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To get things started with the second part of our talk on Multifamily and Affordable Property with Principle of Pursuit CRE, George Kruse, we wanted to discuss the idea, shared by many, that the US is currently going through an affordable housing crisis.
Affordable Housing Crisis
According to Kruse, this concern is 100% validated. America is currently suffering at the hands of a huge affordable housing crisis which every state and every municipality is trying its hardest to solve. However, to build brand new B and C class properties with the intention of renting them out at only $700 per month is, according to Kruse, an impossibility whereby the numbers simply do not pencil out.
“Of course, something has to happen, be it public partnerships, government assistance, or donated land. There are so many options and a lot of people are talking about it. So, it’s not being ignored by any stretch. However, it’s not just a housing problem, it’s a teacher problem, a nurse problem, a police and fire service problem. The reason is that nobody wants to drive 45 minutes from the outskirts of town to work their minimum wage job, and unless you give them a place to live close by, everyone will complain.”
With this in mind, specifically with regards to the prospect of government assistance, we asked Kruse his opinion on alternative construction methods and whether or not they could be implemented to help resolve the current affordable housing crisis in America.
“In Florida, something was recently passed where people can put development units in the back of their house so long as it is no more than 50% of their front house size with a maximum space of 1000 feet². This allows residents to capture rental income while providing people with a place to live.”
Modular housing, he claims, is another possible solution that is currently being looked at. There has also been a rethinking on mobile home parks which have been a big sticking point for a lot of communities for a long time – the reason being they are affordable and a lot of them can be built on a reasonably sized lot. With regards to Florida, Kruse informed us how he has been seeing more developments of tiny houses – tiny homes that occupy less space while still providing an adequate living environment.
Is the Spread Between Buyers & Sellers Widening?
Many believe that the gap between buyers and sellers within the multifamily market is widening by the day, and Kruse is someone who shares that belief wholeheartedly.
So much so, in fact, that he will be heading down to Miami in September to moderate a panel on the subject. Right now, Kruse informs us, there are people putting properties up for sale that they know are worth around $2.5 million for a selling price of $4 million just to see what will happen. Likewise, when somebody walks across the street and sees a property that is overpriced, they immediately call up their broker and demand that the price of their property is increased, too.
“You can’t find a meeting of the minds here [in Florida]. So many properties come on the market that are otherwise great properties that would have had 20 offers 12-18 months ago. Now, however, they stay on the market for 6 months then come off as nobody is paying those prices.”
In this state of gridlock, Kruse attests that eventually, something will have to give. However, in his opinion, he believes it will be the sellers, rather than the new buyers coming through, who will eventually have to give up and sell the properties at a more reasonable price. Either that, or it’s just a fundamental break in the system and everyone who owns properties right now will keep on owning them until interest rates start going up again.
Rising Interest Rates = Higher Refinance Rates?
If interest rates were to rise, we wanted to know if there is enough of a spread in the operating income so that people are going to be able to refinance at higher rates.
“I always tell people yes because – interest rates don’t go up for no reason. It’s not as simple as interest going up in a vacuum. Interest rates go up because the economy is doing well. If your fundamental belief is interest rates are going to go up because the economy is getting better, then if the economy gets better, rental rates are going to go up.”
Other Issues When Underwriting Multifamily
Aside from unrealistic values, we wanted to know if there were any other major issues one is likely to experience when underwriting deals in the modern-day multifamily and affordable housing market.
According to Kruse, a major problem is that too many people are trying to sell multifamily properties today based on future performance. Though there may have been some validity to this a couple years ago when the market was still experiencing its big run-up, today it’s not the same. Right now, rent growth is down 2% and vacancy is sitting at around 6%, meaning any growth we see right now is just standard growth. As a result, it pays to proceed with caution when looking at these numbers, as Kruse warns how there are many people who will manipulate these figures in order to secure a sale.
Should You Invest in Multifamily?
Should you suddenly come into a substantial amount of money, be it a generous inheritance from a recently departed family member or a sudden stroke of luck at the stock exchange, we wanted to know what benefit you stand to gain by investing that capital into the multifamily property.
Irrespective of how irrationally high the prices of multifamily properties have become, Kruse still encourages you to buy it if you have that kind of money available. After all, if you have that much cash in your pocket, it should be invested somewhere and you’re never going to make anything off cash. In fact, based on inflation rates, you will undoubtedly lose value every day by sitting on that. Considering this, it is much wiser to invest in something that is cash flowing and at a level with a reasonable leverage point of around 75%.
“If you can underwrite a multifamily property at 75% leverage, you’re not losing that property even if it was back in 2008, you are still going to own it, it’s still going to cash flow, and it’s still going to have tenants. Though you may not get quite as high a yield for a few years, all the people who did that in 2008/2009 were able to retain their properties and are all very rich people now.”
How to Preserve & Enhance Value of Multifamily Property
When people have full-time careers and zero experience in a multifamily property, making the right decisions can be incredibly difficult and time-consuming. Moreover, a failure to make the right decisions can be highly detrimental to the success of purchasing multifamily, which is why many people opt for the assistance of a good property manager – but where can people with limited experience in the field find the right kind of property manager?
In response to this question, Kruse informs us that [at least in Florida], every property management company is a member of the chamber of commerce and will most likely be found attending real estate meetups, both big and small, looking for a business. If you’re looking to speak with a property manager, you should call up your chamber of commerce and ask them to put you in touch with real estate property managers who specialize in the field of multifamily Also, given that insurance brokerages insure a lot of multifamily properties, it may be worth contacting them for suggestions as they will know from experience who the good managers are.
Thank You George
We want to thank George for his time spent with us last week. We greatly enjoyed his company and are so appreciative that he shared his extensive knowledge with us! Not only was George informative, but he helped calm some of our nerves regarding a multitude of uncertain housing topics. Instead of worrying about the future, George offered us practical solutions – we will certainly take his insights as food for thought. As he said, you do not need to be an expert in order to succeed in multifamily, so we hope this encourages many of you considering work in multifamily. Take it from an expert.
If you want to watch the webinar from this conversation with George Kruse, check it out here.