“Build your own dreams, or someone else will hire you to build theirs” – Farrah Gray
Why Apartment Landlords Are Confident About 2024
Multifamily developer confidence heading into Q3 and Q4 of 2023 remains upbeat, even though the market is experiencing a highly competitive landscape and higher-than-expected costs in land, labor, and construction materials.
Many also see strength continuing into next year – in both value-add or new construction.
“Because the assets continue to provide a strong NOI, there is room for planned CapEx spending and continued development opportunities,” Ira Singer, Founding Partner at Mosaic Construction, tells GlobeSt.com.
Singer said there are proven development, value-add, and adaptive reuse strategies being implemented in major and mid-major markets that continue to add housing, resulting in continued growth in the construction sector for the foreseeable future.
“Projects that continue to show no signs of slowing down are focused on reducing utility/operational costs, which includes window and door replacements and smart lighting and plumbing fixtures retrofits.
“The overall sector is focused on providing a residential ‘experience’ while building a community. There are opportunities to enhance the physical spaces by creating larger and more secure package rooms and mailbox centers, building out pet-friendly spaces and amenities as well as upgrading community areas for work and play.
Land prices and hard costs rose from mid-2020 through early 2023 while interest rates fell, according to David Fletcher, Excelsa Properties Managing Director and Head of Acquisitions.
He tells GlobeSt.com that today, hard costs have stabilized, and interest rates have risen. However, land prices remain elevated.
“Returns on cost do not support developing, in the context of higher projected exit cap rates, trended rents, insurance expenses and real estate taxes,” Fletcher said. “Importantly, buying is cheaper than building.”
Demand ‘Surprised to the Upside’
Brad Case, PhD, CFA, CAIA, Chief Economist & Director of Research for Middleburg Communities, tells GlobeSt.com that rental housing demand has surprised to the upside for two reasons.
“One, the strength of the economy has supported household formation—that is, young people are willing to move out of their parents’ basements and sign leases for their own apartments because they have confidence that they’ll keep their job and their income,” Case said.
“Second, mortgage rates averaging more than 7% have made homebuying less appealing than ever, especially given the possibility that record-high house prices may retract. Combine that stronger-than-expected demand with the supply difficulties, and it’s easy to see why those developers who can still make a project work are more optimistic than ever about its future.”
Ryan Shear, Managing Partner at PMG, tells GlobeSt.com that this year has presented multiple opportunities for growth across the nation’s most desirable downtown cores.
“PMG’s national multifamily portfolio Society Living has experienced properties securing financing, reaching significant construction milestones, and garnering widespread interest from their communities,” Shear said. “With the limited availability of single-family residences for sale across the country, the continued migration of professionals into growing metropolitan centers, and elevated interest rates incentivizing renting, the multifamily market is currently hitting its stride and should remain steady heading into 2024.”
Doug Ressler, Yardi Matrix, tells GlobeSt.com the multifamily market exhibited strength in July, as the economy continues to outperform expectations.
The average U.S. asking rent rose $2 to $1,729, while year-over-year growth fell to 1.6%, down 30 basis points from June.
Supply growth has emerged as the key factor in metro-level rent growth. Of the 12 metros in Matrix’s top 30 list with supply growth of 2.5% or more year-over-year, six recorded negative rent growth this month. Austin (4.4% increase in total stock year-over-year through July), Nashville (4.1%), and Raleigh (3.5%) led in supply growth.
Homeowners, Others Won’t Budge
Paul Rahimian, CEO and founder of Parkview Financial, tells GlobeSt.com there is renewed optimism about multifamily because “the reality is, there’s a housing shortfall in most MSAs.”
As mortgage rates have gone up (exceeding 7% this week), the ability of home buyers to be able to buy a home has diminished.
“Further, homeowners that locked in low fixed rates are not likely to sell their homes as they won’t be able to replace the low mortgage rates of the past few years,” Rahimian said.
“This has caused a slowdown of existing home transactions and will create more pressure and demand for apartments. Despite rising financing costs, the decline in construction costs and the demand for multifamily product will continue to create opportunities for developers to build apartments for many years to come.”
