One philosophy the BAM founder and CEO, Ivan Barratt, likes to impart is that “winter always comes.” Unlike a certain epic show, this refers to the economic down-turns that are as inevitable as the changing seasons. While no one can predict the length and weather of the winter, there’s no doubt that it’s coming. Yet just because the seasons change doesn’t mean that you (or your investments) have to suffer! We look at some ways to ride out the coming winter in comfort in today’s BAM blog…
A Portfolio for All Seasons
Ivan urges investors to build an all-seasons portfolio: that is, assets that aren’t affected by winter, or these inevitable market down-turns. Is this easier said than done? Maybe not with due diligence and healthy planning. As Ivan has remarked in several podcasts, you can reduce risk by choosing specific asset classes as well as specific financing.
Avoid the Banks
Ivan has quoted other operators as saying that “the banks are your friend…until they’re not.” Banks are beholden to stakeholders, political policy, the Fed, and subject to regulations. Once the economic winter hits, the bank can re-value your asset; they can call the loan to “right-size” it, and if you don’t have the necessary available cash, you’ll be forced to sell. This economic winter can result in a buyer’s market, as in the 2008 crash – many people lost good assets because they weren’t able to roll over the debt.
Unlike banks, Fannie, Freddie, and HUD offer benefits that can help you ride out a winter in comfort. As for Ivan, sometimes Fannie and Freddie have too-short of terms at ten years, and HUD is a better bet for large multifamily deals. There’s a misconception that HUD only caters to subsidized housing or Section-8 assets, but in realty HUD finances all asset classes: A, B, C, and D properties. One of the major advantages of a HUD deal is being able to lock in a rate for 35 years with a 35 years amortization period! Depending on the loan terms, you can refinance or sell after 5-10 years. This removes a lot of risk from the table. You can avoid selling or refinancing during an economic winter, and hold the asset while still having cash flow. You can weather the storm and then refinance or sell once the market re-stabilizes. Unlike others who may be rocked by uncertainty or storms in the market, you won’t be forced to sell in a buyer’s market.
Find the Right Deal
Ivan has talked about how BAM looks at 200 deals to find the one good deal. Of those, BAM prefers workforce housing in a good school district, without a lot of heavy value-add necessity. Another tip: look at the asset like a business, and find one that is already operating as a well-run business. By choosing housing that is typically always in demand over luxury assets that may be hit early on by any downturn, you’ll help safeguard your investment in economic winter.
The BAM Bottom Line: Find the right property in the right area and do due diligence on the deal. Choose financing that can remove risk and help prevent a financial hit during a downturn. By working to build a portfolio for all seasons, you can watch winter come and even enjoy the season!
*For more real estate investing tips and multifamily industry insight from Ivan Barratt, visit ivanbarratteducation.com!