Report: Multi-family Real Estate Investors About to Hit Turbulence

Published September 08, 2023

And what this means for physician investors

As the Wall Street Journal reports, those who invested in multi-family buildings are facing mounting debt and adverse market conditions. These investments have become popular with physicians over recent years, posing a possible threat to their portfolio.

“A real-estate haven turns perilous”

In the wake of the COVID-19 pandemic, we’ve seen countless headlines about the uncertain future of the commercial real estate market. With remote work becoming popular and (in many cases) permanent, office buildings around the country are sitting vacant, generating little income for landlords and investors and endangering mortgages.

According to financial experts however, the state of multi-family buildings (apartment buildings) is following suit — and by some metrics, fairing worse. Historically, these investments have been low-risk for investors. During the 2008 housing crisis, they proved to be recession proof as former homeowners relied on rental properties for housing.

More recently, inflation was driving up rents, as well. According to the Apartments List, a popular apartment listing site, rents rose 25% over 18 months across 2021 and 2022. This caused the value of many buildings to go up and investors took notice.

According to the WSJ, these positive market signs prompted many investors to take out short-term, floating rate loans to buy properties and raise rents — with the assumption that, with the rising value of these apartment buildings, they could easily sell them at a profit or favorably refinance their debt down the line. 

Instead, interest rates on the loans spiked, which drove down the value of the properties and put many investors in a difficult position. In Houston, Nitya Capital alerted investors in March that profits on their $3 billion of multi-family properties were getting reduced in order to pay off interest on loans.

“We are essentially paying the higher mortgage costs instead of making cash distributions,” Swapnil Agarwal, a Nitya Chief executive, told investors in a letter.

Similarly, Veritas Investments, one of San Francisco’s most prominent landlords, is at risk of losing more than a third of its San Francisco portfolio after recently defaulting on debt associated with 95 multi-family rental properties. 

Overall, the value of apartment buildings fell 14% in the last year — after rising 25% the year previous (according to data company CoStart, cited by the WSJ). That decline mirrors the recent slide in office properties. The Mortgage Bankers Association estimates that nearly $1 trillion in mortgage loan debt on these properties is set to come due over the next four years, a number that far outpaces current landlord and investor debts in the commercial real estate space.

As former managing partner at Mack Real Estate Credit Strategies Peter Sotoloff told the WSJ, landlords and investors are now facing a “hydrogen-bomb scenario.”

Are you a physician with a real estate portfolio concerned about how higher interest rates might be impacting your investments? Earned is ready to help assess your portfolio, determine strategies to mitigate risk, and better ensure the long-term health of your finances. Contact Earned today to set up a consultation.

Real estate investments & physicians

Real estate investments, including multi-family properties, have become popular among high earning physicians and have been touted as a great way for doctors to diversify their portfolios and generate additional income for retirement. Generally speaking, investing in real estate:

  • Can make doctors eligible for certain tax breaks.

  • Provides long-term appreciation. 

  • Protects against inflation.

However, investing in real estate doesn’t come without risks. The impact of the pandemic on commercial real estate and the sudden spike in interest rates are two recent examples of such risks for physicians investing in real estate. Other risks can emerge from owning one or just a few properties, namely diversification and geographic-specific risks. Another risk worth noting is liquidity risk. Real estate is generally not considered a highly liquid investment, meaning investors cannot quickly trade in and out of properties as market conditions change.

Physicians can experience the benefits of owning properties while mitigating risks by taking a prudent approach to real estate investing. Such strategies may include building a diversified portfolio of professionally managed real estate that has exposure to a variety of property types and regions. Also, to manage other risks such as interest rate risk and liquidity risk, physicians may want to consider augmenting their real estate investments with allocations to other asset classes such as publicly-traded equities.

How Earned can help

At Earned, we’ve seen firsthand just how popular real estate investing has become among today’s physicians and, in many cases, have advised doctors on how to build institutional-quality real estate and investment portfolios. 

If you have exposure to multi-family properties or other real estate investments, our expert advisors at Earned are ready to help assess your risks and identify opportunities. No one knows with certainty where interest rates will go next, but there are investment strategies that physicians can implement to help weather whatever market conditions emerge next. Here at Earned, we’re experts at helping  physicians manage their assets wisely, including how to build high-quality real estate portfolios.

If you’re a physician wanting to optimize your real estate investments, Earned is ready to hear from you. Contact our team to set up an initial consultation.

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