Top of Mind: Is Multifamily Still a Good Investment? - Aspen Funds
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Top of Mind: Is Multifamily Still a Good Investment?

Multifamily real estate has been an incredible investment for the past decade, but with interest rates rising, many investors are asking if it’s still a good place to invest. In this episode, Bob Fraser and Ben Fraser talk about several macro-trends in multi-family apartments. Tune in as they delve into relevant data from economic outcomes as well as statistics on these properties as they give a thorough understanding of what’s happening within these markets right now!

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Top of Mind: Is Multifamily Still a Good Investment?


Ben Fraser

Today we wanted to talk about multifamily, and this is an asset class we’ve talked on and off about, uh, really for the whole, you know, past year on this podcast.

Um, but we’ve gotten questions recently. Is is multifamily still a good investment? Right. With a lot of the turbulence going on. The, uh, capital markets right now? It’s a great question, and we’ve been, uh, invested in multifamily for, uh, for a while. We’ve looked at a lot of deals recently and have passed a lot of deals for certain reasons.

So we wanted to kind of get into what we’re seeing in the market, where we’re seeing opportunity and just as kind of a macro look at what is the market doing.

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Ben Fraser

Hello, Future Billionaires! Welcome back to the Invest Like a Billionaire podcast. I am your co-host Ben Fraser, joined by fellow co-host Bob Fraser, and today we have another Top of Mind, uh, episode that we want to bring to you. So again, these episodes are meant to be, um, shorter.

Focusing on one or two things that are going on in the market, in the economy, and, uh, things that our investors or listeners are asking us. And we wanted to, you know, talk about these for the benefit of all of our listeners. So before we jump in though, I do wanna let you know if you have not seen it yet, check out our new website for this podcast. At,, and you can, uh, see all the episodes there.

You can leave reviews. You can also what’s, uh, do what’s called, Ask Anything, which is, uh, kind a cool new feature. Wanted to add to this show where we can, uh, have you as listeners reach out to us and share thoughts, ask questions, and, uh, they may even be brought into future episodes. Um, so with. Bob, what are, what are you seeing?

I know you’ve been looking at some of the, uh, kind of macro trends going on in multi-family, but kick us off here.

Bob Fraser

Yeah. We’ve got obviously a lot of turbulence in the market and. Um, you know, so, uh, in the midst of really household formation and lots of demand, so, you know, the, the big, the big tides that we’ve been talking about are still in place, and meaning that the, there’s been a chronic under, under investment in housing since 2007.

Households are being formed and there just is not enough housing supply. So that is still the foundation, but what’s happening is because of this rapid rise in interest rates, while since all these multi-family properties are bought with debt, It’s creating, uh, you know, a big, a big issue, right? With, uh, with profitability.

So it drops profitability of new deals. So anything with fixed debt in place is, is fine. Um, and then you have, so you have this whole debt issue, and then you have the recession issue. So if there’s a recession, you know, is multi-family, is it safe to be in real estate and. And I just still wanna point out in high inflation, the, the, the, one of the, one of the least safe places you can be is cash because you can, you’re guaranteed to be losing 8% per year or 9% per year.

Right. And guaranteed, you know, because of inflation. So cash is not safe, uh, in high inflation. So let’s look at multifamily and let’s first talk, kind of talk about, um, um, Recession. So yeah, it is recession. How does recession affect multi-family? Well, definitely, definitely has an impact.

Um, but multi-family is considered the safest. Of all real estate classes, right? And the reason is because people need a place to live, right? . And so you, you need a place to live. What are you gonna do? It’s like, you know, so businesses, you can go out of business and, you know, so warehouse space can empty up or you can stop shopping.

And so retail dries up. But at the end of the day, it doesn’t matter what’s going on, you still need a place to live with what’s going on with the economy. And so it’s considered the safest and has the lowest cap rates because of that meaning, right, the lowest yields to investors. And, uh, so it’s one of the, it’s considered one of the safest places, and that really doesn’t change.

