A “Signal” That Multifamily Is Finally Bottoming Out (Time to Buy?)

Large multifamilyThe housing market is constantly shifting, driven, not just by mortgage rates and inventory, but by bigger forces like population trends, inflation, and long-term economic cycles. Today I’m joined by seasoned real estate investor and friend of the podcast Brian Burke, to explore what those macro and demographic shifts mean for investors and where the biggest opportunities might lie in 2025 and beyond. I’m Dave Meyer. Welcome to On the Market. Let’s get into it. Brian Burke, welcome back to On the Market. Thanks for joining us,David. It is great to be here once again. Thank you.Good. Well, I just really want to check in with you. You are one of the more astute observers of the real estate market of the economy, and since there’s so much confusing stuff going on, I just like checking in with sophisticated and smart investors and so now that I’ve complimented you enough, I’d love to just hear a little bit about what you’re thinking about the market, what’s on the top of your mind?There’s all kinds of stuff going on in the market, but what actually is the market, Dave? I mean there’s like a hundred thousand different markets. You’ve got different sectors of real estate, you’ve got different geographies, you’ve got different strategies. There’s always a strategy that works somewhere at some point in time, and that’s really the trick to real estate investing, I think is finding the right strategy in the right place at the right time because everything is doing all kinds of different things. So we’ve got a lot to talk about if we’re going to cover the market today.Yes, that’s a very good point and well said because totally right. There are seemingly always opportunities and you just need to find them. How are you working your way through all of the noise out there to sort of find the signal in the data and the news so that you can develop a cohesive strategy.A lot of it is looking at different sectors of real estate and where they’re at in the market cycle and what kind of factors are involved in investing in them. We did a show recently about small multifamily and we talked about benefits of investing small, and it’s kind of funny, just this morning saw an article that came out talking about where the action really is, and guess where it was Dave? It was in small multifamily.There you go.Okay,So you got that one right. See, that’s why I was calling you a smart investor. You got that oneRight? Okay, there’s one, I guess I’m one for a hundred, we’ll call it that, but okay, here’s a great example. My core competency is in large multifamily, and that’s what I’ve been focused on for the last 20 years and I just can’t get behind it. It’s almost literally uninvestible right now. When you think about how you make money in real estate, a lot of times people talk about the spread between the cap rate that you’re buying at and the interest rate that you’re financing at, and the difference between those two is where you make your money. And I’m not saying subscribing that I fully believe in that theory. I think there’s a lot of errors and holes just in that belief, but assuming that that’s the case right now, multifamily cap rates are lower than borrowing costs, which means that you’re losing money under that thesis.
So trying to find a place to invest in real estate where you don’t have the deck automatically stacked against you, that’s the trick. And can you buy single family homes and cashflow them with interest rates where they are today? Is that perhaps a strategy? Small multifamily, if you can find a really good deal because you found a tired landlord or somebody that needs to get out of the business or a family that’s in inherited properties that have been owned for dozens and dozens of years by the same owner who’s done nothing to them to keep ’em up. There’s a lot of places you can find needles in haystacks, but if you’re looking at just broad strategy multifamilies, just one I really can’t get behind right now. I think there’s other places you can look.So tell me a little bit more. You’ve been on the show before. You’ve talked a lot about just sort of a discrepancy between what sellers are asking for and what buyers are willing to pay. Is that the main underlying reason you don’t like multifamily right now?Yeah. Here’s how I see this. Imagine that you live in a really small dinky town. It’s a hundred miles to anywhere. There’s no grocery stores in town. There’s no access for food whatsoever except for one restaurant and their food is absolutely awful.I’ve been to this town,Right? Yeah. So you’re really hungry. What are you going to do despite the fact that you can’t stand the taste, you’re going to eat it. And that’s what’s happening in the multifamily market right now I think, is you’ve got people that are eating that food, nothing else to eat. Now you’ve got a few people that live in town who have a few extra pounds and they’re like, you know what? I can survive without food for a while. I’m just not eating until there’s better food. I’m just not eating and they’ll live.ButNow here’s what happens. Somebody else finally opens a competing restaurant and then somebody else and then somebody else. Now you’ve got 10 restaurants to choose from and the business gets thinned out amongst all of them, and now nobody’s making any money. All the restaurants are going barely have any customers. And finally one of ’em says, I’m going to make really good