Many ‘Forced’ to Rent
Joseph Rubin, Senior Advisor at EisnerAmper, tells GlobeSt.com that multifamily is experiencing strong tailwinds that will sustain demand. “High interest rates are forcing households to rent, and it is not likely residential mortgage rates will fall,” Rubin said. “If long rates stay at their historical norms, mortgage rates above 6% could be a reality for several years.
“Additionally, tenant credit issues created by the pandemic are abating. Collections have improved and, in many states, landlords can now enforce their leases. Despite potential pockets of temporary oversupply in certain markets, we expect multifamily demand to continue to be strong over the next few years, which supports continued new development.”
Masoud Shojaee, CEO and Chairman of the Board at Shoma Group, tells GlobeSt.com, “An increase in confidence among multifamily housing developers is a welcome indicator of growth within the real estate industry. “More developers reporting favorable conditions should spur an uptick in new projects and boost the housing market,” Shojaee said.
South Florida, for example, is being driven by migration patterns across the state, the demand for multifamily housing in urban areas is continuously high, he said.
“However, while we remain hopeful about the market and the 2023-2024 season, market fluctuations and economic uncertainties could become roadblocks to this positive momentum,” according to Shojaee.
Some are finding new ways to finance projects.
New Methods for Funding Projects
David McCullough, ASLA, PLA, Principal Landscape Architect at McCullough Landscape Architecture, tells GlobeSt.com that new development models have recently emerged that are allowing many to see new opportunities. One example is student housing grant money that is provided by the State for developments on community college campuses across California. In addition, local agencies are providing land for housing under the State of California Surplus Lands Act.
“Many new incentives are being provided by local governments for developers that are interested in developing affordable, transit-oriented, ecofriendly (“complete”) housing solutions,” he said. “These incentives are helping the cost of construction look much more reasonable than in the past.”
US Housing Affordability Hits Worst Point in Nearly Four Decades
A recent surge in US mortgage rates has pushed affordability to the lowest level in nearly four decades. For house hunters, waiting for any relief is a risky gamble.
It’s been a hard lesson. Last year’s slowdown brought a brief respite from the price gains of the pandemic boom but that’s now vanished, with home values recovering the nearly $3 trillion they’d lost.
Now, one measure of borrowing costs has climbed to a level not seen in more than two decades, and the Federal Reserve has indicated it may hike rates further, raising the risk that mortgage rates may push toward 8%.
“The resilience of the economy and the consumer has confounded a lot of people,” said Melissa Cohn, regional vice president at William Raveis Mortgage. “At the beginning of this year, people were predicting that the Fed would actually be cutting rates by the end of the year, but the economy has withstood this higher-rate environment.”
Mortgage rates — at the heart of the past year’s housing slowdown — have pushed higher as the Fed raised its benchmark rate. According to minutes from its July meeting, policymakers saw “significant upside risks to inflation,” suggesting even more increases ahead and further upward pressure for mortgage rates.
On Thursday, Freddie Mac’s average rate on a 30-year, fixed loan jumped to 7.09%, the highest since 2002. Another measure — from the Mortgage Bankers Association — showed the average contract rate on a 30-year fixed mortgage rising to 7.16% in the week ended Aug. 11.
Some buyers with low credit scores and high debt-to-income ratios are getting quotes in the 8% range, according to Cohn. Borrowers who are moving ahead on mortgages right now are forging ahead with hopes to refinance when rates fall in a year or two, Cohn said. They’re also confident that buying now will get them lower prices than they’d secure if rates ease and buyers rush into the market.
For now, potential buyers are facing “a lot of mixed messages,” according to Bess Freedman, chief executive officer of real estate brokerage Brown Harris Stevens. Consumers don’t know if the Fed is going to keep raising rates or what else is on the horizon, she said.
“There’s been a meaningful change in the economy,” she said Thursday on Bloomberg Television. “We’ve avoided a recession, inflation has come down. But for housing, we’re still in a sluggish market. We’re not out of the woods yet.”
