5 Reasons to Invest in Multifamily Real Estate in 2021
You’re probably wondering about this question.
Is now the right time to invest? Is 2021 the year to invest in multi-family real estate?
After all the uncertainty of 2020, is now the right time?
Here are five reasons to invest in multi-family real estate in 2021.
I’m sure that we can all agree that we don’t want to hear the words “lockdown,” “corona,” and especially the phrase “new normal.” That last one drives me nuts! I’m so done with it.
We had a lot of ups and downs in the stock market. There was a lot of fear. A lot of people didn’t know what was going to happen. This is one of the advantages of multi-family real estate.
CBRE released a study where they looked at multi-family real estate and other commercial real estate assets — retail, industrial, and office. They looked at how those different assets performed during past recessions. (As you know, everything is cyclical in real estate. And so we always look at past performance to indicate potential future performance.)
What they found was that multifamily was the most stable asset class in market downturns. So if I’m looking to invest my money, I want an investment where my money is safe, where it’s stable, where I don’t have those wild drops in the market. And when things do pick up, I want my asset to pick up faster and stronger than the other assets. This is what multifamily real estate does.
Multi-family is an incredibly stable asset. It’s one thing to look at how an asset performs in the good times. But it’s doubly important to look at how an asset performs in the downturns. Because no matter what some pundits say, downturns will happen.
The real estate market is cyclical. What happened before will happen again. So we always look at history to indicate future performance. And multi-family outperforms other commercial real estate asset classes in market downturns.
2. Cash Flow
If you’re a single family home real estate investor — and I’ve had a lot of single family home investors come on my podcast, Real Wealth Through Real Estate — you know that one of the challenges you’re facing right now is the rising prices of residential real estate.
Even though the stock market had its ups and downs, residential real estate prices keep going up. And what does this do to real estate investors? It limits the rental yield of the property. If the property price keeps going up but the rent stays the same or even drops, the yield diminishes.
In other words, you get fewer dollars per value for that property in terms of cash flow. You’re paying more for the property, yet you’re getting less rent for every dollar that you’ve paid. This is a diminishing rental yield — something we real estate investors don’t want.
What we want is strong, positive cash flow. And if you’re in a hot real estate market, cash flow is extremely tight in residential properties — the yield just isn’t there. But in multi-family real estate, the scale works out in our favor. So multi-family is incredibly strong when it comes to cash flow.
One fact of 2020 — the turbulent year that we’ve just had — is that debt got a whole lot cheaper. It’s incredibly cheap to get debt now. This is a plus when you’re investing in real estate. If you are able to get better terms and better rates, this is a good thing. Why?
Here’s why: It improves your cash flow. The freed up cash flow can be used to improve and raise the value of that property, putting even more money in your pocket. So it’s a good thing.
So the positive to come out of 2020 is that debt is so much cheaper now because of all the stimulus going on and the central banks lowering interest rates. This is a great thing for us real estate investors.
So if you’re looking to go out and borrow a large amount of debt to mortgage a property, now is the time to do it because rates are incredibly low.
A couple of years ago, I said rates were ridiculously low. And now in 2021, they are even more ridiculously low — if that’s even the right way to say it. Debt is extremely cheap right now. So go out and take advantage of it and make it work for you.
On the commercial side of multi-family real estate, we value properties using what’s called the income approach. This is different from how we value residential properties which use the comparable approach. This is a huge advantage for us as multi-family real estate investors.
But this is where the discount comes into play. In a lot of markets in 2020, rents actually went down. And because of how we value multi-family real estate, this means that the price of assets has gone down because we use the NOI, the cash flow produced by that property, to value it.
So if rents are going down, the amount of cash flow being produced by the property goes down too, and the value of the asset goes down as well.
So are multi-family properties on sale in 2021? Well, I would argue they are, because rents will always bounce back. It’s only a matter of time before rents do bounce back.
We have a tremendous amount of stimulus going into the economy. We’re going to see a massive recovery in the economy. Rents will go back up, and in turn the cash flow produced by your property and then its valuation, once you are now the owner.
So take advantage of the current situation. Rents have gone down in a whole bunch of markets. Take advantage of that. Acquire multi-family real estate property and then work to bring up the value of the property. Improve the property, raise the rent, and put more money in your pocket.
Make 2021 your year to scale your real estate investing portfolio. I’ve put out so much content (both articles and videos) about the benefits of multi-family real estate — the improved cash flow, the stability, the professional management, how it’s built to raise capital, and all the structuring benefits we have for true passive investing.
So if you’re investing in single-family homes right now, consider scaling up to take advantage of all the benefits multi-family real estate provides. And if you’re a passive investor, take advantage of the strong cash flow, the predictable returns, and the stability in downturns. Because we know another downturn is only a matter of time — it’s inevitable.
The Bottom Line
Let’s go back to the question we asked in the beginning of this article: Is multifamily the real estate asset to buy in 2021? Absolutely! We’ve got the stability, we have the cash flow, we have the financing, and the rates are so incredibly low right now.
Are we buying at a discount in some markets? You are, because rents have gone down. Plus you can take full advantage of the benefits that scaling up to multi-family provides your portfolio.