Not Investing Right Now? Here are the 4 reasons why

Multi-Family and Apartment Investing
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Not Investing Right Now? Here are the 4 reasons why

Dan HandfordPro Member
Investor · Lexington, SC · Member since 2018 · 779 posts · 501 votes

For those of you trying to raise capital right now in the middle of the coronavirus pandemic, you will likely face challenges from your investors that are normally faithful in investing with your group. 

Here are four reasons why some investors are sitting out right now: 

1. Lost Money in Stock Market

This investor has lost money in the stock market recently and either doesn't have the cash to invest right now or they are not pulling out in hopes that they will get their money back when the market recovers. 

2. Putting Money Into The Stock Market

This investor is looking to invest their capital into the stock market while it is at a low point in hopes of riding it up over the next couple of years to rake in some solid returns.

3. Sitting on Cash to Get Discounted Deals in 6-12 months

This investor is sitting on their cash in hopes of getting amazingly discounted deals over the next 6-12 months when properties begin defaulting.

4. Lost Income and Need Cash Reserves

This investor has either lost their job, been furloughed, or income has been impacted. Our group has many professionals, such as physicians and dentists, that have had their income completely halted since they are unable to perform any procedures. They don't know when they will be able to return to work and in turn need to preserve their capital in case they need it for personal expenses. 

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All 4 points above are valid but #3 I think is going to disappoint many investors. The difference between the 2008 financial crisis and now is that back in 2008 there was not a lot of capital in the market. Today, on the other hand, there is a ton of capital in the market. Many people are sitting on the sidelines waiting for those potential "amazing deals" and I don't think we are doing to see too many this time around. 

There is such much capital in the market right now that will be going after these deals that the prices will still get bid up to a point where the deal doesn't have that much of a discount. Sure, you are still going to see some discounts but nothing like 20-30-40% like we saw in 2008. 

I predict that prices will see a 5-7% discount overall over the next 6-12 months but it will quickly rebound to where it was pre-covid. 

What about you? 

Are you investing right now?

Or are you in one of these categories above?

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    Melissa Uppelschoten
    Atlanta, GA · Member since 2016 · 53 posts · 78 votes
    6y

    Thanks for those insights. I am seeking my first small multifamily in Atlanta right now. And realize there is no crystal ball as to what is to come. Will do my best to trust my number crunching and base my decision on that instead of emotion or fear of what is to come. Good luck everyone!

    5Reply
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    • Todd Dexheimer
      Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
      6y

      #1 reason that I am hearing: Too much uncertainty out there right now

      I agree with you that there is a lot of money out there, but there was a lot of money out there in 2008 as well. It's not how much money people have that convince them to make a decision, but the amount of fear/clarity that they have. If we continue with high unemployment to a while, you will see businesses shutting their doors, which will in turn cause a longer and deeper recession. This in turn will put stress on apartment collections and occupancy (people will double up or move back to their parents house). If that happens, then apartment owners start giving the keys to the lender and the snowball starts. 

      I am not expecting it to be 2008 version of single family homes, but I do expect a 15-20% decline in non-distressed apartments and a 30%+ decline in REO/distressed sales.

      The money will still be active during this time, but it will sideline a lot of investors who wanted to dip their toes in or just had $50-$100k to invest. The experienced investors will see the opportunity, the rest will be paralyzed in fear. 

      4Reply
    • John Blanton
      Investor · Apex, NC · Member since 2017 · 135 posts · 97 votes
      6y

      Great points @Dan Handford!! I am more in the camp of wait and see right now, not turning away a deal if the risk adjusted returns, conservative underwriting makes sense and the debt/ hold period are far enough out the current situation shouldn't matter too much in 5-10 years.

      How do you think investors should view a particular opportunity in the current environment as there is so much uncertainty? Should they be looking for higher returns due to the expected risk? Or lesser returns in a more conservative geography/ higher class asset?

      With less capital available for syndicators to raise for projects, should that lead to less competition on properties/ lower sale prices?

      1Reply
    • Melissa Uppelschoten
      Atlanta, GA · Member since 2016 · 53 posts · 78 votes
      6y

      Thanks for those insights. I am seeking my first small multifamily in Atlanta right now. And realize there is no crystal ball as to what is to come. Will do my best to trust my number crunching and base my decision on that instead of emotion or fear of what is to come. Good luck everyone!

