Expect to Continue to Pay Up for Multifamily

LOS ANGELES—Multifamily activity isn't slowing down this year, and investors should expect to continue to pay high prices for multifamily product. Gregg Bernstein, the CFO and co-founder of property management from LBPM, has clients purchasing multifamily investment properties at cap rate in the low 3% range. Those he said become hard to manager, because there are natural recurring and fluke maintenance costs. As cap rates continue to compress, he says that clients are showing no signs of slowing down.

“My take is that everyone believes that the market is going to grow to the sky,” Bernstein tells GlobeSt.com. “There is really unbridled enthusiasm. People who have bought buildings in the last few years have purchased properties, in my opinion, at really low cap rates.  We have gotten heat from clients that have paid too much for a property.”

First quarter numbers of 2017 confirm that investors are remaining bullish on multifamily. According to the Mortgage Bankers Association, mortgage loan originations in the first quarter were up 9% for multifamily properties and the dollar amount on the loans was up 14%. Overall, multifamily continues to be a major driver of all originations trends, and will likely continue through 2017.

To help curb the high pricing, Bernstein has recommended that his clients—especially mom-and-pop and high net worth investors—to treat multifamily investments as commercial properties, which use a different set of tools, like accelerated depreciation, to increase their bottom line. “We tend to encourage our clients to look into these cost segregation studies, but there is some hesitation,” he says.

Using these tools—which should be done through a CPA—is not considered aggressive tax policy, and will help defer fees to another year, or even forever. This is specifically appealing to long-term owners. Owners looking to switch out of their properties will need to be careful. “If you sell the property and you do not exchange into another property owner, you could have recapture,” explains Bernstein.

LOS ANGELES—Multifamily activity isn't slowing down this year, and investors should expect to continue to pay high prices for multifamily product. Gregg Bernstein, the CFO and co-founder of property management from LBPM, has clients purchasing multifamily investment properties at cap rate in the low 3% range. Those he said become hard to manager, because there are natural recurring and fluke maintenance costs. As cap rates continue to compress, he says that clients are showing no signs of slowing down.

“My take is that everyone believes that the market is going to grow to the sky,” Bernstein tells GlobeSt.com. “There is really unbridled enthusiasm. People who have bought buildings in the last few years have purchased properties, in my opinion, at really low cap rates.  We have gotten heat from clients that have paid too much for a property.”

First quarter numbers of 2017 confirm that investors are remaining bullish on multifamily. According to the Mortgage Bankers Association, mortgage loan originations in the first quarter were up 9% for multifamily properties and the dollar amount on the loans was up 14%. Overall, multifamily continues to be a major driver of all originations trends, and will likely continue through 2017.

To help curb the high pricing, Bernstein has recommended that his clients—especially mom-and-pop and high net worth investors—to treat multifamily investments as commercial properties, which use a different set of tools, like accelerated depreciation, to increase their bottom line. “We tend to encourage our clients to look into these cost segregation studies, but there is some hesitation,” he says.

Using these tools—which should be done through a CPA—is not considered aggressive tax policy, and will help defer fees to another year, or even forever. This is specifically appealing to long-term owners. Owners looking to switch out of their properties will need to be careful. “If you sell the property and you do not exchange into another property owner, you could have recapture,” explains Bernstein.