food, then everybody’s going to come eat here. And they do that. And guess what happens? Everybody goes and eats and eventually the other restaurants see that and go, we have to make better food. So they all start making better food. And when they do, people come, even the people who are like, I’m not eating anything. They start to come. That’s what the multifamily market is like. The prices are way out of scale and people are paying it because there’s nothing else to eat. But as soon as you start seeing forced sales from lenders and owners who have loan maturities and all that, and all these properties start coming to market, they have to get legit on pricing or no one’s going there and everybody’s going to starve. So you’re going to see pricing actually come in line with reality because that’s what has to happen. That’s kind of the market situation that we’re stuck in right now. And it’s coming. If you look at loan maturities for this year
Is approaching a trillion dollars in commercial real estate. That’s what a t, that’s a lot of, I don’t even know how many zeros that is, but that’s a lot of zeros, and that means that there’s going to be things happening I think in the market that’s going to change the dynamic a lot.Yeah, absolutely. And I thought this would happen sooner. I’ll just be honest. I thought that we would see more distress in this market sooner. Is it just people have gotten good at kicking the can down the road and now we’re finally just at a point where people are going to have to face reality because rates didn’t go back down in the way that they had been hoping?Well, I kind of think so, but not quite. So they were never good at kicking the can down the road. They were just doing it to survive. It wasn’t doing it because this was good or this was this particularly brilliant strategy. What was happening was lenders were like, oh my gosh, the market’s terrible. If we foreclose or force a sale, we’re going to take a huge loss. We don’t want to report that loss to our investors and so on, so let’s just give them another year. And then so they give ’em another year, and then the other year comes up and then it’s like, okay, well if we can get the borrower to give us a million dollar principle pay down, then we’ll give ’em another year and then they can kind of kick this can. But here’s the part that I think a lot of people mistake is the lenders aren’t doing this to help the borrower, the syndicate or the syndicate investors or the owner’s investors,They’re not doing that. The kindness of their heartsSurprise, surprise, no, they’re doing this to help themselves. And the moment I’m telling you, the moment that things start to get to the point where the market’s improving enough, where the lender is assured that they’re going to get all or most of their principle back, they’re going to stop kicking that can down the road. And they don’t care if that means that the borrower is going to lose a hundred percent of their equity as long as they get their principle back. That’s the situationYou’re going toFind yourself in. So it isn’t a matter of like, oh, well the lender’s going to get tired of kicking the can or the borrowers are going to use up all their favors. This is simply just a matter of when the market gets good enough for the lenders, the lenders are going to put their foot down.That makes sense. And so it seems like you’re choosing not to eat. You got a little extra fat using your analogy here. So you’re choosing not to eat. When do you think the menu’s going to look appealing to you? Do you have any idea estimates of when things might look a little better?Yeah, well, my sayings that you’ve heard me say on this show before was end the dive in 25. So that means that I think that before prices can go up, they must first stop going down. So I think 2025 is the year that happens. Prices will probably stop going down, or at least real values will stop going down. There’s a difference between prices and real values. Real values will stop coming down. My other saying is it’s fixed in 26, and I think what that means is now that real values level off seller expectations, maybe because they’re under pressure, are going to align more with real values and allow transactions to take place. And then I’ve said Investor heaven in 27, meaning this is the point where you’re right at the cusp of when the market’s going to start to go back in our favor. So that’s still my timetable for now. Now I might have to come up with some new sayings if things don’t go the way I think, but so far I think we’re still on track for that.No, I like your sayings. As long as they rhyme I’m in.Yeah, yeah. It doesn’t matter if they actuallyHappen. I actually think that the logic is sound here. We do have to take a quick break, but when we come back, I want to get back to this small multifamily caveat or sweet spot that we’ve talked about a little bit and also get to the residential market as well. Please stay with us. Welcome back to On the Market. I’m here with Brian Burke. We are talking about trying to see the signal through the noise and the confusing economy that we’re in. We’ve talked a little bit about Brian’s bread and butter, which is the multifamily market, but we’ve also actually on the BiggerPockets real estate show, our sister show been talking about through this sweet spot that Brian talked about where multifamily maybe there is an opportunity in this five to 25 ish unit space. Tell us a little bit about why that subsection of