      5Reply
    • Dan HandfordPro Member
      OP
      Investor · Lexington, SC · Member since 2018 · 779 posts · 501 votes
      6y
      Originally posted by @Todd Dexheimer:

      #1 reason that I am hearing: Too much uncertainty out there right now

      I agree with you that there is a lot of money out there, but there was a lot of money out there in 2008 as well. It's not how much money people have that convince them to make a decision, but the amount of fear/clarity that they have. If we continue with high unemployment to a while, you will see businesses shutting their doors, which will in turn cause a longer and deeper recession. This in turn will put stress on apartment collections and occupancy (people will double up or move back to their parents house). If that happens, then apartment owners start giving the keys to the lender and the snowball starts. 

      I am not expecting it to be 2008 version of single family homes, but I do expect a 15-20% decline in non-distressed apartments and a 30%+ decline in REO/distressed sales.

      The money will still be active during this time, but it will sideline a lot of investors who wanted to dip their toes in or just had $50-$100k to invest. The experienced investors will see the opportunity, the rest will be paralyzed in fear. 

      Your #1 reason would fall under #3 above in my original post. The people who are uncertain right now are simply waiting and sitting on their capital to realize higher returns in the future as assets begin to be sold at a discount. 

      I think the % discount you are expecting will certainly be had in many smaller markets. 

      I still believe the discounted pricing will be short-lived and the economy will rebound quickly.

      1Reply
    • Dan HandfordPro Member
      OP
      Investor · Lexington, SC · Member since 2018 · 779 posts · 501 votes
      6y
      Originally posted by @John Blanton:

      Great points @Dan Handford!! I am more in the camp of wait and see right now, not turning away a deal if the risk adjusted returns, conservative underwriting makes sense and the debt/ hold period are far enough out the current situation shouldn't matter too much in 5-10 years.

      How do you think investors should view a particular opportunity in the current environment as there is so much uncertainty? Should they be looking for higher returns due to the expected risk? Or lesser returns in a more conservative geography/ higher class asset?

      With less capital available for syndicators to raise for projects, should that lead to less competition on properties/ lower sale prices?

      Any deal you are analyzing right now should be balanced with realistic assumptions. You have to assume that rent growth over the next 6-12 months will be flat. You also have to assume longer renovation timeframes up to 24-36 months depending on the market. You also have to underwrite for a wide array of debt flexibility. 

      If the deals still makes sense, then go for it. 

      Also, don't let the idea of "less capital available" keep you from acquisitions. There is still capital being deployed and everyone is not sitting on the side lines. If you have a solid deal, in a solid market, with solid fundamentals, and with a solid operator then the capital come in in the midst of covid-19.

      0Reply
    • Dan HandfordPro Member
      OP
      Investor · Lexington, SC · Member since 2018 · 779 posts · 501 votes
      6y
      Originally posted by @Melissa Uppelschoten:

      Thanks for those insights. I am seeking my first small multifamily in Atlanta right now. And realize there is no crystal ball as to what is to come. Will do my best to trust my number crunching and base my decision on that instead of emotion or fear of what is to come. Good luck everyone!

      As long as you are well-capitalized and you can weather a storm, then you will be fine. This is a short-term blip, albeit a major blip, but in the long term multifamily assets will still outperform other asset classes due to demand.

      Glad to see you still actively seeking deals. 

      Have you connected with Whitney Ward in Atlanta, GA yet? She is a great small multifamily broker and you should certainly connect.

      0Reply
    • Ryan Daigle
      Investor · Apex, NC · Member since 2018 · 253 posts · 215 votes
      6y

      The long term demographic trends that are supporting multifamily as a property class are still very much in place. I'm with you @Dan Handford that we may see a small dip in the short term, but that asset prices and returns for the 2+ year time frame will remain strong.

      1Reply
    • Todd Dexheimer
      Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
      6y

      #3 says they're waiting for discounts. Some investors I talk with are waiting for discounts. Most just have no clue what is going to happen and want to wait because of the lack of clarity on the situation. As Charlie Munger said, no one has a clue what is going to happen. 

      I actually think that properties in bigger cities will be hit the hardest, especially urban core properties. The high rises and mid-rises in my opinion will be hit very hard. The suburban apartments will possibly even see some demand increase. This doesn't mean the prices on suburban won't get hurt. They will be effected by the urban decline, just to a lesser extent. 

      I get saying anything negative about multifamily, as a multifamily investor and syndicator is counter-intuitive. Most people in this forum won't agree with my assessment, because we have told everyone that multifamily is recession-proof. I do think that multifamily will get smacked around a bit, but strong operators will make it through just fine and have deals to scoop up a long the way. Once this passes, multifamily will look different, but still will be one of the best and safest investments long term.

      Right now prudent sponsors are keeping cash liquid, not doing distributions, no paying themselves and are preparing for rough waters. I hope that you are right and we only see a 5% drop in pricing, that would be great for all of our current deals. I tend to be very optimistic by nature, but I agree with Charlie Munger, CoStar, Ken McElroy and a host of others.

