Upcoming recession and how to take advantage of it?

12 Replies

Hi everyone and I hope you all have a wonderful day,

First, a little bit about my background. Around December 2019, I partnered up with an experienced hotel operator in Colorado on a $3.5m hotel. That obviously didn't go well because Covid-19 hit and everything in the hospitality industry went upside down for a couple of months. The hotel is reopened but the traffic is VERY low but we are still hopeful that it will start picking up again soon. 

The thing about this deal is that it seems to me that I learned so little about how everything (about how to purchase CRE) works in overall. We created the LLC, made an operating agreement, he did the loan through a local bank, we wired in the money and voila we take over in December. I got plenty of experience about how to run a hotel because I got thrown in and pretty much just told to operate a hotel with little to no guidance. The hotel was chugging along pretty nicely until the **** hit the fan. Now, I want to do my own deals to take advantage of the upcoming recession but, truthfully, I don't know where to start even. I started cold calling brokers and mortgage brokers but none took me seriously.

I am aiming to buy $1.5m to $2m apartment complex soon in the near future but I'm not even sure if I'm qualified for permanent financing yet? I know that I can get financing for 7% interest rate but that seems incredibly high for an apartment complex and, based on the numbers that I got for some deals on loopnet, that is pretty hard to turn a profit. We have around $650k in cash for this type of deals. Is there a chance that lenders will lend based on the property itself? My FICO is ~ 800 but I have no income (no 2018 2019 tax return) to back it.

Danh

Hey @Danh Nguyen ,

Sounds like your first CRE investment experience was a poor one, and only partially due to COVID. Sorry to hear that. You definitely shouldn't have been thrown in the deep end with no support (unless you knew that going in).

Your primary questions seem to be around financing. It is going to be difficult to quality for a loan because it doesn't sound like you're listed on any other CRE loans. Lenders want to see that you've done it before and this isn't your first rodeo. So that's one hurdle. Most people get around this by partnering on their first deal so both partners sign on the loan with one bringing their past experience/qualifications. Your hotel deal may help here even if you're not a guarantor on the loan, but quite likely it may not. Be sure to ask.

The other thing about qualifying for a commercial loan is that you will often need to have a net worth equal to the loan amount and have personal liquidity of 6-12 months of debt service (varies by lender). So, yes, the lender will underwrite your property and base their decision on how they think the property will cover your debt service, but they also want to know you have the ability to step in if stuff goes sideways. So they're also looking at your personal qualifications.

Hope that helped? Happy to answer any other questions as well.

@Danh Nguyen I specialize in CRE in the Pa area. @Ryan Daigle has given you good advice. In addition, hospitality is in a windfall. RCA analytics reported that reported that only 10 hotel transactions took place nationally last month. That is a historical low, running about half of sales activity during the crash of 08-09. In addition, hotels are just being allowed to operate at 50% occupancy. In my opinion, I would stay away from hospitality for a year or two. But to answer your overall question, the real way to take advantage of this recession is in "adaptive re-use". Values will be dropping soon due to the fact that these types of properties, (including certain types of retail and office) will have to be "repriced" according to the new occupancy regulations. Buy at a discount and convert the space to something that is in high demand.

Hi Brett - I agree that adaptive re-use is how the next wave is going to look like. I am seeing some hotels in the midwest that are ripe for multifamily conversions.

Understanding re-zoning and land use is key and ofcourse finding financing to construct - since thats likely to be a larger number than land acquisition cost. 

Curious on your thoughts on what retail is likely to be converted to? Do you see that happening already in the market you're in?

Originally posted by @Brett Peters :

@Danh Nguyen I specialize in CRE in the Pa area. @Ryan Daigle has given you good advice. In addition, hospitality is in a windfall. RCA analytics reported that reported that only 10 hotel transactions took place nationally last month. That is a historical low, running about half of sales activity during the crash of 08-09. In addition, hotels are just being allowed to operate at 50% occupancy. In my opinion, I would stay away from hospitality for a year or two. But to answer your overall question, the real way to take advantage of this recession is in "adaptive re-use". Values will be dropping soon due to the fact that these types of properties, (including certain types of retail and office) will have to be "repriced" according to the new occupancy regulations. Buy at a discount and convert the space to something that is in high demand.

 

@Danh Nguyen , to answer your question, for that deal size, yes the lenders will be underwriting the property "more than you".  But, as Ryan mentioned, you will need a personal financial statement showing a net worth typically 1:1 of the loan amount, i.e. $1mm loan needs $1mm net worth, and liquidity of 6-12 months debt service for agency financing.  You can likely get shorter term private financing through local lenders as well, but their underwriting will be similar to agency for non-recourse, and you will likely need tax returns for recourse loans.  

I would reach out to a commercial mortgage broker, who can help you navigate the waters better. They will likely cost 1-2 points when you actually move forward on a deal, but will keep you moving in the right direction, and can help point out any potential issues they see with your situation or the project overall.

@Sri L. You've made very good points. I agree with you on the conversion of hotel to multifamily, and it would pose a tangible solution to the affordable housing crisis. 

