Returns are relative.
Let’s take 6% returns. By the time you are reading this, 6% per year could be horrible. Or it could be normal. Or it could be amazing (in which case you probably have more urgent things to attend to).
But failing to adjust your return expectations to current reality may cause you to miss out on good deals.
So let’s examine risk and demand to figure out how to approximately make decent returns during any given market cycle.
And then we’ll pinpoint what is going on right now, as this article is published.
They Expected Discounts & Instead Got Prices Pushed By Demand
Upon this writing, the Covid Pandemic has been raging for just over a year in America.
When it first hit, the average investor worried about financial uncertainty. And the savvy investor asked “so when and where will I be able to identify discounts?”.
We’ll examine this on the topic of multifamily apartments.
Typically, when the market loses confidence and panics, people sell based on emotions. And that creates incredible (discounted) buying opportunities for savvy investors.
Well, those discounts never came.
In fact, the opposite happened. Prices went up (for acquiring new multifamily properties) in most cases.
Multifamily showed heartening resilience from 2020-2021 . Whether it was institutional, syndication, or international capital… and whether it was a primary or secondary (or even tertiary) market… the flow was positive.
Simply because the assets just refused to not perform.
Because they were relatively stable, instead of seeing discounts we observed full to overpriced sales.
Think of that for a second:
Not only were there no bargain multifamily deals in that timeframe, but prices were bid… up!
“Classless” Cap Rates Are Dictating Our Focus
Cap rates remain compressed. Even when going to the historically attractive secondary and tertiary markets.
Typically we would direct your focus to Class C value-add or workforce housing. But right now the spread between Class A, B, and C is very thin.
That’s why we teach context rather than dogma.
Historically Class C can offer interesting opportunities. But right now? The market is making the case for more stable “trophy” assets in primary areas.
This is, of course, general. There are deals to be made across the spectrum of asset classes… but they have all become quite hard to find.
To find great deals in all markets, one has to diligently hunt and not rely on past projections or expectations.
Include Risk To Judge Relative Returns
At the time of this writing, here is what had happened in the past:
Doubling investor money in 5 years, and high teens to low twenties IRR / 10% cash on cash returns.
Unrealistic. Not impossible, but very rare. Especially if we want to maintain a reasonable risk profile.
Maybe 6-8% COC returns, and low teens IRR are more realistic.
This requires you to think more in terms of RELATIVE returns. Meaning what can you achieve compared to other options in the current market.
For example, you may want to compare a Class B multifamily deal with what you can reasonably expect in non-volatile stocks and bonds.
You may also argue that a 10% return today is very attractive on a relative basis, especially considering that interest rates are roughly around 0%. Yet, you may have an ABSOLUTE return value that you desire no matter what the market is otherwise offering.
Here is the thing you have to remember:
When you set an arbitrary, absolute goal… it may require taking on much more risk to achieve your desired returns in certain market conditions.
You may be better off accepting lower prospective returns in exchange for greater certainty of those returns.