Founder, CEO of Blue Lake Capital LLC. Helps passive investors grow wealth through real estate. Podcast Host: REady2Scale.
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The worldwide pandemic continues to create serious problems with the economy, impacting almost every type of business imaginable. That certainly includes real estate investing, as it has forced owners, operators and investors to pause and re-assess their approach to how they invest in the market. There are many different types of investors, from extremely conservative to very aggressive, along with a multitude of approaches found in between those extremes. Knowing which type of investor you are can help you determine your reaction to investing during the pandemic and understand what it says about you.
I’ve seen many investors hoarding their cash out due to the uncertainty in the market, unwilling to invest any amount until they are confident that the threat of the Covid-19 pandemic is over. Others are waiting to see price declines that they would consider to be a “fire sale” on multifamily properties. I’ve also seen other investors who continue to invest their money cautiously, particularly with sponsors they have invested with before.
Experience indicates to me that there is a correlation between the sophistication, experience and wealth an investor has and his/her willingness to keep investing; investors who have been through one or more cycles tend to continue to invest because a temporary downturn doesn’t scare them. I always tell investors who are afraid of investing to never do anything that they don’t feel comfortable doing. However, I encourage them to bear in mind that the investors who built great fortunes were able to do so because they were willing to take some risk.
Are You Waiting For A Price Drop?
While the pandemic initially caused major concern in the multifamily market, the price declines never materialized. Buyers took a “wait and see” attitude before investing, and sellers held their ground on pricing. What resulted was a “frozen market,” where nobody blinked, but that only lasted for a short two to three months, starting March 2020, because pretty quickly investors realized that multifamily as a sector performed well during the pandemic.
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Aside from multifamily’s strong performance since Covid-19 emerged, another reason that the predicted price declines never happened was due to lenders, who began giving property owners a 90-day forbearance on their mortgages due to the pandemic. There was no real incentive for sellers to discount their prices. As the forbearance periods end, there might be more discounting of prices by sellers, depending on the economy and how the pandemic continues to fuel unemployment, impacting a tenant’s ability to pay rent.
Those With Higher Net Worth Continue To Invest
An interesting correlation I’ve seen is that individuals who have a high net worth continue to invest — the higher the net worth, the higher the likelihood for that investor to actively purchase properties during the pandemic. It comes as no surprise, as a recent survey of high net worth individuals showed, that almost 60% of their asset allocation went into real estate. That makes sense, as real estate is a long-term investment and history shows us that market fluctuations won’t deter the overall appreciation and return on their investments. In addition, high net worth individuals are used to taking risks (which is how many of them have built their wealth to begin with).
For investors who continue to have confidence in the multifamily market despite the impact of Covid-19, there is a way to gain additional returns on top of their investment. Investors who are willing to sign on the loan will make an additional 5% to 10% on the deal. They’re still a limited partner, but by being willing to take on some additional risk by signing along with the general partner, their return will be much higher, much faster.
Summary
While many multifamily investors have taken a “wait and see” approach, sellers are holding firm on their pricing, and there are no fire sale deals to be had by buyers. In addition, the prediction that tenants would not be able to pay their rent or that occupancy rates would fall substantially never came to pass. Other investors continue to invest, realizing that there are many opportunities available despite any risks. This is especially true of high net worth individuals who have been through real estate cycles before and understand that investing is critical to building generational wealth.
As vaccines become available and once the pandemic subsides, those who have continued to invest in multifamily properties will be in a good position for both income from cash flow and appreciation as prices increase.
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