House hunters are already battling for scarce inventory. Many homeowners have been reluctant to list their properties and give up lower mortgage rates than they could get now. Elevated prices spurred by the supply crunch are combining with higher rates to make this the least-affordable housing market since 1984, according to Optimal Blue rate-lock data from Black Knight Inc.
“This inventory issue is a really difficult one and is emerging as something akin to a structural problem,” said Mark Hamrick, senior economic analyst at Bankrate.
Tight inventory is also limiting sales for previously owned homes. Transactions for existing homes fell nearly 19% in June from a year earlier, data from the National Association of Realtors show.
If rates move higher, borrowing costs may sideline more buyers, pressuring transactions which could ultimately push down prices, according to Andy Walden, Black Knight’s vice president of enterprise research strategy. But any softening of demand has collided with tight inventory, keeping prices firm “for the time being,” he said.
Mortgage costs are a “heavy burden,” according to Mark Zandi, chief economist at Moody’s Analytics.
“The market seems to be incredibly on edge with regard to rates,” Zandi said. “When you get to 7% plus, the market goes dark. Affordability is too far out of reach. That’s when house prices resume declining.”
Is Investing In Rental Real Estate Right For You?
Are you considering investing directly in rental real estate? Real estate can be a good source of income and a hedge against rising inflation, but there are downsides too. First, let’s take a look at some of the benefits of becoming a landlord:
Income: One of the main benefits of owning real estate is the ability to generate significant income without having to sell your investment. It’s possible to generate high single to low double digit returns on your cash even with a mortgage.
Inflation protection: Not only can real estate provide good income, but it’s also income that naturally keeps pace with inflation. Inflation can also increase the value of real estate and reduce the real burden of mortgage debt over time. For these reasons, it can be a great way to hedge against the possibility of rising inflation, which generally hurts both stocks and bonds.
Leverage: Historically, real estate appreciation has underperformed stocks and bonds. What gives real estate an advantage is the ability to benefit from the leverage of purchasing it with borrowed money at relatively low interest rates. For example, if you put down 20% on a $100k property and it appreciates 3%, you actually earn a 15% return ($3k of appreciation divided by the $20k you put down). Of course, you can also buy stocks on margin, but margin rates are higher and are not tax deductible. You could also be forced to sell your stocks while they’re low to satisfy a margin call.
Tax advantages: Real estate also comes with a lot of tax advantages. First, you may be able to deduct costs such as the mortgage interest, property taxes, and depreciation from your taxes and even use excess “losses” to reduce your other taxes. If you sell a property, you can defer the capital gains tax by reinvesting the proceeds into another property. When you pass away, your heirs can inherit the property and sell it without having to pay any tax on all the appreciation during your lifetime.
Control: You can add additional value to real estate by purchasing a property you believe will appreciate faster than the overall market (the real estate market is much less efficient than the stock market so there are more opportunities to profit from superior knowledge), making improvements, and managing it yourself.
However, real estate is not for everyone. There are some important challenges to be aware of too. Before taking the plunge, here are some questions to ask yourself:
Do you have to have a good credit score and debt/income ratio? Ideally, you’ll want a credit score above 740 and total debt payments (including future mortgage payments) of no more than 43% of your gross income. If you’re not there, take steps now to improve and protect your credit score and pay down your debt. Otherwise, you’ll get a higher mortgage rate or you may not even be able to qualify for a mortgage at all. If you have enough cash, you can purchase real estate without a mortgage but you lose the benefits of leverage.
Do you have enough savings? A 20% down payment will help you avoid having to pay for PMI (private mortgage insurance), but a 25-30% down payment is often needed to qualify for the best rates on an investment property. You may also need another 2-5% for closing costs. If you don’t have that, start saving now. Keep in mind that you’ll also need savings for emergencies after the purchase, including maintenance, repair costs and covering the mortgage during vacancies.
Do you have time and patience? Sites like Roofstock are making it easier, but buying direct real estate isn’t as easy as buying a mutual fund. You’ll likely have to spend a lot of time researching and looking at properties and may not get your first, second, or even third choice. Even once you have a signed contract, expect lots of phone calls, emails, and paperwork to complete the transaction.
