What types of Apartment Complexes Weathered the Great Recession ?
Real Estate Investor · Member since 2017 · 47 posts · 12 votes
So maybe this comes off as a novice question but I'm wondering if certain types of investment properties did better during the last housing crash than others.
Let's say that another great recession happens, how would you best insure yourself to weather that storm if you were gonna be buying multi-family units going forward ???
If I can understand my potential downside it would help me make better decisions.
Hi Ken,
@Mike Dymski mentioned one solid data point. Worth repeating, during the last recession, MF mortgage delinquency rate was 1% (take out speculative markets like Vegas, Phoenix and Miami, and it was almost nil) according to my friend@Paul Moore who did some great research when putting together his excellent book on MF investing. SF homes were running about 4-5% in contrast.
Here's some practical experiences. We had a property mgt company in Houston that had 10 + value add B/C properties when oil fell from $100 barrel to $50 barrel (a significant local economic shock due to its dependency on oil related jobs) and their occupancy stayed steady at 92% and even tailed up a bit to 93% during that timeframe while class A fell from 95% to mid 80s. The service jobs in staid industries that make up the demographic tends to hold up better than the $100K oil jobs that went fleeing and favor class A apts.
Secondly, I had an investor recently who wanted to know what the average occupancy was in Richardson, TX (a Dallas suburb) at the worst point in the last recession, where we were acquiring one of our four apartments there. Worst year was 2009 at 85%. We compared that with the sensitivity analysis on our deal where we could still be making a positive return at 81% and B/E was going to be 75%. That was a comforting data point to share with him.
Lots and lots of cash. Low leverage debt with cash on hand. If that happened again, im sure the lenders would would offer concessions to owners to help with the recovery process. It does them no good to take a property unless the owner is truly operating it poorly.
But yeah, cash and low leverage is the way to go if you're concerned about that.
I agree with @Joseph Bramante. If the property is cash flowing well above the DSCR, you have nothing to worry about. Properties that are over-leveraged may have their notes called in a crisis. Having cash, or access to cash, will allow true investors to scoop up deals that are being sold at fire sale prices. Lenders were not loaning money last time, so don't count on getting financing next time either.
It's simple, the ones that cash flow.
As long as you don't fudge the numbers on your purchase when doing your pro forma then your should be protected.
Example, most multis are 100% occupied in our portfolio right now and have been for some time. But, we still budget for 8% vacancies or 92% occupancy.
FYI if your occ is 100% its is because your rents are too low. Increase your rent. Feel free to send me a consulting fee with all the money i just made you haha
It's simple, the ones that cash flow.
As long as you don't fudge the numbers on your purchase when doing your pro forma then your should be protected.
Example, most multis are 100% occupied in our portfolio right now and have been for some time. But, we still budget for 8% vacancies or 92% occupancy.
FYI if your occ is 100% its is because your rents are too low. Increase your rent. Feel free to send me a consulting fee with all the money i just made you haha
Should he raise his rent by 8% or a different percentage ???
He should raise his rents until his closing ratio on new leases is 0% for more than 2 weeks
push rents until the market pushes back
Apartments did well during the last recession. Fannie Mae had less than a 1% default rate on their multifamily products. Residential lending tightened up and many people became renters...a trend that has continued. All economic cycles are different though and the next one will hit asset classes differently than the last one. If you purchase assets in good locations that appeal to the masses, you should be fine in many cycles. If you add value, that is another way to mitigate risk. And, as others have mentioned, some investors are increasing their amount of capital allocated to cash flowing assets and they are not as concerned with national market value swings.
Apartments did well during the last recession. Fannie Mae had less than a 1% default rate on their multifamily products. Residential lending tightened up and many people became renters...a trend that has continued. All economic cycles are different though and the next one will hit asset classes differently than the last one. If you purchase assets in good locations that appeal to the masses, you should be fine in many cycles. If you add value, that is another way to mitigate risk. And, as others have mentioned, some investors are increasing their amount of capital allocated to cash flowing assets and they are not as concerned with national market value swings.
Maybe people that buy apartments are better with money and numbers than the average home owner ???
Apartments did well during the last recession. Fannie Mae had less than a 1% default rate on their multifamily products. Residential lending tightened up and many people became renters...a trend that has continued. All economic cycles are different though and the next one will hit asset classes differently than the last one. If you purchase assets in good locations that appeal to the masses, you should be fine in many cycles. If you add value, that is another way to mitigate risk. And, as others have mentioned, some investors are increasing their amount of capital allocated to cash flowing assets and they are not as concerned with national market value swings.
Maybe people that buy apartments are better with money and numbers than the average home owner ???
When you are investing other people's money, you have to be.