So today, You know, you’ve got, you’ve, you’ve got a, you need a place to live. You know, you’re just forming your family, you’re getting married, you’re having kids or whatever. Um, you need a place to live. Well, what’s happened is now housing, single family homes or condos are kind of outta reach, right? For a lot of people.

I mean, the affordability is just really, you know, hit the tank. Um, you know, with interest rates rising, simultaneous prices rising. I mean, costs are just out, out of bound. So what’s, what’s, what is people alternative? Well, now you rent and, you know, I’ll, I’ll pull up this chart from, uh, from Marcus Miller chap, which I just, I love, and it really shows the, uh, the, uh, You know, the, that, that, that dynamic and here you see in the top of the blue line is how a home payment, a principal and interest pay, mortgage payment on a home versus the average rents in the United States.

You see, there’s this push me, pull you relationship, so anytime. Housing prices and the mortgage payments go up, well then rents start going up because people, people choose not to do that. And they choose to rent instead. Anytime. Anytime they come together, anytime rents and, and mortgage payments get close, well then people choose to buy a home and so that it begins rising.

So, So there’s this relationship, and right now, you know, you can’t see it on the chart. But, uh, the blue line has gone even further high in the, in the, uh, in the, the gold line there, which is rats, um, is, uh, it has stayed pretty steady. So what’s happening is, Rents are going to be, uh, going to be going up. Um, now I don’t believe they’re gonna continue to go up at the rate that they have.

I mean, there was really extraordinary rises. So, yeah. So demand is gonna be there for, I,

Ben Fraser

I think it’s an interesting point, right? Because in several markets, you know, this is a national look at, at overall rents, um, you know, relative to average home price and home payments, but, You know, the, the misnomer is that well, rents have gone up so much, um, in the past two years in multi-family across the board, and especially in growth markets, that it’s unsustainable and it’s, you know, maybe there’s, um, you know, The landlord’s been pushing too hard, and there’s gonna be kind of this, uh, you know, falling off the cliff here when it kind of catches up.

But looking at this chart, , I mean, it’s, it’s hard to think that that’s, that’s gonna happen. Um, even though rents have gone up quite a bit the past two years, and really the past, you know, 12 months, it’s still substantially cheaper than a mortgage payment.

Bob Fraser

You have to live somewhere.

So what are you gonna do? And, um, So, you know, our view is that rents will continue to rise, but at a much more modest pace. It’s still a great investment. So let’s, let’s talk about the multifamily space. So we’re, we’re quite active in the space and as you mentioned at the top of the show here, where we’ve passed in a lot of deals.

And we’ve actually, actually exactly what we said was gonna happen at the beginning of the year is happening. So it, you know, I, I guess, you know, we got one right? And we got one right. and, and we were talking about the danger of bridge debt. For those that are not, you know, super versed in the market.

What’s happening is, is you know, let’s say the last two years, especially investors realize that within this high rent growth market, you could go buy an old class C property. You know, let’s say an old 1960s vintage or seventies vintage apartment complex. and you go buy it, you go, you go fix it up, rehab it, and it’s flip it and it’s called a value add strategy.

You make a lot of money. And what these guys did primarily is use bridge debt. They didn’t go to to banks, they went to what’s called bridge lenders. And so these bridge lenders, you know, basically offered very sweet terms, um, meaning, and you could, you could leverage as much. 80% of your costs, you only need like 20% equity or even as little as 10% sometimes.

So you could get in with very little cash, but they had variable interest rates. And that’s, that’s the thing. And so that whole market, the whole bridge debt market has completely shifted. And I said it’s gonna be very dangerous. What happens if these, these highly leveraged properties, Let’s say you’re 80 or 90% leveraged, uh, you, you just bought this apartment complex, 80 or 90% leverage, and you’ve got a floating interest rate.

What happens if three years from now when that that note is now due? That interest rate rises and what if now you can’t cover your debt service because you have a little bit of a recession and because if cap rates went, went, went the wrong way, the property isn’t worth what it is. You, you are forced to liquidate.

You, you, you can’t refinance. And, and, you know, and you, you, you, you’re not gonna break even on this property and Right. You see a lot of equity wipe outs and it’s playing out. It’s playing out. So, yeah. You know, you can talk about the bridge debt space a little bit here, but we’re seeing a lot of properties coming on the market, especially the Class Cs and the, you know, And to some degree the bees.