Do you know how you’ll manage the property? You can do it yourself or hire a professional property management company. The first method makes it a business/part-time job. The second is an additional expense that can cut into your returns.
What tax bracket are you in? While there are lots of tax breaks for owning direct real estate, the rental income is subject to your ordinary income tax rate, which is higher than the tax on qualified stock dividends. One way to avoid this is to invest more for appreciation than income while you’re working and in a high tax bracket. Another is to purchase real estate in a self-directed IRA, which can grow to be tax-deferred or tax-free, but that comes with its own complications.
Are you okay having your money tied up? You can’t generally sell real estate as fast as you can a stock or mutual fund and transaction costs can be high. You can take out a line of credit to borrow against any equity you have, but that still needs to be paid back.
Do you have a high risk tolerance? People often think that real estate is less risky than stocks. With an individual stock, you could lose all the money you invested, but with a rental property, you can actually lose more than you put in. After all, you’re on the hook for maintenance costs and mortgage payments even if you don’t have a paying tenant. If you sell it at a loss, leverage can work against you as you can end up not just losing your down payment but also possibly being stuck with an underwater property.
Like any investment, real estate has its pros and cons. The important thing is to go into it with both eyes open. It’s not just location, location, location. It’s also education, education, education.
Crowdfunding Industry Tries To Restore Confidence In Wake Of Nightingale Fraud Allegations
Scandal has rocked the real estate crowdfunding industry over the past month, after Nightingale CEO Elie Schwartz was accused of walking away with tens of millions raised from small-time investors on the CrowdStreet platform.
It’s a black eye for the industry — which has only existed for about a decade — and it has prompted some of CrowdStreet’s competitors to soothe their own customers by reassuring them they are more protected from possible fraud than the hundreds of investors who lost money by investing in Nightingale deals through CrowdStreet.
“This has been a challenging few weeks in the online real estate investing realm,” RealtyMogul told investors in a letter published on Reddit last month. “While we have no comment on [the Nightingale] incident, we are saddened and concerned whenever investors in our industry face adversity.”
Nightingale raised roughly $63M on the platform last year to acquire an office complex in Atlanta and renovate another office building in Miami Beach, but the company never closed on the deals. After months of delays and a lack of communication, an independent manager was appointed to take over the entities created for the deals.
Last month, that manager, Anna Phillips, said less than $130K combined was in the two entities’ accounts, and the vast majority of the funding was missing. On Friday, Phillips said forensic accountants had traced roughly $40M to accounts affiliated with Schwartz.
While CrowdStreet isn’t accused of committing fraud — unlike Schwartz and Nightingale, which are now under investigation by the Department of Justice and the Securities and Exchange Commission — many of the nearly 700 investors who had their money misappropriated have raised questions about why there weren’t more controls in place at CrowdStreet to prevent such an act.
The biggest sticking point comes down to the fact that the equity raised on CrowdStreet had been sent directly to accounts controlled by the sponsors, even before deals closed.
“The idea that someone in that position would just commit such blatant fraud was shocking,” EquityMultiple CEO Charles Clinton, whose real estate crowdfunding platform has funded about $4.4B in projects, told Bisnow. “I was also very surprised about the escrow arrangement. That was the other thing that jumped out.”
EquityMultiple also issued a letter last month, similar to RealtyMogul, highlighting the differences between its policies and CrowdStreet’s.
“In light of the news that the largest investment funded to date by Crowdstreet is embroiled in potential fraud, I want to take the opportunity to remind you of what makes EquityMultiple different,” Clinton wrote in the letter.
Both Los Angeles-based RealtyMogul and New York-based EquityMultiple’s letters highlighted the platform’s use of third-party escrow services, as well as the fact that they are registered investment advisers with the SEC.
Clinton said he doubted the Nightingale scandal would turn into an existential threat for the real estate crowdfunding industry, but acknowledged it could be damaging. He said he has heard from a few investors who have shared fears over crowdfunding’s security.
“Financial services and fraud are unfortunately a natural pairing, and given that our industry is still newer and on a growth curve, anything that could hurt the reputation could hurt its growth,” Clinton said.
