Why I’m Not Afraid Of A Market Crash

One of the most common concerns I hear from investors is “What happens if the real estate and/or stock market crashes?” I love that question, because I believe that generally speaking, apartment syndication as an investment class is exponentially safer than the stock market. That’s not to say that I don’t have money in the stock market as well, it’s just that as I move toward retirement, having steady income and paying fewer taxes becomes vitally important to my future.

To illustrate, if we use 2008 as an example of the worst-case scenario, the chart below shows how various popular investments fared according to Morningstar.

Did housing prices go down as well? Absolutely. Did rents go down? Not so much, and that’s one reason why I am so excited about the power of investing passively in apartment communities.  According to the 2016 US Census American Community Survey, (ACS), the average rents in Texas, and especially in the Dallas market where MQ Ventures primarily invests, remained steady in most areas.  Some submarkets fluctuated +/- 10-15% or so, but in short, communities that were already cash-flowing, remained so.  

At the end of the day everyone needs a place to live, so fast-forward to today’s market, and the story gets even better. In most major markets, the bulk of new construction is taking place in the “Class A”, or luxury end of the market, but my company focuses on Class B properties where the least new construction is happening, yet where the demand is the greatest. With rents stabilizing and wages growing, Class C and D renters also have the opportunity to trade up.

One day the real estate market will go down, no question. But when people can no longer afford their homes, they rent. At the same time, high-end renters often trade down. Both of those dynamics provide us with opportunity to attract tenants as the economy ebbs and flows.

In addition to the above, here are some specific things that we look for in deals to prepare for a potential down-market in real estate:

We do not buy for appreciation, we buy for cash flow. That means that if we need to, we can simply hold onto the asset until the market improves. That's largely what happened in 2008.

We use long-term loans wherever possible. That way we won’t be forced to sell quickly if a note comes due at a bad time. Interest rates are indeed rising, and loan terms are getting tighter, but a track record of strong investments and solid relationships with lenders go a long way to towards negotiating the most favorable terms possible.

We buy in markets that are growing. Besides Texas, there are other growth markets such as the Carolinas, Georgia, and Alabama to name a few, where there is still a real shortage of housing.

In summary, I’m conservative, and I’m always thinking about the worst-case scenario to protect our investors. When things crash, there is a good chance that the stock market will crash first. I feel great about multifamily because if the worst-case indeed happens, apartment communities can provide solid cash flow while we wait for things to recover.

That makes me excited, and it’s why I do what I do. Every accredited investor should have multifamily investments in their portfolio. Personally, I’m more afraid of NOT having them, and that’s why I continue to spread the word.