As the United States is arguably entering a period of recession, investors may wonder if now is the right time to invest in the multifamily real estate market. After all, there are many advantages of doing so, including rising demand and limited supply options. However, there is no easy, one-size-fits-all answer to the question, as a number of factors must be considered in order to come to the right conclusion. Below, Peak Commercial takes a look at investing in multifamily real estate during a recession.
Is it Wise to Invest in Multifamily Real Estate During a Recession?
Statistics show that the multifamily sector performed better than other forms of real estate during past recessions. Everyone needs a place to live, and a multifamily property can accommodate hundreds or even thousands of individuals and/or families. This form of real estate can be an affordable option for those who cannot afford to rent/buy a single-family home, making it appealing to a large target demographic. Furthermore, as property values tend to fall during a recession, it can be an ideal time for savvy investors to make great buys.
Risk Versus Rewards
On the other hand, investing in multifamily housing can be a dangerous bet during a recession if an investor has not done careful research, which is why some experts advise waiting until the economy shows signs of stabilization before investing in multifamily housing. Recessions tend to bring about changes in migration patterns; cities and states that had an influx of new residents before the recession may start to lose residents while states/cities that were steadily losing residents may be an uptick in returning or new residents. Keeping track of migration patterns can help investors know which cities have the best investment opportunities and what type of multifamily housing would be the most profitable in any given area.
Keep Up to Date With Development Plans
It is also important to keep tabs on city development plans that could impact a potential multifamily investment. Building permits, inspection records, filings of architectural plans, and other documents can be obtained via the federal Freedom of Information act and can help investors pinpoint great deals as well as potentially problematic investments. Shops, clinics, parks, and new schools are all desirable investments that can raise a property’s value; however, investors should realize that these developments will likely have a bearing on the property’s target demographic in order to make appropriate improvements and modifications to attract potential buyers and/or renters.
Know Your Financial State
Finally, an investor will want to consider his or her financial state of affairs before making a large purchase. Is there a lender that is willing to finance the purchase at a reasonable interest rate? If further development or improvements are needed to improve the value of the building, can these be made at a reasonable cost and within a reasonable amount of time? Investors should bear in mind that the impact of the COVID-19 lockdowns is still being felt by the construction industry, as a worker shortage, rising inflation, and supply chain shortages have significantly raised the cost of labor and building supplies.
Multifamily real estate is a historically profitable investment option and a recession can be an ideal time to get good deals. However, it’s also incredibly costly, and an investor will need to do careful research in order to find good properties in the right areas in order to turn a profit without undue delay.