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Research

Why Now Is the Best Time to Invest in Multi-Family

By CommLoan, Categories CRE News
Is it a good time to invest in multifamily during COVID-19 in 2020.

We know what you’re thinking. How could the middle of a global pandemic possibly be the best time to invest in multi-family real estate?Loan regulations are tightening. Many tenants have lost their jobs, and some multi-family investors are struggling with cash-flow.

But, if you’re financially stable, you can increase your revenue – even during this difficult time.The effects of the pandemic have created a great environment for multi-family investing. Instead of letting COVID-19 harm your portfolio, you can seize this opportunity to make it stronger.

Wondering how the pandemic has created a multi-family investment opportunity? Here are the reasons why now is the best time to invest in multi-family.

Great Property Prices

Many can’t handle the stress, uncertainty, and economic pressure of COVID-19 – including multi-family property owners. The uncertainty of whether tenants will pay has put too much strain on some multi-family property owners. Even with most tenants making their rent payments, some investors still want to get out of multi-family real estate.

Plus, some investors have over-extended themselves before the pandemic. Any reduction in cash-flow makes it hard for these investors to afford every property in their portfolio. To salvage some of their assets, these investors are looking to sell their multi-family property quickly. This desire to sell as fast as possible means property owners are more flexible with sales prices. Selling quickly and getting the most value for a property doesn’t go hand in hand. Instead, distressed property owners have to prioritize closing quickly over value.

While this leaves distressed multi-family property owners in a predicament, this can be a great opportunity for others. For a fraction of the pre-pandemic price, you can snatch up a profitable multi-family property. Not only do you save money on the purchase price. You also increase the earning potential of your portfolio.

With many multi-family investors overwhelmed by COVID-19, you can find cheaper multi-family properties. This abundance of great deals is one reason why now’s the best time to invest in multi-family real estate.

Low Interest Rates

To help mitigate the financial impact of COVID-19, the Fed cut rates to a target of 0.00-0.25%. This is the lowest rate since the financial crisis of 2007-2008. Although interest rates don’t directly parallel with the Fed rates, interest rates for nearly every type of loan have dropped, including commercial real estate loans. For example, conventional bank CRE loans currently have an average interest rate of 3-4%. Before the pandemic, conventional loans had an interest rate of 4-5%.

A lower interest rate has the potential to save you a lot over the lifetime of the loan. Plus, a lower interest rate means lower monthly payments, so you have more revenue each month with lower loan expenses. However, along with decreased interest rates, banks have tightened lending requirements making it harder to qualify for a commercial real estate loan. But, if you have solid finances, you may be able to get a much lower interest rate loan than you would before COVID-19.

Because of lower interest rates on CRE loans that save money on a property both short and long term, right now is a great time to invest in multi-family real estate.

Shortage of Affordable Housing

Multi-family properties are a good investment now because of the shortage of affordable housing. Even before the pandemic, there was only 33% of the needed affordable housing options, resulting in fewer homes in the price range many people can afford.

To make matters worse, COVID-19 has created widespread job losses, and have forced people to use savings intended for a down payment. This means many Americans can no longer purchase houses even if homes were priced low enough. Priced out of homeownership, more people need to rent a place to live, so multi-family units offer a more affordable living option. With more demand for affordable housing than supply, investing in affordable housing is a smart move.

With a multi-family property, you don’t need to invest in a specifically affordable housing property to reap the benefits. Rents are often cheaper than owning a house. So, most multi-family units are affordable when compared with homeownership. Investing in multi-family real estate today is a smart choice because of the chronic lack of affordable housing. Multi-family properties offer a way to satisfy the overwhelming demand – while still being profitable.

Low Tenant Turnover

Investing in multi-family now is also a good idea because of lower tenant turnover compared to other asset types. With every social interaction posing a potentially deadly threat, people are spending as much time as possible in their homes. As their personal germ-free space, many people are wary of letting outsiders into their home.

As such, more people are forgoing moving during the pandemic. It’s easier, cheaper, and safer to stay in their current residence. So, instead of moving out of their apartment when their lease is up, more people are renewing their leases. This is a plus for investors buying an already occupied property. If the property has good tenants, chances are, you won’t have to worry about finding new tenants during the pandemic. Instead, you can purchase a multi-family property that has a positive cash flow from day one.

The pandemic has created a lot of uncertainty – even for multi-family investors. But, investing in a new property with good tenants is a safer choice due to low tenant turnover.

Higher Rent Payment Rate

When compared with other CRE sectors, multi-family properties are collecting rents at a higher rate – making multi-family the best CRE investment today. The pandemic is forcing people to tighten their budgets and eliminate unnecessary expenses – like dining out and clothes purchases. But, one expense people can’t eliminate is housing. Everyone needs a place to live. Whereas offices have seen drastically reduced usage since the start of COVID-19, homes are getting more use than ever.

In May, 93.3% of multi-family tenants paid their rent. This is compared with only 44% of non-multi-family CRE property owners collecting 75% or more of their rent payments. Whereas fewer office/retail/industrial tenants paid rent, multi-family rents were strong even in the middle of a global crisis. Multi-family is the only sector of CRE that’s generating a reliable cash flow for property owners. With so much uncertainty stemming from the pandemic, it makes sense to invest in a stable asset that will continue generating revenue even in tough times.

Wrapping It Up

COVID-19 has changed the way we do everything. From working to socializing to spending money. As such, CRE has been one of the hardest-hit industries during the pandemic – especially hospitality, retail, and office space. Post-pandemic, these sectors may never fully recover. However, multi-family properties have fared considerably better. While cutting costs on non-essential items, most tenants have paid rent during the pandemic. Plus, few tenants want to move during a pandemic – lowering tenant turnover.

As the most resilient CRE sector, multi-family is a great investment choice – even during the pandemic. With more great deals and lower interest rates, you’ll save money and lower monthly costs, while purchasing a reliable revenue-generating asset.