Why Timing Matters, DOGE, & More

release edition [010]

read time [8 minutes]

Welcome to The Multifamily Download, a weekly newsletter where I provide institutional insights to help you build an exceptional Multifamily career.

Today at a Glance:

• DOGE: Early Observations
• Market Timing: Why It Matters
• Basis: Your New Best Friend
• Weekly Listen:

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DOGE

The DOGE conversation is an important one, and attempting to shape it as political may be short sighted. The fiscal policy of the U.S. Government has been on a dire and disastrous path, and it must be corrected if America hopes to endure.

Spending just 30 seconds looking at the U.S. debt clock shows the unsustainable nature of America's current fiscal path.

The deviation from trend shown below is a great visual representation of the problem at hand.

Politics aside, something needs to change, and the current administration appears to be up for the task.

I have no clue how impactful the DOGE effort will be in the end, but I do know that running the government at a deficit into perpetuity is unsustainable by definition.

The DOGE efforts will create ripple effects throughout our economy, some good and some bad, with the ultimate goal of being net-positive.

Based on what I've seen thus far, I anticipate that the U.S. economy should expect a productivity J-Curve.

As the labor force shifts in a net-private direction, many expect GDP growth to slow. I anticipate a J-curve effect to unfold as workers shift from the public (government) to the private sector.

It was reported that 93% of the new jobs added in February were private sector, which is a strong trend reversal from the 2021-2024 period in which private jobs were just 69% of U.S. job growth.

Here's why this matters: Public sector job growth is often seen as less efficient than private sector growth because public jobs are funded by taxes, which can crowd out private investment.

However, private sector jobs, driven by market demand, tend to foster innovation and economic productivity.

The February 2025 data suggests a return to private sector dominance, reflecting economic recovery and reduced need for government intervention.

A great example of public vs private is comparing NASA and SpaceX.

It's estimated that it costs NASA $2B to launch each SLS rocket, whereas SpaceX launches 90% of all rockets globally today and does so at a fraction of NASA's costs.

Additionally, SpaceX is on their way to creating a rapidly reusable rocket system, which is a concept that had never previously been considered possible.

Dollars are far more productive when they're spent or invested by the private sector.

Why? Because in the private sector, profit and loss actually matter, and excessive spending leads to bankruptcy.

If private sector employment increases and public sector employment decreases then government spending will be reduced.

Excessive government spending is what causes inflation, so a shrinking government will likely have a net-positive impact on the economy.

Productivity per capita will increase, and in turn, consumers will benefit from stronger real wages and (hopefully) lower taxes.

This double-benefit to consumers will bode well for those of us in the Multifamily sector.

Market Timing

Investors universally agree that it's important to 'buy low and sell high'.

Why, then, did Multifamily investors go against this philosophy in 2021-2022?

The market had been rising since 2010, and then began to accelerate into the stratosphere in 2021 due to a record amount of capital flooding into the sector.

I believe this phenomenon was due to a few key reasons, which I've outlined below.

This list is not exhaustive, as every investment decision is unique in it's own right, but this list should provide a high-level perspective to consider.

Lastly, I think it's worth mentioning that the longer I'm in this business, the more I want to learn from the mistakes of others so that I can avoid those same mistakes in the future. I'm confident that the bull run culminating in 2021-2022 will be providing us with powerful lessons for many years to come.

1. FOMO & Greed

The cost of inaction always feels greater than the cost of action, until it's not. Said differently, it's incredibly difficult to make the decision to do nothing even when doing nothing is the right decision. Because of FOMO and greed, capital flowed into the red-hot Multifamily sector in an attempt to capture a slice of the alluring IRR pie.

2. Perceived Risk

Strong fundamentals caused many investors to flock to the Multifamily asset class, but unfortunately, many investors forgot that fundamentals are just one component of risk. Variables such as price, leverage, and timing were seemingly forgotten amid the strong fundamentals narrative. Generally speaking, the strong fundamentals narrative was accurate, but it wasn't (and never will be) a full representation of the foundation on which sound investments are made.

3. Yield Starvation

Coming out of the pandemic era, investors were starving for yield. Liquid assets including stocks and crypto were taken for a rollercoaster ride during 2020, while the Fed's rate cuts lowered the front of the curve to nearly zero. These factors, combined with runaway inflation, had investors feeling a brutal combination of yield starvation and inflation exposure. Holding cash was defensive, but costly, in that high inflation environment.

