Apartment Owners During 2008 Recession?

Question

Hello everybody, long time browser of BP but first post. With the impending recession on the horizon, I’m curious if there are any apartment syndicators on BP that owned / managed properties during the last recession? If so, what were your key takeaways? What should / do you include in your stress test for current deals based on your last experience?

Thanks in advance!

Zach

Thanks in advance!

Zach

Erik W. · Answer

Affordable, functional, clean housing will always be in demand.  I invest in the C+/B- SFH & plex market, and even though I'm just now starting into apartment, I see no reason why that strategy would not work.  People need a place to live.  People strongly desire their own place.  That's why they spread out into their own home unit when times are good.

A key metric is affordability.  Let's take a look at general trends:

1) If you are in the top 20% price range for your area, some of those folks will downsize into median range (40-80%)

2) If you are in the middle, many folks will stay put, and you'll get a few down-sizers from above and lose a few to a lower bracket.

3) If you're in the bottom (0-39%) these are the folks most at risk of crashing out because they have no plan and no cushion when the bad times hit.  Unstable jobs & lives.  They end up in parent's basement / friend's couch.

Most people want good schools for their kids, a quiet neighborhood, and a clean, safe, functional place to live.  Trendy is nice if they can afford it and more profitable when times are good.  But "meat and potatoes" housing is always in demand in all markets: it's a good place to be in good or bad times.

They also need to be within reasonable commute time of employers that off decent-paying, stable, above McJob-level employment.  Jobs that take more than an application to get into and don't go away regardless of whether the economy is good or bad.  Think hospitals, education (teachers), Govt workers.  Even in an economic slump, people still go to the doctor.  Kids still go to school.  Govt still keeps Govern-menting (*sigh).

I'm looking at a 20-unit right now with rents at $650/month.  5 minute drive to an elementary school and the largest hospital in the area.

This level of rent is for a 2-bed apartment for my area.  Cheap is $400 - $600.  Affordable is $600 - $800.   Nice is $800 - $1000.  Anything over $1,000 is trendy.  I think being in either the "Affordable" or "Nice" market niches is a good place to be regardless of the economy.

Michael Ealy · Answer

Zach,

I am one of the few real estate investors who actually THRIVED during the Great Recession. It enabled me to have so much cash that in 2013, me and my partner Nate have acquired about 28% of all the apartments for sale during that year.

Why did I survive and thrive when others went from flipping houses to flipping burgers?

1. I was and still am VERY conservative with my numbers and I am choosy with my projects

For example, I only did and do apartment projects that have a 30%, preferably 40% + IRR. A lot of apartment syndicators do marginal projects and they give up 70% of their equity to their LPs. I actually choose very good projects and only give up 30% of my equity to my investors.

I also assume my exit cap rate to be 100 basis points higher than current or existing cap rates. If the deal still makes sense, and I meet the 30%-40% project IRR, then I do the project.

Also, I assume the financing interest rate is also 100 basis points vs. what I can get today, when I refinance in 3 or 5 years. If I can get a substantial portion of my investors' capital back, and again, meet all my metrics, then I do the deal.

2.  In addition to buying right, I buy in the right sub-markets where growth is about to happen.

So even if the recession happens in the national market, the sub-markets I chose will still produce rent and occupancy growth although maybe lower than expected. That's exactly what I did prior to the recession and during the recession.

3.  I was well capitalized and even more so today

When the Great Recession happened, bank financing dried up. I was not affected because I have private capital behind me. As a result, I was buying when my competitors were selling at a discount :)

And as far as the Recession happening - they predicted a recession as far back as 2013. Good thing my business model above is recession proof and I did not stop buying. In fact, it becomes better during a recession. I look forward to it and if it does not happen soon, I am still buying and making even more money now than ever before!

Seth Williams · Answer

Watch out for the Housing crash

Zach,no doubt the economy will be volatile, but housing country wide should stay very strong. Based off last several recessions, only a few effected housing, 2008 is obviously an anomaly. Check out this video i did about this topic.

Curtis Bidwell · Answer

I added a 24 unit to our portfolio in 2008.  We never lowered rent on an existing tenant during the recession.  Our units were B-/C properties that were relatively reasonable. We are in a growth region.  We had some consolidation of living arrangements (particularly young adults sharing a unit or house). My mortgage and other costs remained relatively stable.  So we faired just fine.

We didn’t have enough capital to expand at the time, but we used our cashflow to aggressively eliminate 2nd mortgages putting us in a stronger position with lower overall debt service.

Don’t fear a potential recession if you buy right and manage properly. Even if you don’t make a home-run deal, Remember that time heals most RE mistakes.

Jaron Walling · Answer

@Anurag Bhalla - turnover for over priced rentals sure. If the unit is priced correctly and the owner isn't increasing rent during an economic downturn they should be fine. When times get tough the over-leveraged properties in bad locations go under first.

Casey Rolland · Answer

@Michael Ealy

Thank you Michael. I am learning from your posts. Can you please help explain with some real numbers what below paragraphs mean? Thank you again.

"I also assume my exit cap rate to be 100 basis points higher than current or existing cap rates. If the deal still makes sense, and I meet the 30%-40% project IRR, then I do the project.

Also, I assume the financing interest rate is also 100 basis points vs. what I can get today, when I refinance in 3 or 5 years. If I can get a substantial portion of my investors' capital back, and again, meet all my metrics, then I do the deal."

Mike Dymski · Answer

The commercial multifamily default rate was very low during the last economic recession. But, the last recession was accompanied by a housing crisis that put millions of homeowners into the rental market and, therefore, threw commercial multifamily a life preserver. Only time will tell what will happen with the next recession. In the meantime, we can focus on good locations, cash flow, adding value, prudent debt, and reserves and we should be fine.

Roni E. · Answer

Bridge and near term expiring debt is an issue. Then another issue budget we plan to increase rents by 100 dollars a month and not able to shift and possibly doing a capital call creates an unhappy situation with investors and problems.

Mark Allen · Answer

@Zach Heine I was not a syndicator during the last recession. Seems like there’s a wave of syndication that we didn’t have last cycle because of how fast information moves with social media and sources like BP.

That being said, properties that went into receivership were (for the most part):

1) In low income areas. Rents and occupancy go the opposite way. Location and tenant quality is important. (Buy in A/B areas)

2) Owners who weren’t well capitalized / properties that had significant deferred maintenance. (Budget enough CapEx)

3) Loan maturity - For those that had to refinance or sell due to loan maturities when values were cut in half, they didn’t have the equity to survive. (Lock in long term debt / Stay away from bridge product)

Anurag Bhalla · Answer

What about turnover? I have seen many posts where owners say that turnovers increased for all kinds of properties which affected NOI drastically.

Apartment Owners During 2008 Recession?

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