How to talk about a possible recession?

Question

I brought my investor a possible deal that looks pretty good on paper. He had some concerns and various questions which is totally fair. But then he also brought up the talk around the looming recession and how that could potentially affect the deal and maybe his willingness to fund it ... I didn’t have a great answer for him.

Does anyone know a good way to approach this topic when people (especially those in the rental market game) bring it up as a concern and maybe even a hesitation to get involved?

Thanks!

P.S. The market we’re focused on is Indianapolis, IN it that makes any difference.

Joe Villeneuve · Answer

A good deal is a good deal in any economy.  Just ask all the experts that have been predicting doom for the past 10-12 years.  You don't invest for the economy...you invest for the deal.

This is why you shouldn't invest where your profit is tied to future events (good/bad) that you have no control over.  That's not investing...that's speculating, and THAT IS impacted by the economy.

Canesha Edwards · Answer

@Casey Sbrana

Great question. Firstly, like everyone has said there has been talk about a recession for years. No one can predict when it’s coming not even the Fed ( Ex Federal Reserve here)

To make your investor feel comfortable, talk about the numbers. If you were conservative in your underwriting and analysis, those should be your talking points.  Also, another great underwriting tip is to stress test your numbers.  Any property will cash flow in a perfect world. But what do the numbers look like if you lose 30% of your tenant base? If interest rates increase ( unlikely).  It market rent decreases. If market rent is $1000. Would the property still be a good buy with rent dropping to $750? If a recession hits, and tenants stop paying and you have to start the eviction process, how does this affect your bottom line?  Especially if you have to evict more than 1 tenant. Maybe you under write your deals with a high reserve percentage to account for this risk.

Investing is solely risk management. So, to easy your investors mind. Point out the risk of the project and then provide your solutions to mitigate the risk.

Every investment is a risk, doesn’t matter if the market is good or if it’s a recession. Buy right, don’t speculate, and mitigate the risk appropriately.

Hope this helps!

Canesha

Bill Plymouth · Answer

@Casey Sbrana make sure your numbers can survive a 20-25% plunge. If you can do that, and still cashflow/breakeven, then you can show your investor that this property can survive a recession

Amil D. · Answer

@Casey Sbrana they said the same thing in 2011. But I bet he would have regretted not buying back then.

Market timing is impossible

Nik Moushon · Answer

Just remember that once the yield curve has flipped (which has caused all the media frenzy) its been an average of 22 months before the next recession actually occurs. It could be earlier or it could be later. Obviously the faster you get a project done the better but if you can project when you will get your investments back to him and its a good amount of time before the avg 22 months I think that will ease your investors mind a lot. Once you start creeping up closer to that 22 months thats when investors should start to actually worry about a recession. Thats my 2 cents anyways and every location will be different. Impossible to accurately predict.

Jay Hinrichs · Answer

were did you see this panel or was it a webinar.. Jeremy is LA based and one wicked smart investor..

Amy Heitner · Answer

@Casey Sbrana, just listened to a panel of experts on the state of the market in mid 2019. James Eng, Dino Pierce, Jonathan Twombly, and Jeremy Roll.

The general consensus was that B Class properties were the most recession-proof.

I was surprised because I had thought C Class would be but the point was made that these tenants tend to be the ones worst hit by a recession.

Karl B. · Answer

Predicting a recession is speculation; buying a deal where the numbers make sense is not.

Jay Hinrichs · Answer

dealing with investors you talking about investor sentiment and such.

it really depends on what type of project your talking about.. if its just rental property that's pretty easy.

but if your talking about development or flipping then you cant have blinders on  you do need to  try to anticipate market changes.. we have done that by limited debt so if we do have a change we ride it out no problem

but to take on max debt in certain segments of real estate in certain markets you do need to be more than Hey my renters wont leave  LOL

Jay Hinrichs · Answer

was the event in LA  ?

How to talk about a possible recession?

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