New to Real Estate · Hendersonville, TN · Member since 2021 · 12 posts · 7 votes
Which class and areas did multi family do the best in our last recession? If we have a slight decline (2-3%) in the market, which kind of tenant would be effected the most? I am mostly thinking about multi family in the Nashville area. Thank you.
Investor · Tucson, AZ · Member since 2017 · 394 posts · 178 votes
4y
Hopefully this will spon more experienced people to respond to this question. My understanding is that no class was immune though some took the brunt more than others (A-class) as discussed above. However, only the best operators were able to survive. Many who bought highly overvalued and highly leveraged properties paid the price, no matter the class.
I also understand that multi did very well, relatively speaking, compared to other asset classes. I did not go through the last recession personally with multi so I give up the floor here.
Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
4y
@Alex Hawk, there is a lot more to this than just which class. As noted, generally the highest earners have the most stable jobs, and tend to live in the best assets. As such, Class A properties tend to have the most stable tenant base. But, in the financial crisis, where white collar workers were getting laid off, or in the pandemic where these same people wanted more space, the urban class A rentals saw hits.
Class D, and likely C, tend to have the highest risk tenants, which are first to be laid off or lose income when recessions hit.
But a deal goes beyond this: a highly leveraged Class A property is more likely to be foreclosed on than a very low leverage Class C. A property with poor expense controls is more likely to be in trouble faster than an efficiently, low expense property. And finally, while Class A properties tend to have low capex/deferred maintenance due to age, relative to Class C and D, if there are capex items that are not accounted for it can cause any class property to run into trouble sooner than properties without deferred maintenance.
New to Real Estate · Hendersonville, TN · Member since 2021 · 12 posts · 7 votes
4y
It looks like I should be more focused on buying right and avoiding over-leveraging my properties than looking at class although it is important. Big thanks to everyone for your insight.
Syndication Expert and Investor · Indianapolis, IN · Member since 2016 · 591 posts · 808 votes
4y
Different class assets behave slightly differently depending on the cause/effect of the recession
That being said the most resistant is a straight down the fairway B class asset that caters to renters hovering around the area median income. People at all income levels can be effected from economic down turns, and if you are catering to the broadest proportion of the population you will likely see residents move up and down the economic ladder through your property, providing steady demand and relative stability. You could still see rents flatline or even decline for 6-24mo, and see increased expenses due to higher rates of delinquency, evictions, resulting in higher turn costs.
Recessions are also historically followed by several years of strong rent growth, therefore it's important to set up your investment with preservation of principal as a top priority. The best way to achieve that (beyond buying right) is to use appropriate debt (long term fixed rate is best), and have more than ample cash reserves. A value add strategy forcing appreciation can also eventually decrease risk (after an initial higher risk period during renovation and lease up), once rents have been increased and the asset can be partially, or fully de-risked by returning capital via a refinance.