One of the more common questions I’m being asked lately is whether it makes sense to be a buyer in today’s market. As someone who’s been purchasing and renovating large-scale apartment properties before, during, and after the Great Recession, I thought I’d share my thoughts on the subject.
We are nearing the end of a long credit cycle in the U.S., characterized by an expansionary monetary policy and historically low interest rates. This credit cycle has helped push asset values at, or near, all-time highs—not just in real estate, but also in stocks and other equities. Plus, the 2017 Tax Cuts and Jobs Act gave us an extra boost in the current upswing.
With pricing at record highs, it makes strategic sense to be a net seller in this phase of the market. The Federal Reserve is shrinking its balance sheet and raising interest rates to curb inflation. That could very likely put downward pressure on asset values in the next few years. So consider selling any assets you aren’t planning to hold for the long term.
At the same time, now is not necessarily a bad time to be a buyer. Looking back at MPG’s many acquisitions, they’ve come at all different phases in the market. In fact, some of our most successful projects were bought at times when most people would have said not to buy—i.e., during a seller’s market. That doesn’t mean you shouldn’t pay attention to market cycles but, as an opportunistic buyer, you don’t let the market dictate when you make your move. A great deal is a great deal in any market; you just have to know the telltale signs and always be prepared to pull the trigger.
Here are a few tips for finding a great deal in any market.
Don’t overpay
This might seem obvious, but it’s nearly impossible to overcome a bad purchase price—no matter how great your execution plan might be. Of course you need to have realistic expectations as a buyer. Be prepared to pay fair market value, but don’t overpay…especially in this phase of the market. When in doubt, remember that sometimes the best deal is the one you don’t make.
Look for long term ownership
Assets that have been held for a significant period of time—10 years or more, if you can find them—typically have under market rents and plenty of things that need updating: from the exterior, to the amenities, to the interior of the dwelling units. This ideal scenario gives maximum return on investment from the combined capital improvements. That’s not to say a property held for less time is a bad deal. Just be aware that each time a deal is value-added, you need to pay the current owner for their value creation before you can add yours. There’s a law of diminishing returns the more times you value-add a property in a short period of time.
Identify multiple ways to add value
It’s important for projects to have more than one way of increasing Net Operating Income because value-add strategies can sometimes miss the mark. For example, maybe your unit upgrades didn’t generate the amount of rent increases you projected. But, if you also identified opportunities to bill back for utilities, and you added covered parking to produce additional income, then you have more headroom for error, with the success of the second and third strategies potentially offsetting any shortfall from the first. Furthermore, multiple value add plays can give you additional margins of safety in case the economy takes a turns for the worst and you need to reduce your rents in the bad times to keep your property occupied.
Go long, not short
One last thing. I’m a big believer in being a long term investor and focusing on risk adjusted returns, not just raw returns. It’s even more imperative in this phase of the market to have a “slow & steady wins the race” perspective. Look for superior location and asset quality as top priorities, and strongly consider putting fixed rate, long term debt on your projects with a relatively lower amount of leverage. Doing this will help to preserve your capital investment and protect your downside.
A smart investment isn’t a gamble, it’s a formula. Find out how the MPG strategy can work for you.