Make A Multifamily Real Estate Investment In A Recession, part 5

Making a multifamily real estate investment is one of the best investment opportunities around in a recession.

The obvious metaphor for Recession is Winter.  In winter the days are shorter and there are few opportunities for growth.  As bad as this latest Recession was in Portland, for Phoenix and Las Vegas it was like a Nuclear Winter.

LENDERS

During a recession risk adverse banks shut down lines of credit, increase Debt Service Coverage Ratios, lower Loan To Value requirements, and in some cases cease to make new loans at all.  Getting a buyer and Seller to agree to terms is rarely easy and there are always the myriad of details to handle.  But during a Recession managing the lender is as big a deal as keeping the principals mollified. An Example: I had a small 1031 Exchange deal getting ready to close in the midst of the recent Great Recession.  The lender called me in my role of Buyer’s Broker to tell me that the bank had changed their lending parameters and that my client needed to increase the downpayment by 65% in the next couple of days so we could close.  I pointed out that was a discussion the lender should have with our mutual client, not me.  He said he felt bad “doing this” so close to closing but there was nothing he could do.  Bear in mind that my client and his wife were in their 80’s and only owed $225K on a $2M estate.  I told the lender that I knew my client’s finances well and that much ready cash was not available.  The lender said” I”m sorry, I guess that means we ‘re out of luck on this deal.  He’ll have to go elsewhere…but don’t forget about me in the future.”  I told him:  “This is bad form to do to anyone, much less an elderly investor with an exchange…and you can rest easily…I’ll never, never forget you.”

CONDITIONS

Recession vary in intensity, but the hallmarks are:

  • Increasing vacancy rates
  • Increasing concessions
  • Low to negative absorption
  • Low to negative employment growth
  • Low to negative rent growth
  • Decreasing prices
  • Tightening lending requirements
  • Raising cap rates

The one-two punch of Recession is that vacancies are on the rise so revenue drops, concessions raise…dropping revenues further and then Cap rates rise meaning that each dollar of the diminishing profit stream is worth less.  One way to optimize profitability…or in some cases…minimize loses…is to appeal property taxes.  Hotels, land, offices, industrial plants, apartments, assets acquired below market price are all excellent candidates.  FULL DISCLOSURE:  I co-founded Prime Property Tax Negotiation because paying more than your fair share in property taxes is wrong.  Last week our client got a check for $32,300…not enough to change their lives..but still quite welcome. Feel free to call 503.577.1034 for a free evaluation.

There are a few hardy animals that actually thrive during the coldest months when other animals hunker down…just as there are investors who do well during Recessions.  All cash offers swing a big club, particularly to distressed or marginal investors without sufficient resources.  During Recessions “buy well below market price due to distress” and “buy and hold” strategies are solid, but flips are much harder.  Some of the deals will require “all cash” to close, but even the few deals that are financed will be at low LTV’s.

One thing to remember about Winter (and Recessions):  Spring  (and Recovery) will come someday.  I was in Las Vegas working on multifamily projects at the start of the financial bloodbath…but now Institutional investors are paying low, low caps (high prices) again for Class A assets.  They are also doing terms like “Downpayment goes hard in 4 weeks” that is nuts. The problem I had with living and investing in Las Vegas is you can make or lose a ton of dough…and every morning when you wake up you’re in Las Vegas.  Personally, I’m a 5th generation Society Of Native Oregon Born (SNOB) and I love Portland.  Living and investing in Portland multifamily is great…it’s a great place to do well…and every morning when I wake up I’m in good old PDX!

More posts in our Timing Your Multifamily Investment Series:

 

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