Apartments did well during the last recession. Fannie Mae had less than a 1% default rate on their multifamily products. Residential lending tightened up and many people became renters...a trend that has continued. All economic cycles are different though and the next one will hit asset classes differently than the last one. If you purchase assets in good locations that appeal to the masses, you should be fine in many cycles. If you add value, that is another way to mitigate risk. And, as others have mentioned, some investors are increasing their amount of capital allocated to cash flowing assets and they are not as concerned with national market value swings.
Maybe people that buy apartments are better with money and numbers than the average home owner ???
When you are investing other people's money, you have to be.
So it was just the shear volume of uneducated and unqualified people that were buying homes during the boom that led to the bust. And all of those people still needed a roof over their heads and some had bad credit after defaulting on their loans. So every class of apartment complex had enough customers and was able to stay afloat as long as they weren't underwater themselves.
So right now it's more difficult to get money to buy a home than it was before which means less people can buy but they still need a roof over their head.
Why would I only want to collect 1 rent check from 1 household that has a roof over their head when I can collect 10 or 100 rent checks from people with 1 roof over their head ???
Let me ask you this were apartment occupancy rates lower when it was easy for people to borrow money to buy a house ???
There's probably multiple factors which affect that as well. Marketing, location, amenities, population growth rates, new employers.
Multi-family still seems like a better use of time and money than single family homes to me.
And the single most expensive and important thing that most people pay for every month is the roof over their head.
I wasn't investing back then. Maybe somebody else can chime in. @Mike Dymski @David Thompson
I think properties with larger amount of units do well during recessions in B and C class areas. A property that has 5 units vs 50 unit will struggle more (all things equal). I second what others have said. Don't over leverage. Just because and appraiser said your property is worth $5M and a bank will give you 80% LTV doesn't mean you should take the leverage. I like to be at 1.5 DSCR or higher while using very conservative numbers. I also look back at historical information. If you see that income and population has grown by 1%/year and rent has grown by 5%/year, then you should look back to see what rent would be at if it only increased at 1%. Same w/vacancy. If the historical vacancy is 8%, then use 8%. Also consider economic vacancy (bad debt from no pay and evictions). I use 5% in C class and 4% in B class.
I think properties with larger amount of units do well during recessions in B and C class areas. A property that has 5 units vs 50 unit will struggle more (all things equal). I second what others have said. Don't over leverage. Just because and appraiser said your property is worth $5M and a bank will give you 80% LTV doesn't mean you should take the leverage. I like to be at 1.5 DSCR or higher while using very conservative numbers. I also look back at historical information. If you see that income and population has grown by 1%/year and rent has grown by 5%/year, then you should look back to see what rent would be at if it only increased at 1%. Same w/vacancy. If the historical vacancy is 8%, then use 8%. Also consider economic vacancy (bad debt from no pay and evictions). I use 5% in C class and 4% in B class.
You know what this B and C thing makes sense to me.
I was never an all A or an all D student.
Bring forth your, mid range occupancy, B and C properties that need some shining up and I'll make that baby look like a diamond in the rough.
And I'm sure that only helps the A and D level players as well.
@Account Closed shining up a B will only hurt an A. If A residents are wanting cheaper rent and find a B area with a renovated property for cheap, they are more likely to make that step down.
@Account Closed shining up a B will only hurt an A. If A residents are wanting cheaper rent and find a B area with a renovated property for cheap, they are more likely to make that step down.
But A level has already built an apartment complex with it's own bowling lanes and movie theater.
And if they haven't then they aren't really my competition now are they.
Their just people born with a silver spoon in their mouth.
Hi Ken,
@Mike Dymski mentioned one solid data point. Worth repeating, during the last recession, MF mortgage delinquency rate was 1% (take out speculative markets like Vegas, Phoenix and Miami, and it was almost nil) according to my friend@Paul Moore who did some great research when putting together his excellent book on MF investing. SF homes were running about 4-5% in contrast.
Here's some practical experiences. We had a property mgt company in Houston that had 10 + value add B/C properties when oil fell from $100 barrel to $50 barrel (a significant local economic shock due to its dependency on oil related jobs) and their occupancy stayed steady at 92% and even tailed up a bit to 93% during that timeframe while class A fell from 95% to mid 80s. The service jobs in staid industries that make up the demographic tends to hold up better than the $100K oil jobs that went fleeing and favor class A apts.
Secondly, I had an investor recently who wanted to know what the average occupancy was in Richardson, TX (a Dallas suburb) at the worst point in the last recession, where we were acquiring one of our four apartments there. Worst year was 2009 at 85%. We compared that with the sensitivity analysis on our deal where we could still be making a positive return at 81% and B/E was going to be 75%. That was a comforting data point to share with him.
