Fourplex investing with an impending recession?

203 Replies

@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.

.

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.

.

The next best thing to cash is friends WITH cash.

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. 

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.

 

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.. 

 

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). 

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.

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.

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!

@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 

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. 

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.

@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

@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.  

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... 

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

We hate spam just as much as you