Multifamily: A Crowded Trade

Multifamily: A Crowded Trade

A crowded trade is when too many dollars are chasing too few goods. Multifamily acquisitions is a full time profession for some and part time past time for others. Recently, both camps seem to be working full time making for a crowded traded in multifamily. But for how long?

Chasing Yield, Finding Yield

When people chase yield, they chase yield any place they can find it. In 2010, junk bond yields hit 20%...for a season. And then the herd moved on to municipals as they "seemed" safer with less volatility.

Think of the recent IPO of Linkedin where some were paying 100 times next year's projected earnings. How can that possibly have any basis in reality?

The story is similar in the multifamily asset class. Multifamily had the best yields of any real estate in the last year. This increased interest and brought in more investors. Cap rates started compressing even as mortgage rates plummeted.

As interest in multifamily increased investors took note of the various means for capturing yield with income property via property owning REIT's, Mortgage REIT's, Private REIT's, partnerships and direct investment.
Often, for the the the retail investor, direct property ownership has too many strings attached. It's much easier to open a quarterly statement and read about the polished happenings at your property rather than contemplate the potential of late night calls about backed up plumbing. I simplify, of course.

The Professional Class

What alternative exist between owing shares of a public company and having direct responsibility for property management? Consider the alternative between these two extremes, that is the professional class. This entails engaging multifamily professionals to manage multifamily properties professionally. Not a new concept, of course.

Keys to Success

For investors able to acquire assets with low leverage this is a viable (and profitable) alternative to passive investment in real estate that may delivering higher yields than more passive investment alternatives. There are two keys to success; professional property management and reasonable leverage.

Direct ownership does not fit for everyone. Here is a simple exercise. For sake of example, prior to placing one million dollars into a real estate fund, compare this to buying a two million dollar multifamily asset with one million cash down payment. The results may surprise you. Granted, the investor is exchanging geographic and property diversity for yield.

The decision point is determining if the differential in yield is wide enough to select direct property ownership versus public investment alternatives. Seek professional counsel.

About This Blog
Multifamily Insight is dedicated to assisting current and future multifamily property owners, operators and investors in executing specific tasks that allow multifamily assets to operate at their highest level of efficiency. We discuss real world issues in multifamily management and acquisitions. This blog is intended to be informational only and does not provide legal, financial or accounting advice. Seek professional counsel. We discuss best practices in multifamily management and methods related to how to buy apartment complexes. Our focus is sharing strategies and tactics that can be implemented and measured. For more information, visit: www.MultifamilyInsight.com
 

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