Investors might be scared now, as with any kind of fraud in financial services, but the impact won’t be permanent, Clinton added.
“In the last three or four weeks that things have been unfolding, we’ve seen no disruption at all,” he said.
RealtyMogul declined to make anyone available for an interview.
Ian Ippolito, an independent real estate investor who has invested in other CrowdStreet deals but not Nightingale’s funds, said he wasn’t surprised by allegations of fraud.
“From the beginning, this deal had problems all over it, and improprieties,” Ippolito said. “They were not disclosing things that they were required to under law. They weren’t disclosing their losses, which is a big, big no-no. It looked impressive from the numbers, but I thought at the beginning, ‘I’m not touching this deal.’”
“It’s a bit of a Wild West out there,” Ippolito added. “Some people will say, it’s fine, these are accredited investors that can take the loss. But when you talk to these investors, they’re angry. They’re very, very angry. It didn’t work the way they expected it to, and nobody likes to lose money.”
Ippolito said while CrowdStreet will probably suffer, the real estate crowdfunding industry will bounce back. On Tuesday, just weeks after the Nightingale scandal came to light, reports indicated that asset manager Yieldstreet could purchase Cadre in a deal that would value the platform at as much as $100M, according to The Information. That would be a steep drop from its $800M valuation in 2017.
Major corporate investments aside, individuals have become accustomed to real estate crowdfunding as an option for investing their money.
“There’s just so many of these deals going out, and there’s just so much capital that people are looking to deploy that I don’t see it stopping,” Ippolito said.
The U.S. crowdfunding industry as a whole is forecast to expand from $1.67B in 2022 and is expected to expand at a compound annual growth rate of 16.7% from 2023 to 2030, Grand View Research reports. Real estate is a major component of the industry, along with tech, media, healthcare and food and beverage.
That is also despite the fact that this kind of fraud will happen again, Ippolito said.
“Sadly, it’s going to happen again,” Ippolito said. “These marketplaces don’t have any duties to do any due diligence. I mean, they say they do, but they basically do minimum due diligence to protect themselves.
“I would love to see some new regulatory action, but I don’t know if it’s going to happen,” Ippolito said. “What’s needed is better rules on disclosures. [Nightingale] continued to raise money for months from these investors while they weren’t disclosing the losses.”
Not long after the Nightingale scandal came to light, CrowdStreet CEO Tore Steen exited the company. In a statement published by Crowdfund Insider last week, CrowdStreet defended its due diligence process.
“Importantly, CrowdStreet has consistently followed a detailed due diligence process and does with all deals and sponsors, including Nightingale,” CrowdStreet stated.
“Nightingale provided references from notable institutions, including KKR, Citibank, Wafra Capital Partners, ICER Properties, and DRA Advisors,” the statement said. “Our review and vetting process did not give us cause for concern with Elie Schwartz, Nightingale, or these deals, which went through their own due diligence process.”
CrowdStreet also said it is launching its first offering utilizing CrowdStreet Capital, a FINRA-registered broker-dealer.
A CrowdStreet spokesperson said in an email to Bisnow the platform adds to existing sponsor due diligence via various means, such as assessing a sponsor’s aggregate portfolio risk, requiring audited financial statements and implementing anti-money laundering screening. It said all investor funds would be placed in escrow accounts moving forward.
“CrowdStreet has evolved its business model as a licensed broker dealer acting in the best interests of our investors,” the spokesperson wrote.
Sponsors vary in quality, StarPoint Properties Senior Analyst of Capital Markets & Acquisitions Taylor Trautloff said, stressing that investors need to look at the sponsor itself to make sure they have the track record they say they have.
Her company has raised funding on crowdfunding platforms for commercial property developments in Phoenix and Denver.
“At the end of the day, the risk still lies with the sponsor. The crowdfunding platforms, I think, can only do so much,” Trautloff said.
Accessory Dwelling Units: What Are They And How They Work
Accessory dwelling units (ADUs) can be an affordable and effective housing option for renting a room or creating extra space. You can convert your basement or garage into an ADU, or you can utilize land from your backyard and build one from scratch. Before you consider such a project, make sure you understand how ADUs work as well as your financing options.