      3Reply
    • Jingru Sui
      Real Estate Agent · Atlanta, GA · Member since 2014 · 683 posts · 317 votes
      6y

      There's a #5. Lending is tight! 

      2Reply
    • Bjorn AhlbladPro Member
      Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
      6y

      @Dan Handford My tenants are doing OK. Many are still working and paying rent with income from Pensions, SS, wages, savings etc. I am sitting on cash and lost little in the stock market because I don't invest much there.

      What is giving me cold feet is the giant number of unemployed, the number of companies that will never be back, and the attitude of entitlement being sown by a growing segment of politicians and population in general............."the government will take care of you, you should not be worried about working and housing is a human right". I need to see where that goes-you and I know the government simply can't afford to underwrite that. For now I am ok with a couple of percent on my cash; at my age I can't rebuild a third time. I am confident the economy will be back, just not ready to bet on when.

      2Reply
    • Melissa Uppelschoten
      Atlanta, GA · Member since 2016 · 53 posts · 78 votes
      6y

      Thanks Dan! Will add Whitney to my list and mention you sent me. 

      1Reply
    • Joe SplitrockPro Member
      Moderator
      Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
      6y

      @Dan Handford lots of damage has been done to businesses and the economy but with all the federal money being pumped in combined with frozen payments (auto, utility, mortgage, student debt), we are not feeling the pain yet. Even with businesses reopening, there are still entire segments of the economy that will remain closed. Large venues like concerts, conventions, theme parks, casinos, weddings, etc. will all be hit for the rest of 2020. Even businesses like restaurants will operate at 50-75% of normal revenue for the rest of the year. Add to that mounting state debts that will likely bankrupt states, causing massive debt default. On top of all this, the virus is expected to be around through the end of the year, plus we have an election cycle in November! A change in the control of the house, senate or presidency will create a major shift.

      I don't know the net effect of all of this, but I know in 6 months, we will have much better clarity than we do today. More importantly there is just too much irrational optimism right now. Everyone believes in a V shaped recovery, but am pretty sure we can expect a W with the second dip being worse. 

      3Reply
    • Farrukh Ali
      Rental Property Investor · Pasadena, CA · Member since 2019 · 8 posts · 2 votes
      6y
      Originally posted by @Joe Splitrock:

      @Dan Handford lots of damage has been done to businesses and the economy but with all the federal money being pumped in combined with frozen payments (auto, utility, mortgage, student debt), we are not feeling the pain yet. Even with businesses reopening, there are still entire segments of the economy that will remain closed. Large venues like concerts, conventions, theme parks, casinos, weddings, etc. will all be hit for the rest of 2020. Even businesses like restaurants will operate at 50-75% of normal revenue for the rest of the year. Add to that mounting state debts that will likely bankrupt states, causing massive debt default. On top of all this, the virus is expected to be around through the end of the year, plus we have an election cycle in November! A change in the control of the house, senate or presidency will create a major shift.

      I don't know the net effect of all of this, but I know in 6 months, we will have much better clarity than we do today. More importantly there is just too much irrational optimism right now. Everyone believes in a V shaped recovery, but am pretty sure we can expect a W with the second dip being worse. 

      I wholeheartedly agree with the sentiment that there is too much irrational optimism right now. I am a first time investor and I am going to wait at least few months before moving forward with my first purchase. 

      0Reply
    • Aigo Pyles
      Flipper/Rehabber · Memphis, TN · Member since 2020 · 758 posts · 285 votes
      6y

      It's the cloud of uncertainty makes it harder for people to invest right now. Most of people would like to wait until this Coronavirus gets contained. We don't really know when. We don't if it will hit harder. So the uncertainty is there. 

      1Reply
    • John McAllister
      Specialist · East Greenville, PA · Member since 2019 · 82 posts · 35 votes
      6y

      @Dan Handford

      I am currently doing #2 with the goal to achieve #3.

      3/26 I jumped in the market with zero experience and been scalp trading as the market goes up and down. My savings were in a bank account w/ 1.5% interest and the pass few weeks I have a 30% + Return. There where 30-40% discounts on company’s.

      Buying my first house hack last year, listening to bigger pockets and reading books like RDPD caused me to see the opportunity and go for it.

      “Overcome fear”

      “Make your money work for you”

      “Learn a new formula “

      “Learn a new skill”

      Are a few principles from RDPD and I am glad I applied them.

      #3 is coming and I will be ready to ride that wave up.

      1Reply
    • David Smith
      Rental Property Investor · NJ/PA · Member since 2016 · 555 posts · 149 votes
      6y

      Now is the best time to buy. Or price will go even higher.   And very low inventory as always. 

      0Reply
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