When to Make Multifamily Investments

Making a multifamily real estate investment is one of the best investment opportunities around in a recession.

The obvious metaphor for Recession is Winter.  In winter the days are shorter and there are few opportunities for growth.  As bad as this latest Recession was in Portland, for Phoenix and Las Vegas it was like a Nuclear Winter.

LENDERS

During a recession risk adverse banks shut down lines of credit, increase Debt Service Coverage Ratios, lower Loan To Value requirements, and in some cases cease to make new loans at all.  Getting a buyer and Seller to agree to terms is rarely easy and there are always the myriad of details to handle.  But during a Recession managing the lender is as big a deal as keeping the principals mollified. An Example: I had a small 1031 Exchange deal getting ready to close in the midst of the recent Great Recession.  The lender called me in my role of Buyer’s Broker to tell me that the bank had changed their lending parameters and that my client needed to increase the downpayment by 65% in the next couple of days so we could close.  I pointed out that was a discussion the lender should have with our mutual client, not me.  He said he felt bad “doing this” so close to closing but there was nothing he could do.  Bear in mind that my client and his wife were in their 80’s and only owed $225K on a $2M estate.  I told the lender that I knew my client’s finances well and that much ready cash was not available.  The lender said” I”m sorry, I guess that means we ‘re out of luck on this deal.  He’ll have to go elsewhere…but don’t forget about me in the future.”  I told him:  “This is bad form to do to anyone, much less an elderly investor with an exchange…and you can rest easily…I’ll never, never forget you.”

CONDITIONS

Recession vary in intensity, but the hallmarks are:

• Increasing vacancy rates
• Increasing concessions
• Low to negative absorption
• Low to negative employment growth
• Low to negative rent growth
• Decreasing prices
• Tightening lending requirements
• Raising cap rates

The one-two punch of Recession is that vacancies are on the rise so revenue drops, concessions raise…dropping revenues further and then Cap rates rise meaning that each dollar of the diminishing profit stream is worth less.  One way to optimize profitability…or in some cases…minimize loses…is to appeal property taxes.  Hotels, land, offices, industrial plants, apartments, assets acquired below market price are all excellent candidates.  FULL DISCLOSURE:  I co-founded Prime Property Tax Negotiation because paying more than your fair share in property taxes is wrong.  Last week our client got a check for $32,300…not enough to change their lives..but still quite welcome. Feel free to call 503.577.1034 for a free evaluation.

There are a few hardy animals that actually thrive during the coldest months when other animals hunker down…just as there are investors who do well during Recessions.  All cash offers swing a big club, particularly to distressed or marginal investors without sufficient resources.  During Recessions “buy well below market price due to distress” and “buy and hold” strategies are solid, but flips are much harder.  Some of the deals will require “all cash” to close, but even the few deals that are financed will be at low LTV’s.

One thing to remember about Winter (and Recessions):  Spring  (and Recovery) will come someday.  I was in Las Vegas working on multifamily projects at the start of the financial bloodbath…but now Institutional investors are paying low, low caps (high prices) again for Class A assets.  They are also doing terms like “Downpayment goes hard in 4 weeks” that is nuts. The problem I had with living and investing in Las Vegas is you can make or lose a ton of dough…and every morning when you wake up you’re in Las Vegas.  Personally, I’m a 5th generation Society Of Native Oregon Born (SNOB) and I love Portland.  Living and investing in Portland multifamily is great…it’s a great place to do well…and every morning when I wake up I’m in good old PDX!

More posts in our Timing Your Multifamily Investment Series:

• Multifamily Investment Basics-Part 1 of a series
• When To Make Multifamily Investments-Recovery-Part 2 of a series
• When To Make Multifamily Investments-Expansion-Part 3 of a series
• When To Make Multifamily Investments-Hypersupply-Part 4 of a series

 

--- END POST ---

Timing the market is as important as getting a good deal.  The Portland multifamily market is full of investment opportunities that create perfect situation to enter or reposition equity.  This installment, the 4th in my When to make multifamily investments, covers the climate for new investments during the Hypersupply phase.