Mm-hmm. coming back. Um, and it’s primarily an age designation, you know, but exactly those, those coming back in the market. Um, and the bridge debt is no longer available. All of a sudden the bridge debt guys have just pretty much disappeared. Um, so talk about what you’re seeing a little bit. Yeah.

Ben Fraser

Well I think this kind of underscores, you know, such an important point in looking for opportunities.

You know, you can have strong macro trend support, um, as multi-family does, and there’s gonna be continued demand. I mean, there’s, there’s no doubt about it, that question going up, but, It’s really important to understand your capital stack, to understand your financing and, and the, the impact.

Bob Fraser

The capital stack just for those is, is basically what does your debt look like and what does your equity look like?

Ben Fraser


Bob Fraser

And how that’s structured makes all the difference whether this is a good deal or a bad deal

Ben Fraser

A couple years ago because of how strong multifamily was and how strong lease growth was. And, um, all these things, lenders, these bridge lenders, Got very aggressive and so they were about 80% loan to cost.

Bob Fraser

All these multi-family flippers. I mean, they came outta nowhere. It’s like I think the number of multi-family flippers went up like tenfold or 20 fold like . Why flip a single family houseman? You could do a multi-family flip and you know, here’s how to get rich quick.

And so all these young entrepreneurs, You know, went out there to go do it and they used bridge debt a hundred percent. Even if now it’s, it’s, you know, Yeah. You know, and we’re actually, we’re actually very optimistic. We think this is good, a good buying opportunity, right? Not good for the investors who, who partnered with these guys.

Uh, but for the, for the more seasoned investors, uh, this is a great opportunity. So, Right. We’re seeing, so here’s, here’s what happened. So people bought, let’s say you, you bought your, you got your bridge debt, bought this multi-family deal. And what happened, We had this great inflation. So anybody who’s in the construction business knows that suddenly over the period, about a nine month period, costs construction costs just ballooned balloons.

So, so you, you, you built your rehab budget. At, at x and you, and all of a sudden when you, you bought this property, put your rehab budget at X and you started building it, you started doing your rehab, your project, all of a sudden it’s X times two, your costs. Yeah. Balloons up. Yep. Well, now, and now you’ve got this bridge debt and, and you’ve got your cost.

It doesn’t make it, it doesn’t make economic sense anymore. And number number two, you’re outta cash. You raised your money from your equity partners. So you’ve got this half finished project you, and you’ve got a bridge, bridge lender. You can’t refinance this. And so we’re seeing actually prices come down and cap rates going up.

So cap rates is basically the yield return of a property and, and when cap rates go up, prices go down. There’s, they’re inversely related. Uh, so, so what’s happening? We’re seeing the Class Cs. A lot of them, The prices are softening dramatically. Yeah. Um, and we’re, but we’re not the same in the class a’s, Right.

Ben Fraser

If you think about, you know, just the term bridge debt, the whole point is that it’s a bridge to permanent financing. Right. And it’s intended for these, these heavier value add projects. Well, I was just having a conversation with a, uh, a national broker and a debt broker who places debt on, um, you know, mostly multifamily properties and been a space for a long time.

He said what they’re seeing, it’s really interesting. A lot of these operators have been hitting the original business plan from a rent growth standpoint, right? Because we all believe in that story. It’s, it’s apparent what’s going on in the, in the growth of rents. And that was what drives in NOI growth, which drives value, right?

But what they’re, what they’re finding is because, um, you know, whether they, they, they kept it at a floating rate. Um, and or the cap rates have gone up to the point where a lot of these properties, they can’t refinance right now. If they refinance, they would actually be in the red. Meaning they would have to write a check to pay off

the reply.

You write a check in, these guys are not gonna do it.

They’re not gonna do it. And so what’s happening in at the same time? The bridge, the bridge lenders are all of a sudden feeling the pinch, right? They’re like, Oh man, we’ve gotta tighten up the reigns. You know? Uh, bridge debt is, is getting a lot less aggressive.

