SS36: Why Is There So Much Hype Around (Multifamily) Real Estate Investing?

Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing why is there so much hype around multifamily real estate investing?

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Talking Points:

  • Recency bias due to above-average returns over the past 5-10 years (in real estate and multifamily specifically) and the perception of easy money to investors
  • Fear of Missing Out (FOMO) due to more people participating and making money from this type of investment recently
  • There is no real operational expertise required to make money in real estate when you are in a market that is increasing by double digits each year
  • On ABC News in 1994; Donald Trump famously said that “Everything I touched turned to gold immediately” when describing his 1980s real estate success. This sounds very similar to what is happening now.

Recency Bias

The S&P 500 stock index’s average annual return over the past two decades has been approximately 13.6%. Likewise, the broad real estate sector has done just as well as the overall market, returning over 10% every year. This is above average in both cases if we go back 100 or even 50 years.

This rings true even when factoring in the drastic collapse in housing prices during the 2008 financial crisis.

The longer this continues, the more people will pile into real estate expecting the same or even greater returns, and with too much money chasing too few (good) deals, the returns inevitably will begin to diminish; which we have definitely seen over the past few years.

Perception of Easy Money

Real estate and particularly multifamily real estate has come to be seen as a “less volatile” alternative to its various counterparts.

This is due to:

– owners are unable to check the exact value of their property; at any given time; like a stock – they are just looking at; purchased this for $100k and sold it 5 years later for $150k. Leaving out certain factors like I was invested through a pandemic.

–  Multifamily being a more efficient form of investment (easier to manage a 10-unit complex than 10 separate single-family homes in different locations)

– Being easier to finance as a result of generating strong cash flow every month and being less reliant on just a single tenant

– Better positioned to hire a property manager that is paid a set percentage of the monthly income that a multifamily property such as an apartment building generates

– Larger complexes are less volatile than smaller properties or smaller portfolios; investors involved with these properties have the ability to earn more consistent returns

These same reasons, coupled with above-average recent returns can make multifamily real estate seem like an almost foolproof investment.

Fear of Missing Out

Tulipmania in the 17th century, British railways in the 19th century, Crypto coins, and other speculative bubbles today, all have one thing in common which allows them to spread – the fear of missing out.

It is no different in regards to many overheated property sectors today when it is constantly reinforced that a particular asset’s value can only go up. A speculative mania ensues and a bubble is created.

It is important when you are underwriting and purchasing real estate that you have a business plan for the property; in an up, down, and sideways market. When we are in a down or sideways market; operational expertise is required to make money and generate returns.

Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing why is there so much hype around multifamily real estate investing? So if you’ve reviewed any type of real estate investments or programs or methods for making money in real estate over the last few years, or even been buying any properties or putting offers in on properties, you know that there are a lot more multifamily investors today than there were a few years ago and definitely a lot more than there were a decade ago. And the bias is due to a lot of above average returns over the past five to 10 years in real estate. And multi-family specifically, and it’s a perception of easy money to investors put that together with FOMO, fear of missing out due to more people participating in making money from this type of investment. Recently, the other thing is important to know is that there’s no real operational expertise required to make money in real estate.

Charles:
When you’re in a market that’s increasing by double digits each year. So you don’t really need to know what your doing. If you say, I can buy property here and three years from now, I can resell it. And these prices are going up so high. Even if I don’t know how to operate the property correctly, I can still make money. That’s a very dangerous mindset, the BN, but it’s happening all around us famously. I remember on ABC news in 1994, Donald Trump famously saying that everything I touched turned to gold immediately when describing his 1980s real estate success, this sounds very similar to what is happening now. So what does this recency bias and the S and P 500 stock index average annual return over the past two decades has been approximately 13.6%. Likewise, the broad real estate sector has done just as well overall returning over 10% of a year.

Charles:
This is above average in both cases, if we go back a hundred or even 50 years now, this rings true. When factoring in drastic collapse, the housing prices during the 2008 financial crisis, the longer this continues, the more people pile into real estate expecting the same or even greater returns and with too much money chasing too few good deals. The returns inevitably will begin to diminish, which we have definitely seen over the past few years, right? A lot less meat on the bone for investors that are buying properties today. Now the perception of easy money, real estate, particularly multifamily real estate has come to be seen as a less volatile alternative to its various counterpoints. This is due to owners are unable to check the exact value of their property at any given time like a stock. They’re just looking at, I purchased this for a hundred thousand and sold it for five years later for 150,000, leaving out certain important factors.

Charles:
Like I was invested through a pandemic, which in any regular economy without this, this drastic printing of money would be would be a huge thing that you’d want to calculate and would have probably devastating returns on your property. Multi-Family being a more efficient form of investment, easier to manage a 10 unit complex than 10 separate single family houses in different locations is also a huge factor because people think they’re going to be able to do less work for making more money. Now it’s true that you can scale your properties easier when you have more units and everything like that, but you, someone still has to manage the properties in some buddies still has to manage the manager or what we call asset management. It’s also being easier to finance as a result of generating strong cash flow every month and being less reliant on just a single tenant is another factor why people love multifamily put together with it’s better positioned to hire property management that is paid a set percentage of a monthly income of at a multifamily property, such as a apartment building generates.

Charles:
So you’re gonna be paying a lot less per unit when you’re buying say 50 units versus buying one or five. Now larger complexes are less volatile than smaller apartments, smaller properties, smaller portfolios, and investors involved with these properties have the ability to earn more consistent returns because they have more doors, more income streams paying them hopefully every month. Now the same reasons coupled with above average, recent returns can make multifamily real estate seem like an almost full-proof investment. Now, the fear of missing out this is a big thing. And everybody goes back to tulip mania and something century and British air railways in the 19th century and crypto coins and other speculative bubbles today, they all have one thing in common, which allows them to spread the fear of missing out. It is no different in regards to many overheated property sectors today, when it’s constantly reinforced that a particular asset can only go up, which is exactly what we were told in 2008.

Charles:
And we know for sure that that’s not true, maybe over a 20 or 30 year period prices always go up, but you cannot say that every year real estate continuously goes up a speculative mania and sues. And a bubble is created is important when you’re underwriting and purchasing real estate, that you have a business plan for the property and an op down in sideways market. When we are in a down or sideways market, operational expertise is required to make money and generate returns. When we’re in a market, that’s just going up. There’s no operational expertise required. And it’s very important when you’re looking at these deals, whether you’re going to partner with someone and be active, or are you going to passively invest with someone you need to, and it’s not going to be clean cluttered. It’s not going to be something you’re going to find these numbers, right.

Charles:
And underwriting, and Nope, but you have to make your decision and review their past results as an operator from what was what they did operationally and what the market did. And yes, they bought in the right market. That was the first. That was a good, first good thing they did. But how do they operate that? Because if they’re operational, part of it probably was less than half let’s say of the returns. And it was really just the market. Well, what happens when this you’re invested with this operator and the market’s going down or sideways, very important to make sure to keep your capital always safe. So thank you so much for listening. Please remember to rate, review, subscribe, submit comments, and potential show topics at global investors, podcast.com. Look forward to two more episodes next week. See you then

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