How to talk about a possible recession?

17 Replies

I brought my investor a possible deal that looks pretty good on paper. He had some concerns and various questions which is totally fair. But then he also brought up the talk around the looming recession and how that could potentially affect the deal and maybe his willingness to fund it ... I didn’t have a great answer for him. 

Does anyone know a good way to approach this topic when people (especially those in the rental market game) bring it up as a concern and maybe even a hesitation to get involved? 

Thanks! 

P.S. The market we’re focused on is Indianapolis, IN it that makes any difference. 

A good deal is a good deal in any economy.  Just ask all the experts that have been predicting doom for the past 10-12 years.  You don't invest for the economy...you invest for the deal.

This is why you shouldn't invest where your profit is tied to future events (good/bad) that you have no control over.  That's not investing...that's speculating, and THAT IS impacted by the economy.

Predicting a recession is speculation; buying a deal where the numbers make sense is not. 

When investing in homes - you can't go wrong if you buy it correctly. 2nd Indy is in the midst of a housing shortage and there is only so much room to build here. In time all the places we are skipping over will eventually turn over, its just a matter of time. I bring great deals to investors and they take their time and lose the deals. They will kick themselves and hopefully remember your recommendations. 

@Casey Sbrana make sure your numbers can survive a 20-25% plunge. If you can do that, and still cashflow/breakeven, then you can show your investor that this property can survive a recession 

@Casey Sbrana

Great question. Firstly, like everyone has said there has been talk about a recession for years. No one can predict when it’s coming not even the Fed ( Ex Federal Reserve here)

To make your investor feel comfortable, talk about the numbers. If you were conservative in your underwriting and analysis, those should be your talking points. Also, another great underwriting tip is to stress test your numbers. Any property will cash flow in a perfect world. But what do the numbers look like if you lose 30% of your tenant base? If interest rates increase ( unlikely). It market rent decreases. If market rent is $1000. Would the property still be a good buy with rent dropping to $750? If a recession hits, and tenants stop paying and you have to start the eviction process, how does this affect your bottom line? Especially if you have to evict more than 1 tenant. Maybe you under write your deals with a high reserve percentage to account for this risk.

Investing is solely risk management. So, to easy your investors mind. Point out the risk of the project and then provide your solutions to mitigate the risk.

Every investment is a risk, doesn’t matter if the market is good or if it’s a recession. Buy right, don’t speculate, and mitigate the risk appropriately.

Hope this helps!

Canesha

@Casey Sbrana We've been in the longest economic expansion in the history of the country. Nothing lasts forever, so there is a good chance that can go in to a recession in the next 12 to 18 months. But let's define what a recession is. It's defined as 2 consecutive declines in GDP. So does that mean that we'll see a 2008 crash all over again? Not at all. Keep in mind that none of the 3 major factors that led to the housing crash do not exist today. Those factors were 1. Extremely loose lending guidelines, 2. the money supply that was in the market at the time, and 3. over construction of new housing. We don't have any of those factors today and in fact, there is a shortage of housing in the market which is driving prices up. 

@Casey Sbrana I think your investor did not like your deal and was looking for a way out. I have wholesalers that i work with some and I may bite on a “deal” or not. What they consider a deal may not appear a such a deal to me, and just because they are offering me a deal they should feel upset if the answer is no.

As far as all this recession talk goes, bring it on. The passed two recessions I did not lose one tenant. Several fellow investors in within our market reported the same. I just closed on a property and have great hopes on it. I am going build resources in case this recession hits so I may be able to buy some properties with great discounts, but as opportunities become available along the way I will pluck them like fruit from the tree.

@Casey Sbrana , just listened to a panel of experts on the state of the market in mid 2019. James Eng, Dino Pierce, Jonathan Twombly, and Jeremy Roll.

The general consensus was that B Class properties were the most recession-proof.

I was surprised because I had thought C Class would be but the point was made that these tenants tend to be the ones worst hit by a recession.


Originally posted by @Amy Heitner :

@Casey Sbrana , just listened to a panel of experts on the state of the market in mid 2019. James Eng, Dino Pierce, Jonathan Twombly, and Jeremy Roll.

The general consensus was that B Class properties were the most recession-proof.

I was surprised because I had thought C Class would be but the point was made that these tenants tend to be the ones worst hit by a recession.

were did you see this panel or was it a webinar.. Jeremy is LA based and one wicked smart investor.. 

 

dealing with investors you talking about investor sentiment and such.

it really depends on what type of project your talking about.. if its just rental property that's pretty easy.

but if your talking about development or flipping then you cant have blinders on  you do need to  try to anticipate market changes.. we have done that by limited debt so if we do have a change we ride it out no problem

but to take on max debt in certain segments of real estate in certain markets you do need to be more than Hey my renters wont leave  LOL

Just remember that once the yield curve has flipped (which has caused all the media frenzy) its been an average of 22 months before the next recession actually occurs. It could be earlier or it could be later. Obviously the faster you get a project done the better but if you can project when you will get your investments back to him and its a good amount of time before the avg 22 months I think that will ease your investors mind a lot. Once you start creeping up closer to that 22 months thats when investors should start to actually worry about a recession. Thats my 2 cents anyways and every location will be different. Impossible to accurately predict.

Originally posted by @Amy Heitner :

@Jay Hinrichs, It was a panel from Dan Handford's Multifamily Investor Summit in June, the next one is in January.

I agree that Jeremy is excellent and also James Eng.

was the event in LA  ?

 

@Jay Hinrichs Multifamily Investor Nation Summit (#MFINSummit) is a 3 day virtual event put on by Dan Handford. Check it out. So much good stuff!