What is the best strategy for the coming Recession?

Multi-Family and Apartment Investing
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What is the best strategy for the coming Recession?

Josiah Mann
Specialist · Springfield, MO (springfield mo) · Member since 2016 · 48 posts · 12 votes

Hey everyone,

My wife and I recently moved to Kansas City, KS and are partnering with investors to acquire multifamily properties in the area. We have an idea of what types of properties we want to go after and the numbers we need to hit, but we expect the economy to change shortly and want to position ourselves accordingly.

If the economy goes south and bubbles start bursting, where are the best opportunities you see in multifamily? (Interested to hear thoughts on other asset classes as well if you think MF is bust)

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Russell BrazilBusiness Member
Moderator
Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
10y

Buy before the recession, buy during the recession, buy after the recession.

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  • Eric P.
    New York City, NY · Member since 2016 · 470 posts · 348 votes
    10y

    if you think there's a coming recession, cash is king. When assets drop in value, cash doesn't. If that's your position, sell all assets, sit tight, & pad that bank account. Imagine what an amazing position you'd be in if you had done that in 99 & again in 06

    7Reply
  • Josiah Mann
    OP
    Specialist · Springfield, MO (springfield mo) · Member since 2016 · 48 posts · 12 votes
    10y

    Thanks @Eric P. In fact, we just sold our house last week after buying an RV to live in, haha. If the equity in SFs drop, we want to be in a position to buy... Plus we like the freedom and flexibility of the RV thing for the purposes of our investing.

    0Reply
  • Bryce Davis
    Los Angeles, CA · Member since 2014 · 113 posts · 17 votes
    10y

    what makes you think the bubble will burst again and the Fed will let it. 

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  • Josiah Mann
    OP
    Specialist · Springfield, MO (springfield mo) · Member since 2016 · 48 posts · 12 votes
    10y

    @Bryce Davis, I'm interested in other people's thoughts on this, but I don't see that the evidence supports the idea that the bubble ever really burst the first time. Additionally, and more importantly in my assessment, I believe that history moves in cycles that correspond with demographic trends. According to those trends, we're due for a major change in the order of things.

    2Reply
  • Darren Budahn
    Investor · Milwaukee, WI · Member since 2014 · 811 posts · 420 votes
    10y
    Are you suggesting you don't believe the housing bubble really burst around 2008 and that there really wasn't a massive financial collapse and recession? I'm not sure I follow
    1Reply
  • Andrew SyriosPro Member
    Moderator
    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    10y

    As Eric put it, if there's a recession, you want to have cash on hand so 1) you can stay solvent of course, but 2) you can buy up assets when they're cheap. Fortunes are made during recessions.

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  • Josiah Mann
    OP
    Specialist · Springfield, MO (springfield mo) · Member since 2016 · 48 posts · 12 votes
    10y

    Thanks @Andrew Syrios. I'm pretty certain I've watched a few presentations your dad has online - one in particular for  'building a real estate empire'. Aren't you the father/son/son team here in KC?

    @Darren Budahn, thanks for the comment. I didn't mean to discuss the economy generally in this thread so just consider it a hypothetical :)

    0Reply
  • James Mc Ree
    Rental Property Investor · Malvern, PA · Member since 2016 · 1k+ posts · 936 votes
    10y

    The question you pose is really one of market timing.  There is a lot of research out there that market timing really doesn't work.  A few get lucky, but many buy high and sell low.

    Examples:

    • Coming out of 2008 collapse, "everyone" recommended against buying bonds because the Fed was going to raise rates which would crush bond prices 17% per point raised (or something like that).  We are still waiting for that increase 8 years later.  It will eventually happen, but bonds have performed fairly well in the interim.
    • Lots of experts said in the 1990s and 2000s to bail out of the stock market because it was going to pop.  It eventually did, but years after the prediction.

    A takeaway from these historical examples is a recession eventually will come, but when?  When is the really important question.  Australia has gone 25 years without one, as recently highlighted in the news.

    What to do in the meantime if you think a recession is coming within a year?  As mentioned, go to cash or long term government bonds or bond funds is a good bet.  There will probably be a flight to quality which will boost your bond investment value and give you buying opportunities; unless bonds are what is clobbered (ie. 2008 bond market crash - there is always an "unless....").

    What to invest in during a recession?  Under-priced, stressed real estate is always an option regardless of the economy, but there is usually more available in a recession.  That's good and bad: you can buy cheap, but then you are selling cheap too.  The real estate is cheap because funds are not available to buy.  You should consider if you buy into the recession. 

