Hey, everyone’s got an opinion, but some people are just WRONG.
Especially when it comes to investing in Class A Multifamily.
Trust me, you DON’T want to fall into that trap!
I know it’s sexy…
With all the shiny new stuff that’s being built in exotic locations like Miami.
Don’t get me wrong, Miami is a great city.
The market isn’t the problem.
It’s the LUXURY.
Today, I’ll go into detail on why we avoid putting our investor’s money (and our own) into Class A Multifamily deals.
Stay tuned or read on below!
Risk Return of Class A Real Estate
Right off the bat, the main reason we don’t like Class A Multifamily is the risk return. We just don’t like the way that particular class performed during the last recession, and we don’t think it will do well heading into the next one.
In the last recession, Miami was hit hard. Prior to the recession of 2008, you’d see all these cranes sprouting up all over the city.
When the recession hit, half of these units were left empty. Why?
People couldn’t afford the rent anymore!
Others were losing their homes and had to downsize, but the luxury apartments were way out of their price range.
Think about it – in most cases the cost to rent a luxury apartment is the same cost as a home mortgage.
A similar phenomenon happened in Houston a few years ago when the oil industry took a turn for the worse.
If you’re not familiar, Houston’s economy is heavily dependent on the Oil & Gas industry. Many people work in this sector, and when the industry takes a big hit, so do thousands of people that work in this city.
For about 12 months, Class A got hit hard in Houston. There were lots of vaccines and lots of concessions.
Point being, it doesn’t take a nationwide recession for Class A to be a risky venture. In great times, it’s fantastic. But as soon as a city experiences a downturn, Class A is the first real estate type to be impacted.
The other side of this risk coin is the return. Returns for this particular class are lower than other classes of real estate for a couple of reasons: (1) they are expensive to build and (2) everybody wants to be in them!
Sure it’s sexier to say you have a Class A building in London or Paris then it is a Class B in Huntsville, Alabama; but the investors in the latter are laughing all the way to the bank!
Recession-Proof Real Estate
The recession-proof real estate that we invest in at Nighthawk is Class B, B-, and C+.
Why do I call it recession proof? When people find themselves in the throes of a downturn, these are the classes they will rent; the stuff that was built in the 80s and 90s, maybe even the early 2000s.
In bad times, people will tend to migrate to Class B or C properties. And in good times, people will upgrade from Class C to Class B.
They’re converging in both markets, which is where we prefer to play.
These properties do have their own challenges. Class B & C properties are older so there are going to be repairs, some major, that need to be made.
But from our perspective, we’d much rather invest in the upkeep of a property that provides stable cash flow and returns, then to put all of our funds into a newer building that is a riskier bet.
Now, a lot of the larger funds really gravitate towards Class A, but there's a reason for that. They have a much longer time horizon, in some cases 20 years!
They know that cities like Paris, New York, and San Francisco run long real estate that almost always appreciate in value. So, they’re not too concerned if a recession happens.
We, on the other hand, operate on a 3-5 year horizon. We want to have a faster return for our investors and we want to move that money!
Value-Add Deals
The best way we have found to turn our investments in 3-5 years is to create value-add deals. This means that we get into deals, create value, refinance out, return the capital, and do it all over again.
Related Article: Uncovering Value-Add Opportunities, A Multifamily Property Tour in Alabama
Related Podcast: Maximizing ROI in Value-Add Deals
Let me give you an example of why this strategy works so well:
Let’s say we get into a Class B- deal and we're doing a Class A deal at same time.
Now, let's say in 18 months there’s a market correction.
The Class A has nowhere to go. There wasn't a value add deal so the only way to go is, essentially, down.
But in my Class B- value-add deal, I’ve had 12-18 months to build value. This means that I've been able to increase my rents and my occupancy.
When a recession hits, I'm already ahead of the game. I have a margin of safety or a “buffer” during a market correction.
Am I going to be affected by that? Yeah, sure.
My vacancy rate’s going to go up a little bit, and my rent may stay the same or go slightly down, but I'm already way up and far above my safety net from that time that I purchased the property.
If you don’t believe me about the importance of margin of safety in investing, maybe you’ll listen to Warren Buffet who calls it one of his “cornerstones of investing”.
Additional Resources
The best investment you can make is in yourself, and that starts with education. You don’t have to be an alumni of Wharton or Columbia, like Mr. Buffet, to learn the ropes in multifamily investing.
I’ve put together a few free resources for you to access, including the opportunity to learn 1:1 with me during a mentoring session. Check them out below.
Special Report: What’s the Best Investment, The Stock Market of Real Estate?
If you’re ready to get started in multifamily investments and want a little guidance, let’s set up a call to discuss your goals one-on-one: https://themichaelblank.com/mentor/
