Is a Multifamily Market Crash Coming? A Peek into the Crystal Ball

By Karl Krauskopf, a commercial multifamily operator

My very first “investment” was the Flagship Vanguard mutual fund. I put $35,000 of my cash savings into that account when I was 23. Note, this wasn’t a retirement account, this was my liquid capital that I didn’t want sitting in a bank account.

I was obsessed, I checked on the ticker multiple times per day, the emotional roller coaster of trying to time the market to make sure I didn’t lose any of my money was eating at me. Then, I get a text from a loved one who said a market crash/correction was imminent and to make sure I wasn’t overly invested in stocks.

I tried to play it cool, thought nothing of it for the next two weeks and forced myself not to look. Well, the headlines finally snatched my attention. I sold in a panic and lost $6,000 below my original position. I thought to myself, “I’m a terrible investor, what am I doing here?” It took me a few months to mentally recover from that loss before putting money back into stocks.

That mutual fund, obviously, went on to far exceed my original position. Had I held through what ended up being a short-term correction, I would’ve been absolutely fine. On top of that, had I bought somewhere during that correction, my average cost basis would’ve put me in a strong winning position.

Fast forward 9 years to where I am today, buying apartments in any market cycle, up or down, has its benefits.

Ever heard the saying, "Every cloud has a silver lining"? This means that even in bad times, there's always some good. Let’s explore this idea in the world of big apartment buildings, called multifamily properties.

What's the Buzz?

Some folks are whispering about a possible "market crash." A market crash is when prices of properties drop very, very quickly. Think of it like when a toy's price drops after Christmas. But is this crash really coming? And is it all bad news or is there some good too?

Market Moods: Crashes, Corrections, Stagnations, and Growth

1. Market Crash

This is categorized as a sudden drop of more than 20% in market value. Typically led by the stock market.

As a Buyer:

• Good: When prices are low, it’s like a big sale! You can buy more for less money.
• Bad: Lending environment is typically more risk-adverse making loans more difficult and less favorable.
• Solution: Get creative with sellers. Seek Seller Financing deals or plan to bring a sizably larger portion of equity to the table to get the deal done.

As a Seller:

• Good: Not much, honestly. It's hard to sell at a good price in a crash.
• Bad: You might get much less money than you hoped for. You may end up losing some of your initial capital.
• Solution: Stay on top of the market. Ensure you’ve always got a strong runway on your debt position with a long term, fixed rate position.

2. Market Correction

This isn't as scary as a crash. It's when prices drop by 10% due to overvaluation in the stock market.

As a Buyer:

• Good: You might get a slight discount and favorable deal terms. Lower earnest money and longer feasibilities to perform your Due Diligence.
• Bad: Savvy owners will not adjust pricing expectations. If prices were super high before, they might still be a bit expensive.
• Solution: Identify and catch the panic sellers. These are often those that are overly eccentric, tell you about the falling skies, and can quote any major news headline.

As a Seller:

• Good: Hold unless you need to sell for one reason or another. If you sell early, you might still get a decent price.
• Bad: You might get a bit less money than during the highest times, but you’re likely still far ahead of your cost basis.
• Solution: Long term fixed rate debt will get you through this period; however, even better if you can sell or refinance prior to the correction.

3. Market Stagnation

This is when prices don't move much. They're like a car in park.

As a Buyer:

• Good: You have time to think and choose without prices changing fast.
• Bad: There’s no big sale happening. Most sellers will hold their pricing expectations.
• Solution: Continue to get offers out the door based on the deal mechanics you can secure. Work on your internal business processes.

As a Seller:

• Good: Your property value isn’t dropping.
• Bad: Buyers are not flocking to you in droves like the “good days”.
• Solution: Hold and collect cashflow, continue to market your property, and do not waste too many brain cells.

4. Growing Economy

This is when things are great, jobs are strong, and property prices go up.

As a Buyer:

• Good: Buying in a growing economy means your property value might go up later.
• Bad: Prices can be high. Seller’s have the upper hand and will want more for their property.
• Solution: Continue evaluating and searching for what supports your investment thesis. We prefer value-add deals where we can add a significant amount of Net Operating Income (NOI) and resell down the road.

As a Seller:

• Good: You can sell for a higher price and make a profit.
• Bad: If you sell and then want to buy again, prices will be high.
• Solution: Pick your buyer carefully. Ensure they are capable of paying your asking price.

So, is a Crash Coming?

It's hard to say. Imagine predicting tomorrow's weather without a forecast. But as someone who works with big apartment buildings, here's what I think:

1. Look at History: Markets always have ups and downs, like a seesaw. After every down (like a crash), there has always been an up (growth).
2. Growth Signs: There are many new jobs, and people are earning.
3. Supply and Demand: More people want houses than there are houses available. This usually keeps prices up.
4. Be Ready for Anything: As an investor, it’s like packing both an umbrella and sunglasses. Be ready for rain (a crash) or sunshine (growth).

Moving Forward

In the big world of apartment buildings, things can change. But every situation has its good and bad. Remember the silver lining? Even if a crash happens, it might be a chance to buy at low prices.

So, if you're thinking of joining this adventure, don't be scared. Together, we can find the silver linings and make the best choices. And always remember: in the world of property, patience is the key!

Schedule a call to find out how Gold MF can help you in your journey to financial abundance.