The stock market can be volatile, and “flipping” properties focuses only on capital gains, not to mention what happens to your portfolio during the next (inevitable) downturn? We explain why multifamily investing (and doing it correctly) can result in a diverse, weatherproof portfolio in today’s #BAMblog…
Into each market some rain must fall! If you paid attention to the stock market from Christmas on, chances are you felt like you were on a roller coaster (just not the fun kind) as stocks suffered the biggest drop ever on Christmas eve, only to see the biggest historical rally the next full trading day. The week of New Year’s Day saw more ups and downs. The moral of the story is that the market can be, and frequently is, volatile. Those seeking to diversify their portfolio frequently decide to invest in real estate, some with the idea of “flipping” property: buying, improving, and selling for a profit. In fact, if you turn on your tv, there’s no shortage of shows that depicts many couples working in all sorts of markets to buy houses, fix them up, and then sell them – always hoping to recoup the sale and improvement funds. This hunt for the next best deal and then sale focuses on capital gains – not cash flow.
So what should you do to build a solid portfolio that can ride out a downturn? One tactic is to take a page from BAM founder and CEO, Ivan Barratt’s, book and focus less on capital gains and more on cash flow. As we’ve written previously, Ivan has stated that when he realized early in his career (and after the 2008 crash) he was focusing on the wrong thing (capital gains), he knew to set the reset button and focus on what really mattered: cash flow. That’s when Ivan formed BAM as a property management company and began to scale up, purchasing larger and larger multifamily properties. The property management company became the machine that allowed Ivan to focus on raising capital and continue building his vision.
As Ivan has noted, the work is often the same whether you’re financing a smaller property or a larger property, but with the larger property you’ll have what Ivan calls economies of scale. Once you pass 100 units, you’ll gain having management on site and you’ll gain the benefit of not having to worry if you suddenly lose a resident – because you have other residents still paying the rent.
Ivan often says that “winter always comes” – meaning economic hard times. You may not know when, how long, or how rough it’ll be, but you can count on it coming. Your portfolio can either suffer with the winter or you can be sitting in style, and with a weatherproof portfolio, you won’t worry when the first economic rain or snow starts to fall. Much of having a weatherproof portfolio comes from ensuring that you’re in the right deals to begin with. Finding a good deal involves being sure you’ve carefully vetted any sponsor you’re working with, as well as done due-diligence on any multifamily deal you’re considering. According to Ivan, currently BAM looks through about 200 possible deals to find one good deal. Be prepared to be patient!
On the good-deal check list: looking at the area (location matters!) and finding one that is improving, low on crime, and that has a mix of jobs as well as good schools. Typically, BAM sticks with B and C-class assets which are often workforce housing. Workforce housing is more resistant to bumps in the economy because it tends to have a higher, consistent demand from necessity-renters. Class A assets (luxury properties) may feel the economic weather and show less demand. Ivan has also said that currently BAM stays away from heavy value-add properties, opting instead for properties that may need new paint, doors, fixtures, etc.
As for financing, BAM tends to avoid the banks and uses HUD or other government lending. According to Ivan, as long as you can stand the red tape and all the hoops you have to jump through with HUD, the benefit is being able to lock in interest rates for up to 30/35 years with a 35-year amortization period – which takes a lot of risk off the table! Depending on loan terms, you can often refinance or sell after 5-10 years. Although people may associate HUD with low-income properties, HUD actually finances every asset class, up through luxury properties. You can hold your property during an economic downturn, and refinance or sell once the market improves; however, you won’t be forced to sell in the buyer’s market of an economic winter.
What if you’re looking for a deal when the housing market is already showing signs of bad weather? Not to worry – head over to ivanbarratteducation.com and learn how to find a good deal in any housing market! Ivan’s site hosts a library of free informative videos and articles filled with insider information and industry tips. You’ll also find guidance on vetting sponsors and finding good deals!