The multifamily market may be reaching peak - by Maria Hopkins

Maria Hopkins, Maria Hopkins Associates

The multifamily market and by that I mean 2 families all the way up to large apartment complexes has been a favored investment for both small and large investors in recent years and for good reason.  Rents have held stable or are increasing and vacancies are low.  This year was great because the plowing expense was low which helped offset last year’s record high snowfall.  Interest rates have been low so the cost of borrowing money is cheap.  So investors love multifamilies but this has driven prices up to record levels.  The question is whether these prices are sustainable.  If interest rates go up it will affect these values along with everything else.  I think the 2-4 family market is somewhat at risk because a lot of the new investors will soon realize that being a landlord is not as easy as their realtor told them and the rents they thought they could get may not always be obtainable. Some tenants don’t pay once they take occupancy-surprise, surprise.  Expenses always run higher than anticipated and then repairs may be needed that they didn’t anticipate—like a new roof or heating system.  New investors quickly learn that the easy cash flow is not always easy.  There is a shortage of inventory especially in the better neighborhoods and location is key when buying a multifamily.  The quality of tenant is not the same in every area and being a landlord can become very time consuming if you have a lot of turn over and delinquency.  So we will see how long the newest generation of investors stay in and how many will throw their buildings back on the market.  When the market is hot, it is often wise to condominiumize apartment buildings and sell the units.  But this is an exit strategy and sometimes investors just want to keep the monthly cash flow and aren’t ready to pay capital gains on a profit.  Because everything in the multifamily universe seems to be aligned as perfectly as you will get right now,  I think we are approaching the peak of the market.  Time will tell?

Maria Hopkins, SRA,RA, is president of Maria Hopkins Associates, Spencer, Mass.