The Hypersupply cycle in investing is like Fall.  In Fall trees slow their growth, flowers fade and the days turn cooler.  Some flowers open and close and follow the sun each day.  That’s a luxury that condo converters and large project builders don’t have in investment real estate.  Due to the barriers to entry and time it takes to permit and build apartments we can’t just shut them down.   At the beginning of Hypersupply it sometimes looks like the economy is just taking a breather before getting a second wind.  While absorption rates are a key the fundamentals of a Hypersupply cycle market include:

• Increasing vacancy rates
• Moderate to high new construction
• Low to negative absorption
• Moderate to low employment growth
• Medium to low rental growth
• Per unit prices tend to peak at the transition of Expansion into Hypersupply
• Increasing value attributed to all cash offers
• Tight lending standards

The strategies that worked great in Recovery and well in Expansion are not as plentiful in Hypersupply.  Buy and hold long term is viable…but it is important to use proper financing to avoid a Debt Service Coverage issue later on in the cycle.  Flipping is very perilous with large numbers of new units coming on line, absorption challenges, stagnant rent growth tend to lower values.  Condo conversions already under way may continue, but new projects are often delayed or cancelled.

There are some good deals to be made during Hypersupply, but cash becomes more important.  Lenders tend to raise DSCRs, lower their LTV’s, and Non Recourse Loans become rare or non-existent.  Lenders change their underwriting from focusing on the deal (is this going to work and produce the profits the investors had hoped for?) to focusing on the dealmaker. (How solvent is the borrower; does he/she have the resources to weather the storm?)

The other analogy I liken Hypersupply to is coming over the top of the roller coaster.  There is a slowing of upward motion then a brief period where things almost stop then….

Next up: The fourth and final phase of the investment cycle: Recession…or “the race to the bottom.”

More posts in our Timing Your Multifamily Investment Series:

• Multifamily Investment Basics-Part 1 of a series
• When To Make Multifamily Investments-Recovery-Part 2 of a series
• When To Make Multifamily Investments-Expansion-Part 3 of a series
• When To Make Multifamily Investments-Recession-Part 5 of a series

 

--- END POST ---

Expansion in the multifamily market is creating an excellent real estate investment opportunity.

I liken the Expansion phase of the investment cycle to an analog in Nature: Summer.  If Recovery (Spring) is characterized by the creation of potential, Expansion is all about unleashing that.  A market that is in Expansion mode has a palpable energy: hiring is at the highest pace of any point in the cycle.  So are occupancy rates, rent growth and absorption.  Units that have been in the planning stage since Recovery come on line and more are planned.  Debt is readily available to finance acquisitions.  Debt Service Coverage Ratios (Net Operating Income/Monthly Loan Costs) tend to fall.  That makes deals possible that banks wouldn’t look at previously.  The rapid rise in rents spurs some to opt for buying a home.  As home prices go up condominiums become more attractive.  The possibility of making a fortune makes developers convert existing apartment products into condos.  This further exacerbates shortages of rental units causing rolling waves of rent increases.

The Expansion cycle sees a sharp increase in the number of units sold and a dramatic increase in the prices per units accompanied by a consolidation of Cap Rates.  The REIT I worked for in Las Vegas bought a nice institutional size property during the last Expansion cycle .  It was a B asset in a B location.  We bought well…we always did.  Our acquisition strategy was “Buy and hold” with a “mild lipstick refurb”.  By the time we got it painted we received a “Brando”.  A firm offered us a $13,000,000 premium over what we had paid for it less than a year before.  That worked out to a million bucks a month net profit to the investors.  Before I move on its important I acknowledge that while I was damn proud to be a valued member of that team I was not the Principal Broker.

Just as Nature transitions from warm June days at the start of Summer to blistering hot days in August…so does the Recovery cycle.  Eventually even people who don’t have a background in development jump in.  After all, “What could possibly go wrong?!”

