Fourplex investing with an impending recession?

Tukwila, WA · Member since 2019 · 70 posts · 88 votes

When is the optimal time to purchase multi-family residential property? With the impending recession, what are some considerations for aspiring investors? What echelons of property should be honed in on? Which should be avoided? New member here, so if my post is in the wrong location or structured incorrectly, please let me know. Thanks!

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Wy Kay

Specialist · New York City, NY · Member since 2019 · 34 posts · 111 votes

@James C Norman Jr

Ideally, the optimal time to buy is when everyone is selling and running for the hills, when it's a buyers market. Right now, the markets across the country are overheating and it's a sellers market. Sellers can demand all cash, a fast closing and get offers above asking price too. It doesn't mean you shouldn't be a buyer, only that it's significantly more difficult to find a good deal.

In addition, unless someone has a crystal ball, there isn't a surefire way to know when the next downturn will come about. It can be in a month or 2-3 years from now, no matter the dire predictions we constantly hear.

If an investor is savvy enough and has the means and patience to wait, potentially another 2-3 years or more, properties will be selling for steep discounts to what they are going for now and will put some of the best deals you can find now to shame. Warren Buffett is sitting on $122 billion in cash just waiting for the next opportunity. Buffett is very savvy, patient and disciplined to do so.

There are still deals out there and plenty of profit to be made with the current market conditions, just depends on your investment profile.

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James C Norman Jr
OP
Tukwila, WA · Member since 2019 · 70 posts · 88 votes
7y
@Ian Walsh I agree, Ian. Hopefully I’ll find some!
0 Reply
Brian Graham
Rental Property Investor · Tulsa, OK · Member since 2019 · 17 posts · 9 votes
7y
@Jay Hinrichs Very informative response. I was a child when all that business went down. I didn't think about the fact that anyone without adequate cash could be locked out of the market potentially.
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So what that means is if you cannot build large cash stores in preparation. You should be finding partners and building a reputation with folks who DO have cash and may not be savvy investors themselves.
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The next best thing to cash is friends WITH cash.
2 Reply
Ola Dantis
Multifamily Syndicator · Houston, TX · Member since 2016 · 1k+ posts · 2k+ votes
7y
Originally posted by @James C Norman Jr:
@Ola Dantis agreed. How are multifamily prices affected (if at all) in an extended-duration economic downturn?

Interestingly, of all asset classes, Multifamily remains strong during recessions, as more people move into Apartments during recessions.
1 Reply
Steve K.
Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes
7y
Originally posted by @James C Norman Jr:
@Steve K. Thanks for your response Steve! Would you recommend buying say a B class duplex over a C class fourplex at a similar price point?

Hard to say, it would depend on the specifics of each. In general I like B class over C class but on the other hand the quad would be more likely to meet my buying criteria because it would be more likely to cash flow in my market. I haven’t found any duplexes that cash flow yet so my portfolio is mostly quads and bigger. If I were house hacking and just looking to offset some of my living expenses I might go with the duplex, but the quad would be more likely to provide cash flow. Your market might be different, maybe the duplexes there are much more desirable and more likely to appreciate providing a better overall return.

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
7y
Originally posted by @Ola Dantis:
Originally posted by @James C Norman Jr:
@Ola Dantis agreed. How are multifamily prices affected (if at all) in an extended-duration economic downturn?

Interestingly, of all asset classes, Multifamily remains strong during recessions, as more people move into Apartments during recessions.
while generally correct just think about todays syndicators they are buying value add all the time from landlords who just cant make a go of it. so its not like you just buy a MF and it all goes perfect.. plenty of MF was lost in the GFC in the hard hit areas of GA FLA AZ Central CA Vegas .. in vegas many MF went to 30 to 40% vacancy and landlords could not debt service and lost them.. but again I am for one not predicting another GFC that hopefully was a once in a lifetime event.. but it did happen..

