Past Performance May Not Equal Future Results

Right about now we're seeing a ton of funds popping up talking about the returns they've made over the previous 2-3 years. Here's why you should and shouldn't consider this.

The bad news first. The Multifamily Real Estate market is waning in some, but not all, market areas. So, there was a traffic signal up ahead, it would be yellow in some markets, and maybe green in others. None the less, a "proceed with caution" outlook in these areas is wise.

Now, the geographic area isn't the only factor that brings about risk factors in a deal. We also so higher interest rates and cap rates that aren't moving equally so, as they should be, this is partially because buyers are still paying high prices (supply and demand) which has left considerable risk on the table as well.

It's necessary to understand that this is a zero sum game, and that in order to finish there must be a sale at the end of the term. We're talking about someone willing and able to pay your exit price for fulfillment of lender and investor obligations, as well as GP profit.

We've just seen the greatest equity moves in history for the Multifamily Real Estate sector (and many others as well) unfortunately, they are unsustainable for future outlooks. This equates to flat rent movements and possibly even declining rents in some areas.

Corrections are a natural part of all healthy markets. A continuous upward protectory would actually be an unhealthy market occurrence. The correction will solidify the increase by stabilizing market support price points, so you want to see prices pull back enough to create these "bottoms", which were not created in the recent massive rent increases.

Now the good news. There is a still a shortage of housing in the Multifamily marketplace, and this is expected to take until 2035 to flatten out if the current rate of increase stay consistent with its current levels. If you buy right, you can still formulate a healthy deal that is profitable for you and your investors.

While this looks good for a healthy Multifamily market going forward, no one has a crystal ball, in fact I would run from anyone who proclaims to have one, and as always your best bet is to know the numbers, know your market, and study other players.

No one can know everything. Keep your areas of expertise limited to just a few markets that you like for specific reasons and learn as much as you can about them. Real Estate is Local, whether that means by city, county, state or Region to you, it definitely not Nationwide unless your a huge company with boots on the ground in every state.

You can increase you chances for success by decreasing your coverage area, and becoming a specialist, not a generalist. Specialize in specific functions and delegate what you're not great at to other professionals or form a team that compliments your best attributes.

Remember to practice within when you're doing without. Always be looking at deals, underwriting deals and even sending out LOI's (even if they're not pretty) mostly, don't settle for taking on more risk then you and your investors are willing to take on. The number one rule in investing is: "Don't Lose Money".