Apartment Investing Through a Recession

**Note** This article is written for limited partners investing in apartment syndications

Nobody has a crystal ball on market timing, so there is no use trying to predict what will happen or when. Instead, consider investing in assets that perform well (historically) in recessions such as multifamily apartments.

Here are a few helpful tips:

I tend to focus my investing in stable markets throughout the Midwest, Texas and Florida. Historically speaking, you can count on cash flow from multifamily properties in these areas regardless of what’s going on in the housing market at large.

WHERE IS THE GROWTH?

There are three types of growth I look for when considering markets to invest in:

Job Growth

Population Growth

Income Growth

Ideally, you want to find markets that have all three types of growth on an upward trend and where there is still a good amount of yield for cash flow and potential for appreciation.

When investing as a limited partner in syndications, it is critical (especially at this stage in the market cycle) to invest with firms who conservatively underwrite their deals and under-promise/over-deliver. Always ask for referrals and do your own due diligence to verify this information.

Be cautious when looking at “projected returns” and pay close attention to:

Rent Growth High aggressive projections such as $200 a month rent increase in the first year are often unrealistic. This is more likely to be achieved after 24-36 months of implementing a value-add plan.

Debt Structure Avoid groups who over-leverage and ensure they are not using long-term debt for short-term holds or vise versa. Make sure the type of debt used, fits the business plan time frame.

Cap Rates Predictions Upon Sale A lot of syndicators are aggressive on this point, predicting cap rates equal to or lower than the current numbers. At the late stage of a market cycle, use caution. Ashcroft Capital for example, typically adds at least half a point to the current cap rate. (The higher the cap rate, the lower the purchase price).

Plan for The Worst and Hope for The Best Always think worst-case scenario and consider what might happen to the NOI, the debt, and the break-even point should things go wrong. Always ask the syndicate group these difficult questions and make sure you feel comfortable with the response you receive.

Have Adequate Reserves Ensure that the team you're investing with has properly allocated reserve funds for all the “what-if scenarios”. These reserves are commonly referred to as the “capex budget”. On a personal note, keep a good amount of liquidity in your own bank. In many cases, there is the possibility of a capital call to investors, you don’t want to put your investment in jeopardy if you can’t come up with the additional capital.

RECAP

Be prepared for the next recession by following these steps:

Don’t try to time the market

Follow the growth

Be realistic

Have adequate cash reserves on hand

Multifamily apartments have historically performed well throughout recessions compared to other asset classes, but it’s important to keep in mind, there are no guarantees in investing. If you follow these tips and you are prepared, you will drastically increase your portfolio’s protection against future recessions and market volatility.

To your success,

Travis Watts