Tuesday, December 13, 2022

Why Multifamilies Will Be The Best Investment On The Planet in 2023

Apartment Building Art as if by Thams Kincade
Did I "make it" if I used DiffusionBee to render the image?

As a real estate entrepreneur, I've purchased 11 properties: some multifamily rentals, a couple of single-family homes, a storage facility, warehouses, and land.

I started in 2009 and could not have timed the market better. And we accelerated our growth by finding poor-condition properties and improving them (known as a value-add deal). And after purchasing $4 million worth of real estate as a solopreneur, I'm transitioning our business model because of three major trends.

Economic Headwinds

We are in uncertain economic times (duh). The efforts of central planning to counteract free market trends are no longer enough to keep the boom going, and now our government's focus is on minimizing the crash.

Despite those efforts, experts I follow - Robert KiyosakiHarry DentPeter SchiffGeorge Gammon, and Michael Burry (and others) - all think housing prices will drop significantly. Even as much as 50% in 2023! My experience has been they usually get the magnitudes right, but the transition takes longer because of central planning offsets.

Looking at housing price drivers - income, inflation, mortgage rates, yield curves, T & bond markets, demographics, and unemployment - they point to a highly volatile real estate market in the next few years.

In general, when housing suffers, this increases the demand for rentals. Plus, larger rentals are valued differently than single-family homes (multifamilies are basically a mini-business and valued as such), so their values tend not to drop as much as long as rents don't fall. (1)

Also, volatility creates opportunities.

Housing Demand

The demand for smaller housing is driven by a few factors:

  1. People are having fewer kids and having them later in life, so they don't need as much space.
  2. People are choosing to spend their income on clothes, food, and experiences.
  3. We are now an "asset light" generation, where everything is becoming a subscription. We no longer need to buy and store DVDs, books, or cars - we can, and increasingly do, rent them.
  4. The minimum construction cost per square foot has increased because of increased code requirements and building costs. This pushes builders and flippers upmarket - a principle described in The Innovator's Dilemma. The logic goes like this: "Doing the minimum work is already expensive, so we might as well install the highest quality possible to earn the highest margins." This makes new and recently remodeled homes less affordable.
  5. Plus, in my opinion, tiny homes are awesome! :)

I see this anecdotally with my rentals. My studios and 1-bedrooms rent significantly faster than my 2 or 3-bedroom places.

Technology Automation

The real estate industry is notorious for slowly adopting technological changes. In 2005, being a DIY landlord became much easier because of Youtube. Suddenly, I could watch someone do a repair, and I felt empowered to tackle it myself.

Docusign started in 2003, but it wasn't until 2013 that agents began using it. Also, in 2013, online rent payments became much more straightforward - and free! - with sites like Cozy (now owned by CoStar Group), but that also took a few years to gain traction.

2020 normalized doing everything online. Now I don't meet tenants face-to-face until I hand them their keys (and I only meet my storage tenants if there's a problem).

And today, those simple online payment websites are complete management suites. Not only do they handle all tenant interactions, but they also help passive investors track their investments. These platforms focused on automating and standardizing routine tasks. Today, many of them are starting to leverage AI models to aid decision-making (like predicting maintenance needs). What used to require a small team can be done by a single part-time person leveraged by technology.

What It Means

Inflation, and central planning efforts to control it, will put downward pressure on real estate prices. Again, we'll likely see significant drops in real estate prices (not every market, but many) and even more falls in the stock market. This will probably ruin millions of baby boomers' retirement plans.

But it won't last forever.

Eventually, Fed Chairman Jerome Powell will win his war on inflation, and as we're starting to see, rates will come back down. It won't happen immediately, given the other economic issues, but it will help housing prices rise again. And they'll be at higher inflation-adjusted prices.

Meanwhile, demand for apartments continues to grow, which raises rents. Plus, inflation raises rents. Meanwhile, the cost of managing real estate assets continues to fall. Maintenance and utility costs are increasing, but the overall net effect on the net operating income (NOI) is higher margins.

The value of a multifamily property is determined by a multiplier of the net operating income (NOI). (2) And interest rates are starting to push the multiplier down. So, despite the increasing NOI (which would increase the value of a property), property values are staying the same and starting to decrease.

Large multifamily price drops likely won't be anywhere near 50%, but they will create an exciting buying opportunity over the next few years.

Multifamily Syndication

Instead of buying properties using only our funds, we're opening up our business for other investors to partner with us. By pooling our resources, we can purchase apartment buildings that would be difficult or impossible to buy on our own.

We, the General Partners, will organize the syndication: find the property, secure financing, and manage the property. Others, the Limited Partners, will provide the cash and receive an equity share along with cash flow distributions and profits in return for their investment.

I believe multifamilies are the best investment on the planet because of their consistent above-average returns (10%+), extraordinary tax benefits, inflation hedge, and creative financing. And it's providing something that everyone needs: housing.

So we're excited to open up multifamily investing to people who don't have the time or knowledge to pursue it on their own. We already have a few people interested in joining us, and we're open to more. It'll be a win for us, investors looking to diversify from the stock market, residents looking for a nice place to live, and communities with quality, safe housing.

We've revamped our website as well: https://furlo.com.

I don't have a place under contract yet, but over the next year, you'll hear more about what we're up to (read: you'll see more activity on social media). I'll also be sharing updates and insights via email.

One interesting wrinkle of syndications is that they use private securities. According to the SEC's Rule 506(b), we must have a prior relationship before inviting someone to invest in a specific property. So, if you're even a little interested, let's chat. I can show an example deal and share more about our investment philosophy. We can also talk about your goals. Then, when we get a property under contract, you can decide if you want to participate.

It's an exciting time!


(1) There's more nuance, of course, but that's a longer conversation, which I love having! Ping me. :)

(2) Technically, it's divided by a percent, called the Capitalization Rate, but I find it easier to think in terms of a multiplier, like the PE-Ratio with stocks.

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