With recent rises in inflation and high interest rates, it’s increasingly important to make sure that you find the right investments. Investors and analysts are growing concerned about an impending recession as fluctuations in interest rates can directly affect the severity of economic contractions. Because employment rates and consumer spending decline during a recession, investing might seem like a risky proposition; however, multifamily homes have historically proven to be a safe investment during recessions.
Here are the top reasons why it’s a smart idea to buy multifamily homes if you’re looking for a recession-proof investment.
Advantages of Buying a Recession-Proof Home
As with anything, there are both pros and cons in real estate investing; however, the advantages far outweigh any disadvantages. The first advantage is that multifamily homes are cost-effective compared to buying the same number of homes separately. That’s because you can group maintenance costs, making repairs cheaper. For example, you only need to hire one gardener, electrician, or plumber to look at the building. Also, when making inspections, you can visit all of the units at once. There is no need to travel all over town to separate properties.
Multifamily homes are also a big earner for the amount of rented space. Typically, you can charge more than if one family was renting the entire building. Therefore, potential earnings increase significantly.
Multifamily homes spread the risk between multiple renters. Even if one apartment is vacant, you will likely still be earning revenue from the other units. If one tenant becomes delinquent and doesn’t pay on time, the others will likely continue to pay.
Finally, rental vacancy rates remain low during a recession, as housing is a basic need. Rental inflation rates typically remain positive, making multifamily properties a recession-proof investment. In general, moving into an apartment costs less than moving into a home, so multifamily properties should have more success in finding tenants quickly.
How to Find Investable Multifamily Homes
You are not the only person looking for suitable investments during a recession. Real estate owners are holding on to their assets for the reasons outlined above. You’ll need to work harder than usual to find a property that is a good match for your investment portfolio.
You’ll need to practice more persistence and check listings regularly. You can also try to find off-market deals through seller relationships and well connected brokers. The trick is to move quickly when you find something of interest. If you wait too long to make a decision, another buyer could move in ahead of you. Even in a recession, sellers may need to get rid of a hot property for various reasons. Be in the right place at the right time to take advantage.
Real estate investment companies, like Yankee Capital Partners, can simplify this process by finding the right investment properties for you. Using favorable terms from lender relationships, we buy multifamily properties at conservative levels of debt leverage. We also conduct due diligence with our property management and construction teams.
Due Diligence in Recession-Proofing Your Multifamily Homes
Have you bought a multifamily home but don’t know how to make the most of your investment? Tilt the odds of success in your favor by implementing a few steps to recession-proof your property.
- Tenant Retention: The goal is to keep your tenants in the property for as long as possible. Tenant turnover is costly because you may need to pay for cleaning and maintenance services as well as spend time looking for new tenants. Interview tenants to get a feel for how long they are likely to stay in the property. You can also increase capital expenditures on amenities to encourage retention.
- Capital Reserve: It’s always a smart idea to save up money for when rental income has a downturn, especially during a recession. Tenants may lose their jobs and not be able to pay for months at a time. Therefore, a capital reserve is vital to get you through potential spikes in vacancy or emergency repairs.
- Cost Control: Multifamily renting is like owning a business – the aim is to keep costs down to increase ROI. Don’t buy the most expensive furniture and flashy appliances. Instead, look for deals and bulk purchase discounts, as they are a great way to limit costs and boost profits. You can adjust your rent rates while maintaining a positive cash flow by reducing expenses and utilizing your cash reserve.
- Rent Collection: Rent collection methods are especially important during a recession. You should utilize technology and allow for different methods of payment. For residents who fall behind, you can use software that takes a portion from their paycheck. Post-resident software also helps to collect payments from residents who left without paying.
- Income Streams: By broadening your income streams, you can help soften the blow to your revenue when tenants become delinquent. For example, you can offer other services to your residents, such as laundry vending.
- Leverage Point: Buying with a lower leverage point (debt-to-equity ratio) is a safer investment during a recession, as higher leverage poses significant risk due to potential property value declines. To mitigate this risk, opt for lower leverage (55-70%) and choose fixed-rate debt over floating rates. This conservative approach ensures more stability and predictability in interest payments, providing a safer investment strategy amid economic uncertainty.
- Diversification: It’s a smart idea to diversify your investment portfolio across various locations, property types, strategies, stages, etc. This will help to spread the potential risks associated with a recession.
Multifamily homes are an excellent investment in a recession. All you need to do is find the right deal and make the purchase when it becomes available. There will always be a demand for multifamily homes, which makes it a low-risk investment.
Follow the list of preparation steps outlined above, and you can make the most of your multifamily investment. Take action by contacting Yankee Capital to expand your portfolio and reap the rewards, regardless of economic contractions.