 In regard to retail, it is a little trickier. We know we can't stick a warehouse beside a Taco Bell, right. But I think medical office, urgent care etc. The healthcare industry is an enormous economic force. It is the nation’s largest and fastest-growing employer, as I'm sure you are aware. 

 Currently, in my market we are seeing the conversion of some office into warehouse and some warehouse into medical office. Although, the last scenario has caused problems in efficiency percentages. But mostly I have seen just paused development. Let me know your thoughts.  

@Brett Peters @Evan Polaski @Ryan Daigle Thank you all for your responses. Apparently, my name was not put on any loan document (we formed an LLC inside a LLC). I came in with my partner on the fact that he will be able to support me but it turned out that I have to support him on various aspects of running a hotel. It was rough for 3 to 4 months but, after almost begging for him to do his job, the guy finally started doing the things that he supposed to do even before we acquired the hotel.

About the requirements of net worth = loan amount + 6-12m of debt service, those will not be a problem. We will actually have access to a little bit more than 1m in cash but we are being conservative because, not counting the hotel, this will be our first CRE deal. I talked to a reputable mortgage broker in my area and he gave me several leads on how to get financing for my "first" deal. Do you guys think that the discounted apartment/office/retail will start to pop up soon? As of right now, I'll go and read as many books as I can find + getting my CCIM designation. Do you all think CCIM designation is worthy of its price?

Danh

@Danh Nguyen In regard to discounted property. Repricing will take place wherever occupancy is limited. A restaurant that can only serve at partial occupancy will have a different NOI, likewise for other asset classes affected. However, I don't think we will see this with apartments. It should be noted that cap rates will most likely remain the same, while the NOI itself lowers the value. But if we compare this to the last recession, buying opportunities should start popping nearing the end of this year. But yes, there will definitely be inventory at a discount.

 As for CCIM, I am a member of the institute and have one class left to take before designation. To answer your question, it is a fantastic program and worth every penny. However, whether this stuff will benefit you depends highly on your market and your level of deal activity. The material is extremely high level and the reality is, it not as easily applied in every market. If you do go for it, I suggest you take "Foundations for Success" as a warm up. It is less expensive and it will give you an idea of whether to go forward. Best Wishes

You need to find a partner or pay a mentor and read a lot of books. No offense, but it sounds like there is a lot of learning that needs to happen, plus MF is a team sport. 

Financing: You should be able to get around 3.5-4.5% interest rate on a 25-30 year am, locked in for 5-10+ years. It sounds like you qualify besides the experience part. Having no tax return won't help either. The good news is that is you get the right financing there are people that will sign on the loan with you for a little bit of the equity (they are called a Key Principle - KP).

Deal sourcing: If Brokers aren't taking you seriously, then you're not approaching them properly. You need to learn how to talk with brokers and you need to be crystal clear on what you are looking for and confident in your approach. 

As for future opportunities: I think we are 6-12 months out from seeing "deals" come on to the market. This could play well into your hands. Now is the time to learn and network and be patient. https://www.biggerpockets.com/member-blogs/10145/89918-opportunities-to-come

@Danh Nguyen there is definitely something going on in the economy right now. There are too many unknowns to get excited and think that its going to be a free for all and that you cant make mistakes. Right now I am semi excited about the fact that opportunities may arise but I am also cautious. There is no book or any investor out there that can give you good advice on what to do if there is a pandemic. 

@Todd Dexheimer Thank you for your reply. I know that I will need to improve upon various aspect before getting myself into another deal but I, definitely, do not want a partner. According to my mortgage broker, I will be able to get at least at least a 1:1 leverage with a good rate (4% maybe?) if I deposit a "sizable" deposit with local banks and credit unions (any pitfall in this? sizable here probably means around $500k I assume). However, he steered me toward doing my first deal with owner-financing (40% ltv, 5%) instead of getting a loan because there might not be an option that makes sense financially. Do you guys have any experience with owner financing that you can share? Any good, bad experience?

English is my 2nd language so talking to brokers are daunting (especially with commercial RE brokers because these guys play with millions). I figure brokers only want people that can close deals but do they have any responsibility in guiding you toward closing deals (in theory, yes but, practically)? As of right now, lending for my first apartment seems doable. Do you think I should start talking to brokers now and have their "bird dogs" find me a deal or wait until everything settle down a little bit? Cap rate in the markets that I want to buy (TX,CO) still hovering around average. I found some very good value-add deals on Loopnet that just recently pop up but, because of Covid, I figure I should wait until bullish trend resume.

Hey @Danh Nguyen , there will definitely be opportunities. Unlike retail and hospitality, multifamily was virtually unscathed at least thus far due to COVID. The fundamentals indicate that this may be the case through this pandemic, though certainly there will be deals from burnt-out owners. 

Before jumping into a multifamily deal, you should speak to others who are more active and knowledgable in the space. Numbers are only part of the equation. 

I can understand the challenge the language barrier presents, especially when talking to brokers who want to know you are a credible buyer. Tagging  @Delphine Nguyen as she may have some thoughts to help you.