Hi Ken,
@Mike Dymski mentioned one solid data point. Worth repeating, during the last recession, MF mortgage delinquency rate was 1% (take out speculative markets like Vegas, Phoenix and Miami, and it was almost nil) according to my friend@Paul Moore who did some great research when putting together his excellent book on MF investing. SF homes were running about 4-5% in contrast.
Here's some practical experiences. We had a property mgt company in Houston that had 10 + value add B/C properties when oil fell from $100 barrel to $50 barrel (a significant local economic shock due to its dependency on oil related jobs) and their occupancy stayed steady at 92% and even tailed up a bit to 93% during that timeframe while class A fell from 95% to mid 80s. The service jobs in staid industries that make up the demographic tends to hold up better than the $100K oil jobs that went fleeing and favor class A apts.
Secondly, I had an investor recently who wanted to know what the average occupancy was in Richardson, TX (a Dallas suburb) at the worst point in the last recession, where we were acquiring one of our four apartments there. Worst year was 2009 at 85%. We compared that with the sensitivity analysis on our deal where we could still be making a positive return at 81% and B/E was going to be 75%. That was a comforting data point to share with him.
Honestly I don't have a clue what any of that means David.
I'm just a dumb guy that goes to work everyday.
Some investors laugh at me, some think that they are better than me, some are scared of me, some are terrified of me and others see no value at all in me.
That's my current perception, right or wrong. That's how I see landlords right now.
Apartments did well during the last recession. Fannie Mae had less than a 1% default rate on their multifamily products. Residential lending tightened up and many people became renters...a trend that has continued. All economic cycles are different though and the next one will hit asset classes differently than the last one. If you purchase assets in good locations that appeal to the masses, you should be fine in many cycles. If you add value, that is another way to mitigate risk. And, as others have mentioned, some investors are increasing their amount of capital allocated to cash flowing assets and they are not as concerned with national market value swings.
Maybe people that buy apartments are better with money and numbers than the average home owner ???
CRE (commercial real estate) is underwritten by professionals and it is required to cash flow with minimum DSC (debt service coverage) ratios; so, there are definitely controls in CRE that did not exist in SFR. But professionals make mistakes too and market cycles are hard to predict. The primary causes of multifamily foreclosure during the last recession included (1) under-capitalized properties...no money available for needed cap ex/repairs/turns (2) properties in bad or marginal locations (3) poorly managed properties and (4) untimely balloon payments with one or more if items 1-3 present. Good locations, appeal to the masses, add value, and...I will add, longer term debt help to mitigate risk in any asset class.
haha Thanks for the advice @Joseph Bramante , where should I send the check?
@Rob L. @Joseph Bramante was able to get my company to donate 3 tee shirts each to the shelters in the area - If you guys want to know where to do something similar send me a PM!
Dallas-Ft. Worth wasn't hit hard by the recession but the bank/servicers were still taking back properties. My Managing Director was one of three brokers who worked exclusively with all the special servicers and he made a good amount of money selling apartments during the recession. I believe he helped sell ~11 class B/C apartments/year for 3 years. With 3 brokers working with the servicers, I bet there were 85+ REOs during that time period which is closer to 8% of the available product (~1100 apartments in DFW at that time).
Going through the list of apartments he sold between 2010-2012, they were mostly in C areas. Investors were most likely leveraged at 80% and the properties were poorly or self managed.
Interesting I've recently (Like within the last 12 hours) come to realize (Unrelated to this post) that there may be more money than smart people living in Dallas.
In Honolulu, pre-recession cap rates were in the 5% range. During the recession they were between 6-7%. Now they are pretty consistently in the 4% range. If you didn't have to sell, you were fine. Rents held pretty well.
We saw rents drop about 15% during the recession. Most owners weathered the storm well. Local banks here typically want a DSCR of 1.2, so even with rents dropping 15%, most owners were still able to stay afloat and meet their obligations, even those who bought just prior to 2009.
Maybe take a look at historical rent data for your target market and structure your financing to provide yourself a reasonable cushion. As was mentioned above, most commercial lenders will be fairly strict in their underwriting, but others may not be. Just because a bank will lend you the money doesn't mean the terms are financially sound for you. Especially in the current climate, some restraint may be necessary when purchasing.
We saw very few (1% or less) multifamily owners go under. Those that did were mostly in the lower price range of properties ($500k-$800k).
As others have mentioned, the more cash on hand the better. Obviously banks will tighten up and require more from the investor (reserves, downpayment, etc). Cash requirements today may not be sufficient to purchase when the market adjusts, so plan on over-saving now.