Three Inescapable Factors Pointing to the Fact That This Could be the Perfect Time to Buy Multi-Family Projects

The commercial real estate market requires a flexible outlook, and a willingness to adjust as the market conditions demand. Right now the residential housing market is either soft, or imploding, depending on your perspective. Foreclosures on houses are reaching near record numbers, as the boom of Adjustable Rate Home Loans are pinching home buyers…which means that a lot of people are losing their homes, sad to say, and looking for places to live.

What this means for you is that owning a commercially viable multi-family rental unit may make a lot of sense for the buy-and-hold strategy. There are a lot of housing trends to pay attention to in the news, but the biggest one is that the peak in adjustable rate mortgage signings was done in the 3rd and 4th quarters of 2004, and the first quarter of 2005, when interest rates were at miniscule levels. Nearly every one of those mortgages had a clause in place saying the first rate adjustment would happen in two to three years, and most of them are coming due later this year.

Look at the housing market where you are, and look at what the sales prices are for single family homes, and how much they differ from the asking price. If houses are consistently selling for 10% or more under the asking price, then your local housing market is deflating. If the local economic conditions still show good, reasonable employment, it's time to look into buying town homes and duplexes (and even small apartment buildings) for rental purposes – or, if you're in a buy-and-re-sell mode, time to buy them, renovate them, and turn them over fast – there's going to be a strong demand for rental units as people try to get out from under their mortgage payments.

There are always cyclical fluctuations in the housing market; we're going through a particularly sharp fluctuation right now, spurred on by the refinancing boom earlier this decade, and a bunch of risky decisions made during the housing bubble that resulted. However, like all cyclical adjustments, the key to turning a profit in an investor is to look at the needs the adjustment is creating. Two years ago, the money was there to be made in making single family dwellings, selling them in the hot home market, and pocketing the difference. Now, it's in apartments and condominiums.

Sadly, for the people who can't get out from under their mortgages, there's going to be a rash of foreclosures on sub-prime loans. Indeed, many of those home owners have a negative equity situation – they've lost money from their investment in their house. Even worse, a lot of sub-prime lenders are likely to go down with them with the foreclosures happen. With their credit mangled by the foreclosure, most of those former home owners are going to switch back to renting, and having apartments for them to rent is only sound.

The fact of the matter is that every adult, throughout their life, has to make important decisions about renting and housing. While the conventional wisdom is that most young professionals settle into their careers, buy a first home, and gradually "trade up the market" as their incomes rise over their lifetimes, the conventional wisdom is only one set of solutions to the housing problem. There is a growing trend, from professionals who've had to try to sell a parent's home after a death in the family, or for people priced out of the housing market in the major metro areas on both coasts, to simply rent. A truism is that you don't own a house, it owns you. Renting, with a reliable landlord means you're paying for maintenance that otherwise you'd have to fund on your own; for families in a careers that requires a fair bit of relocation, renting makes a lot of sense, as anyone who's had to try and sell a house across the country can attest.

>From the perspective of the commercial real estate investor, the current down turn in the housing market is an investment opportunity. Do your homework in the local housing market and do what needs to be done to capitalize on it. When investigating multiple-family projects, it's worth it to look at the usual housing demographic trends: Is there an employer that's about to expand their entry level work force? If so, there's going to be a push for more apartments. Is your housing market particularly over-valued (the short answer is that if you're within driving distance of the Eastern Seaboard, the answer is "yes", likewise for the California coast)? If so, there will be a lot of people in the financial straits described above.

It may also be worth looking at condominium foreclosures in this leg of the market cycle. While the trend in recent years has been to convert apartments into condominiums to make a quick cash influx on an investment, with foreclosures happening – even on condominiums – reversing the trend may make a certain amount of sense, and you may be able to get the entire building for a significant discount, particularly if it's been foreclosed on by a federal agency.

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