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,” says Shravan Parsi, CEO and founder of American Ventures, a commercial real estate company, and ForbesBooks author of The Science of the Deal: The DNA of Multifamily and Commercial Real Estate Investing (www.scienceofthedeal.com).
“It’s how you prepare for and deal with those situations that makes a difference.”
Parsi offers a few tips for real estate investing not only during the COVID-19 crisis, but at any time when you need 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 you to develop backup plans that have a good chance of succeeding,” Parsi says. “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 you’ve closed a deal is to be flexible, Parsi says. “When you are flexible with a deal’s timing and other variables, you can overcome the possibilities,” he says. “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, Parsi says, you have an option to refinance and obtain a supplemental loan after a year of holding the property, provided your property has increased in value.
“Sometimes downsides are so bad that you have to resolve them through a complete course correction, but even those situations are opportunities to learn,” Parsi says. “If you just view the downside as a mistake and move on, you miss out on the value of the experience. To turn failures or downsides into something positive, you must pause and reflect, critically analyze your failures, apply what you learn, and build your expertise.”