Learn when to sell to ensure a strong return on investment with pro advice from our multifamily investment advisors
As an illiquid asset, real estate takes much more effort, time, and friction to sell when compared with liquid assets like publicly traded stocks and bonds.
Despite the long sales cycle, investing in real estate can be extremely lucrative if you’re willing to put in the work to invest in the right type of real estate at the right time. For example, commercial real estate offers a typical annual return of purchase price between six and 12%, which is much higher than residential properties at one to four percent. [2]
The time that you choose to sell your asset can either help or hurt your return on investment. That’s why it’s essential to look at the market cycle to understand the times when prices are rising, falling, and flattening out.
Join us as we explore the ups and downs of the real estate market to help you determine when you should sell your investment property to get the best possible ROI with expert advice from one of our multifamily investment advisors.
What is a seller’s market?
A seller’s market occurs when there is more demand than supply of real estate inventory. With low supply, almost every property will sell since there are less options for buyers to choose from.
In a seller’s market, you should experience a smooth, easy transaction throughout the whole process. “When the market’s going up, your property value will continue to increase during your transaction,” explains Joe LaFleur, multifamily investment advisor and co-founder of 100Units. “You go to a broker for a property valuation, the broker goes out and takes it to all the buyers, gets the best offer, puts it under contract at an agreed to price, the buyer goes to get an appraisal, goes to the lender, visits the credit committee, and actually goes to closing, all while the value of your property continues to increase.”
In most real estate sub-markets, the cycle will move upwards when the credit market is loosening up, and it’s easy to get financing for properties, which also allows property values to rise.
What is a neutral market?
In a neutral market, the number of buyers and sellers is usually about the same, and the market doesn’t experience any favorable swings toward one party or the other.
As a seller in a neutral market, you go through all the usual steps of the transaction, but the value of your property remains the same. It typically takes about 180 days for the market as a whole to become neutral from an upwards swing because of real estate being such a slow moving, illiquid asset.
“In a neutral market, all the steps of a transaction start to become more difficult, creating a dampening effect on price appreciation,” details Joe. “You hope that the appraisal comes in at a good number and doesn’t start to drop. You hope that the lender agrees that the property is worth it, and actually funds the transaction and you can close. When the purchaser is out raising the equity, they’re looking for a higher return, acting hesitant, and feeling nervous about the future.”
What is a buyer’s market?
A buyer’s market exists when there is greater supply of real estate inventory than demand from buyers. There will be fewer sales which will skew median prices downward.
If you choose to sell on this side of the market cycle, you’ll experience the inverse of all the steps in the transaction process from the seller’s market.
“As you go through each step of the transaction, your property value will continue to decrease, making it very difficult to close,” says Joe. “Each of the people involved in the transaction — the buyer, the lender, the appraiser, the underwriter — are not going to want to pay at the price you set because they see that its value is depreciating. In this scenario, the appraiser is going to come in lower, the underwriter is going to become more conservative and drop their LTV back, the equity that your buyer is raising is going to decrease, and the purchase price is going to to shrink because other properties around yours will start to sell for lower prices.”
The market starts to turn downwards when lenders no longer want to lend on investment real estate, causing property prices to fall and creating a nearly impossible time to get a deal done. This period in the market cycle typically lasts 12-24 months before it reaches some sort of equilibrium at the bottom that lasts for another six to 12 months before going back up again.
Where does the real estate market currently stand?
Over the past decade, the U.S. real estate market has been on an upswing where lending has been easier, interest rates have been accommodating, and prices have been appreciating.
“In Central Florida, we’ve had a doubly strong real estate market in the past 11 years due to the astonishing levels of population and rent growth,” shares Joe. “However, lenders are now tightening up, interest rates are rising, and buyers are starting to get a little hesitant in Central Florida. I have yet to see the prices curve out for multifamily, but in other markets—especially in the institutional markets of retail and office—it’s already curved, so it should also occur in multifamily unless rents continue to further increase.”
What’s the best type of real estate investment in the current market?
If you want to be a successful real estate investor now and in the future, consider investing in multifamily real estate.
“As an asset class, multifamily real estate is an incredibly good inflation hedge because rents will continue to rise with the inflation. What that does is pay down your debt, because your debt is typically a fixed-interest rate,” details Joe.
The recent midyear outlook from the Freddie Mac Multifamily Research Center supports Joe’s advice with predictions that multifamily growth will moderate for the remainder of 2022. It found that the industry is well-positioned to weather the economic uncertainty and interest rate volatility of the broader economy. [3]
Additionally, the government-sponsored enterprise found that the top markets by gross income growth this year include Jacksonville, Orlando, and Tampa in Florida. [3]
Final thoughts
By knowing where the real estate cycle stands, you can make an informed decision to execute in a seller’s market whenever possible.
As an investor, you don’t want to find yourself in a situation where you need to sell, but the economy is turned against you. You have equity tied up in your property, and selling is your best option to access it.
“If you’re in a seller’s market and you know you don’t want to own your property five years from now, you would be wise to sell immediately instead of holding it,” advises Joe. “Circumstances could turn against you because of changes in the macroeconomy that you have no control over, and then you’d be stuck holding your property for five to 10 years just to get back to where you were.”
Do you need help selling your Florida multifamily asset?
At 100Units, our objective as your multifamily investment advisors is to help you achieve your long-term investment goals.
As a seller, we’ll lend you our unique perspective on your situation and provide you with real time market analysis to help you stay ahead of every changing market trend and make timely, informed decisions.
With a speciality in selling properties that range from five to 150 units, our marketing and sales experience allows us to reach every investor interested in purchasing Florida multifamily real estate across the country.
Ready to sell your multifamily property?
Get started by finding out what it’s worth.
Sources:
1: Forbes | Buying A House Vs Investing In The Stock Market
2: Nolo | Pros and Cons of Investing in Commercial Real Estate
3: Multifamily Executive | Freddie Mac: Multifamily Growth to Moderate