Like nearly every industry, the multifamily real estate market has taken a hit during the COVID-19 pandemic, but it may have one advantage that some industries don’t.
People always need a place to live. For investors or potential investors in multifamily real estate, that means it’s just a matter of waiting for opportune moments to arise once the worst of the crisis has passed.
I think anyone who invests in multifamily knows there is always the possibility of downsides. It’s how you prepare for and deal with those situations that makes a difference.
The following are a few tips for real estate investing — not only during the COVID-19 crisis but at any time when the investor needs to be prepared for potential downsides:
Have a backup plan. One way to handle downsides is to have a backup plan that transforms the downside into something with upside. Stress testing a model enables an investor to develop backup plans that have a good chance of succeeding. At my firm, we stress test for increases in interest rates, tax increases, decreases in rent, lower occupancy rates — all our key performance indicators. We stress test the underwriting model’s metrics aggressively against the worst-case scenario.
Be flexible. Another way to deal with a present downside or one that crops up after the deal is closed is to be flexible. Being flexible with a deal’s timing and other variables allows the investor to overcome the possibilities. Are property prices low right now? Hold on to the property and sell later. Are interest rates rising? Wait for them to fall. Do property prices seem to be peaking? Sell sooner rather than wait. At American Ventures, there’s flexibility when we sell, and there’s flexibility with how long we hold on to a property.
Recapitalize. Recapitalizing a deal is another way to generate flexibility. With most of the Fannie Mae and Freddie Mac fixed- or floating-rate loans, investors have an option to refinance and obtain a supplemental loan after a year of holding the property, provided said property has increased in value.
Sometimes downsides are so bad that resolving them requires a complete course correction, but even those situations are opportunities to learn. Those who just view the downside as a mistake and move on, miss out on the value of the experience. To turn failures or downsides into something positive, one must pause and reflect, critically analyze one’s failures, apply what one learns, and build one’s expertise.
Shravan Parsi, CEO and founder of American Ventures, a commercial real estate company, is author of the Amazon No. 1 bestseller The Science of the Deal: The DNA of Multifamily and Commercial Real Estate Investing. Parsi is an entrepreneur and innovator with a background in the diverse fields of real estate investing and pharmaceutical research. He has been involved in Texas real estate since 2003.