the multifamily market is different.Well, I think the primary reason is the seller profile. So if you look in the large multifamily space, your seller profile is a professional real estate investor or group, well capitalized, sophisticated, this is their business, this is their daily bread and butter. The market is fairly efficient because you’ve got professional buyers who are in this market every day. You get into the small multifamily space and your seller profile is just different. You’ve got mom and pops, you’ve got families, you’ve got individuals, you’ve got owner occupants in some cases, a whole different seller profile who isn’t in this market every single day and they’re selling for their own personal reasons. There’s death, divorce, changes in strategy, all the different things that come into play. And when those people say it’s time to sell, they’re more inclined to do what they have to do to sell. Whereas your professional owner of a large property is like, oh, we think we should sell, but we’ve got enough capital. We’ve got access to capital to last longer, so don’t sell. Now. You don’t see that quite as much in the small multi space. AndAre you seeing volume here? I get in theory that this makes sense and that there’s a good opportunity here, but so much of the problem these days is that even the things that logically makes sense, there’s just nothing out there to buy.Yeah, that’s true. And I’ve given up on smaller properties a long time ago, so I’m not as into the market’s inventory
As I probably should be to answer that question really accurately. I think it’s going to vary from market to market. But here’s the beauty of it is in the small multi space, you can actually stimulate deal flow. You can write letters, you can knock on doors, you can visit properties, you can call property managers, you can build relationships with management companies and see who their retired owners are. There’s a lot of things you can do to drum up deal flow that doesn’t really work as well in the large multifamily space. So if you can’t find deals out there, go make a deal.Okay. And do you have any advice on specific markets or things that people should be looking for because as you know, selfishly am interested in this asset class or subsection of the asset class, just like any nuts and bolts advice on how people could go about this since you think there is opportunity?Yeah, I think differently than when you’re thinking about larger commercial properties and people think about cap rate yield on costs, IRR, all these different things. As a smaller investor who’s trying to get started, think about flow and just think about what you buy these units for, what they rent for. If you were to improve ’em a little bit, what rent could you get? Subtracting out all the expenses and baking it down so that even at today’s borrowing costs, you’re making a positive cash flow. If you are able to do that, you’re able to play the time in market game versus the timing of market game,WhichI think works really well in this smaller space, especially if your timing is starting right now because you’re getting into a decent basis much better than you. I think if you would’ve been trying to do the same thing in say 2021 or 22.So basically, just to reiterate, you’re saying as long as you could sort of break even or hopefully do a little bit better, but as long as you’re cash flowing, that allows you to get into the market and take advantage of any potential growth and upside, but you’re protecting yourself and you’re not at risk of losing an asset because you’re not actually cash flowing at all and you’d have to come out of pocket to make things workAnd just make sure that you’re really cash flowing. And this is where a lot of newer investors get tripped up is they think like, okay, this is going to cashflow at this price because rents are going to be this or expenses are going to be that. If you’re unsure, always err to the side of caution and overestimate your expenses, underestimate your rent, anticipate capital improvements like resurfacing a parking lot or putting on a roof and things like that and ensuring that you’ve got the capital to accomplish those things. And you’ve got the cashflow to cover that type of stuff because what you don’t want to find yourself in is a negative cashflow situation or a situation where you’ve got to pull extra money out of your pocket to try to keep the building maintained in a condition adequate enough to attract and retain tenants.And that’s true of residential too for everyone. You have to be calculating this correctly regardless of whatever asset class you are looking at. Brian though, you said something about a lower basis, which is honestly one of the two things that gets me excited about this potential asset classes multifamily across the board down 10, 15, 20% depending on the market. The other thing though is the way I see it is that rent growth is probably going to resume again at some point in the future after years of stagnated or depending on who you ask modest declines in rent on a national basis. Do you also agree?I do. And you’ll find some markets have had rent growth all throughout this period in the Midwestern markets where there hasn’t been a lot of development, there’s been moderate rent growth throughout this entire period of the decline in values, especially across the Sunbelt. But the primary factor behind rent declines, negative rent growth and flat rents has been overactive development.