They also, and I think the bigger problem is they have not enough cash to deploy because they expect a certain level of churn in their portfolio. As these, these shorter term loans pay off and they can redeploy that.

I’m really curious to see what happens over the next, you know, 12 to 24 months because they’re extending right now. And they’re probably willing to do that because hey, you achieve your business plan and et cetera, et cetera. But if interest rates remain high, which, you know, we, we laid out a case, you know, in last episode or two.

While we think they’re gonna stay high, probably through 2023, it’s, it’s gonna put a lot of strain on these properties and a lot of strain on these lenders.

Bob Fraser

Yeah. Yeah. I, I think we’re gonna see a lot of Cs coming. The prices coming down dramatically.

Ben Fraser

And we don’t have a chart here, but if you look at the cap rate compression, Based on a class of, of a asset.

You know, A, B, C? C actually had the biggest compression of all three, whereas actually trading at similar price per units,

Bob Fraser

Meaning the prices spiked higher. Yes. For the Cs. Um, and this is because of this value add strategy and all these, all these young entrepreneurs go enter the space using bridge debt and it’s gonna, so it’s gonna come back down to historical. Historical, right. You know, and actually it’s, you know, honestly, I’m very bullish. All this is a good opportunity for us to look at it, look at getting into Cs at a better price. Especially if you see, you know, the economy does slow down and makes construction costs a little bit more reasonable. Get in for a good price.

I mean, you know, um, then all of a sudden it makes great sense and we can get these, get these properties at a very, you know, discounted price. Yeah. Right. And there’s no such thing as a bad apartment complex, right? There’s only a bad price. And, uh, and uh, so at some price, it all, everything makes sense.

And so Totally, totally. Uh, so good, good opportunities for us, you know, so, so begs the question, you know, is this a good time? You know, or is for, is multifamily still a good investment? And, and, uh, so what we’re seeing, so, and to your point, we’re not seeing cap rates move on the class As, which is very interesting.

So, so class As you know, you know, I, I, I guess we could argue that while in a recession class As may be, may be hit, these class A are more expensive, right? So class As may, may take a hit. So what do you think about that?

Ben Fraser

Yeah. You know, I think it’s, it’s interesting because every recession is different.

You know, if you look at the, the oh eight recession, that was pretty deep and pretty long. Class A definitely was impacted, you know, because, uh, there was high unemployment for a longer period of time. If you look at the, you know, Covid, the most recent recession we had, it was disproportionately affecting the lower end of the workforce, The more blue collar.

Um, you know, retail focused jobs and those that could work from home and, um, you know, more white collar jobs. They were. Kind of not really that impacted. Uh, and if you further break down, you know, class A into luxury, and what I would say is, you know, affordable class A, um, I, I think there’s a pretty big distinction there.

And so one, That’s a good point. Yeah. One, one of the things that mean, we, we kind of see this in the capital markets, uh, inflows. Outflows, as you know, we hit turbulence in a market. Institutional investors, generally there’s a flight to quality, right? Because quality is perceived as less risky, you know? And so as we’re kind of going into, you know, potentially turbulent market here, You know, I, I would make a case that there’s gonna be opportunities in class A.

You know, the returns may not be as high, but you’re gonna have lower maintenance costs. Um, you’re gonna have, uh, you know, much higher margins. And if you do it with smart debt, you can ride it out and then into good growth market, you can ride and expand those margins.

Bob Fraser

So there’s like everything, there’s always niche opportunities.

So one of the things, you know, we just uncovered this incredible deal that we’re gonna be, uh, be, we’re, we’re excited about and it’s uh, it’s got consumable fanny debt. At 3.49%. So literally fixed debt for nine years at 3.49% and it’s assumable. So we’re, we’ll basically assume that debt. Holy smokes. Well, all of a sudden, yeah, this property is just wonderful and it’s, it’s a class A and one of the fastest growing markets in the United States and super demand. So yeah. These are super hard to find, but there’s always good deals, right? There’s always good deals that, that are gonna work. Yeah. So, but, but having the debt like that makes, it, makes it a very, very sweet deal.

