SS110: Recession Proof Real Estate Investing

SS110 Recession Proof Real Estate Investing

Commercial real estate, particularly multifamily real estate, can be more resilient than other investments during a recession. Still, not every property is recession-proof. In this episode, Charles discusses the real estate asset classes that are more resilient to a recession and how to recession-proof your properties for a downturn.

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Talking Points:

  • Commercial real estate; especially multifamily real estate; can produce a consistent income stream; even during a recession. However, not every apartment complex is recession-proof. The major benefit of investing in multifamily real estate is the flexibility it provides. Even if real estate prices fall or liquidity dries up; apartment complex owners are still able to ride out the storm with a solid source of passive income.
  • In this episode, we will be exploring several steps for making a real estate investment; recession-proof. You can refer to these steps when purchasing a new property or follow these steps to reinforce the fundamentals of properties you already own.
  • Maximize cash flow. I feel this is the most important. Cash flow is what pays your expenses, pays your debt, and pays the limited partners. There are a number of ways to maximize cash flow including;
    • Bring apartments to market rent after a tenant moves out. Also, I would avoid increasing rents dramatically on renewals. During a recession; I would rather have tenants paying slightly under-market rents to avoid an empty apartment, make ready expenses, and lost revenue. The key is keeping your good tenants in your units during a pullback.
    • Minimize full apartment upgrades. This is all dependent on your renter base. If after you fully renovate a unit; you are able to rent it at full price; continue renovating them. In most instances during a recession though; people would rather rent a clean unit that might be slightly dated; for a lower price. This also is less risky for owners with a better ROI. For example; instead of spending $5k on a new unit upgrade to raise the rent by $200 per month; maybe spend $800-$1000 on painting and minor repairs in order to raise the rent by $50-$100 per month. These classic units will rent fast in C+ to B-class buildings.
    • Last point on maximizing your cash flow; as your cash flow and net operating income increase; your loan to value decreases. Of course, if cap rates expand it won’t decrease as much but the point is; increasing cash flow reduces risks and is the main step to recession-proofing your property.
  • Reduce your debt. The lower the loan to value; the lower the risk. Prior to recessions; many lenders will push loans to values upwards of 90%. These properties are usually the first ones to go into receivership. As a recession looms; make sure your LTV is under 70%. The lower the LTV; the easier it will be to refinance.
  • Decrease expenses. Consistently review your property’s expenses. Put vendor contracts out to bid regularly and look into submetering water in your property. After the submetering is complete; all new tenants and new leases will be paying for their own water and sewer. It takes about 12-14 months for it to fully go into effect however; instead of raising rents on renewals; have them pay their own water and sewer. We just completed this on one of our properties in Tampa where we were previously paying over $100 per month, per unit of water. The tenants were paying a flat fee of about $50 a month but were grossly taking advantage of it. We removed the flat fee on new tenants and renewals and tenants are now paying for their own water. A saving that goes right to the bottom line.
  • Increase additional income. Install coin-operated washers and dryers, install lockers and storage units, and rent them out. Create premium parking spots and charge for them. These are great ways of increasing income without raising the rent.
  • Buy properties in growing landlord-friendly states/cities.
    • If you are looking for a mix of appreciation and cash flow; you should be buying in growing areas of the U.S. This will help to facilitate rent growth; faster than other parts of the country. You might pay more for a property in a growing market than a stagnate one, but you will have less of a problem trying to rent it and less of a problem trying to raise rents.
    • During COVID; we had a small portfolio in a tenant-friendly state and there were rent moratoriums for well over 1 year with tenants taking full advantage of it. Once we could; we evicted them; re-rented the units; waited 6 months and then listed the whole portfolio for sale.
    • Who knows what tenant-friendly states will do during the next recession? They might enact another eviction moratorium. It is important to recognize that some cities in the U.S. still have COVID eviction moratoriums.
  • Lastly, avoid investing in vacation properties or vacation areas. Areas where there is not a solid, diverse job market. Demand for vacation properties drops substantially during a recession.

Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing recession proof real estate investing.

