Not all real estate is created equally. Non-professional real estate investors tend to mistakenly generalize all real estate under one big umbrella. Each asset class performs differently under different market conditions and areas. If you remember, the market crash of 2008, single-family homes got crushed, but a lot of multifamily properties thrived.
Let’s take a look at the reasons why multifamily is the best investment during recessions.
1) Increased demand for apartments
During recessions, the economy typically slows down. Many people experience pay cuts, and some are let go. Their dream of buying a home gets sidelined for a while. In the meantime, these people need to find a place to live and end up moving into apartments. This causes a high demand for apartments which increases rent.
2) Apartments are valued based on income
As opposed to single-family homes that are valued based on comparable properties sold in the area, apartment complexes (just like any other business) are valued based on their income. As demand for apartments increases, so does the rental income, and the value of the apartment.
3) Cash flow
If the apartment complex is not over-leveraged and it cash flows a healthy amount, it can get you through a downturn. The people who made it through the 2008 market crash unscathed, had cash flow. Most apartment complexes are set to break even at around 65% occupancy. During the last great recession, the biggest dip in vacancy was 11.5%. Generally, apartment complexes have a vacancy rate of 5-6%. You can see how there is still a good margin there to pay all operating expenses and still have enough cash flow.
It is important to note that not all real estate, including apartment complexes, will perform the same in a downturn. Real estate is a very basic supply and demand business. If the apartment complex is located in an area where all occupants are dependent upon the one major business in town, and suddenly that business slows down or closes, then your occupants will not have money to pay you. Which will result in bad news for that apartment complex owner.
This is why you hear “location, location, location.” Some areas are just better than others! We always choose properties that have a good mix of strong businesses in the area, not just one (no matter how big it is!). We also constantly monitor which areas are becoming increasingly popular. Where is everyone moving, and why? These are very important questions to ask when considering a multifamily investment.
Invest with a team that knows how to find great properties in great locations. Join our investor club!
Satch Bernhardt, Founder & CEO of Bernhardt Capital
