Hearing pundits talk about real estate over the last year, you’d think the sky had fallen several times over.
Don’t get me wrong. The real estate sector has seen its share of challenges over the last year. Home prices in some markets have fallen after years of skyrocketing at unsustainable rates. Rapid interest rate increases left many would-be sellers feeling “stuck” in their homes, pinching supply, and left some investors with variable rate loans with thin or even negative cash flow.
But I still invest in real estate, month in and month out. Just as I still invest in stocks month in and month out, regardless of the market’s latest gyration.
The “Meltdown” Already Happened
Trying to time the market is an amateur mistake. I’ll get to why shortly, but even if you disagree, consider that right now might actually be “the perfect time to buy” (not that I believe such things exist mind you).
Paul Moore makes a compelling argument about how “newru” (newbies posing as gurus) syndicators caused the multifamily real estate syndication market to collapse. He argues that inexperienced investors overpaid for properties, overpromised returns, and borrowed variable interest loans assuming that low rates would last forever.
Plenty of that happened, no question. It has forced some distressed owners to sell sooner than planned, perhaps at a loss.
That sounds like opportunity to me.
When I read Paul’s case, I don’t see an argument against investing in multifamily. I walk away with a strong reminder of how important due diligence is.
Invest with experienced syndicators who have seen several different types of real estate markets. Avoid investing with operators who don’t underwrite very, very conservatively.
Interest Rate Risk = Accounted For
By now, we’ve all had a dash of cold water in the face reminding us that interest rates don’t stay near zero forever, even if spend-happy governments wish they would.
Multifamily syndicators—at least the savvy ones—factor in interest rate risk in their underwriting. They take steps such as buying interest rate caps or borrowing fixed-rate loans, taking out longer loan terms, and setting aside larger cash reserves. Many aggressively hunt for assumable seller loans or negotiate seller financing.
Everyone’s been talking about interest rates for over 18 months now. The time to worry about rising interest rates was actually several years ago when so many operators took out variable interest loans with no rate caps. By now, no one’s ignoring that risk anymore.
You should be worrying about the things that no one’s talking about, not the risks on everyone’s minds.
As a final thought, high interest rates aren’t all bad for multifamily investors. They boost the cost of homeownership, causing many would-be homebuyers to continue renting longer than they would have otherwise. Last year, over 60% of renters couldn’t afford to buy a home in the cities where they live—so they keep renting, driving up demand for rental housing.
Fewer Deals, Pickier Syndicators
As rising interest rates have crunched cash flow, multifamily syndicators have found it harder to find good deals.
Many have also found it harder to raise capital, given how some syndications have performed since rates started rising. Underperformance has ranged from discontinuing (or delaying) distributions, issuing capital calls, or even losses.
I’ve spoken with dozens of syndicators over the past six months, and I hear the same refrain again and again: We’re doing fewer deals this year. Raising capital has been harder over the last year. We’ve tightened our underwriting. We’re setting aside larger cash reserves.
Two or three years ago—when syndicators were selling for record profits—was actually not a great time to invest. Today—when everyone’s a more cautious mood after less rosy performances—is actually a better time to invest.
Again, if you believe in trying to time the market, which I don’t.
Timing the Market is a Fool’s Game
Imagine a would-be homebuyer in 2019 who said, “I’m going to wait until the next housing market correction to buy.”
First of all, they’d have sat on the sidelines for four years. But even when the correction hit, nationwide home prices are still around 33% higher than pre-pandemic.
Don’t get clever. Don’t get smug. The best market analysts in the country can’t consistently predict market movements, whether for stocks or real estate. If they can’t do it, you certainly can’t.
Besides, when you try to time the market, your crystal ball needs to be right twice: the lowest possible entry point and the highest possible exit point. You might luck out and get close to that once but don’t expect lightning to strike in your favor twice.
And by the time it becomes clear what’s going on in the market, the tides have already shifted. Despite the gloomy mood among buyers and sellers, analysts such as the National Association of Realtors now believe the market has entered recovery mode. But by reading the prevailing headlines, you wouldn’t think so.
What to Do Instead: Dollar-Cost Averaging
Every week, money transfers automatically from my checking account to my brokerage account. Once there, my robo-advisor invests it automatically to keep my asset allocation where I want it.
Known as “dollar-cost averaging,” it involves investing consistently in the same assets on a regular recurring basis. You end up mirroring the market’s movements, which may not sound very sexy, but over time you come out ahead of all the “clever” people out there trying to time the market.
It’s the main reason why the average investor underperforms the market at large.
I use the same strategy with real estate investments. Every month, I invest in a new real estate syndication deal. While ordinarily, that would take $50-100k each month. This is the precise reason SparkRental launched our Co-Investing Club: to pool funds together to invest smaller amounts in more deals.
Nor are real estate syndications the only option. You can invest in real estate crowdfunding platforms, often in increments as small as $10. For example, I invest small amounts in Groundfloor loans each month.
And, of course, if you have enough cash, you could buy a new rental property each month.
Final Thought: Recession Risk Isn’t All Bad
Often, investors lie awake, biting their fingernails and worrying about what happens if a recession strikes. I don’t.
If a recession struck tomorrow, the Fed would stop raising interest rates. In fact, they’d quickly start cutting rates, which props up real estate markets.
And while home prices do sometimes dip during recessions, rents rarely do. Even in the Great Recession, rents merely flatlined:
The fact that rents have dipped in some markets this year speaks more to rents overshooting market fundamentals after the government interventions during the pandemic. Rents remained largely frozen during the eviction moratorium, even as home prices exploded. When the moratorium lifted, renters flush with stimulus money went out and bid up those rents, which caught up with home prices. Like home prices, rents overshot the mark in some markets and are now correcting.
While falling rents aren’t a serious threat to most real estate investors during recessions, that doesn’t mean recessions pose no risks at all. Vacancy rates often rise during recessions, as do rent defaults. That still eats into your rental cash flow, even as rents hold steady.
By the time all the pundits start talking about a trend, it’s already well underway. All the absurdly high returns that syndicators were earning in 2020-2022 generated a ton of buzz, and investors flocked to syndications. That made it a not-so-ideal time to invest, as some syndicators and investors found the hard way. But you wouldn’t have guessed that from the mood at the time.
Forget trying to time the market. Just invest slowly and steadily, and accept that occasionally the market will turn against you. Over the long term, you’ll come out far ahead of all the “clever” market timers.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.