Ep. 005: Multifamily Financing Options in Turbulent Markets
In this episode of On The Move, we sit down with David Schwarz with Newmark to discuss strategies and tips for financing large multifamily assets during uncertain times.
Get in touch:
David Schwarz
David.Schwarz@nmrk.com
Overview:
Multifamily investing can be a smart investment strategy during times of economic turbulence, providing a range of benefits for real estate investors who are looking for a long-term source of passive income.
Resilience to economic downturns: Multifamily properties tend to be more resilient during economic downturns than other types of real estate investments. This is because people always need a place to live, regardless of the state of the economy. As a result, rental income from multifamily properties tends to be more stable than other types of real estate investments, which can help protect investors during turbulent economic times.
Diversification: Multifamily investing provides an opportunity for investors to diversify their portfolio, reducing their exposure to risk. By investing in multiple properties, investors can spread out their investments across different locations, property types, and tenants, which can help to reduce the impact of any one property's vacancy or underperformance.
Tax benefits: Multifamily investing can provide significant tax benefits for investors. For example, investors can take advantage of deductions for property depreciation, property repairs, and property management expenses. These deductions can help to reduce the investor's taxable income, resulting in lower overall tax liability.
Potential for long-term appreciation: Multifamily properties have the potential to appreciate in value over time, especially in growing and thriving metropolitan areas. While short-term economic volatility can cause fluctuations in property values, long-term investments in multifamily properties can generate substantial returns for investors over time.
Passive income: Multifamily investing provides an opportunity for investors to generate passive income through rental payments. This can be an attractive investment strategy for those who are looking to supplement their current income or build a long-term source of passive income.
Increased demand: During times of economic turbulence, there is often an increased demand for rental properties as people may be unable to afford to purchase their own homes. This can lead to increased rental rates and occupancy levels, which can result in higher overall cash flow for investors.
Rising interest rates can have a significant impact on multifamily loans, and it is important for real estate investors to understand the potential risks associated with these changes.
Increased borrowing costs: Rising interest rates can increase the cost of borrowing, resulting in higher interest payments for multifamily property owners. This can reduce cash flow and make it more difficult to generate a profit from the property.
Decreased property values: Rising interest rates can reduce the amount of money that potential buyers are willing to pay for a multifamily property. This can make it more difficult to sell the property or refinance the loan, and may lead to a decrease in property values.
Decreased affordability: Higher interest rates can increase the cost of borrowing, which can make it more difficult for potential renters to afford the monthly rent payments. This may lead to increased vacancies, decreased rental rates, and lower overall cash flow for property owners.
Difficulty in securing financing: Rising interest rates can make it more difficult for property owners to secure financing for their multifamily properties. Lenders may require higher down payments, lower loan-to-value ratios, or stricter underwriting standards in order to compensate for the increased risk associated with higher interest rates.
Higher prepayment penalties: Multifamily loans typically have prepayment penalties that are designed to compensate lenders for the loss of interest income when a borrower pays off the loan early. When interest rates rise, these prepayment penalties can become more expensive, making it more difficult for property owners to refinance or sell their properties.
In order to mitigate these risks, real estate investors may consider implementing strategies such as locking in low interest rates through long-term fixed-rate loans, using interest rate caps to limit the impact of interest rate changes, and conducting thorough market research to ensure that the property's rental rates and occupancy levels can support higher borrowing costs. It is also important to work with experienced professionals, such as real estate agents, attorneys, and lenders, to navigate the complex landscape of multifamily property investing.
In conclusion, multifamily investing can be a smart investment strategy during times of economic turbulence. With its resilience to economic downturns, potential for long-term appreciation, tax benefits, and potential for passive income, multifamily investing can provide a range of benefits for investors who are looking for a long-term source of passive income. As with any investment strategy, it is important to conduct thorough research and work with experienced professionals, such as real estate agents, attorneys, and lenders, to ensure that the investment is structured in a way that is most beneficial for all parties involved.