Charles:
Have you always wanted to invest in real estate, but didn’t have the time, didn’t know where to find the deals, couldn’t get the funding and didn’t want tenants calling you. Since 2006, I’ve been buying income producing properties and great locations that provide us with consistent passive income. While we wait for appreciation in the future and take advantage of tax laws while we’re waiting and unlike your financial advisor, we invest alongside our investors in every property we purchase. Check out to investwithharborside.com. If you like the idea of investing real estate, if you like the idea of passive income partner with us at investwithharborside.com, that’s investwithharborside.com.

Charles:
Commercial real estate, especially multi-family real estate can produce a consistent income stream even during a recession. However, not every apartment complex is recession proof. The major benefit of investing in multi-family real estate is the flexibility it provides. Even if real estate prices fall or liquidity dries up, apartment complex owners are still able to ride out the storm with a solid source of passive income. In this episode, we’ll be exploring several steps from making a real estate investment recession proof. You can refer to these steps when purchasing a new property or follow these steps to reinforce the fundamentals of properties you already own. Number one is maximize cash flow. I feel this is the most important. Cash flow is what pays your expenses, pays your dent, pays the limited partners. There are a number of ways to maximize cash flow, including bring apartments to market rent after tenant moves. Also, I would avoid increasing rents dramatically on renewals during a recession. I would rather have tenants paying slightly under market rent to avoid an empty apartment.

Charles:
Make ready expenses and loss revenue is a huge expense when getting into multi-family real estate. The key is keeping your good tenants in your units and during a pullback, minimize full apartment upgrades. Now this is all dependent on your renter base. If after you fully renovate a unit, you’re able to rent it at full price, continue renovating them. And if there’s still desire and demand for that, keep on doing it. In most instances during a recession though, people would rather rent a clean unit that might be slightly dated for a lower price. This is also less risky for owners with a better roi. For example, instead of spending $5,000 on a new unit upgrade to raise rents $200 per month, maybe spend 800 to a thousand on painting and minor repairs in order to raise rents 50 to a hundred dollars per month. These classic units will rent fast in C plus to B class buildings.

Charles:
Last point on maximizing your cash flow is as your cash flow. Net operating income increase your loan to value decreases. Of course, if cap rates expand, it won’t decrease as much, but the point being increasing your cash flow reduces risk, and it’s the main step to making your property recession proof. Second is reducing your debt. The lower the loan value, the lower the risk prior to recessions. Many lenders will push loan to values upwards of 90%, and these properties are usually the first ones to go back into receivership as a recession. Looms, make sure your your V is under 70% and the lower the loan to value, the easier it will be to refinance if anything happens. Third is decrease expenses. Consistently review your property’s expenses, put vendor contracts out to bid regularly looking at submetering water in your property. And after the submetering is complete, all new tenants and new leases will be paying for their own water and sewer.

Charles:
It takes about 12 to 14 months for it to fully go into effect. However, instead of raising rents and renewals, have them pay their own water and sewer. We just completed this on one of our properties in Tampa where we were previously paying over $100 per month per unit in water. The tenant were paying a flat fee of about $50 a month, but they were grossly taking advantage of it. We removed the flat fee and the new tenants and renewals and the tenants are now paying their own water a savings that goes right to the bottom line. Fourth is increase additional income. So install coin operated was dryers. Install lockers and storage units and rent them out, create premium parking spots and charge for them. These are all great ways of increasing income without raising rents. Fifth is buy properties in growing landlord friendly states, cities.

Charles:
If you are looking for a mix of appreciation, cash flow, you should be buying in growing areas of the US and this will help facilitate Rent Grove faster than other parts of the country. You might pay more for a property in a growing market than in a stagnant one, but you’ll have less of a problem trying to rent in and less of a problem trying to raise rents. Now during covid, we had a small portfolio and a 10 friendly state, and they were rent moratoriums for well over one year with tenants taking full advantage of it. Once we could, we evicted them rere the units waited six months and enlisted the whole portfolio for sale. Who knows what tenant friendly states will do during the next recession. They might enact another eviction moratorium. So it’s important to reorganize and recognize that some cities in the US still have covid eviction moratoriums. Lastly, avoid investing into vacation properties or vacation areas, areas where there is not a solid diverse job market demand for vacation properties drop substantially during a recession, and it’s usually one of the first areas to get hit hard. So I hope you enjoyed. Please remember to rate, review, subscribe, submit comments and potential show topics@globalinvestorspodcast.com. Look forward to two episodes next week. See you then.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.

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