## Multifamily Market Slowdown Forces a Shift in Strategy for Investors
**Key Takeaways:**
– The multifamily market is slowing down, leading to challenges for investors, especially those in major markets like Dallas, Austin, and Houston.
– The slowdown is driven by rising operational expenses, including insurance costs, and a decrease in rent growth potential.
– Veteran investor Vanessa Alaro argues that investors need to shift their focus to secondary and tertiary markets to find better deals and avoid overpaying in highly competitive markets.
– Alaro emphasizes the importance of building a solid business foundation before acquiring properties, focusing on financial metrics over emotional attachments.
**Multifamily Market Shift Exposes Risks of Over-Leveraging and Miscalculated Projections**
The multifamily market, once a hotbed of investment activity, is facing a significant slowdown, presenting challenges for investors who overleveraged and relied on overly optimistic projections. This shift is driven by rising operational expenses, particularly insurance, and the diminishing potential for rent growth, as illustrated by the experience of Venus Capital founder Vanessa Alaro.
“Expenses went up 7.2% last year, double the inflation rate. Taxes went up almost 11%, payroll 8%, and insurance in some states 400%”, Alaro explains. She cites her own experience in Orlando, where insurance costs skyrocketed 400% for a new property despite no new hurricanes occurring. Attributing this to a lack of insurance professionals in the area due to the exodus after Hurricane Katrina, Alaro highlights the significant impact of rising costs on property performance.
Alaro emphasizes the need for investors to build a strong business foundation before diving into property acquisitions. “You’ve got to be able to manage the property. You’ve got to be able to pay the insurance, the rates that are going up right now,” she urges. She highlights the tendency for investors to become enamored with properties and overlook potential risks, especially in a market where many are desperate to secure deals. “They’re all desperate to buy deals because that’s the only money that you get to fuel the machine,” she notes.
**Secondary and Tertiary Markets Emerge as New Opportunities**
Alaro advocates for a shift in investment strategy, focusing on secondary and tertiary markets. “We have never even looked at a deal in Austin,” she reveals. This strategy has allowed her to navigate the market downturn, avoiding the heightened competition and overvaluation that have plagued major markets.
“We buy in all these secondary and tertiary markets that nobody knows,” she explains. Alaro acknowledges the challenges in raising capital for deals in these markets, which often lack the same level of investor recognition as major cities. “It’s extremely hard because then you have a syndicator making up the projections showing 35% annualized return in three years, we give you your money back, you triple your money, and then we come like, ‘Hey, this is our property, it’s in a market that you’ve never heard of before. Conservative increases, and we have 11% vacancy and you know you’re going to make 25%, but you have to be there for seven years.’,” she says.
Alaro emphasizes that this approach allows investors to secure more realistic deals with a focus on long-term, sustainable growth. The current market presents an opportunity for investors who are willing to move away from the allure of major markets and embrace a more calculated, long-term approach.
**Focus on Financial Metrics and Due Diligence**
Alaro highlights the importance of focusing on financial metrics over emotional attachments to properties. “I don’t even look at the properties, not even the pictures. I don’t even see any pictures until I know that the financials are good. I just see numbers,” she emphasizes. This disciplined approach helps avoid overpaying for deals based on assumptions or emotional responses rather than sound financial analysis.
Alaro emphasizes the need for thorough due diligence, both regarding the property and the individuals involved in the transaction. “The most important thing in any of this is really diligence. Diligence on the people you are going to be working with, diligence on the property, the numbers, before you get emotionally involved,” she advises.
**Conclusion and Summary**
The slowdown in the multifamily market, characterized by rising expenses and limited rent growth potential, highlights the importance of a strategic and disciplined approach for investors. By shifting their focus to secondary and tertiary markets, focusing on financial metrics, and prioritizing diligence, investors can navigate these challenges and secure opportunities for long-term growth.