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Mark Twain once said that history doesn't repeat itself, but it often rhymes. This idea is really relevant in the world of real estate investment, especially when we look at the multifamily sector. This area has shown a lot of strength and potential for making money, but it's also had its fair share of ups and downs. By taking a closer look at what's happened in the multifamily market recently, we can pick up some valuable tips about investing wisely and the risks of not paying attention to the basics.
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The Growing Popularity of Multifamily Investments
After the financial crisis in 2008, a lot of investors saw multifamily properties as a safe bet during uncertain times. Thanks to really low interest rates, it was easier and more appealing to borrow money, which led to some strong profits. The JOBS Act of 2012 also made it easier for more people to get into investing by allowing crowdfunding, which brought even more money into the sector.
People were drawn to multifamily investments not just because of the low borrowing costs but also because they believed these investments would hold up well, even if the economy went south. The thinking was simple: people always need a place to live, no matter what's happening in the economy. This belief, along with a surge of eager investors, created a very active and optimistic market.
Source: Moody's Analytics CRE
The Risks of Getting Too Excited in the Multifamily Market
As the market got hotter, investors started chasing properties they could improve or manage better to increase cash flow. This rush brought a lot of new players eager to get a piece of the action. But sometimes, their excitement made them overlook the balance between risk and reward.
Then COVID-19 hit, shaking things up by increasing the demand for bigger living spaces and leading to some unprecedented economic policies. With rents going up and interest rates staying low, some investors got a bit too bold, banking on the idea that rents would keep rising and financing would always be cheap. This kind of thinking ignored some basic market truths and set the stage for potential trouble.
Interest Rates Jump and a Return to the Basics
When the Federal Reserve started raising interest rates in 2022, it signaled the end of easy money and made investors rethink their strategies. This wake-up call highlighted the need to stick to smart investing basics. With interest rates climbing quickly, investors are feeling the pinch on their returns, especially in the short term. Now, more than ever, it's crucial to be realistic about what you can earn, focus on the real value of your investments, and not get carried away with overly optimistic predictions. Being conservative remains paramount.
Understanding Real Estate Cycles
To get why all this is happening, it's helpful to know about real estate cycles, which usually go through four phases: recovery, expansion, hyper supply, and recession. During recovery, the market starts to pick up after a downturn. In expansion, things are booming, and there's a lot of building and buying. Hyper supply happens when there's too much real estate available, leading to a drop in prices. Finally, recession is when the market slows down, prices fall, and it's tougher to make money.
Source: Mueller, Real Estate Finance, 2016
Understanding these cycles is important because seasoned investors know how to keep their cool and work through the pros and cons of each cycle. For now, while prices are down and experiencing a correction from than the grossly inflated prices we experienced in 2021 and early 2022, there’s an important signal to catch. If you’ve ever heard the saying “you make money when you buy”, it’s this exact time in the cycle when this statement rings true. It’s time to buy.
Lessons and Moving Forward
The recent ups and downs in the multifamily market are a clear example of the real estate industry's cycles. They remind us that ignoring solid investment principles can lead to trouble. As the market keeps changing, the lesson is clear: successful investing is about being smart, understanding the market's natural rhythms, and being ready for change. By sticking to these basics, investors can navigate through uncertain times and keep the multifamily sector strong and profitable in the long run.
As always, Be Bold, Be great, and Keep Pushing Forward!
P.S. If one of your priorities, like mine, is building and preserving your wealth through multifamily real estate investments, click here to download my new eBook: The Ultimate Guide to Creating & Preserving Your Wealth.
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About Ellie Perlman
Ellie Perlman is the founder of Blue Lake Capital, a commercial real estate investment firm specializing in multifamily investing throughout the United States. At Blue Lake Capital, Ellie partners with both institutional and individual investors to grow their wealth by achieving double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.
A defining factor of Blue Lake Capital’s strategy is founded in utilizing machine learning/artificial intelligence throughout the course of all acquisitions and asset management. This advanced technology enables the company to produce accurate and data-driven forecasting for all assets on a market, property, and even tenant basis. In doing so, Blue Lake is able to lead commercial investments with the full capabilities of today’s technology.
Ellie is the founding host of REady2Scale, a podcast that highlights the assets, processes, and strategies for the multiple approaches to successful real estate investing.
She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.
Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.
You can read more about Blue Lake Capital and Ellie Perlman at www.bluelake-capital.com.
*The content provided on this website, including all downloadable resources, is for informational purposes only and should not be interpreted as financial advice. Furthermore, this material does not constitute an offer to sell or a solicitation of an offer to buy any securities.