    Next bet: How long will the recession last and how will it affect your local area?

    In the end, if you can accurately answer, "When is the next recession and how long will it last?" you are a market genius and can make far more $$$ as a financial advisor or economist than a real estate investor.  More likely, you will miss the boat.

    My recommendation: Find a great deal in real estate if that is where you are looking based on the numbers in the deal.  Don't compromise.  It's OK if nothing fits your return criteria - that will be the best protection against a bubble.

    Jim.

    5Reply
  • Account Closed
    Attorney · Sacramento, CA · Member since 2014 · 300 posts · 172 votes
    10y

    I'm interested in the demographic trends that lead you to believe a recession is impending. The economy is cyclical, but I'm not smart enough to predict the ebbs and flows. But I'd love to read more about it. Please let me know if you have any reading recommendations.

    1Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    10y

    Buy before the recession, buy during the recession, buy after the recession.

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    13Reply
  • Jay J.
    ., OH · Member since 2015 · 361 posts · 127 votes
    10y

    I've had this same thought, and I guess what I always come back to is keeping the debt on properties low enough that you can take a 10% drop in rents and still be solvent. Even if your CF drops, its better than going negative..

    and I'm not an expert, but..

    1. All the 'demographic' talk sounds a lot like Harry Dent. He's been screaming about an 'impending demographic collapse' (think Japan) for years.. (not that I agree or disagree)

    2. Cash isn't always king. (its not a bad place to be, but..) Believe it or not, the value of the US dollar could go down. But also, with negative rates (a real possibility) pouring cash in to a savings acct isn't really saving.

    3. RE is local, so just because home values in X go down, doesn't mean home values in Y will go down too. To a 'buy & hold' investor, rental rates are arguably more important that home value (property debt not withstanding)

    4. If you're really concerned with a sharp market dip, short index funds or use options.

    3Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    totally regionalized... and in markets were you have a huge % of SFR's that are rentals ( mid west) the values don't swing that wildly... what guys were paying for wholesale houses in the mid west at the bottom of the crash and now are really not that much different.. the values are supported by cash flow.. the only way these assets ( which are so heavy to renters in those areas crash) is if rents can't be collected and rents go down.

    were the market collapse is

    1. over building of new construction   think FLA  GA VEgas PHX  Central CA.. those were the melt down areas.

    2. Rents go down or stop... .Think Vegas PHX  and some other markets.. Many investors that bought PHX in 04 to 05 had their 4 plexs completely vacant in 2009 .. nothing can help that if you have no cash flow you have no cash flow.. those properties in the peak sold at 350k for a 4 plex.. they went down to 80k.... and have bounced back to somewhere in the middle now that renters came back.

    3. multi family got hammered in Vegas... some stellar wipe outs there.. think about all the folks that talk about repositioning multis on BP right now.. someone lost on those and the new folks are picking up the pieces.

    4. High end homes those homes well above the mean.. they softened in all markets.. but unless your just looking for a deal on your personal resi not necessarily anything one would buy as an investment.

    So if your buying in KC  ( and I like that market a lot for B C cash flow)  I don't see any wipe out in values.. the only wipe out will be Failed landlord syndrome  and that happens in ALL market conditions.. gets pronounced in a recession.. but I can pretty much guarantee there are plenty of deals to be had in the mid west at wholesale prices in the Rental stock areas... never has really changed much in my 20 years of funding this product for buy and hold folks.. Turn key folks etc.

    Not sure about an RV I think If I do something like that I would buy a nice big boat and live on that.

    wait there is no ocean I KC.. OK scratch that Idea.. RV it is..

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    9Reply
  • Tommy Chan
    Investor · WA · Member since 2016 · 13 posts · 4 votes
    10y

    great question and good comments!

    0Reply
  • Josiah Mann
    OP
    Specialist · Springfield, MO (springfield mo) · Member since 2016 · 48 posts · 12 votes
    10y

    Originally posted by @Jay Hinrichs:

    Haha, we might do a boat down the line, but I'm not sure about a boat on the river either:)

    I appreciate your thoughts here. 

    @Jay J., I'm paying attention to Harry Dent, though he's pretty extreme. Peter Schiff has the same premise, but thinks it will play out differently. There are debates between the two on youtube about whether the result of the Fed's money printing will be inflation or deflation...

    'The demographic cliff' theory seems to resonate with the research of the authors of 'The Fourth Turning', which is a pretty important book in my shelf.

