"It's not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for." — Robert Kiyosaki
As the economy remains unpredictable, the yield curve inverts itself, and falling stocks overwhelm the news, it's important to know what assets can shelter your investments and potentially help you thrive during a recession. Especially during times of uncertainty, investors are seeking predictable and consistent income. Today, we will discuss how investing in multifamily can help you achieve steady and reliable income even in times of economic uncertainty.
RECESSION RESISTANCE
The term recession-resistant refers to an asset not greatly affected by a recession. In addition to multifamily, other real estate assets such as self-storage, senior living, mobile home parks, and student housing tend to be considered recession-resistant. These asset classes have an advantage over stocks, bonds, mutual funds, metals, crypto, etc. during economic downturns.
Let's take a closer look at why multifamily real estate is considered recession-resistant.
MULTIFAMILY REAL ESTATE
It's important to note that not all multifamily real estate is created equal. Factors such as the property's location, condition, and performance result in an asset's desirability or undesirability. However, as a rule of thumb, Class A-/B(+/-) multifamily in a strong market with population growth, rent growth, lower than the national average unemployment, and positioned in a market with multiple large employers, performs well during a recession.
Below are a few reasons why this is true:
In times of economic uncertainty, people are more likely to save their money and cut discretionary spending. Housing along with food stamps are the last two expenses people forego during periods of economic stress.
People tend to value liquidity in a recession, so rather than looking to buy homes, people are driven towards renting. Similarly, many families downsize from homes and luxurious apartments and move into Class A-/B(+/-) apartments during times of economic stress.
Currently, there is high demand for affordable housing as many people are no longer able to qualify for mortgages. In addition, we are experiencing a low inventory of affordable housing and a low inventory of apartments across the United States. Millennials, seniors, and immigrants contribute to the current high demand for apartment living.
The short-term nature of multifamily leases allows apartment owners to be more flexible to react to changing economic conditions. Likewise, owners can quickly adjust to short-term vacancies and renegotiate leases during times of economic recovery which reduces the long-term impact.
Multifamily has a large tenant base, so a few vacancies do not materially impact income, unlike retail or office real estate classes which tend to rely on only a few major tenants.
These are just a few material reasons why renters will still pay rent during a recession and how apartment investors can create reliable and steady income even amidst economic downturns. It's important to note that investing in multifamily real estate is investing in one of our basic human needs, the need for shelter. Again, during a period of economic stress, along with food stamps, shelter is one of the last two expenses people forego.
In order for these conditions to change, we would need to experience an oversupply of apartment units as well as a continued trend of reduced rents as apartment owners attempt to stay competitive. As a reminder, the good news for investors is that we are millions of housing units undersupplied of the need for housing in our country.
To further hedge your investment against risk, investors can hyper-focus on high-growth markets such as San Antonio, TX. San Antonio experienced a 7.8% rent growth year-over-year which exceeds the national rent growth of 7.5% and it has no signs of slowing down.
SUMMARY
Is multifamily really recession-resistant? We believe so. As previously mentioned, it's important to select a strong investment in Class A-(B+/-) multifamily in a strong market to ensure that your asset will outperform other investment opportunities. Similarly, it's equally as vital to partner with a team who has the expertise to ensure that your investment performs during a recession as the market proves to be uncertain.
Are you ready to invest in an asset class that will provide you with steady and reliable income as we enter into a recession? If so, we'd love to connect with you! Click the button below for more information.
SOURCES
Bethel, D. (2021, September 16). How would a recession affect multifamily investing? 37th Parallel Properties. Retrieved October 15, 2022, from https://37parallel.com/recession-multifamily-investing/
Levarek, C. (2022, April 7). Real estate recession proof: Multifamily syndication. Real Estate Investing Made Simple | Multifamily Syndication. Retrieved October 20, 2022, from https://valkeregroup.com/blog/real-estate-recession-proof
San Antonio, TX Renter Market Trends. Average Rent in San Antonio, TX & Rent Price Trends. (n.d.). Retrieved October 20, 2022, from https://www.apartmentlist.com/rent-report/tx/san-antonio