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Pros & Cons of investing in multifamily during an inflationary period

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

Sperry Commercial Global Affiliates Highlights our multifamily listings.


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