Multi-Family Investments and the Impact of Escalating Housing Costs

After the great recession, the annual average inflation rate was often around two to three percent. Such a favorable economic atmosphere saw the multi-family real estate sector thrive as investors could secure funds at incredibly low rates. Even when the pandemic was at its peak, the government cushioned multi-family investors by maintaining low rates or lowering them further. However, now that most stimulus packages are off and inflation is at its highest, the prospect of multi-family investing seems to be a bit trickier.
So why is that? In this post, we look at the impact rising housing costs due to inflation have on the multi-family real estate market and the current opportunities investors can take advantage of in the sector.

What Impact Does The Rising Housing Market Have on Multi-Family Investing?

• Discounted asset prices: multi-family investors are selling their multi-family homes at low rates due to fear that the rising inflation rate could lower prices even further.
• Slow buying cycles: many buyers are having trouble accessing funds because of strict lending rates, meaning closing deals is taking longer
• Indecisive investors with critical underwriting: The uncertainty created by skyrocketing rates in the real estate industry is causing many investors to go one foot into the water and do more due diligence before assuming the risk.
• Lenders are resisting unique scenarios: Many real estate mortgage companies are taking a step back on the “client-first approach.” They are becoming more critical even to unique client scenarios to protect their businesses from risk.
• Cash flow is King: Only investors with enough cash on hand can cover the high cost of real estate purchases. It’s the most convenient now with other funding options becoming more strict.

• Having Net worth and Liquidity suitable for approval of the loan
• Experience owning and managing similar properties
• Meeting the loans credit requirements

Why is the Rising Housing Cost Affecting Multi Family Investment?

First-time Home Buyers are Opting to Continue Renting

Housing Demand Has Become Inelastic

Even before the pandemic, America’s housing supply was short of demand with about 2.5 units. Now that housing prices have increased and purchasing a home is no longer a viable option, the entire demand burden is on multi-family rental units. And with prices rising even higher, demand and supply scale will take a while to balance again.

Increasing Cost of Operations

The cost of construction has increased due to inflation. According to the National Association of Home Builders (NAHB), the average construction cost increased by 26.1% within the last year. At the same time, the demand for construction workers is increasing daily due to the shortage of construction workers in the market. All these factors increase the price of a home to a value that most investors can afford.

Rent Prices are on the Rise

When Navigating the Current Multi-Family Real Estate Market, Do The Following

• Raise cash – cash flow is king during this period. Raise cash to shore up any operational expenses arising due to economic uncertainty, whether in vacancy or collection costs.
• Switching to a fixed interest rate option – holding a variable rate debt is risky with all the adjustments happening. It would be best to switch to a medium or long-term fixed rate to avoid the impact of rate adjustments.
• Review leasing terms – one of the best ways to stay on top of the impact of inflation on multi-family units is to update leasing terms to accommodate a wider range of clients. You can revisit the leasing criteria from the required credit score to debt-income-ratio to ensure your property is full of renters who pay on time.
• Tighten underwriting – it’s clear that the past robust rates won’t be the same going forward. When looking for investment funds, it’s important to consider the current debt standards to know whether you qualify early.
• Be more creative – if you already own a multi-family property that isn’t selling due to the current economic atmosphere, consider renting it out. In this case, you could substitute an upfront security deposit with an added rent fee.

Contact Terrydale Capital for Multi-Family Investment Options!

Multi-family investing is an excellent source of passive income. When done right, it can even fund your retirement needs. However, it takes considerable effort and time to start and succeed even under normal circumstances.
And now that the multi-family property industry is experiencing a slowdown due to a shortage of buyers, it’s more important to know the ins and outs of multi-family investment. At Terrydale Capital, we have the knowledge and connection to help multi-family investors make the right investment choices. Our comprehensive underwriting and connections to industry leaders ensure you find one that suits your needs. Contact Terrydale Capital today and find assurance in your investing endeavors.