Multifamily Is in a 2008 Moment. Ken McElroy Explains Why.

McElroy distinguishes debt backed by cash-flowing assets from borrowing for land development, which has no current income to repay it. He favors fixed debt on income-producing property, conservative loan-to-value of roughly 50%–60%, and enough cash flow to withstand some income loss.

McElroy says debt is typically cheaper than equity, but the property must support the full financing cost: his example of 50% equity at 7% and 50% debt at 5% yields a 6% blended cost. He also cautions that equity costs vary, including when investors contribute their own savings.

McElroy describes several potential tax strategies with important conditions: spreading investment across properties may increase depreciation deductions, while a $10 million jet may be fully written off in its purchase year but face recapture upon sale. He says a 1031 exchange can mitigate tax consequences from a property sale, and limited partners may be offered the option to roll into another property.

McElroy says inflation reached 9.1% in June 2022 and raised multifamily costs, including labor, materials, and insurance, while property taxes were also starting to rise. He separately warns of insurance pressure in Houston, along the Gulf of Texas, and in much of Florida, and says rising rates erased cash flow at Tucson's Prescidio until he put cash in to secure a rate.