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Matt R.
Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
7y
It may not be a recession for sure vs slow down from hot. There is still a reasonable chance there is not a recession impending. At any rate, I hope prices come down like last time and probably wishful thinking.
I think most of the old plexes in Vegas are D class ish and over priced, maybe check Henderson to avoid personal nightmare BP story post. The last BP dude to try that lower end plex in Vegas spun his wheels for a year before selling to the next wheel spinner (Eviction City).
1 Reply
Victor Saumarez
Investor · Lahaina, HI · Member since 2012 · 47 posts · 35 votes
7y
Recessions put pressure on prices. Recessions are imminent and there’s nothing different about this time and one is long overdue. The mother of all hedges is value investing; buy low and sell high. The numbers rarely make sense when investments are over-bought. Best investment currently is in patience.
3 Reply
Michael Ealy
Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes
7y
Originally posted by @Dennis M.:
Well Weve been on the verge of a recession for about ten years now . Chill out and do it anyway . Be like Nike and just do it ! We are real estate investors bro we stay calm and make calculated decisions based on logic . We don’t sit on our laurels running for cover every time the Dow Jones dips down a few hundred points . Think this over . If people lose their good job and that nice house what are they going to do ? Jump off a cliff ? Live under a bridge ? They are going to downsize and become renters . So how do you think that affects you being you own apartments? This is why sometimes rents can actually increase in an economic crisis . Everyone needs a place to stay and real estate is local

Spot on brother!
This is why I made money before, during and after the Great Recession. The same can't be said of flippers (in general).
Also, on a separate post (and it seems like every week someone ask the same question here on BP: "The recession is coming! Should I buy?"), instead of worrying about the next recession, with real estate investing, you can "create your own economy". How?
Buy right in areas that are up and coming and you know (not guess) that rents are increasing in the area. If the recession happens and rents will stop increasing and even if the value drops significantly, you're still making passive income. If the recession does not happen, you can choose to keep with ever increasing rents (and value is increasing too) or you can choose to sell and get that big capital gains so you can buy more properties.
3 Reply
James C Norman Jr
OP
Tukwila, WA · Member since 2019 · 70 posts · 88 votes
7y
@Steve K. Great insight. Thanks Steve!
0 Reply
James C Norman Jr
OP
Tukwila, WA · Member since 2019 · 70 posts · 88 votes
7y
@Jay Hinrichs. Interesting, Jay. Where did the tenants go? Evicted or cut their losses and fled the area entirely?
0 Reply
James C Norman Jr
OP
Tukwila, WA · Member since 2019 · 70 posts · 88 votes
7y
@Matt R. Wow Matt! Thanks for sharing. Any specifics to that story or perhaps a link to the forum post (if applicable)?
0 Reply
Rob B.
Chicago, IL · Member since 2018 · 546 posts · 227 votes
7y
Looks like @Wy Kay and Jay have this covered! Great advice all around. As they've noted above, unless you plan on selling during the recession or anticipate major neighborhood changes as a result of the recession, keep the focus on your business goals/plans. I was just having a very similar conversation with a close colleague and it always comes back to what the underlying business objective is -- I will, however, say that having a diverse local economy should play a factor in the decision making here. Best of luck with your move to Vegas!
1 Reply
James C Norman Jr
OP
Tukwila, WA · Member since 2019 · 70 posts · 88 votes
7y
@Victor Saumarez Great counterpoint, Victor!
0 Reply
James C Norman Jr
OP
Tukwila, WA · Member since 2019 · 70 posts · 88 votes
7y
@Michael Ealy Great points, Michael!
0 Reply
James C Norman Jr
OP
Tukwila, WA · Member since 2019 · 70 posts · 88 votes
7y
@Rob B. Thanks for the well-wishing Rob. They say the house always wins. This may be the one case where I hope that’s true!
1 Reply
Bob Prisco
Specialist · Cleveland, OH · Member since 2018 · 1k+ posts · 666 votes
7y
@James C Norman Jr who cares about a recession, people will always need a place to be.. If you are buying for cash flow who cares about 10, -15% up or down, as long as the cash flow makes sense. it all evens out overtime..
Good Luck
1 Reply
Isaac A.
Grosse ile, MI · Member since 2014 · 117 posts · 46 votes
7y
Originally posted by @Mike Dymski:
Search the forums for "recession". There have been weekly posts on this topic since 2014.

