Or is that Sell...
The multi-family housing sector across the country was hot in 2012. Driven by low interest rates, pent up investor demand and, of course, increased rental housing demand from the coming of "Rental-Age" Genration-Y.
Will things cool in 2013? Don't count on it.
The Fed is poised to hold interest rates low as the US economy adjusts to massive budget cuts... While these cuts are likely to affect all segments of the economy and damper peoples ability to pay rent, they are also likely keep renters from becoming home owners and (lets hope not) create a new round of mortgage foreclosures.
While multi-family investors live and die by cash-flow, it is Cap Rates that drive the market. This past year has seen a steady decline in cap rates, which is a good things for multi-family owners. With cap rates down, values are up!
Investors use a term called "Risk Premium" to evaluate the potential return on an investment as it compares to the safest of investments, the 10-Year Treasury Note. At the peak of the housing bubble in 2006, risk premiums for the multifamily sector were around 90 basis points over the 10-year T-Note. The historic average for multi-family risk premium is +/- 300 basis points... Considering that the risk premium for these investments is now around 460 basis points it seems that it is, at least historically, A GOOD TIME TO BUY.
So what about selling your valuable asset? Consider your investment objectives. Where are you today on your path and where are you trying to get to? If you are new to the concepts that I have outlined above, it won't take you long to realize that interest rates are the elephant in the room... There are many factors that play into the supply & demand of rental housing dynamics, but an increase in interest rates will surely rain on the parade.
If you can answer yes to any of the following questions, now may just be your opportunity to sell:
The multi-family housing sector across the country was hot in 2012. Driven by low interest rates, pent up investor demand and, of course, increased rental housing demand from the coming of "Rental-Age" Genration-Y.
Will things cool in 2013? Don't count on it.
The Fed is poised to hold interest rates low as the US economy adjusts to massive budget cuts... While these cuts are likely to affect all segments of the economy and damper peoples ability to pay rent, they are also likely keep renters from becoming home owners and (lets hope not) create a new round of mortgage foreclosures.
While multi-family investors live and die by cash-flow, it is Cap Rates that drive the market. This past year has seen a steady decline in cap rates, which is a good things for multi-family owners. With cap rates down, values are up!
Does this mean that it is time to Sell?- Maybe.
Does this mean that it is not a good time to Buy?- No.
Investors use a term called "Risk Premium" to evaluate the potential return on an investment as it compares to the safest of investments, the 10-Year Treasury Note. At the peak of the housing bubble in 2006, risk premiums for the multifamily sector were around 90 basis points over the 10-year T-Note. The historic average for multi-family risk premium is +/- 300 basis points... Considering that the risk premium for these investments is now around 460 basis points it seems that it is, at least historically, A GOOD TIME TO BUY.
So what about selling your valuable asset? Consider your investment objectives. Where are you today on your path and where are you trying to get to? If you are new to the concepts that I have outlined above, it won't take you long to realize that interest rates are the elephant in the room... There are many factors that play into the supply & demand of rental housing dynamics, but an increase in interest rates will surely rain on the parade.
If you can answer yes to any of the following questions, now may just be your opportunity to sell:
- Are you nearing retirement and/or changing your investment strategy from Growth to Preservation?
- Do you have a number of investments that are performing, but are short on cash/liquidity?
- Have you been waiting out the downturn in the housing market and wondering when it will come back? And as I have previously mentioned, interest rates are not scheduled to change any time soon, but when they do the game will change...
If you are a real estate investor in "growth" mode, now is the time to BUY and lock in interest rates for as long as possible.
If you are a multifamily owner, you have weathered a formidable storm and now may be the time to pay yourself back...Lastly, how will you know when the market is back? The answer is Cap Rates.
