The unprecedented spike in interest rates and now the disturbing trends in GDP and unemployment remind me of a time period around 2014 to 2015 when it looked like the economy was falling apart. Indicators looked bad! Politicians worried about losing their jobs, and the nightly news screamed Armageddon!
For better or worse, my 4 unit apartment building was coming together nicely after having owned it for three years. Income was up. I did the management of it myself, so my laser focus was on getting out of the property management business. I wanted to sell it and use the equity to buy something bigger.
My timing didn’t line up with the economy’s timing though.
Fortunately I tuned out the doomsayers. Maybe naïve, maybe bull-headed, maybe some unjustified confidence.
I found the property I wanted to buy to replace this one, put this one up on the market, and did a 1031 exchange. There wasn’t much competition to buy, maybe because buyers were scared off by the coming recession. I got my price, made the purchase of the new property, and was finally out of the property management business.
That was my biggest goal. I had no grand visions of huge cash flow or big rent bumps from renovations. Just getting out of the property management job. Yes, it’s a job. A challenging one. Hats off to PM’s.
But what happened with this property that I bought in the teeth of a down economy?
Cash flow. A lot more than my prior property. Same equity, just moved to a bigger property. Enough cash flow to pay my kids’ college tuition, year after year.
Six years later, equity multiplied by several times. Not part of my plan, and not because of some secret strategy I had. The economy didn’t crash after all, and that market was good. I knew it was good before, and that it was going to stay good. It did.
I sold it and moved that equity again, this time into a property several times as large. More cash flow, more appreciation.
This is what any multifamily investor should expect. Not every property, but there are big wins out there if you have the strength of purpose to tune out the voices of doom.
Market update
Louisville, KY – I admit, I like highlighting cities which have a lot of detractors. Sometimes they’re right, though, so I try to share a perspective of both sides. Louisville has a lot to offer, from bourbon tours to horse racing to big manufacturers and the Louisville Slugger. Even though my baseball days were brief, I’ve used one.
The city got its start in the Revolutionary War, because you can navigate all the way up the Mississippi and Ohio Rivers to Louisville where there’s a water falls. Then you have to portage up over the falls to keep going, so they built a city there.
It is one of the few cities in the U.S. where most people can name a big company who is headquartered there, UPS. UPS’s business has grown steadily with the rise in ecommerce, but they’re not the only game in town. A Ford plant makes their trucks, their most profitable line of vehicles. Then you have huge health care conglomerates like Norton, Humana, and Baptist. Add in many more big employers including Amazon, GE Appliances, and Walmart and you have an exceptionally diverse employer base.
In fact, there are 38 employers just in Louisville with more than 1,000 employees.
That’s what we look for as multifamily investors.
How is that doing for growth? Population is up about 15% over the last 25 years to 624,000 today. That’s impressive, although it is typical of a lot of big cities. The MSA, which includes surrounding cities and towns, is 1.3 million. With a population that large, there will be pockets of growth in certain parts of the MSA, and pockets of decline. It’s our job to learn where these are.
Job growth seems to have slowed. Although Site Selection Magazine named the region as the No. 5 U.S. metro for economic development per capita, it is likely that the employers who call Louisville home have become cautious. A difficult strike at the Ford plant and an Amazon corporate strategy of greater vertical integration are limiting growth of employment at Ford and UPS. Clearly the other large manufacturing employers are picking up the slack, though.
Milken Institute does not (yet!) have a positive outlook for multifamily in Louisville, ranking them 97 out of the top 200 large cities in the U.S. Their worst scores were in High-Tech Concentration, High-Tech GDP, and wage growth.
Costar, however, likes Louisville a lot. They report rent growth of 3.7% year over year, the third highest major metro in the U.S. The red hot markets of DFW, Charlotte, Nashville, Phoenix, all negative.
If you decide to venture into Louisville with your investment dollars, be sure of the location and the attributes of the sub-market. As with any other market in the U.S., multifamily in certain areas around town can perform spectacularly, or not, depending on these factors.
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Finer Points of Multifamily Properties
How diversified is your real estate?
Where are your real estate investments?
Your home town? Because you can drive there and put your hands on it?
In one of those red hot, exploding markets down south?
What has happened in the U.S. in the last two years?
We’ve seen interest rates rise.
We’ve seen huge shifts in unemployment rates, from 10% or more in many places just after the start of the Covid virus spreading, back down to under 4% in many markets, but now trending higher again.
We’ve seen inflation rise and heard our leaders tell us not to worry, it’s “transitory”, which means temporary.
Then inflation escalates to the point where the Federal Reserve had to launch the fastest hike in interest rates we’ve ever seen – to fight inflation.
Those are severe pressures, and who could have foreseen their outcome.
Now the markets that performed the very best over the last 5-10 years, including Phoenix and Dallas, have seen vacancies up and rents down.
Those are great markets and you can be sure they’re coming back, but did you put all your eggs in one of these baskets?
You can listen to Andrew Carnegie, who 100 years ago said put all your eggs in one basket and then watch that basket carefully, but that’s not always great advice.
Now look around, and where are the high rent-growth markets? Places like Columbia, SC, Newark, NJ, and Wichita, KS, according to Zillow.
These aren’t small towns. They are markets which have proven recession-resistant, which weren’t over-built, and which will have strong industries decades into the future.
These are today’s leaders, but are they tomorrow’s leaders?
We’re all riding out this economic downturn together. Are you learning the value of diversification?
Have you learned that you can’t predict which markets will do the best and worst in a downturn, but you can diversify and you can target markets which have historically done well in downturns.
Or you can time the market with perfection and pick a red hot market to invest when it’s down, sell when it peaks. I’m not sure anyone knows how to do that!
“You can only fight the way you practice.”
– Miyamoto Musashi