I like this statement. When Donald Trump won the elections, so many gurus on BP said that there is a pending recession. Such a joke.
1 Reply
Jacob Sampson
Investor · Topeka, KS · Member since 2015 · 1k+ posts · 1k+ votes
7y
There is no best or worst time. There is only a good or bad price. If you think a recession is coming soon then model out how that might affect rents over the next several years and purchased based on those compressed rents. If you find that you can't purchase a property now for a reasonable price then just hold back and accumulate cash.
Nothing will do more for your cash flow and net worth then having a ton of cash when the real estate world is ending.
2 Reply
James C Norman Jr
OP
Tukwila, WA · Member since 2019 · 70 posts · 88 votes
7y
@Bob Prisco Thanks Bob!
0 Reply
James C Norman Jr
OP
Tukwila, WA · Member since 2019 · 70 posts · 88 votes
7y
@Isaac Agbolosoo Very true, Isaac!
0 Reply
James C Norman Jr
OP
Tukwila, WA · Member since 2019 · 70 posts · 88 votes
7y
@Jacob Sampson Great points, Jacob!
0 Reply
Bryan Cavellier
Rental Property Investor · Syracuse, NY · Member since 2019 · 90 posts · 34 votes
7y
@James C Norman Jr my POV on this is simple. A deal works or doesn't based on your situation and the numbers that you pay attention to when buying. No matter the situation the economy is in the deal has to make sense to you. I personally would suggest a B but definetely a C class building because when tough times hit, people will move down a class so the B and C are "recession" proof, theoretically.
Sum it up... People will always need a place to live so if it makes sense for you to buy... Do it!
Best,
Bryan
1 Reply
Andrew Van Sicklen
Member since 2019 · 1 post · 1 vote
7y
@James C Norman Jr
I think its great your being careful in considering your entry point and the current marco environment. Personally I would continue to look for deals but leave yourself a larger vacancy allowance in underwriting and plan to keep some excess reserves for the property. Should the worst case scenario come to fruition and you do have an increase in vacancy you'll still be able to float the property. If you dont have an increase in vacancy you can use the reserves to pick up some of the depreciated assets from those who were over leveraged or malpositioned. This is going to make it a little harder to jump in but keep digging and offering and something should click.
1 Reply
Joe Willets
Specialist · AZ · Member since 2019 · 5 posts · 5 votes
7y
Originally posted by @Bryan Cavellier:
@James C Norman Jr my POV on this is simple. A deal works or doesn't based on your situation and the numbers that you pay attention to when buying. No matter the situation the economy is in the deal has to make sense to you. I personally would suggest a B but definetely a C class building because when tough times hit, people will move down a class so the B and C are "recession" proof, theoretically.
Sum it up... People will always need a place to live so if it makes sense for you to buy... Do it!
Best,
Bryan

This is exactly the right mindset. In multifamily investing, you need to consider the deal, the location of the investment, and the job market/economy in that location. As others have mentioned, many areas were hit harder than others. In Vegas, the recession caused less discretionary spending, leading to entertainment worker layoffs, and people couldn't afford rent. Vacancy is a killer in the investment real estate world.   I'm a big fan of C-Class multifamily. There will always be a market for it.

As far as the next big recession, an inverted yield curve can be an indicator of troubling economics. However, as the gentleman in the manufacturing industry pointed out, they are extremely busy in his industry. Manufacturing is a leading indicator that the economy is strong.

The US financial stability is much stronger than it was 10+ years ago. Stronger bank balance sheets (with significantly less toxic investment assets), manageable household leverage, and personal savings rates are higher. Even though The Fed has been slow to enact monetary policy changes, most economists see it coming.   If we are "on the verge of collapse!!", as I've heard people say, there certainly don't seem to be the right indicators.

As far as timing the purchase, I like the gold nugget analogy.

I'm totally paraphrasing/butchering it but:

Hypothetically, this gold nugget is worth $500.

    An bank says, "hey I'll give you $20/mo to let me hold onto that."

    The recession hits, and the value of your nugget plummets.

    As the value changes, it doesn't affect you at all. You still get $20/mo.

The point being, as long as your asset is producing an income, the value of the asset can change, and you shouldn't be affected much.

This got a lot more long-winded than I initially thought it would...
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Henry Lazerow
Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes
7y
It's very market specific. Find areas gentrifying that are growing at faster rate then overall US Market for a bit of a buffer. I personally don't think real estate will fall in near term but always good to be safe in your analysis.
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