How to Invest in Multifamily During Economic Uncertainty

2023 has proven to be an uncertain economic year globally. Rising inflation has been fueled by various global events and tensions affecting economic powerhouses. For the real estate sector, 2022 was a slow year, with investment growth slowing down due to high interest rates and rising inflation.  

However, despite the general slow growth in the sector, multifamily real estate investments remained the most resilient.  

According to data, despite multifamily construction slowing down, the sharper decline of single-family housing in late 2022, falling to the lowest level since May 2020, kept the overall demand for multifamily property high.  

This is a positive sign for multifamily property investors who are unsure about the resilience of their investments during economic turmoil. Here’s a look into multifamily properties and how they can still pay dividends during economic uncertainty.  

The Outlook for Multifamily Investing 

The multifamily investment outlook for 2023 has remained primarily positive despite hiking interest rates and inflation. In February 2023, the Federal Reserve raised the target federal funds rate by 25 basis points, bringing the range to 4.50% - 4.75%. 

With the cost of borrowing increased, sectors such as real estate were expected to be hurt significantly, with investors having scarcer access to capital to buy new properties.  

Geopolitical events, such as the Russian-Ukraine war and tensions between the U.S. and China, also drove volatility and uncertainty in the market. Therefore, with more uncertainty, several multifamily investors and property developers were unwilling to take risks, leading to a slowdown in investment activities. 

However, despite the strong economic headwind, the forecast for multifamily investing in 2023 and beyond has remained positive. Research shows that multifamily investing will continue to grow in 2023, seeing above-average performance amidst the capital market disruptions.  

Still, there’s expected to be slower rent growth and higher vacancy rates throughout the year as the economic storms settle. Despite these slowdowns, the occupancy rate for multifamily property is expected to be higher than 95%, with rent growth at 4%.  

What is Driving Multifamily Investments Despite an Economic Downturn? 

There are two key factors driving multifamily investments despite the economic uncertainty. They include the following: 

Continued Demand for Rental Properties 

The continued demand for rental properties is one of the most significant drivers of multifamily investment in 2023. The economic uncertainty is causing demographic shifts and lifestyle changes, causing more people to lean towards rental properties, especially among the younger generations. 

This shift is offering multifamily investors an opportunity to develop and acquire multifamily properties that cater to the needs of these tenants.  

Shift Towards Green Technologies and Sustainability 

Multifamily investors are now increasingly prioritizing environmental sustainability in their multifamily properties. This includes adopting green building practices and incorporating energy-efficient technologies, which reduce building costs and attract tenants who value sustainability.  

Reasons You Should Invest in Multifamily Property During Economic Uncertainty 

There are several benefits of multifamily investing during economic uncertainty. Here are the most compelling ones. 

Historical Resilience 

The real estate sector has demonstrated historical resilience during economic uncertainty. The sector is known to weather short-term fluctuations and long-term trends in the economy while still appreciating over time.  

Moreover, demand for rental housing remains relatively stable during economic downturns, ensuring your multifamily property doesn’t lose too much value during uncertainty.  

Diversification 

Multifamily real estate investments allow you to diversify your investment portfolio, which is crucial to maintaining a steady cash flow during economic uncertainty. Therefore, you operate with lesser risk since all your eggs are not in one basket.  

Stability and Steady Income 

Multifamily properties typically provide steady monthly rental income. During economic uncertainty, more people lean towards rental properties over buying homes due to high interest rates and other factors, increasing the likelihood of your investments having demand and making consistent returns. 

Potential for Appreciation 

Multifamily properties in desirable locations tend to appreciate over time, giving you significant gains when you decide to sell. Short-term economic fluctuations hardly tend to affect appreciation in the real estate value.  

Tax Advantages 

Multifamily properties offer various tax advantages, including depreciation, mortgage interest deductions, property tax deductions, and depreciation, which offset your rental income and reduce tax liability.  

These tax advantages can be carried over to subsequent years and help provide cover when the economy is stormy.  

Inflation Hedge 

Real estate properties have historically been used as an inflation hedge. As the cost of living rises, property owners can increase rental rates accordingly, potentially increasing their cash flow and preserving their investment’s value.  

The Challenges of Investing in Multifamily During Economic Uncertainty 

Multifamily properties are not recession-proof. Investors might face a few challenges when investing in a multifamily property during economic uncertainty.  

Lower Occupancy Rates and Rental Income 

If the economy bites hard, some tenants may be forced to vacate your property, leading to higher vacancy rates and lower rental income. If the downturn is too steep, you may be forced to lower rental rates to accommodate more tenants and sacrifice your income until the situation stabilizes. 

Lack of Capital and Expertise 

Access to investment capital during economic uncertainty is scarce. Moreover, buying multifamily property at this time requires great expertise to source high-quality properties that will still drive significant demand and rental income. 

This can be a significant barrier for new and inexperienced investors who want to place their capital on a resilient investment.  

Multifamily Investment Strategies You Can Use To Invest During Economic Downturns 

How much you earn from your multifamily real estate investment during economic downturns depends on the strategies you use to make the investment more resilient. Here are some excellent approaches you can use.  

Build Good Cash Flow 

During economic uncertainty, cash flow is vital. You should buy multifamily properties in good neighborhoods with steady demand, ensuring a stable income and reliable tenants who will insulate you from market fluctuations.  

Moreover, having a good cash flow will cause your property to appreciate faster when the economy stabilizes, potentially improving your returns if you choose to sell the property.  

Understand the Local Market Dynamics 

Local market forces primarily drive real estate. Therefore, you should extensively research the dynamics of the local market you want to invest in and consider local factors such as population growth, employment, and infrastructure development before investing.  

Understanding these local dynamics can help you build resiliency and manage risks by ensuring the local market can still provide reliable demand and income for your property with short-term and long-term fluctuations.  

Leverage Low Interest Rates 

Economic downturns can sometimes cause banks and other lenders to offer low interest rates to drive up development and investments, creating attractive borrowing opportunities for investors. You can use these low interest rates to finance new multifamily property acquisitions or refinance existing loans. 

Doing this will improve your cash flow and strengthen your investment position.  

Prepare for Opportunities 

Savvy multifamily investors understand economic downturns can create unique opportunities for buying multifamily properties and expanding their portfolios. For instance, you can get several off-market sales at affordable rates for prime property that an owner wants to sell to bolster their cash reserves.  

Therefore, you should be prepared with access to capital, stay updated with current market trends, and stay close to your industry networks to identify and evaluate potential investments offering prime opportunities.  

Let an Expert Guide Your Investment 

Multifamily properties are one of the most stable investments you can make. They can survive sharp long-term and short-term fluctuations in the market and still have a stable and reliable income. Contact a multifamily investment expert today and learn how to invest in a stable property.