And so that has been a headwind for probably the last two or three years where multifamily new product deliveries have been at record highs that’s been making it difficult for owners of existing properties to have any pricing power because they’re competing against brand new properties who are offering concessions like a month and a half, two months free rent and that sort of stuff. This is part of the end, the dive in 25 and fixed in 26 scenario is these deliveries are starting to trail off. It’s extraordinarily expensive to build these properties and with the financing and rent growth forecast and all the other stuff, it’s getting really difficult to borrow, to build, and these new deliveries are trailing off, and that’s going to create a supply and demand imbalance again and give pricing power back. So I think rent growth is going to make a comeback. I don’t think it’s going to be as soon as some people think, I know some people think it’s going to happen right away. I think if we get second half of this year, we could see some at least flattening or leveling, maybe slight uptick in rents by next year. I think we start to see a little bit more sustainable rent growth and then I think by 27 it starts to get fairly robust.Yeah, I’m totally with you. I’ve heard very ambitious people say 10% rent growth next year. I am not there. I’m not there. I I just think that’s so anomalous. It happens a few years in history. I wouldn’t count on such a dramatic swing of the pendulum back in the other direction rightNow. You saw that in 2020 right after Covid, but that was this unique unicorn where you had all these demographic movements into specific markets and those markets had astronomic rent growth coupled with Covid lockdowns that prevented construction in some markets and slowed down new unit deliveries and that sort of stuff. So those things are few and far between, but what happens to investors is it’s so recent in your memory you think, oh, we could easily get back there, but I’ve been doing this for 35 years. I mean, I’ve seen that kind of rent growth once in 35 years. Right, exactly. So maybe sometime between now and 35 years from now, maybe we’ll see it one more time.And honestly it would be good if you own it, but something has to go wrong for those types of growth patterns to occur. Like you said, if it only happens 3% of the years you’ve been investing Brian, something anomalous and weird is going on, and that usually comes with some trade-offs. It’s not usually like, oh, there’s this huge anomaly and everything’s wonderful. There’s usually something potentially negative or just some trade-off that exists to create those really unique conditions.And it also sets you up for reversal. And just as we saw after the 2021 rent growth, what happened after that? It fell off a cliff. That’s kind of what happens. Things revert back to the mean and the line on the graph gets too tall, it has to get back to the middle. And when it does that, that process is somewhat painful. When you see that kind of rent growth, to me, that’s not necessarily a sign to buy. It’s more of a sign to sell.Right? Yeah, because getting that irrational exuberance, you’re peaking, right?Yes,I totally agree. And I just think those past years are what you would call a pull forward. You’re basically taking all the rent growth from four years and pulling it into one year, and that’s what we saw. We had two years of really amazing rent growth and then three years of really bad rent growth to compensate for that. Obviously this should be self-evident to most people, but things just can’t go up forever at these clips. It just does not make mathematical sense. And so although I do think Brian’s sort of thesis here is right, get it in a good basis, cashflow break even, and then enjoy the benefits of time in the market, that totally makes sense to me. I just agree with Brian that don’t count on that rent growth happening all at once. It’s going to happen over the course of several years, most likelyIt will. And you’ll have different things that are going on during that period of time that you may have to overcome. I mean, the one thing about this business is it’s never easy, and another little saying I’ve always had is there’s always a good time to buy. There’s always a good time to sell, but they never occur at the same time.AndSo right now is it a decent time to buy? Actually, I kind of think it’s neither a good time to buy or sell. That does happen at times and I think maybe next year, year after, it’s going to be a good time to be a buyer and then it’s going to be a really good time to be an owner as you ride that wave and then it’s going to be a good time to be a seller, right, when everybody thinks it’s a good time to buy, that’s probably about the time that’ll happen.I assume though, that that’s your take on multifamily or are you looping in residential there for not being a good time to buy as well?Not really. I think residential operates on a whole different plane. There’s not a run on residential construction in a lot of markets. Now there are some markets where you’re getting these massive buy to rent subdivision projects