Investors wondering how they can benefit from the huge wave of foreclosures sweeping the nation should look no further than apartments. The sector presents the best opportunity to finance and profit from potential increases in rent and property valuations.
Multifamily Investment Strategy
As foreclosures rise, people will continue to need places to live. When they cannot own, they must rent. As millions of former homeowners become renters, apartment owners can expect to benefit from decreased vacancies, increasing rents and potential asset appreciation. This asset class is the perfect place to start investing today.
Like all real estate asset classes, apartments experience significant short term declines in value. Overall valuations grew when rents were expected to grow as fast as the economy. As the economy contracted, rents declined because tenants simply could not pay. Additionally, many homeowners begin to rent their homes at lower prices and potential renters doubled up and sought rent stabilized apartments rather than renting their own apartment. As the economy recovers, expect these trends to reverse.
Investors should consider where they want to position themselves. Investors with cash should attempt to buy higher class properties to take advantage of the many consumers that have enough cash to rent, but are wary of owning in a declining market. These properties typically appreciate faster than Class B and C properties and hold their value longer. Investors should also consider rehabilitating Class B and C properties.
Fannie Mae finances apartments. This simple fact keeps the multifamily sector level, while the other commercial real estate sectors decline. Investors can still secure 60-75%+ financing through Fannie Mae at very competitive rates.
It is important to note that Fannie Mae has not been immune to lending issues. Many investors continue to speculate that they will stop lending at some point because of the massive amounts of bad loans they currently have on their books. The government guarantees these bad loans, so at any time they could be given a mandate to stop lending. At that point, investors should be leery of the segment because without financing, smaller investors would have to exit the sector.
Investors interested in this segment should be prepared to manage their properties for at least five years. As the economy recovers and tenants continue to remain fearful of buying primary residence, apartment owners will benefit. Landlords can differentiate themselves by providing a positive, cleaning living space with responsive management. Multifamily tends to be a longer term cash flow investment. As such, name recognition and character directly affect return on investment.