Apartment investing success is all about managing risk. Having and understanding of real estate cycles helps lower investment risk. Right now, we are in an unpredictable market cycle. However, it is not unmanageable if you know about the trends in the market you are investing in. In this series, I’ll outline a typical multifamily real estate cycle to help determine when is the best time to buy, sell, and bet big.
During this phase, population increases, incomes rise and employment is great. Vacancy rates are decreasing which cause rents to rise due to demand. New construction is being planned and under construction. The market has a green light and is on the move. Expect to see increasing transaction volume and rising prices. This is also the time to sell for maximum profit while the cycle is at its peak. Known as a seller’s market, on market times are short and investors go head to head in bidding wars towards highest and best spends and terms in order to acquire desired assets.
In this phase, most likely you’ll see a lot of new projects on the market due to overbuilding. As well as, vacancy rates will start to increase as the supply out paces demand. Furthermore, employment growth begins to slow down and rental rates get low. Additionally, inflation is up, interest rates are increase and prices begin to level. During this time foreclosures, defaults and loan modifications generally start to surface among owners. The market has gone from a sentiment of excitement and confidence to denial and shock. Only solid opportunities are being considered by buyers as the market gradually starts to turns in their favor.
Multifamily apartments in this phase become more difficult to sell. As a result, properties stay on the market for longer periods of time. Property values decrease, interest rates are high, and owners, landlords and property managers compete for tenants within an increasingly shrinking renters pool. Due to overbuilding, new construction has completely halted and there’s now negative employment and rental rate growth. At this point, broken projects are foreclosed upon and the overall market sentiment is complete panic and depression. However, this is the best time to buy, but also the riskiest. Known as the bottom, this is when fortunes are made and lost. Historically well performing assets can be purchased at a 15% -20% discount or more. Properties in great markets with strong apartment fundamentals are at the lowest price points. Savvy, patient investors with plenty of dry powder cherry pick for quality projects, placing calculated bets on undervalued assets.
In this phase, in comes a breath of fresh, welcomed air. The local and national economy starts to show signs of life. Vacancies start to decrease as rents level off and trickle upward. New construction is still low, but developers see promise and opportunity ahead. Speculation begins again and liquidity begins to flow back into the market. Those who survived the storm are prideful yet relieved. The sentiment is optimistic as employment and rental rates start to hike upward.
The Best of Times
When is the best time to buy or sell? If you are able to recognize the cycles outline in this series your chances of making a sound investment are good. However, I think it also depends on your investment style and profile. Buying in the bottom or middle of the Expansion cycle is smart. You are buying on trend and following the market. If you selling, sell during the peak right at the top of the market, assuming you’re able to call that. To help, in my opinion, a good indicator is to watch rents and vacancy rates separately. Once rents level off and become flat for at least a full quarter or more it’s a strong indicator that the top has been reached. With vacancies, after rates are at a three to five year low, that too is a strong indicator the top is in.
This is for the Mavericks, the Risk Takers, the Trendsetters and Fortune Tellers. These are the investors who follow the advice of Buffet, “buy when others are fearful”. As syndicators and trusted stewards of our investor partner funds we are much too conservative to play in this sandbox. However, investors who do buy at the bottom or at the front end of the Recovery phase and are betting on that market to come back big time. This is where the big money is made and where legendary players like Sam Zell starter. These investors are usually the first to invest in the worst part of town. Their placing big bets they’ll come out on top and with an even bigger win. Knowing what you now know, which phase do you think we are in right now?
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