Ben Fraser

A hundred percent.

I mean, it’s, it’s, it’s kind of a unicorn deal right now, right? I mean, we’ve seen a lot of, a lot of people talking about trying to go after the fixed rate assumable loans. Um, I mean, it’s, it’s a no brainer, right? If, if interest rates right now, Six and a half percent, 7% on a, on a, um, you know, residential mortgage.

It’s, uh, if you can decrease your interest carry costs and, and you have long term fixed rate horizon, I mean, it’s, it. It’s amazing right now, especially if you can be in a market that’s gonna have top line growth. You just, you, you lock in your, your interest carry costs and you can expand your NOI, um, through the growth.

So we’re seeing a lot of our opportunities there. They’re very hard to find, to your point. Um, because a lot of people want them, uh, Um, but you know, we, we have one that we’re super excited about.

Bob Fraser

So yeah, we’ve got this unicorn that we’re gonna be getting into, but, and we’re gonna be looking for more deals in ’23.

Again, play, play the mega trend, and one of the best times to make money is when you have a well-identified, clear, powerful mega trend, which we have in the housing shortage. But it’s punctuated by counter trend moves, right? So all of a sudden there’s a big sell off because of whatever reason.

Well, that’s perfect. That’s the, that’s your entry point. Those are gifts, you know, when those happen. So, you know, and I, I’ll pull up another chart here from Moody’s Analytics, and this is just recent, and they’re calling for a massive cap rate compression, primarily in apartments.

And you see capits are quite a bit lower for apartments because they’re perceived as a less risky asset class. Yeah. No matter what. And they’re actually calling for continued compression. This is correct. You’re right. But, but there, there you go. You know? Um, you know, we’re, we’re not very excited about office right now.

You know, we’re not very excited about, uh, you know, hospitality, but, uh, some of these, some of these plays are gonna be fantastic.

Ben Fraser

It’s a, a really helpful chart because one of the points that I wanted to kind of make is where, where do we, what’s the strategy? Where are the opportunities in this market?

And I think you have to shift from these shorter term holds that are, you know, Yeah. Doing a quick high IRR. I mean, you’ve, you’ve seen this like these, you know, operators delivering these 30, 40% IRRs because of this massive compression in the market is timed it well, right? And right, and there are short, shorter period holds.

Bob Fraser

Well, because best investment strategy in the world is luck. As I said, , that definitely

Ben Fraser

luck. But, but I, I think that the, the point here is because we’re kind of at this counter move to the longer term trend. It would be important to adopt a longer term mindset. And you’re investing, right? Because if you Exactly, the longer term trend, eventually it’s gonna normalize back to that trend.

And, and they, they’re not gonna keep interest rates high forever. I mean, they, they’ve shown that they will not do that. And maybe they’re longer than we expected. Maybe, you know, it’s gonna create more turbulence and it’s, it’s a, you know, an unknown fact you can’t control. But if you can, you know, lock in your debt.

Right. And if you can be in a, in a market that’s gonna have strong growth, you can ride it out and, and look for those better opportunities. But I think it’s important to have that longer term mindset because to this point, cap rates are still projected to go down right over the next, uh, you know, many, uh, quarters.

And so it’s, it’s very bullish for apartments. But right now, You know, it’s, it’s not a great time to be a seller. So, um, I think that’s one of the, one of the big points that I wanted to bring up

Bob Fraser

So bottom line is it, is, is multifamily still a good investment? The answer is selectively, absolutely.


Ben Fraser

Awesome. Well, if, uh, you guys have thoughts on this, if you have rebuttals, we’d love to hear ’em and they ask anything. And, uh, always, uh, appreciate you listeners, um, uh, listen to this podcast and more to come. We, um, like we said, are uncovering opportunities in these verticals that we’re excited about and, uh, you know, look forward to sharing those.

So if you are interested, enjoying our investor club to be notified of these deals, uh, right when they come out. Um, Please join the investor club. It is on You can join right from that webpage and, uh, be notified of future deals as they come out.

Thank you so much, and tune in next time.


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