtaining higher returns.
Richard Caldwell’s article on StackSource is thought-provoking, so I am adding my own thoughts to this same message. I work with clients to determine the benefit of leveraging an investment to obtain a higher ultimate return. During this inflationary period there are several pros and cons to navigate:
Pros:
Commercial property values have historically risen. There may be a period of stabilization, but the expectation is for the value to continue to rise.
Increase tenant demand. With the decrease in people buying homes, they will continue to rent.
Increase rents. With the increase in demand comes an increase in rent.
Development slows. Due to an increase in construction cost AND interest rates developers will move slower.
Cash offers traditionally generate a lower purchase price.
Cons:
Increased interest rates can lead to a lower LTV. More cash in the deal means less risk for the banks.
The price gap between sellers and buyers is greater. Sellers' expectations on the value of their asset have not caught up to buyers' need to utilize leverage.
The affordability gap widens.
Current Playbook Analysis I am working on:
Sell existing $5,600,000 asset
Apply the $3,200,000 cash from proceeds to a down payment
$8,000,000 purchase
NOI - $453,000
1031 the $3,200,000 proceeds for down payment
Utilize Debt at current 5.75% to leverage
Pre-tax cash flow $117,000 year 1
Refinance in 18-24 months (depending upon rates) and assure not pre-payment penalty.
Assuming a 4% interest, in year 2 pre-tax cash flow = $266,753
Net Return on Investment year 5 = $1,726,000
Now it is time to sell and take the $4,926,000 cash and increase passive income
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