3200 units foreclosed in Houston, highlighting the challenges faced by the multifamily industry. Is this When events such as these occur, the best practice is to use this as a learning experience, and analyze why and how this happened, what could have been done to prevent the total loss, and now that distressed deals are filling the market how can we step in and serve the communities and our investors by cleaning up the mess. While this may appear callous, it is a reality that such foreclosures can present lucrative opportunities for us and our investors.
Inexperienced Operators take Inadequate Safety Measures:
As experienced sponsors, we have a proven track record of successful investments during market volatility and disruption, which are currently prevalent in the industry. Our high-conviction themes in real estate have been advantageous in selecting sectors with high performance, and our precautions are what have set our deals apart from some of the operators that have recently foreclosed.
The foreclosed properties in Houston were procured during the pandemic period when interest rates were at a low ebb. However, these acquisitions were secured with floating interest rates that are most advantageous when there is a high debt-to-income ratio. Regrettably, the operators in question indulged in unbridled spending with these floating interest rates, essentially borrowing beyond their capacity to repay when the interest rates inevitably escalated.
A floating interest rate, which fluctuates throughout the course of the loan, is subject to change with prevailing economic and market conditions. It is worth noting that such variability can potentially pose significant risks for those with insufficient cash flow, particularly if the interest rates soar, increasing the debt burden.
As seasoned investors, we possess the know-how to effectively manage and mitigate these risks, thereby safeguarding our capital. At Viking Capital, we prioritize fixed interest rates or rate caps as viable options to offset any potential negative impact. While rate caps do entail an additional expense, our experience has demonstrated their worth in situations of inflation and volatile interest rates.
How We Monetize When Foreclosures Occur:
Distressed multifamily properties are sold at a discounted price due to poor performance or financial troubles. This presents a unique opportunity for experienced syndicators like Viking Capital to acquire these properties and implement strategies to increase occupancy rates, reduce operating costs, and raise rental income, thereby improving the property’s overall value. This can result in significant advantages for our investors.
Moreover, foreclosures provide opportunities for experienced syndicators to negotiate with lenders and obtain more favorable financing terms. Lenders may be willing to offer financing options with lower interest rates, longer terms, or more flexible payment structures to facilitate the sale of the property. This can lower the cost of capital and improve the profitability of the investment.
For more experienced and economical operators, even in times of a recession Multifamily assets sit in a sweet spot compared to other real estate property opportunities because demand for housing remains strong while supply is still significantly limited.
Inflation risk management:
During inflationary economic periods, residential rental properties outperform other CRE segments due to the short-term nature of residential leases. When residential leases come to term, rent increases can reset the balance between rental income and rising operational expenses. For residents, inflation will coincide with higher salaries allowing them to afford higher rents.
Through the pandemic, nationwide asking rents increased by 21 percent, while household incomes increased at approximately the same rate. Current rent expansion is less aggressive, but across the U.S. rents are still growing by 4.8 percent compared year-over-year.
At Viking Capital, we see foreclosures and distressed assets as a pathway to profit, and we have the skills and expertise to turn them into profitable investment opportunities. Rather than “feeling the heat” we feel ignited by these financial possibilities and by utilizing our conservative approach we can remain confident during opportunistic times.
If you are looking for more ways you can turn fear into fortune: and invest during a recession, join me for my webinar on April 26th at 8 PM ET.