Founder and Chief Executive Officer of privately-held real estate investment firm Castle Lanterra Properties.
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As we enter another month of a pandemic that has affected the entire globe, devastated the U.S. economy and had a lasting effect on how we all conduct business, I have been asked many times: What advice would I give to the new generation of multifamily real estate investors looking to invest during this challenging time?
First, we must keep in mind that there will always be a need for housing. Moreover, the supply-demand ratio will continue to be strong as there is a limited amount of new construction and product coming online. As a result, I expect that the multifamily market will remain a strong investment vehicle.
In addition, as we have seen over the last eight years, new projects taking shape across the country are mainly focused on higher-end products with more expensive rents to justify the rising costs of the land, materials and labor. As a result, there are not many mid-priced properties being constructed, and demand for such properties in this middle range has been far outpacing supply. Many real estate investors are also looking to move out of office, hospitality and retail investment and toward multifamily, which only further increases the demand in this space.
Furthermore, interest rates and cap rates are likely to remain low for the foreseeable future, which will help maintain property values even if there is limited rent growth over the new few years. Lastly, real estate is a very good hedge on inflation. Specifically, multifamily is, in my opinion, the best asset within real estate because “as inflation rises, so do property values, and so does the amount a landlord can charge for rent, earning higher rental income over time.”
For multifamily real estate investors looking for opportunities during this period of uncertainty, my advice is to look to invest in target markets that you are familiar with and to not base your investment entirely on online research or technology. You have to be on the ground and in the weeds, in the neighborhoods and walking the streets to gain a holistic understanding of your market — from public transportation and commute times to pipelines of future development to diversified job growth, historical crime and social factors. You have to be familiar with how the market performed historically in prior downturns and emerging submarkets.
It is important to feel you did a good deal the day you close on a transaction by buying the right property at a good basis. For instance, to me, making the right deal includes acquiring an asset in an area with strong market fundamentals and offers intrinsic value. My firm looks at income and population growth, whether there is a diverse economy and if there are positive supply-and-demand dynamics. In addition, evaluate the submarket and the property’s access to mass transit, look for highly rated school districts and whether it is in close proximity to employment hubs, dining and retail. Finally, to feel confident that you have purchased a property at good terms, it should have a value-add component. In the end, even if your assumptions are off for the first year or two due to unexpected circumstances, having taken these factors into consideration, you will likely have a fruitful investment that will be profitable.
My philosophy has always been simple yet effective: It is imperative to watch and keep updated on all external circumstances that can impact real estate leasing, collections and renovations, as these are always influenced by nature, health and regulatory factors. It is critical to always be aware, have back-up plans in place and underwrite conservatively. In most businesses there is risk, and what differentiates the successful investor is the ability to be agile, to adapt and to proactively adjust to any situation quickly and intelligently. This has never been more accurate than it is today.
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