Now Is the Time to Consider Investing in Multi-Family Housing

As mentioned in my writings on numerous occasions, a holistic investment portfolio is best. This portfolio should include the ownership and active management of real estate.

For the first quarter of 2009, multi-family sales were so slow as to be almost nonexistent in most areas of the country. Roughly $135b worth of commercial
property changed hands in 2008 - 68% less than 2007 in dollar value. The decrease, which was even more pronounced in the first quarter of 2009 reflects far fewer deals and lower selling prices.

Generally, sellers are waiting and hoping they can weather the storm. Buyers are waiting for rents to drop, sellers to throw in the towel and prices to fall even further. This is the perfect storm for the investor to grab a modest multi-unit property, quite possibly through a bank that does not want to publicly foreclose but needs to dispense with a non-performing asset.

Large apartment complexes are generally the domain of institutional investors of large real estate companies such as Avalon Bay (AVB) and are not really the focus of this post. The sweet spot is the $500g-$5m properties generally owned by a local developer/entrepreneur or consortium's of doctors/lawyers, etc. that may have not been effective property managers, milking the property for rents and not maintaining the premises to continue success. These properties may be in a negative cash flow position with deferred maintenance, having insufficient writeoffs or poor financing which are each, and collectively, reasons to sell.

It is my view, and the view of other professionals in the field that are comfortable in this sector of the real estate market, that deals in the above price range are occurring because properties of this scope and price are viable for individual investors or small investment groups that can pay cash or obtain a loan from a local bank that owns the financing and/or has a good feel for the market. Get to know your local or regional bank's loan officer and real estate portfolio department intimately.

With financing tight, the investor may look for transactions that qualify for specialized loans. Buyers of certain multifamily properties could qualify for funds through the HUD 221(d) program. Business owners may be eligible for a Small Business Administration Loan, which can require as little as 10% down (not suitable for residential rentals, but certainly appropriate for retail, warehouses and office properties).

The individual investor should be aware that banks are a great source for properties close to default (foreclosure) status. Banks do not want bad loans on their books. With short sale regulations and procedures being both standardized and simplified by recent legislation, purchasing these properties is easier and less stressful for both buyer and seller.

Make no mistake, there are many thousands of distressed multi-family properties out there. Sometime, perhaps this summer when the next wave of foreclosures hit home (literally), owners who have overleveraged are going to say, "Let's just get rid of this property", and the market is going to reflect in later months, after the downdraft, equilibrium. Myself and others have found tremendous bargains in real estate for years (There is always a bull market somewhere? I digress.). The time for shedding the notion that stocks and bonds are all you need for investment purposes is at hand through the purchase of income producing real estate at the right price and on the right terms.

Another way to sweeten a deal's bottom line is to proceed to obtain tax credits for providing low-income housing to a percentage of tenants. Although federal funding may be hard to come by, state and private tax credits can be solicited. Added to rents, depreciation and other tax benefits, multi-family real estate speaks in no uncertain terms towards the old adage, "it's not what you earn - it's what you keep."

If you are a novice investor, please seek competent advice from a seasoned investor. My experience is that successful investors in modest multi-family properties are usually more than willing to share their successes and failures with you. I am always learning something about real estate investment (oftentimes from my rent-subsidized tenants - they have their world fine tuned). If you are a good observer, good listener and willing to take your investment portfolio, in part, into your own hands, I bet you will achieve not only excellent profits, but a lifelong interest in not only the brick and mortar part of real restate, but in human nature as well.

Real estate can, and should be, be an investment well lived.

Comments

[Leftfield:]

I was unfortunate enough to buy a low-end 2-family a month before investment real estate lost its tax exemption on mortgage interest, '86. So much for appreciation on such property for a long time.
A distressed property will also likely have nonpaying and worse, tenants, like mine did. Have fun with the eviction process. The damage foreclosed real estate is having is largely because the "owners" were previously lifelong tenants and are used to leaving huge problems for others to clean up.
Most importantly, my water/sewer and tax bills quadrupled and tripled in 18 years, respectively. This is a huge consideration especially now that local/state governments will be grabbing at anything possible to fund their bloated budgets.

