Discover how multi family investments perform in a recession, what NOT to do with multi family properties during times of economic volatility, and the 4 rules to always ensure strong returns from multi family real estate.
How Does Multi Family Perform in a Recession?
The signs of a recession are everywhere now; a shrinking economy, job layoffs, declining housing market and the stock market dropping. The Nasdaq has lost 33%, the Dow Jones is down 20% and crypto has erased a whopping 60% of value! In fact, its estimated that over the last 12 months, 401ks have lost $2 trillion.
So, how does multi family perform during economic conditions like these? To answer that question, we can look back at the recession of 2008-2012. If you invested in multi family during that downturn, your property values have likely doubled. Almost everywhere where we invested, the property values have doubled since the last recession. So, does multi-family perform in a recession? The answer is a resounding, "YES!".
All Roads Lead Back to Multi Family
During a recession multi family performs well for several reasons:
Increased Demand: Multi family demand will increase during a recession. I experienced this myself in 2008-2009, when we increased our rents three times in 16 months. Why were we able to do that? It was because during hard economic times people stop buying homes which creates increased demand for apartments. So, in 2008 with that increased demand, rents went up almost immediately. And this same scenario is likely to happen again. Discretionary spending is optional, but housing is a necessity. Everyone doesn’t need to buy a house, but everyone needs a place to live.
Increased Rental Income: We already have an affordable housing crisis in the country and the current economic trend will only put more pressure on it. The increased demand for multi-family due to the recession will put a squeeze on the current supply and rents will go up. How do we know that? Well, even during the pandemic, that great period of volatility, our rents increased 5 to 10%. So again, it’s the basic economics of supply and demand - demand will be greater than the supply so the rents will probably increase during the recession.
Investor Desirability: Why will multi family continue to be a desirable asset for investors? Well, let me just challenge you with this question here. Can you name a better investment than multi-family in a recession? Is it stocks? How about crypto? No, it's multi-family.
4 Rules for Strong Multi Family Returns in a Recession
Here are 4 rules you need to apply for a strong performance from your multi-family investment during a recession.
Have Cash Reserves: When you're in a volatile economy a rainy-day fund just makes sense. You need money put aside in a separate account for emergencies - in case you need to pay the mortgage or unexpected repairs, or another pandemic happens, or whatever other surprises a recession brings. 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 six months of mortgage payments for each property.
Get Long Term Debt: For your multi-family to perform during a recession you need long-term debt. This is beneficial for a couple reasons. First, you avoid refinancing during a volatile period. Refinancing with interest rates at 10% will have a dramatic impact on your cash flow. But a long-term commercial loan, outlast the volatility and keeps your cash flow consistent.
The other benefit is long-term debt is a hedge against inflation. No matter where inflation goes, your long-term debt stays nice and steady. Again, it just makes common sense to have long-term debt to help you perform during a recessionary period.
Replace your Property Manager if their Performance is Poor: A recession is not time to play games and be easy on the property manager. They're paid to do a job, and their job is to manage your property profitably. And your property manager is not your friend. A lot of beginners are too friendly with their property managers and let them get away with all kinds of things; 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. During a recession, there is no room for mismanagement.
Know your Property 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 bookkeeper, not your accountant. You must know your numbers because the margin for error is so small during a recessionary period. We train our students on 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 properties like the back of your hand.
Don’t Do This in a Recession!
Don’t Wait Until It’s Over: Don't wait until the recession is over. Waiting is foolish because predicting the start or the end of a recession is impossible. No one has been able to do it and you can’t either. Besides, predicting the start and end of a recession isn’t important. What's important in multi family investing is to have a long-term perspective on investing. The game plan for investing in multi family isn’t one to five years, instead it’s 10 plus years. That's when you create wealth and fortunes that can transform your life.
You also need be a good operator. One of the benefits of our protégé program at Commercial Property Advisors is we mentor our students on how to manage a commercial property efficiently. After our students close a deal, we meet with them every month showing them how to create cash flow, how to do the accounting, and how to manage the property manager. As i mentioned above, we equip them with the financial, management, marketing, and maintenance skills of a good operator. Not many of our competitors do that, but we do because the management of a commercial asset is a critical part of structuring a successful commercial deal.
Don't wait for Lower Interest Rates: Often, I get comments from people saying they are waiting for interest rates come down and then they’ll jump in and start commercial real estate investing. My answer to that is then you’ll never jump, or you will grow old waiting. If you wait until interest rates come down, even 1 or 2%, you're missing out on the cash flow you could have had while you sat on the sidelines and waited. You're losing out on the tax benefits, building equity in your property, and raising the rent. Is it worth waiting for interest rates to drop 1-2% and losing out on all the benefits of commercial real estate? No, the benefits out way waiting for lower interest rates.
Don't Wait for a Drop in Multi Family Prices: Don’t wait for a significant drop in multi family prices because they are not going to drop significantly. During the pandemic, people decided not to invest and wait for the pandemic to end. Well, it's ended now, and we have higher inflation and a pending recession. They're still waiting. Now, I'm not saying that prices in multi-family won't drop. They may drop a bit, but it will not be significant because of the high demand in this economy and the limited supply.
The common principle that applies in all three of these points is DON’T WAIT. There’s a saying that states, “Good things come to those who wait. Better things come to those who have patience, and the best things come to those who are persistent.” The principle of not waiting to start investing in multi family is about being persistent and staying in the game.