The Real Estate Espresso Podcast AMA - Is it Time For Apartments?
Thanks for all your valuable insight into real estate investing through the Real Estate Espresso podcast. I was curious your thoughts about investing in an apartment building right now. Do you think it’s a strategic time to buy since there seems to be low demand for living in an apartment with the recent pandemic subsequently lowering an apartment building’s value therefore getting a better deal? It is so difficult finding a single-family property that you can justify buying as an investor because they are so expensive right now. Since single-family properties have a high comparative market analysis driving up value, do large multi family properties have a low income value right now? I am assuming that people will slowly begin to return to apartments and with credit being so cheap and possibly having little demand for apartments it might be a formula for a good investment. What are your thoughts? Thanks!
Allan,
This is a great question. I’m going to reframe the question somewhat to make a couple of distinctions. As worded, your question is a little too general. In some ways it seems like you’re asking if there are bargains to be found in the apartment market.
Part of your question is focused on choosing between investing in apartments versus single family homes for rentals. I don’t view the tradeoff as a yield related tradeoff. They’re fundamentally different products.
Real Estate always is hyperlocal. It is true that there is a high vacancy rate in high rise apartments in New York, San Francisco, Seattle, and Toronto.
These situations are temporary in some cases, and point to a problem in others.
Determining whether the investment conditions are favourable depends on three main factors.
- The local submarket conditions
- The local boots on the ground team you have performing your project management and property management
- The specifics of the deal.
Your question is an over-simplification of the issues which need to be looked at in a more holistic manner.
If you pick a market like NW Austin or Downtown Nashville which are undergoing significant growth, then one set of market dynamics are at play. Demand has exceeded supply by a wide margin and home affordability is an issue. This is creating increased demand for rental product. Eventually, supply may catch up to meet the demand, and could possibly surpass the demand. A deep analysis of the local submarkets is essential to determine the current supply / demand situation and to forecast what is possible in the 5-10 year horizon in terms of supply and demand.
There is no question that there is a lot of institutional money chasing too few opportunities which is creating demand for well managed stabilized product. Investors in search of yield have bid up the prices for these stabilized apartment complexes. Over time, the high quality assets have been snapped up and prices have increased for lower quality assets as money went in search of yield.
I personally would not invest in markets with shrinking population. That was true pre-pandemic and it’s still true today. If you do choose to invest in a market like, say NYC or Chicago, be aware that you’re making a bet about market trends reversing direction from the past several years. Chicago has lost population consistently over the past five years for reasons that could be considered underlying and systemic. There are issues with crime, high taxes, anemic employment growth, all of which have contributed to people leaving the city in search of greater opportunity.
Our criteria has hardly changed at all over the past 5 years. What has changed are the underlying market conditions. Some areas have become more favourable for investment, and others have become less favourable for investment.