The fundamentals present that characterize an Expansion cycle market include:

• Decreasing vacancy rates
• Moderate to high new construction
• Moderate to high employment growth
• Medium to high rental rate growth

Acquistion strategies that work effecively in an Expansion market are similar to Recovery markets, but with additional caveats on timing. Towards the transitional phase from Expansion to Hypersupply (Summer to Fall) it is much more important when making a flip play that you can complete the full deal before the end of the season.  Investors who “Buy and hold for the long term ” will be fine.  Where I have no problems with an agressive leverage strategy during Recession or Recovery,  you can’t afford to buy with minimum down towards the end of the Expansion season.  Where I might be fine with a 75 to 80% LTV (Loan to value) play during Recovery I want to position the asset to have adequate DSCR (Debt Service Coverage Ratios) should the property suffer from some lower revenues during a downturn. 65 to 70% LTV loans make sense during Expansion.  Ironically, this is when the bank is likely to offer even better terms than you should accept.  Over leveraging at the wrong time is how you can inadvertently turn your lovely Cash Cow into an profit hungry Alligator.

Leverage note:  The LTV levels I have discussed are my opinions based on the economic cycle that work for me.  Lowering the LTV has the effect of increasing the equity stake required and lowering risk, along with a commensurate lowering of profit potential.  Like risk, each investor must set their own level in accordance with their personal comfort.

In our next post: When to Make Multifamily Investments-Hypersupply-Part 4 of a series.

More posts in our Timing Your Multifamily Investment Series:

• Multifamily Investment Basics-Part 1 of a series
• When To Make Multifamily Investments-Recovery-Part 2 of a series
• When To Make Multifamily Investments-Hypersupply-Part 4 of a series
• When To Make Multifamily Investments-Recession-Part 5 of a series

 

--- END POST ---

Over the last few months I’ve been telling folks that if they wanted to be a genius in 5 years they should take advantage of smart real estate investment opportunities now.  My other refrain is that they were in no danger of profiting from multifamily investments until they take action.  The focus of this article is the fundamental question: “When should I invest in multifamily?”

Just as in nature where Fall is followed by Winter which is in turn followed by Spring, multifamily investment opportunities follow a cycle.  And cities have an investing climate, too.  Las Vegas tends to be real hot or real cold.  The same with Phoenix. A great deal of institutional money is being pumped into those two cities.  The amount of money to be made and risked is much greater than in more moderate investment climates like Portland and Seattle.

RECOVERY

Recovery is to Investing what Spring is to Nature.  They are both about great potential being born.  There’s no guarantee that your garden will grow…but it has the best chance if planted at the proper time.  It’s a great time to invest too.  Many investors sit on the sidelines during the Recovery phase to make sure that things have really hit bottom.  As a result they buy during the Expansion phase and don’t reap all of the rewards that are available for “trigger pullers.”  The Recovery Cycle is characterized by:

• Decreasing Vacancy Rates
• Low build rates
• Moderate absorption
• Low to moderate employment growth
• Low to negative rental rate growth
• LOW prices relative to potential upside

A broad spectrum of investment strategies are viable during Recovery. “Buy and Hold”, Refurbish, Flip, Repurpose, Build and “Convert” all have their place at this time.  Unlike Nature, the Recovery Cycle is not set in the time it will take to move into the next phase, Expansion.  But just as we know the rains of Spring will yield eventually to the sunshine of Summer, so shall Recovery turn into expansion.

NEXT POST: We’ll cover the attributes of the Expansion Phase of the investment cycle.

More posts in our Timing Your Multifamily Investment Series:

• Multifamily Investment Basics-Part 1 of a series
• When To Make Multifamily Investments-Expansion-Part 3 of a series
• When To Make Multifamily Investments-Hypersupply-Part 4 of a series
• When To Make Multifamily Investments-Recession-Part 5 of a series

 

--- END POST ---