The Power Of Economies Of Scale During Times Of Inflation
Everyone who read our last article learned why multifamily properties are uniquely poised for times of inflation. Building upon that point, apartments with +100 units create an economy of scale that can help to mitigate a passive investor's risk due to the fact that more leases are renewing every month at higher rents. An experienced PM will stagger leases reducing vacancy, and allowing rents to consistently grow over time. These advantages create ample opportunities to boost cash flow and adjust for market conditions providing investors with a much more attractive risk/return profile compared to properties with less than 100 units.
The ability to create more cash flow on a monthly basis is vital to passive investors because most commercial real estate deals bought in today's market are acquired with bridge debt, which utilizes a variable rate. A variable-rate can be dangerous because the FED tries to curb inflation by increasing interest rates resulting in a higher monthly mortgage payment. As many investors learned the hard way in 2008, if you cannot make the monthly payments the bank forecloses and the passive investors capital is lost.
Here at QC Capital, we are taking additional measures to protect our investor’s capital by purchasing a “cap” on the interest rate, limiting the property's largest expense. As a result, any increase in rents after the rate cap limit has been reached results in a larger bottom line compared to other opportunities whose operators are not taking this step and have to subsidize the continued increase with their investors' returns.