@Jimmy Lieu, there is a lot of capital looking for yield and as a result cap rates have compressed in many markets. Here are some strategies that you may wish to employ in light of where we are in the market cycle:
1.Focus on the right asset – multifamily real estate is popular during times of uncertainty because people have a preference for renting during times of uncertainty and because it is valued intrinsically, it is less prone to large swings in sentiment which can impact the value of single family homes.
2.Invest in real estate - it represents diversity in your overall portfolio so if you are taking cash out of equities to invest in real estate then you are potentially building yourself a portfolio that is positioned for excess returns with lower volatility. For a real life example take a look at the Yale Endowment portfolio.
3.Pick the right market – not all housing markets were impacted in the same way during the last recession. If you select a market with population growth, jobs and wage growth, a balance between supply and demand and a diverse range of employers you will do just fine. If you invest in a stagnant market with just one big employer then you will be exposed
4.Buy for cashflow, not appreciation – this is a cardinal rule of real estate investing. If you have a cash flowing asset you can hold onto it indefinitely, if you have negative cashflow and are hoping for appreciation you will end up being a forced seller in a down market. We can create equity in multifamily real estate by investing in our assets to grow rent, improve vacancies and by cutting expenses
5.Avoid high end real estate – high end real estate always gets hit first in any downturn as people migrate from more expensive to less expensive homes. By focusing on class B/C properties we expect to see an increase in demand and in rental rates during any downturn
6.Lock in long term financing – lack of available credit was the downfall of many homeowners and investors during the last recession. By locking in our funding we can eliminate one source of potential distress and we can also 'fix' one of our major expenses by locking in the financing rate
7.Increase your cash position – there will be opportunities to buy distressed assets from people who were not prepared, but you will need cash
8.Reduce Leverage – leverage can be used to provide higher cash on cash returns however along with leverage comes greater sensitivity to any loss of income. If we reduce leverage we may get lower cash returns however we do increase our ability to 'stay in the game' and not be forced sellers should rental rates decrease or vacancies rise. Being a distressed seller during a downturn is not where you want to be
9.Be more conservative underwriting – multifamily properties are priced based off their current financial performance only. When we are underwriting deals we can plan for a downturn in our assumptions e.g. increase expected vacancy and decrease rents to avoid overpaying
10.Dispose of weakest assets – this is simple portfolio management, it's key to let go of underperforming assets to free up cash and credit required to buy better performing assets. Don't wait until the recession arrives to sell underperforming assets
11.Increase cash reserves – whilst this can decrease returns it is all about being able to weather the storm, cash is king!
12.Have a range of exit strategies – If it isn't a good time to sell then you do have other options with multifamily real estate, provided that it is cash flowing. You could, for example refinance to get your cash out.
