Are we overdue for a real estate market correction? Multifamily Investors: Read on for 4 guidelines to help you THRIVE in these uncertain times!
Nervous about investing when many are predicting a recession? Truth is, there are steps you can take to do multifamily deals that keep your money safe, even in a market downturn.
Whether you’re an active or passive investor, it’s important to know how to make your money grow—no matter what happens in the market as a whole.
In this week’s video blog, I share 4 tips to help you thrive in an uncertain real estate market!
I explain why it’s foolhardy to try and time the market and discuss how to find areas of growth (independent of the housing market at large).
You’ll understand how to make conservative projections that pass the stress test—and never run out of cash!
Watch the video below (or keep reading).
My good friend Brian Burke is an experienced investor with a portfolio of more than 3,000 units. In his talk at Deal Maker Live, he shared his top 4 tips for prospering in an uncertain real estate market:
Don’t Try to Time the Market
Nobody has a crystal ball, so there is no use trying to predict what will happen and when. Instead, stay away from cyclical markets like the coasts. Yes, you can make big money in these areas during a run up, but you also lose big when real estate markets crash.
Focus your investments in stable areas like the Midwest or the Sun Belt. So, maybe the deals aren’t as sexy. But you can count on cash flow from multifamily properties there regardless of what’s going on in the housing market at large.
Follow the Growth
Brian also recommends that you ride the Big 3—
- Job Growth
- Population Growth
- Income Growth
Look for markets where all 3 are on an upward trajectory. And where there is still yield, cash flow and the potential for appreciation.
How, exactly, do you find those real estate markets? There are 3 key reports to help you uncover this information:
- The Marcus & Millichap National Apartment Report
- The IRR Viewpoint Report
- The Milken Best Performing Cities Report
For more on how to leverage these reports, check out my video, 3 STEPS FOR PICKING THE BEST AREAS FOR MULTIFAMILY DEALS.
Be Conservative in Your Projections
Another strategy to help you thrive (and keep your money growing) in an uncertain real estate market is to be very, very conservative in your underwriting. Specifically, be cautious in the following areas:
1. Rent Growth Projecting a $150 rent increase in Year One is unrealistic. Slow and steady wins the race, here.
2. Economic Vacancy Include Loss to Lease, Bad Debt, Concessions, Non-Revenue Units… Anything that affects collections at the market level. Use at least 10% here and allow for even more on heavy value-add deals.
3. Debt Structure Avoid over-leveraging and do NOT use long-term debt for short-term holds or vice versa.
4. Cap Rates at Resale Too many syndicators are aggressive on this point, predicting cap rates equal to or lower than the current numbers. To do well in an uncertain real estate market, err on the side of caution. At Nighthawk Equity, we always add at least half a point to where the cap rate is now.
5. Stress Test Your Projections Dream up worst-case scenarios and consider what might happen to your NOI, your debt and your break-even point should things go wrong.
Never Run Out of Cash
Finally, Brian urges us to keep a good amount of money in the bank. (To be clear, this is always a good idea. But it’s critical when the real estate market is uncertain.)
Be sure you have money in escrow at closing to cover emergencies. In addition, take money out of cash flow to allow for unforeseen circumstances. A good rule of thumb is to retain $250 per unit per year in reserves.
So, if you are looking to thrive in an uncertain real estate market, follow Brian’s guidelines:
- Don’t try to time the market
- Follow the growth
- Be conservative in your projections
- Never run out of cash
Active Investors: Would you like some support making good decisions in an uncertain real estate market? Our Investor Incubator mentoring program may be just what you’re looking for. Schedule a no-obligation call with us to see if there’s a fit!
Passive Investors: Looking for an experienced syndicator who will keep your money safe in an uncertain real estate market? Join the Nighthawk Equity Investor Club!