that are coming on and they’re building hundreds, maybe even thousands of homes as rentals and that is occurring in some isolated markets, but it’s not widespread. So I think you’ve got a different dynamic there. You also remember who is your endBuyerTo get you out of that investment is somebody that isn’t buying it because of the cap rate. They’re buying it because they like the way the kitchen flows to the dining room and it’s in the neighborhood close to their school. And those reasons give you a lot of liquidity and a pretty easy exit that you don’t have in a lot of multifamily investments. But again, it still boils down to the same thing. You’ve got to be able to calculate it out to cashflow. If you’re buying something that’s a negative cashflow, that’s not really investing in my opinion. It’s speculating and that’s a whole different animal.I totally agree, but I do want to sort of dig into more of the residential market and what you’re seeing there, but we do of course have to take one more break, but we’ll be right back. Welcome back to On the Market. I’m here with Brian Burke. We’ve talked about large multifamily and why Brian’s staying away. We talked about small multifamily and why that might be a more appealing option right now. And we got into a little bit of the residential market as Brian was talking about before the break. But Brian, tell me a little bit about how you view, I know this isn’t your bread and butter anymore, but how you view the prospects of residential investing right now.Yeah, so this one is really highly micro specific. In other words, you can go almost street to street across the country and have different real estate market conditions in the single family space. School district makes a big difference. Crime rates make a big difference. All sorts of different things are going to play a role. I had a goal when I was in my, I think late twenties that I said, you know what? I’m going to buckle down and I’m going to buy one rental house a year. That’s going to be my goal. And I never accomplished it, but I accomplished way more than that when I set that goal. But I think if anybody did that and accomplished it, timing does matter a little bit, but no matter what markets you’re in, you’re going to do way better in your later years in life than probably 90, 95% of the population. It is one of the greatest wealth builders and really just getting started is the primary thing. You’ve got to just get started and just set a goal and start after it. Now, time in the market is a big deal, especially in the single family space and for smaller investors who are just accumulating a small rental portfolio, you don’t get rich off of collecting rents on a three bedroom, two bath house
Even if you have 10 of ’em, but you will get very wealthy over time here. So time in the market really does matter, but timing also does matter. If you bought a bunch of rental houses in 2005, you were hating life in 2009 and you might’ve even been in bankruptcy court, you certainly had foreclosures. It was just an absolute bloodbath. But I don’t think that now is a repeat of that time. We’ve seen a big decline in commercial real estate, but we haven’t seen that decline in residential, and I don’t think that that means that a decline is right around the corner. What I don’t see is I don’t see a 2008 style kind of like residential real estate collapse. That was a specific situation that was tied to crazy lending standards and just runaway enthusiasm in the residential market that all came collapsing in a ball of flames, and we don’t have those same conditions being set up right now for that space. And I don’t think that this is a bad time if you’re concerned about timing the market.Yeah, actually I just did a deep dive into mortgage delinquency rates and what’s going on with credit standards in residential versus commercial because I don’t know how much you’re on social media, Brian, but there’s been a lot of hubbub about delinquency rates over the last couple of weeks. So if you want to understand what Brian’s saying and why credit conditions are very different, if you haven’t yet, go check out the April 3rd episode of on the Market. But Brian, I agree with you. I think for the market to truly crash, you need to have delinquencies, you need to have forced selling. There’s just no evidence of that right now by almost every standard, the American homeowner is paying their mortgages and they’re in a relatively good position to continue servicing their debt. So that’s all on the good side. That said, I do see prices softening. We are seeing inventory pick up, and so you’re saying it’s a good time. I actually kind of think we’re in a nice window here potentially, but what advice would you give to people who want to avoid the catching the falling knife scenario where you buy in a market, it drops one or 2%. Is that something you should really be concerned about? And if so, is there a way to mitigate that or how do you wrap your head around that?Yeah, one or 2% is not a falling knife. Commercial real estate has fallen like 40%. Everybody says 20 because cap rates have decompressed by 20%, but they forget that the income also declined. And when you factor that in commercial real estate’s down like 30 to 40%, that’s a falling knife. Single family homes coming down, one or 2% is a falling fork. I mean, you could literally put your toe under it and it’s not even going to hurt you if you have a shoe on. So put a shoe on and go invest in some single family homes. How do you do that? Well, don’t get a hundred percent financing with negative amortization, floating rate interest loan, go get a 20% down conventional landlord financing with an amortizing loan with a 30 year maturity. So nobody can tell you you have to sell. This is a part of the problem with commercial too, is these loans in commercial come with a maturity date. So
