Even within this one strategy of syndicating apartment complexes, you can still diversify your portfolio by buying with different sponsors in different markets and with different project plans. There are a few other investment strategies that Freestyle Capital Group is looking into such as storage units and litigation financing, but the bread-and-butter is apartment syndication.
We have become experts on one strategy and just a handful of markets so when we are underwriting a deal, we know exactly what we are working with.
In the markets we buy in, there is no slowdown in economic growth and the need for affordable housing. Vacancy rates are historically low and are trending lower. As single-family home prices increase, the need for apartment units increases.
The development and deliveries are not keeping up with the demand. The Baby Boomers are downsizing and the Millennials are moving more frequently for job opportunities in big cities where homes are more expensive. The Millennials who want to buy, can’t, due to increasing home prices and low inventory of homes in affordable price ranges. The gap between the cost of owning a home and renting is widening.
Pride of Ownership
Although owning an apartment complex isn’t flashy with high risk and outlandish returns, it is stable with very appealing returns. Apartments are fun to talk about because it’s relatable to so many people. It won’t ever go out of style to have a roof over your head.
When you share your investment portfolio with others, talking about apartment projects is much more interesting than talking about single-family homes. You won’t have any bad tenant or contractor stories to share, you will only get to talk about the property, market, and the reliable ACH transfer you get consistently.
Default History is Low
If you look at the 2008 recession, almost 5% of all single-family homes in the United States defaulted and went to foreclosure. For commercial real estate, specifically multifamily, less than 1% defaulted. If you remove over-exuberant markets with high swings in property values, and if you also remove any portfolios that contained multifamily and single family homes, you will see default was almost nil for commercial multifamily.
Banks are encouraged to work with commercial properties to restructure debt if needed, because these properties are multi-millions of dollars, and the banks don’t want to absorb them.
Banks remain conservative in their underwriting for commercial properties and the value of the property is based on the income that it can produce. Banks use a DSCR, or, debt service coverage ratio, to determine if they will lend or not. DSCR is the measurement of cash flow to pay current debt obligations. Banks like to see a ratio of 1.25 and even 1.3 or they will require more down payment.
Worst case scenario, cash flow decreases, but as long as the mortgage is being paid, you’re still getting all of the other benefits of real estate. Most likely case scenario, you continue to receive your cash flow and all of the other benefits of real estate. We like to know we have a safety net. Apartment investing is boring and stable, we like it like that.