May 22 08:46 AM

[PastTense:]

Either you can manage the housing yourself or you can hire someone to manage it for you.

If you manage it yourself you can have a lot of aggravation.

If you hire someone to do it for you your profits disappear.

May 22 10:08 AM

[BerkeleyBob:]

Low cost or subsidized tenants (Section 8) can often cost a small landlord more in grief and damage than it is worth to a small property owner. If you are interested in this kind of investment, long-term and requiring personal involvement, check out the books by John Reed. Extremely helpful and practical advise on every page.

May 22 11:15 AM

[Karen Consumer:]

Only a fool would buy multi-family housing that's been forclosed upon. Based on my knowledge of my city of 200,000, if the owner/management company has let it go, they stopped making repairs at least a decade before and simply don't want to deal with local Code Enforcement officials anymore. They've let the water get turned off more than once, only paying the bill when the local news crew shows up to talk to tenants. The city has threatened to condemn the property unless repairs are made and bills are paid. The owner collects rent and even encourages workers to have tenants sign new leases, then gets their phone disconnected so they don't have to talk to anyone once the property is forclosed on. The bank comes in and either pays through the nose trying to get the property ready for sale or lets the city condemn it. The news crews follow-up talking to tenants who now have 3 days to move to another location, and no money for a new place.

You want substandard housing and got money to burn, go for it. You want a real investment property, hold your cash for a quality property, its less money in the long run.

May 22 04:33 PM

[mlonz:]

As another author wrote, you don't BUY property, you STEAL it. The price you pay makes it a good, bad or mediocre investment, period.

May 22 06:22 PM

[20dollar:]

I have owned Multi Family for over 20 years. Singles, duplexes, Fourplexes, on up to large Apartment buildings. I have made money on every single one of these properties. Some of them caused me way more greif/headaches than others.

Hear is what I have learned. Bottom line. Stick with quality property/location at the right price and you will have quality tenants (again for the right price) and building will practtically run itself. What I like to call Auto pilot.

I will say I sold most of it and traded into Commercial Property. Once you get a taste of a good commercial property, it is very difficult to get excited about Multi Family. However, I have just recently bought a few duplexes in great areas for the right price(I mean REALLY RIGHT or I wouldn't have bought them)

So, is it a good time to buy Multi Family? It depends. In my area, (Northern CA) the deals are on singles, duplexes, and fouplexs-not on the larger complexes YET! I do believe that is about to change...

May 22 11:23 PM

[Vuke:]

As a seasoned real estate investor I can confirm the long term worth of such, even in low income housing if you can abide the beer bottles flying through the windows as you try to collect rent.

I can also confirm you become the fixed target of every local tax grab and financial shyster, particularly in commercial.

I do suggest that, at this time, the surer, easier and rapid road to liquid wealth is in good, undervalued commodity stocks, many of which trade on the TSX. Gold, copper, palladium assets have been sold down in some cases to cash held in the company with no value on the hundreds of millions or even billions in assets.

May 23 09:32 AM

[2houndz:]

The problem I am currently having in my portfolio is the turnover due to non-payment of rent. I'm back to 90%+ occupancy, but due to the time it takes to evict, and the remodel and cleanup costs to make a place tenable just about wiped out my capital reserves. It was really shaky there for a few months, and if the community get hit with more mass layoffs, it could happen again.
Make sure you know what you are doing with this product. You need a loooooooong time horizon, and you need a backup plan in case you get a capital call.

May 23 11:11 AM

[TAS:]

As with stocks and bonds, make sure you chose income producing real estate at the right time and at the right price. And understand your investment.
Nothing beats experience and a good mentor (in advance). If you don't apply yourself to your investment, you will writing against it sounding like a bitter divorcee.
There is a boatload of profits and tax advantages leading to outstanding total returns for those who are prepared to execute upon an opportunity (so call that combination "luck" - I don't).

May 23 05:22 PM