    0Reply
  • Jason Moran
    Emergency Room RN · Magnolia, TX · Member since 2016 · 43 posts · 8 votes
    10y
    Robert Campbell wrote a book called "Timing the Real Estate Market" back in 2002 that gives 5 distinct Vital Signs to use for assessing your local market. If I had followed this system I would have been out of the market in late 2005 rather than the losses I had in 2007. I agree that there is a recession coming and at least one Vital Sign has surfaced in my market. As much as I want to be out buying property, I live in California (a highly fluctuating market) so right now I'm storing up as much cash as possible. If you have the support systems that allow you to buy in a low fluctuating market then invest there as long as it cash flows.
    0Reply
  • Luke Grogan
    Investor · Cocoa Beach, FL · Member since 2015 · 132 posts · 59 votes
    10y
    Interesting question and one I've been considering. I've gone back and forth in it a bit, but I am thinking that good cash flow deals and the right financing is the key. Cash reserves is a big second to that, but I think another recession or bubble bursting will not erase the need for good rentals, but create a stronger demand. The one scenario I am trying to figure out is if A class MF in A class areas would provide a bit of a hedge to the rest of my B/C class SFH or if I should get B class MF. Oddly, it seems that the spread on the cap rates are not that significant in my target markets.
    0Reply
  • Jay J.
    ., OH · Member since 2015 · 361 posts · 127 votes
    10y

    @Josiah Mann

    Yea, I'm not a huge 'dent guy', but the demographics make sense. Although, there's plenty of countries that are opposite to that trend..  (more of a global economic issue)

    ..but I think @Jay Hinrichs is right, its all local. Both to where you are and personally as to what you have (own).

    0Reply
  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    10y

    Thumbs up @Jay Hinrichs for "failed landlord syndrome". That can happy any day and any time and is often the best place to find a deal. If we get a recession (some people are already feeling that way) and you have good reserves and lot LTV you can ride it out. If we go with negative interest rates I have NO idea where that leads...except it won't be good.

    0Reply
  • Eric P.
    New York City, NY · Member since 2016 · 470 posts · 348 votes
    10y

    Lot of good insight in this thread. Keep in mind 2 things that can crush any business during economic downturns: lack of cash reserves & being overleveraged. These 2 things can lead to a cashflow lockup & hence insolvency (eg, see Bear Stearns)

    0Reply
  • Ian WalshBusiness Member
    Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    10y

    They will be everywhere when the next cycle turns.  

    0Reply
  • Eric P.
    New York City, NY · Member since 2016 · 470 posts · 348 votes
    10y
    Originally posted by @Russell Brazil:

    Buy before the recession, buy during the recession, buy after the recession.

     Spoken like a true agent ;)

    3Reply
  • Julia Shevchenko
    Contractor · Hollywood, MD · Member since 2016 · 139 posts · 47 votes
    10y

    @Account Closed. I was also going to mention Robert Campbell's book. He spoke recently at my local REA. His methods of using national trends and even deviations in real estate statistics have not failed him so far and are quite impressive. Check out his site and newsletter, I believed he calls it The Campbell Report. 

    2Reply
  • Brian Ragsdale
    Flipper/Rehabber · Chicago, IL · Member since 2012 · 45 posts · 24 votes
    10y

    Stack up on the mac and cheese, collard greens, get some chickens, grow some potatoes.  Look for pennies like the rest of us. Recessions for one group most certainly will be depression for other groups.  I got lots of room here and can shelter lots of people if need be.  Change is the only constant...so they say

    0Reply
  • John P.
    Investor · Vacaville, CA · Member since 2016 · 433 posts · 249 votes
    10y

    A lot of good thoughts here.  I remain a big proponent of diversification. I think it best protects you during a recession. No guarantees of course but having all your eggs in one basket is the thing that scares me.  If your one type of asset crashes you crash.  Of course all eggs in one basket can be great if you happen to pick the right basket but what are the odds of that!? 

    0Reply
  • Andrew SyriosPro Member
    Moderator
    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    10y
    Originally posted by @Josiah Mann:

    Thanks @Andrew Syrios. I'm pretty certain I've watched a few presentations your dad has online - one in particular for  'building a real estate empire'. Aren't you the father/son/son team here in KC?

    @Darren Budahn, thanks for the comment. I didn't mean to discuss the economy generally in this thread so just consider it a hypothetical :)

     Yup, that would be us.

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