Multifamily Investing in a Recession

Discover how multifamily investing performs in a recession, what NOT to do with multifamily investments during times of economic volatility and the 4 rules to always get strong returns from multifamily real estate.

 

How Do Multifamily Investments Perform in a Recession?

The typical signs of a recession are a shrinking economy, job layoffs, housing market declines and a sluggish or dropping stock market. How does multifamily investing handle those economic conditions? The best recent historical example to draw lessons from was the great recession of 2008. Every multifamily property that we invested in during the years of 2008 to 2012 doubled in value. Therefore, multifamily real estate performs very well in a recession.
 

3 Reasons Why Multifamily Remains Strong during Economic Downturns

There are several reasons why multifamily investments perform so well during recessions:

1. Increased Demand: Multifamily demand increases during a recession because people stop buying homes during hard economic times and that creates increased demand for apartments. Housing is a necessity so if someone cannot buy a house, they still need a place to live and the most affordable option is a multifamily unit. I experienced this myself in 2008-2009, when we increased our rents three times in 16 months.

2. Increased Rental Income: We already have an affordable housing crisis in the United States and the current economic trend will only put more pressure on it. The increased demand for multifamily due to a recession will put a squeeze on the current supply and rents will go up. How do we know that? Well, even during the pandemic, our rents increased 5 to 10%. It’s a basic principle of economics; supply and demand. Housing unit demand remains greater than supply so the rents increase during a recession.

3. Increased Investment: When the economy is down, investors, banks and other money managers move capital to the safest and strongest investments. During the great recession, money poured into multifamily and we are seeing that again here in 2023. In fact, as of the writing of this article, the interest rate on a Multi Family Loan is lower than the rates for home buyers. Which means that banks feel safer lending money on multifamily investments than primary residences! When there is more money invested in multifamily, it strengthens the assets as a whole.

 

4 Rules for Strong Multifamily Returns

Here are 4 rules you need to apply for a strong performance from your multifamily investment whether in good times or bad.

1. Maintain Reserves: You always need to plan for the worst, even if you expect the best. You need money set aside in a separate account to pay for unexpected emergencies, like the time a fire burned my apartment building. Where do you start and how much should you set aside? We recommend building cash reserves from day one and your first goal is to build up a fund that has 5% of your gross rental income. Then you build from there. Ideally, you should have at least 6 months of debt coverage for each property.

2. Lock in Long Term Fixed Rate Financing: For your property to perform optimally at all times, you need a long term fixed rate multifamily loan. It prevents you from having to refinance during a volatile period so your cash flow stays consistent and it’s a hedge against inflation. No matter how high inflation goes, your debt service payments would not change if the rate is fixed. And therefore, as the rents increase, so too does your net cash flow.

3. Manage Your Property Manager: Property managers need to be managed. They’re paid to do a job and their job is to manage your property profitably. Your property manager is not your friend. Many beginners get too friendly with their property managers and let them get away with all kinds of bad behavior; late on reports, not collecting income, not taking care of their property, and not keeping up with evictions. Poor management leads to your property spiraling down into a non-performing, negative cash-flowing asset. Especially during a recession, there is no room for mismanagement. If your multifamily property is not performing well, consider firing your property manager.

4. Know your Multifamily Numbers: You need to know your numbers like the back of your hand. No one cares more about your property than you do; not your property manager, not your attorney, not your accountant. You must know your numbers because the margin for error can be small during a recessionary period. We train our Proteges on the four M’s; how to manage the money, manage the management, manage the marketing, and manage the maintenance of a property. Those four M’S are like a four-legged stool. When one of those starts to collapse, everything begins to fall. So, you really need to understand the numbers on your multifamily properties like the back of your hand.

 

3 Things NOT to do with Multifamily in a Recession!

1. Don’t Wait for a Drop in Multifamily Prices: Don’t wait for a drop in multifamily prices because it may never happen. During the pandemic, many people decided not to invest, forecasting that the pandemic would wreck havoc with multifamily. They were wrong. Instead, even with an eviction moratorium, prices dramatically increased! It is a big mistake to think multifamily will have a dip in values. Demand continues to drastically outweigh supply so the time to get started is as soon as you can.

2. Don’t Wait for Lower Interest Rates: People mistakenly wait for interest rates to come down before jumping into multifamily investing. It’s a fools errand for two reasons; (1) the rates may not come down; (2) even if interest rates come down by 1 or 2%, all the time you sat on the sideslines, you’re missing out on the cash flow, tax benefits and equity build up! Don’t want for lower interest rates!

3. Don’t Wait Until It’s Over: Don’t wait until the recession is over because predicting the end of a recession is impossible. The book The Signal and the Noise by Nate Silver proves that humans are terrible predicters of the future and year after year, even the smartest minds on earth fail to make accurate forecasts about what is going to happen. Furthermore, predicting the end of a recession doesn’t matter because multifamily investing is long term time horizon. The timeline for investing in multifamily successfully isn’t what happens in the first year, but owning for 5 or more years. As the years roll by, you create wealth and fortunes that can transform your life.

The common principle that applies in all three of these points is DON’T WAIT. There’s a saying that states, “The best time to plant a tree was 10 years ago, but the next best time is right now.” The best time to have invested in multifamily was 10 years ago but the next best time is right now!

 

The Key to Multifamily Investing

The key to wisely investing in multifamily is knowing exactly what to do and doing it right. And the fastest and easiest way to can accomplish that is by hiring the right Multifamily Investing Mentor. Every successful multifamily investor has a mentor and you can get yours right here: Commercial Property Advisors Protégé Program.