Smart Investing in Uncertain Times: Protecting Your Multifamily Assets

June 26, 2024

Understanding Investment Risks

Investing always comes with risks, and multifamily investments are no different. However, with the right strategies, these risks can be significantly minimized. On our Apta 37P Fund I acquisitions, we spent countless hours refining our approach to risk management. This commitment to precision planning is the foundation of our approach to multifamily investments.

Recently, several investors reached out to me with concerns that echo the issues highlighted in a recent Bloomberg article. Their situations reinforce the importance of a well-thought-out risk management strategy when investing in real estate.

The Current Investment Landscape

The Bloomberg article paints a clear picture of the challenges facing many operators today: high leverage, maturing debt, and liquidity issues. These challenges have forced some to sell properties at a loss, demonstrating the dangers of an aggressive investment approach.  While we are certainly not immune to the current challenges, our philosophy to investing is to not lose.  Therefore our business model, as you will read about below, has always reflected that priority first and foremost.

In today’s volatile market, it’s essential to focus on the long-term outlook rather than just the current conditions. This perspective allows us to make decisions that can weather market fluctuations and lead to long-term success.

As Ray Dalio often says: “Most of life’s greatest opportunities come out of moments of struggle; it’s up to you to make the most of these tests of creativity and character.

Long-Term Investment Perspective

As long-term investors, we prioritize the future over the present. We constantly ask ourselves if the fundamentals that drove our initial investments remain strong. In our case, the demographics and economic potential of the metro areas where our assets are located have not changed. This stability is key to enduring market ups and downs.

Lessons from the 2008 Financial Crisis

Reflecting on  the 2008-09 real estate market crash, myself and the principals at 37th Parallel were active real estate investors. This period vividly illustrated the pitfalls of excessive leverage and short-term debt in real estate portfolios. We saw that investors who could hold onto their high-quality properties through the downturn eventually prospered reinforcing our dedication to a disciplined, long-term strategy focused on stability and sustainable growth.

We developed a framework designed to withstand market fluctuations to ensure we are better prepared for future economic cycles. When we established the Apta 37P Fund I, we implemented several key strategies to safeguard our investments:

1. Management of Leverage

By maintaining leverage between 50-60%, we protect our equity and create a buffer against market downturns. This conservative approach reduces the risk of being forced to sell assets at unfavorable prices.

2. Long-Term Core Plus Momentum Strategy

We avoid short-term, value-add business plans, which can be speculative and risky. Instead, we adopt a long-term core plus momentum strategy, focusing on stable, high-quality assets that provide consistent returns over time.

3. Financing Choices

Choosing the right financing is critical. We avoid bridge loans and Collateralized Loan Obligations (as mentioned in the Bloomberg article) due to their higher risks and shorter maturities. Instead, we opt for traditional financing options like those from Fannie Mae, Freddie Mac, and life insurance companies, which offer more stability and predictable terms.

4. Debt Maturities

None of our debt matures before 2027, giving us the flexibility to navigate market fluctuations without the pressure of impending debt repayments. This long-term debt structure allows us to focus on the growth and stability of our assets.

5. Reserves and Liquidity

We maintain significant reserves at the asset level to manage unforeseen expenses or downturns. Additionally, we keep an ample amount of personal liquidity, providing a financial cushion that could help support our investments during challenging times.

Market Correction as an Opportunity

I believe that the current market correction is healthy. It serves to separate disciplined investors from those with speculative business models. From an opportunistic perspective, this correction presents a unique chance to acquire high-quality assets at discounted prices.

For disciplined investors like us, this period offers exciting opportunities. We can leverage our strong position to bring high-quality assets into our Apta community, enhancing our portfolio’s long-term value.

A Resilient Investment Approach

Our multifamily investments are designed to withstand market storms. By maintaining moderate leverage, focusing on long-term strategies, choosing stable financing, and ensuring adequate reserves and liquidity, we have built a resilient investment approach. This resilience positions us well to navigate current market challenges and capitalize on future opportunities. 

The 4 Rules for Investing Success

We invite you to learn more about our disciplined approach by exploring our 4 Rules for Investing Success. These principles have guided us through market fluctuations and can help you achieve long-term success in your investments.