The holy grail investing strategy is when one can perfectly time the market. Numerous investors have collectively made millions, scratch that, billions by getting in at the bottom of a market cycle and exiting at the top. Sounds easy, right? Not exactly.

Before we launch into the strategy, I want to start with a little story to set the stage. Several years ago, I started investing in multifamily properties in Houston, TX. There were a lot of things I did not know about the business of multifamily, however, the biggest “A ha” lesson I learned was actually about economics. I always knew that our economy experienced market cycles, but I never realized these market cycles could vary by asset class and location. In other words, the US, as a whole, could be at the top of the market (i.e. thriving), but multifamily in Houston, TX could be in a recovery stage. This is actually not a made-up example, but the status in 2018 when I got into multifamily investing. In fact, Houston and Little Rock, AR were the only two major cities where multifamily was in a recovery stage.

So what are the market cycles, and what do they mean? Since my expertise is in multifamily, I am going to explain each cycle with respect to the multifamily asset class. Starting from the bottom, Recession, construction slows down and even stops. Next is Recovery, where construction starts to pick-up slowly and vacancy begins to decline. The third stage is Expansion with construction ongoing and vacancy declining. The last stage is Hypersupply where construction is continuing but at the deficit of vacancy.

Knowing the market cycles is the first step, knowing what to do within those market cycles is where major profits can be found. While it may seem daunting to identify what one should be doing, it is actually quite simple. This is because market cycles typically follow the same flow - Recession, then Recovery, then Expansion then Hypesupply, then Recession again. Of course there are exceptions, for example COVID which disrupted the cycle schedule, but most of the time cycles remain pretty consistent. What is less predictable is the timing. Typical full market cycles are 8-10 years, but it could be longer or shorter. But if you stay on top of what is occurring within your given market and asset class you still can master the timing.

So what do you do? You prepare for the next market cycle in the existing cycle. Specifically, as it relates to multifamily, in Hypersupply you start to become liquid. The reason is twofold. First, the beginning of Hypersupply is normally a seller’s market so your properties can command top dollar if you exit early. Second, Hypersupply is often followed by Recessions. Recessions tend to have distressed sellers so there are a lot of deals to be scooped up if you have liquidity to take action. With respect to the other market cycles this is what I would personally do to exploit the upcoming market cycle:

Recession: Network and Educate! Surrounded by deals, build up your arsenal so you not only have the knowledge to take action, but the resources both from a capital and a human power standpoint to capitalize on the situation. In my opinion there is no better time to educate yourself, because while numerous people may be exiting the asset class, few are spending the time learning how to profit in it.

Recovery: Acquisition Mode and Develop! Armed with the knowledge and a little momentum from finding deals, continue to find more deals and lean-in to the economies of scale you are creating. Whether it is to build out your own in-house PM company, renegotiate vendor contracts on your properties with your new unit count as your bargaining chip, or just build out a more robust administrative team, now is the time to do it to support your needs for the next market phase. The benefit here is coming out of a recession will allow you the pick of the litter for staffing since most companies would have laid off some pretty good employees during a recession. Another opportunity is found in development. If you time this well, and develop mid-late Recovery phase, your projects should be coming online right at the height of the demand depending on the market.

Expansion: Look for positions for sale. While you could still acquire and develop, do so with caution. Most people have a hard time determining between the Expansion and Hypersupply phases so you do not want to be caught in Hypersupply just starting to position to sell. Since multifamily requires trailing data to sell, typically a minimum of 3 months, building that data during this phase can be very advantageous to position your property for a sale in the next phase, at the height of the market.

Today we are arguably in a Recession phase in the majority of multifamily markets. Clear signs of cooling rents, vacancy upticks, investors vacating the space, foreclosures, capital calls are major indicators of this happening nationwide. As competition in this space cools down, the remaining players who stick it out and new players who enter the asset class will have the greatest chance of being the next class of top performers. Warren Buffet said it best when he said that investors need to be, “fearful when others are greedy, and greedy when others are fearful”. In other words, there are few people right now continuing to network with brokers, lenders and investors. Citing excuses like we have no deals to discuss, as the number one excuse for not having those calls. There are even fewer people educating themselves, citing excuses like the timing isn't right. The problem is building relationships and educating yourself on multifamily takes time. If you don't invest in those two activities now, you will be behind.

There has never been a better time in the past 10 years to build connections and educate yourself on multifamily. Simply put, when has there been a better time for you to educate yourself at the bottom of the multifamily market cycle and then be armed with the knowledge and connections to participate on the upside? Today is the day, so what actions are you taking to get in the game?

Ashley Wilson

Podcast Guest on Show #277

2 Votes