Whatever that maturity date is, you have to do something by that date whether you have to refinance or you have to sell. And if that happens at a time when times are bad, you have a major problem. But in single family, you have this beautiful financing package called the 30 year fully amortizing loan. And what that means is no one can ever tell you you have to sell right now unless you can’t afford to make the payment. And as long as you have enough room in the difference between the payment and the income, you shouldn’t find yourself in that position, especially if you have some cash reserves. So have cash reserves, finance conservatively use fully amortizing debt, not short-term debt, and you’ll be totally fine if the market comes down two or 3%, it’s going to take a while and you have to be patient. I mean, I did this, I bought a house in 1990 and from 1990 to 1997, the price was literally the same. I mean seven years, it didn’t go up at all. And that happens sometimes, but guess what? By 2001, the price had doubled. So that is my time in market theory. Use the time when prices are slacking a little or when price activity is calm, use that period to acquire your assets. Don’t be acquiring those assets when it’s like, Hey everybody, we got to go buy houses. This is the time to buy and everybody I know is buying and then prices are running up, and you’re like, this is great. And it’s like, no, this is terrible. You want to be buying. In times like this, when things are kind of at slackWhen the mainstream media or the average person thinks it’s a good time to buy real estate, it’s too late. You missed the best buying window already. And it’s not to say that you shouldn’t be careful, as Brian said, there are things that you should do and you should not just go out and buy anything. But this actually is I think, a reasonable time to buy. And I haven’t been doing this as long as you, Brian, but I’ve been doing this for 15 years now, and I tell people that I got started in 2010 and people are always so jealous. They’re like, oh my God, what a great time to buy. And in retrospect it was, but my property value went down for two years after I bought that property. It wasn’t instantly a success, and now I look like a genius, but you have to take a little bit of a risk and have to just give yourself that time to hold onto these properties. And so completely agree what you have to say here, Brian. So we’ve covered a lot. We’ve covered commercial multifamily or smaller multifamily. We’ve covered residential. Brian, tell me just a little bit with all the stuff you just said, doze, you talked about tariffs, you talked about the risk of a recession. What are some of the main indicators, one or two things that you’re going to be watching it is the first day of the second quarter over let’s say Q2 here. What are the main things you’re going to be keeping an eye on?I’m watching for recessionary indicators like new jobs, jobless claims, the consumer price index, those kinds of things, because that seems to be what’s on the mind of the Fed when they’re setting interest rate policy. And I think that there’s a complete disconnect right now between what’s happening in the real world and what’s happening behind the boardroom doors in the Fed when they’re setting interest rate policy.AndSo rather than paying attention to what they should be paying attention to, I’m paying attention to what they are paying attention to. And I think when you start to see some of these things like recession is getting more evident and there’s more jobless claims, fewer new jobs, then you might start to see some interest rate declines. And that’s going to mean that there’s going to be some opportunity to acquire again. If we don’t see that and we continue to see this robustness where no matter how bad you think the economy should be, it’s still not bad at all, then I think it’s going to be bad for buying assets for a while. It’s going to take a long time for this to catch up. And so I’m trying to monitor those things, even though I feel like they should be kind of irrelevant, they’ve become very relevant and I think you have to pay attention to it.Alright, well Brian, thank you so much for joining us. This was a lot of fun. As usual, we appreciate you being here.It’s my pleasure. Anytime.And thank you all so much for listening to this episode of On The Market for BiggerPockets. I’m Dave Meyer and we’ll see you next time.