4. Liquidity

The economy was pumping with an enormous amount of liquidity that was seeking yield. The Multifamily sector fell victim to the age-old 'herd mentality'. Groupthink took over and large troughs of liquidity decided that the Multifamily combination of (a) strong fundamentals, (b) cash flow, (c) tax efficiency, and (d) an inflation hedge was the right investment to make at the time.

5. Leverage

Debt was cheap, readily available, and stretching for returns in a similar manner to equity. For this reason, debt fund lenders became ultra aggressive in their loan origination practices. This quickly became a double edged sword, because more debt meant less equity (all else equal), and led to stronger underwritten equity returns. Bad actors (knowingly or unknowingly) became incentivized to take on as much debt as they could because of the perceived financial incentives for doing so (higher equity multiples, IRRs, and more carry/promote).

6. Basis

As I'll explain more below, the most important factors when making an investment decision are the one-time, irreversible decisions, including price, or basis.

These are six of the key reasons why market timing matters.

I'm becoming a firm believer that it's far better to miss the top 10-20% of a bull market, than to be an unwilling participant in the downhill 30-40% correction. (Footnote: It takes far higher returns to recoup losses once they're incurred. For example, a price drop of 20% from $100 to $80 requires a 25% gain for the price to return back to $100. Perhaps this is why Warren Buffett's infamous number one rule of investing is to not lose money).

The period of any cycle or asset bubble in which sentiment is overwhelmingly bullish ("the market is hot and it's only getting hotter!") is both the most difficult and the most critical time to slam on the brakes.

This is why sophisticated institutional investment managers like Fairfield, FPA, and others were generally not active during the recent cycle peak of 2021-2022. They realized that the relatively small incremental gain was not worth the potential downside.

As the old saying goes, "pigs get fat. hogs get slaughtered".

Basis

Investors know that price is important, but in an upward trajectory market, it becomes easy to fall in love with an Excel model and forget the fundamentals that created success in the past.

For example, in 2021-2022 there were syndicators acquiring 1970s vintage properties at prices that exceeded the current 2021 cost of construction.

Logically, this makes no sense, but because of the market timing dynamics listed above, this happened en masse across the country for a few reasons.

First, it became nearly impossible to acquire an asset with a fixed rate Agency loan because of their DSCR constraint.

Because of this, investors flocked to alternative loan products like Debt Funds that were willing to offer debt based on Proforma (future) Debt Yield underwriting. In most cases, the in-place DSCR sized to less than 1.0x at acquisition.

Second, self attribution bias led many syndicators to erroneously believe that their success to that point was because of their operations, efficiencies, or marketing efforts.

The reality was that almost any operator, experienced or not, did well during the latter stages of the most recent Multifamily cycle (2017-2020) due to real wage growth, rising rents, and cap rate compression. It's important to not give oneself too much credit for successes that would have otherwise occurred even without our involvement.

Put simply, many investors moved further out the risk curve without adjusting for the new incremental risk, and as a result, they ended up paying the wrong price at the wrong time for the wrong asset.

Preserving the overall basis of an investment is critical to it's success.

On a relative basis, the higher the purchase price, the more NOI dollar growth much occur to generate an equivalent percentage return on that investment.

For example, buying a property for $10M with 30% equity would require a $3M price gain to produce a 2.0x MOIC. But, buying the same property for $20M with the same 30% equity would require a $6M price gain to produce the same 2.0x MOIC.

If in doubt, focus on basis. It may save you one day.

Weekly Listen

This week's listen is Episode 23 of The Rent Roll with Jay Parsons featuring guest Jasin Alfaro, the CEO of Metonic.

Jay shares data on how (and why) smaller markets have outperformed on rent growth in recent years, and reveals which tertiary markets might continue to see strong demand for apartments and single-family rentals into the next cycle.

Jasin also reveals why Metonic believes in tertiary markets, what he looks for when selecting a smaller market, and how to sell investors on markets they may not know well.

You can listen to the full episode here.

Wrap Up

That's it for this week. I hope you found this edition of The Multifamily Download insightful and enjoyable.

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