Founder of Apartment Loan Store, a commercial mortgage firm, and author of “The Encyclopedia of Commercial Real Estate Advice” published by Wiley, has over 26 years of experience in the industry. Recently, he advised a client looking to purchase a 22-unit building in Portland, Oregon, who planned to pay a high price and improve the property to increase its value. However, the founder explained that current economic conditions, such as increasing interest rates and flat rents, may not support such a strategy.
The founder believes that the value of multifamily properties has been driven more by price appreciation than by rising net operating income in recent years. As a result, loan amounts and returns on investment have decreased significantly at today’s prices, leading him to believe that multifamily properties are currently overpriced. He highlights the importance of considering the net operating income and market cap rates when evaluating the value of an apartment building, rather than relying solely on price appreciation.
To assist investors looking to enter the multifamily real estate market in 2024, the founder offers four key considerations. He points out that high property prices today are a result of low interest rates in the past, leading to higher borrowing amounts and soaring sales prices. However, with interest rates now above 7% and rents remaining flat, he believes that these high prices are unsustainable, and cash-on-cash returns are low.
Moreover, the founder emphasizes that sales volume in the multifamily market has decreased significantly in recent years, driving prices higher despite weakening demand. Additionally, he notes that current cap rates are lower than interest rates, making it challenging for investors to earn a significant return on their investments. With rent growth expected to be minimal in 2024 and rising vacancies and concessions, the founder suggests that today’s multifamily prices may not be supported by the data.
In conclusion, the founder advises caution for investors in the multifamily market in 2024 and warns against overpaying for properties based on assumptions of future rent increases. He believes that sellers may be reluctant to lower prices due to the high cost of replacement properties and financing, but it is crucial for both buyers and sellers to consider the current market conditions. Ultimately, the founder stresses the importance of making informed decisions based on the most up-to-date information and consulting with licensed professionals for personalized advice.
