It's no secret that we're in a very hot market right now. The abundance of capital flooding into the system from COVID-related economic stimulus, combined with very low interest rates, has resulted in real estate being one of the few places where non-zero yield is achievable. And that is driving prices higher and higher.
For value investors like ourselves this makes it very difficult to find properties that match our buying criteria. So, do we stay in a holding pattern and try to wait the market out or do we adjust our strategy?
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I want to talk about how we're navigating this type of market, what challenges we see, and how we're adjusting the types of investment opportunities we're able to bring to you, our investors.
Multifamily isn't the goal, it's the tool
The viability of the multifamily asset class is supported by several long term demographic trends that show no signs of slowing (population migration, limited housing supply, increase in the renter lifestyle preference, etc...). We still believe very strongly in these trends – just not at any price.
We avoid any asset that has limited margins of safety and requires the most optimal outcomes to achieve required returns. We continue to see multifamily properties come to market at prices that don't provide this necessary margin of safety and, thus, we have not been able to offer any multifamily investment opportunities this year.
But multifamily was never the goal. It was just the tool by which we could offer tax efficient, income producing, low downside, investments. So in times like this we have to ask ourselves: Are there other investments that offer these same benefits?
Other types of real estate
The most logical place to look for better risk-adjusted returns is in other commercial real estate types. This includes self storage, short term rental/resort, office and retail, and mobile home parks.
We've spent the last six months exploring these asset classes in our local markets to determine how suitable they are for investment. Here's our summary:
We are excited by the self-storage category. It still has a high percent of mom & pop owners and is the asset class where technology has the most impact on operational efficiency. Given my technology background, this is compelling for us. While it too has experienced a run up in valuations, there still exists meaningful cashflow potential at the current level.
The one downside is that there is a limited supply of self storage properties (49K vs. 16.5M multifamily properties in the US), so finding a property can be difficult. We have started identifying self storage properties in our local markets and hope to have a better sense of the market in the coming quarters.
Short term rentals
With the AirBnB IPO and surge in drivable vacation rental activity during the pandemic, short term rentals are officially on the investment map. We're still very early in the institutionalization of this asset class which is an opportunity for early movers as cap rates compress in the coming years (just as they've done in all the other asset classes listed here).
We are currently exploring the opportunities that exist with multi-unit short term rental properties, combining the cash flow potential of STRs with the more disciplined valuation approach of commercial (5+ unit) multifamily. We believe this is an underserved asset type and hope to share more of our experiences here as we identify opportunities.
Office & retail
In the areas we look to invest in (growing markets in central NC), small office and retail is still being offered at pre-pandemic valuations which are almost as compressed as multifamily. While we believe that community oriented retail will do quite well post-pandemic (think cafes, bottle shops, coworking, etc...), we don't yet see many value-oriented opportunities in this space.
We will continue to look for compelling opportunities in this class, but see similar limiting dynamics here as we do in multifamily.
Mobile home parks
Long a disregarded asset class, mobile home parks are now recognized and respected by the investment community as affordability becomes more and more a driver for rental growth. However, the property management ecosystem around MHPs is under-developed when compared to multifamily and requires sufficient scale before being able to bring this function in house.
At this time, we don't feel like managing MHP assets is a competency Flywheel can develop and are not actively pursuing these properties.
Focus vs. opportunity
Given the broadening scope of investible assets we're pursuing here at Flywheel, you might be asking yourself if we're spreading ourselves too thin. If we're going outside our current area of expertise.
These are fair questions.
I would frame it more like this: our expertise is not in value-add multifamily real estate. It is in identifying real-estate based business that are not reaching their full potential and bringing the right investment and operations to bear to reach that full potential.
Our current value-add multifamily real estate investments match that criteria, as would an existing mom & pop owned self storage facility. Or an under-marketed short term rental portfolio.
Being able to recognize where the opportunity exists in any market cycle is a necessary ability for any asset manager. If we were only ever to pursue multifamily, no matter what the market conditions were, well that would be problematic.
What types of real estate interests you?
So that's where we stand at Flywheel Equity. But we want to know where you stand.
Do these other real estate classes interest you? What types of real estate would you be willing to invest in with Flywheel? Give us some feedback and fill out our super-simple survey here: