Now is the time to start paying attention to multifamily properties when it comes to real estate investing. Why? Many multifamily properties will start hitting the market at discounted prices. This is because the short-term debt utilized in 2020 is starting to run out. And the projections used when buying these properties are not keeping up with today’s calculations.
Setting the Scene — 2020
In 2020, debt was cheap to borrow because interest rates were at historic lows. The prevailing theory was, “Every multifamily deal is somehow a value add.” Buyers believed that rent increases could justify lower cap rates and higher values. This assumption led many to justify inflated prices with the promise of future rent hikes.
However, most who bought multifamily real estate in 2020 did not meet their proforma projections because these projections were unrealistic. A key point to understand here is that small changes in cap rates have a significant impact on property values. And this is precisely what we are seeing today.
The Debt Dilemma
The short-term loans taken out for these multifamily properties are now reaching the end of their terms. These properties need to be refinanced. But today’s higher cap rates mean lower property values, and many owners do not have the equity they thought they had.
This situation is causing a clear discrepancy between the cap rates anticipated in 2020 and those that are playing out now. We are currently witnessing a cap rate reset, and during such resets, equity can be wiped out.
A Look at the Numbers
The Multifamily Price Index reveals a significant trend: Most multifamily properties were bought with short-term debt under the assumption that increasing rents would justify low cap rates. That assumption has failed to materialize, forcing some owners into the market to sell if they can’t find favorable refinancing terms. And, in many cases, they can’t.
In the world of single-family residential, the National Home Price Index tells a different story. The cheap debt of 2020 led to a price increase, with real estate investors picking up as many properties as they could. Into 2022 and 2023, there was a slight dip due to the hangover from cheap debt. From 2023 to now, a supply shortage has kept prices propped up, with long-term loans locking in this debt and reducing the pressure to sell.
Multifamily distress rates add to the narrative that multifamily properties have struggled to make payments. Between early 2023 and mid-2024, distressed rates more than doubled from 3% to 7%. The big question is whether this trend will continue. Some lenders may choose to kick the can down the road by offering loan modifications instead of foreclosing. But it’s safe to assume that many will not.
Is Multifamily Catching a Falling Knife?
A few years ago, it was hard to imagine multifamily properties going for less than asking. Now, values are starting to come down. Sellers are seeing a 20%-25% decrease in value from just a few years ago.
Today, cap rates are at a much more normal or realistic level. This adjustment makes multifamily properties more attractive for investors. With single-family residence (SFR) prices staying high, multifamily properties are now discounted in comparison.
The tricky part of investing in an asset class still in decline is the risk of further losses. However, the current dynamics in the multifamily sector suggest that the decline may be leveling off, presenting a window of opportunity. Investors should study the market trends and risks so as to be ready to capitalize on these potential bargains.
Now Is the Time to Buy
For the real estate investor with a long-term vision, the current market conditions present interesting opportunities. Multifamily properties, with their adjusted cap rates and decreased values, offer the potential for substantial returns. Investors should keep this corner of the housing market on their radar because, by many metrics, it is an advantageous time to enter the multifamily sector.
Moreover, the market shift is creating a buyer’s advantage. With more properties expected to hit the market due to expiring loans and higher refinancing costs, investors can find attractive deals that were previously out of reach. The key is to act decisively and leverage these market conditions to build a healthy investment portfolio.
The current housing trends highlight the importance of seizing current opportunities while learning from the past. Investors shouldn’t balk at how low rates and unrealistic projections led to today’s market conditions. By studying these lessons, they can make more informed decisions.
No one wants to be the investor forced to offload properties at an inopportune time.
The transition from low to higher interest rates has been reshaping the investment landscape for a while. While higher rates typically lead to higher borrowing costs, they also bring about opportunities for investors with capital to deploy.
Multifamily properties have historically been a stable investment, providing consistent rental income and potential appreciation. By focusing on properties with solid fundamentals, in areas with strong rental demand, investors can position themselves for long-term success. Investors who are prepared to act, armed with the right knowledge and resources, can find substantial value in multifamily properties.
Partner with Dominion Financial
Partnering with experienced financial services like Dominion Financial can provide the necessary support and resources to make the most of this multifamily real estate market.
Dominion Financial Services has several loan products designed to help investors. These include multifamily bridge loans that close in as little as seven days without requiring an appraisal. We also offer long-term DSCR rental loans based on property cash flow rather than personal income.
With competitive rates, a price-beat guarantee, and nationwide availability, Dominion Financial ensures you have the best financing options to maximize your investment returns. Reach out to our team and speak to a loan officer who will help you explore your borrowing options and get you a quote within 24 hours.