What Is an Accessory Dwelling Unit?
Accessory dwelling units, or ADUs, are smaller housing units that share the lot of a larger, primary home. These can be tiny homes, garage conversions or other independent living spaces separate from the main property.
ADUs feature a separate kitchen or kitchenette, bathroom and sleeping area from the primary house. They are also referred to as:
- Basement apartments
- Garage apartments
- Guest houses or cottages
- Mother-in-law or in-law suites
- Multigenerational houses
- Secondary dwelling units
ADUs are generally smaller than single-family homes and tend to be more affordable. This is ideal for multigenerational families looking to build close and affordable housing for relatives. It’s also a great way to rent your property on sites like Airbnb without having strangers inside your primary residence.
How Much Does an Accessory Dwelling Unit Cost?
ADU prices vary based on a few different factors, including:
- Construction materials
- Proximity to the primary residence
- Age of the unit
These factors make it difficult to estimate the cost of an ADU. In most cases, an ADU costs a fraction of the price of a new, single-family home. Internal ADUs—like a basement or attic conversion—can be built for as low $50,000. However, detached ADUs are usually more expensive, costing upwards of $150,000, according to AARP.
Pros and Cons of Accessory Dwelling Units
Despite the benefits, ADUs aren’t for everyone. Before breaking ground on your addition, consider these pros and cons.
- Renting can help recoup costs quickly. If you have the space, time and resources available, you can rent your ADU and quickly recoup some building costs. This means an additional revenue stream alongside your main job. It can also serve as retirement income if you’ve stopped working full time.
- Offers an affordable housing option. For families looking to add space for relatives, an ADU allows both parties to maintain independence while keeping them close by. This can be a less-expensive option for multigenerational families instead of buying a bigger home together or separating families into different smaller homes.
- Increases home’s value. Homes with ADUs in large cities and areas with a high cost of living are often priced higher than those without ADUs. Generally, you can expect an ADU to increase your home’s value anywhere between 10% and 35%.
- Costs go beyond construction. The more space you have, the more money you’ll need to set aside for maintenance and insurance.
- Less privacy. Even though ADUs are separate from the primary living space, you’re still inviting others onto your property. This means less privacy, which may be inconvenient at times.
- Not available to build in every area. ADUs are still a relatively new concept. Not all local zoning laws account for them. Check your municipality’s rules to ensure you can pull the necessary construction permits.
Ways To Finance an Accessory Dwelling Unit
There are a few different ways to pay for an accessory dwelling unit, such as:
- Ground Lease. MSC Capital Partners utilizes a residential ground lease to assist homeowners without access to financing to purchase an ADU. MSC Capital Partners builds ADU at no cost to Homeowner. Homeowner receives 25% of gross monthly rent. Homeowner can buy ADU anytime at Buyout Price. If this sounds interesting, let’s talk.
- Refinancing. You can use a cash-out refinance to access your home’s equity and fund the ADU construction. You’ll take out a new, larger mortgage and pay off your existing mortgage, receiving the difference in cash. You can use the extra cash to pay for anything, including your ADU project’s expenses.
- Home equity loans. You can borrow against your home equity with a home equity loan or home equity line of credit (HELOC). A home equity loan provides a lump-sum, whereas a HELOC grants access to a line of credit that you can borrow from as needed. Both tend to offer lower interest rates than unsecured personal loans.
- Construction loans. These are short-term loans from the builder or contractor of your ADU. Construction loans usually have higher interest rates than traditional, longer-term mortgages.
- Local grants or loans. Some local nonprofits and government agencies offer interest-free loans or grants to help fund home construction projects. See if there are deals available in your area before getting a loan to fund your project.
- Cash and savings. The best way to avoid high interest costs is to pay for the project out of pocket. If you can, save up for an ADU to lessen the burden of borrowing.
Building Wealth For Retirement With Alternative Investments
Check out this video on how to Build Wealth for Retirement with a Self-Directed IRA.