major drop in the values of assets across all asset types, including multifamily. However, we do not really care what the value of our asset does in a recession because we are not planning to sell our assets in the middle of a recession. One thing that stayed stable was the overall income off the assets. This is important as the income off the asset is what pays the mortgage and provides additional cash flows to be able to continue to make distributions to investors even in a recession. The riskiest asset class at this point is the Class C and lower end Class B assets as these are hit the worst in a downturn of the economy. There are a couple of reasons why and I’ll explain to help you understand this better. The lower-class assets tend to continue to maintain their “physical” occupancy but the “economic” occupancy is what begins to take a hit. The residents within the lower-class properties are the ones that lose their
jobs the most when employers begin to make budget cuts. This causes the assets to begin to have higher costs due to trying to evict these non-paying residents. This will cause the economic occupancy to tank while the physical occupancy still stays stable. This is why you must always look at both figures when determining how well an asset faired in the last recession. The increased unemployment causes the lower end properties to begin to see evictions which causes higher lost revenue for non-paying residents, high legal fees due to evictions, and also higher expenses related to turning over the units more frequently. This causes the property to be strapped for cash and unable to make distributions for investors, or worse, to be forced to sell the asset in a poor economy. Selling an asset in a down economy is never good for the passive investor. As we charge ahead in 2020, our team will be continuing to look for the
higher B+ class assets and will begin looking for the nicer A class assets which are around 5-10 years old. The difference for an investor in an A class asset is that the cash flows will be a little lower which would cause a lower preferred return to be achieved. In addition, the hold period would be more like 6-10 years instead of our typical 3-5 year time horizon. Feel free to shoot me an email at dan@passiveinvesting.com if you have any further questions regarding this topic. -Dan Handford, Managing Partner, PassiveInvesting.com. • To learn more about our group and how you can join us as a passive real estate investor visit www.passiveinvesting.com and sign up for our Passive Investor Club. One of our managing partners will schedule a call with you to discuss your investment goals to make sure we are the right fit for your investment portfolio.
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