Hi John,
One of the benefits of multifamily over SFH's is that the valuation is a function of the Net Operating Income and prevailing cap rates. The net operating income is simply income minus expenses and therefore there are steps that you can take to protect yourself in a downturn. Here are ten things that I think you could do:
1) Only buy if the property is cashflow positive as this gives you the flexibility to hold on to it if you are not in a position to sell due to an unfavorable market
2) Focus on properties where there are value-add opportunities since this will allow you to increase income or decrease expenses to force equity and improve cashflow
3) Focus on strong markets that have got the economic fundamentals to reduce the risk of a drop in your income i.e. population growth, wage growth, jobs growth, more demand than supply
4) Avoid class A properties as people will move towards less expensive options in a downturn
5) Lock in longer term debt now while it is still possible to do so
6) Use less leverage to reduce your expenses and also maintain adequate cash reserves
7) Be conservative in your underwriting, it may take you longer to get a deal but it will be a deal that you are happy to be in
8) Recognize that real estate as an asset class represents diversity in a balanced portfolio of stocks and bonds. It's better to have some real estate than none.
9) Be aware that in a market that is turning there will be people who are very eager to sell their properties, this will mean opportunity
10) Plan for a range of exit options in case selling isn't an attractive option
Ronan
