Updated: Apr 24, 2020
There is a price paid for instant liquidity. The ability of an equities investor, whether through a 401k or a general brokerage account, to gain instant access to funds comes at the expense of returns, volatility, and emotion-based buy/sell decision making. There is a panic overtaking global equities markets surrounding the Coronavirus pandemic, you see it in the market sell-offs shown above. While there are true threats to earnings, the sudden moves we believe are largely based on short-term investment strategies.
Fortunately we plan for these events as we consider ourselves to first be risk mitigators, and second be growers of wealth. First do no harm. Our properties are located in high-growth MSA's which are producing stable cash flow. None of our properties are cross-collateralized and our debt is non-recourse. What this means is every property stands alone, and has protections in place for even the worst market movements. Here are 4 core ways we stand to benefit from a correction:
Cost of Debt
Multifamily Housing as a Recession-Resistant Asset
Global Supply Chains affecting New Development
Depressed Asset Prices Present Opportunity
So let's talk about the opportunities we see on the horizon. The cost of debt is at an all-time low. This bodes well for upcoming acquisitions, as every investment will produce an amount of cash flow. If debt service is lowered, this directly translates to more cash flow for our investors. We're seeing a 100 basis point difference in loan rates compared to a year ago. On a typical sized deal of $50M using typical leverage of 65%-80%, it's possible to see cash flow increases of 30-50%.
The core drivers of real estate value are population and job growth. In periods of high volatility, we typically won't see material differences in occupancy rates unless companies themselves start implementing widespread layoffs. Even then, multifamily apartments themselves are considered a baseline necessity - it a nutshell it'll be the 'last to go'. Retail and commercial (office space) sectors however will more quickly feel the impacts of a downturn. Housing remains a universal human need and is well positioned to withstand a downturn.
Let's talk about supply. If there is a global supply chain slowdown, construction companies will generally be affected in time. New development projects could see a halt or more likely a slowdown which directly impacts housing supply. As we know a shortage of supply is good for existing properties and drives revenue higher for units becoming available for new leases. Since we are continually updating and renovating existing units as a part of our value-add business plan, these newly available units will command higher rent premiums. The opportunity to achieve higher rents during a supply shortage is baked into our business plan.
A great indicator for the market position we're currently in is the 10 Year Treasury to Cap Rate spread. Basically we're answering the question 'Does the increased risk associated with a real estate investment justify the returns reflected in current cap rates'. In 2008 we saw this spread effectively move to zero - absent any leverage, there was virtually no justification for the increased risk associated with real estate over 10 Year treasuries. However this is not the case today, cap rates continue to remain in the 4-4.5% range for the large developed MSA's we invest in compared to a 10 Year treasury rate of around 1.2%. Should the operational income lower, there is still ample margin to justify risk. It's out intention to take advantage of these very low interest rates as we underwrite and acquire new projects.
All in all, a correction is long overdue and only time will tell if these recent events will have a lasting effect on the market or parlay us into a recession. Either way, we are confident in the ability of our investments to provide cash flow to weather the storm. Multifamily apartments perform well in a downturn when compared with other investments. We are looking forward to the new opportunities on the horizon to acquire assets at historically low interest rates. Our investors are well positioned and well diversified for whatever the market throws at us.
Invest with fyre CAPITAL
fyre CAPITAL is a commercial multifamily investment firm. We purchase and/or partner in 150-600 unit, value-add apartment communities in fast-growing Tier 1 & 2 U.S. markets. Together with our strategic partners, fyre CAPITAL represents over 500 Million Dollars of successful real estate acquisitions. Our developers, sponsors and capital partners have amassed a network of over 1,500 unique investors. We provide new opportunities to invest in projects targeting a 14%-21% Internal Rate of Return . If you would like to join us on our next project, your first step is to Submit an Interest Card. We look forward to partnering with you.