Are new construction fourplexes recession-resistant?Oct 27, 2020
- Are new construction fourplexes recession-resistant?
- How have FIG units performed during the COVID pandemic?
Hey everybody, Steve Olsen here with the Fourplex Investment Group. I just wanted to do a quick update on some of the things we've talked about on our blog in the past.
I'm in our brand new studio, that we don't entirely know how to work yet, and that we're still kind of setting up. So let's see how it goes. And I think these videos will improve overtime as we get a little bit more experience doing this.
We've got Preston, our marketing guy, here with me who's patiently watching me fumble through the video, which I appreciate. So a number of months ago, I think it was probably in early 2020, which seems like it was 10 years ago, early 2020. a different time, right? You know how they have BC, it's almost like that, in many ways, because the world has changed completely.
I recorded a video about fourplexes being recession-resistant. I've been very, very vocal about how I hate the term recession-proof, nothing is recession-proof. And oh, boy, did we learn that through the covid 19 pandemic, which we're still kind of slugging our way through. But some of the facts are beginning to emerge as we start to kind of see what this really is and what it means for markets. And I will say, we don't know that entirely. yet.
There's this word in like seven innings in, I heard one of the respected physicians Scott Gottlieb talked about the other day. So when we talk about fourplexes being recession-resistant, we mean that on a couple of levels, number one, we talked about true 30-year fixed-rate debt.
The reason that's important is if you can make your mortgage payment, so you go into the investment with enough reserves, then you're going to be fine, because you don't have a commercial loan that matures in 10 years and needs to be paid off or be refinanced or even sold with the property that's attached to it.
So you can make the mortgage payment. Okay, you're good. So as COVID-19 change that now doesn't appear to have changed it, your 30 year fixed rate mortgages that you had going into with COVID-19, you still have and if you've made the payment, you're fine, your asset values don't appear to be effective. I think they've gone up during COVID-19, which is probably a video topic for another day. So that didn't change things. We talked about recession resistance because fourplexes are at that nexus between single-family and multi-family in that you have multiple tenants.
So the idea is, you're going to service your debt with multiple people instead of just one person, which you would do on a single-family home. I don't think single-family homes are a bad investment. By the way, I own a few myself. But the idea with the multifamily is to spread your risk out to say, hey, I want the ability to service debt and make cash flow to be spread out over multiple tenants as unchanged with COVID-19. Really, what it drills down to is how healthy is the tenant? What is their ability to continue paying rent, and to do so remotely on time?
So far, what we've seen through the covid 19 pandemics is that in any given month, 5% of the portfolio or so, has a little bit of trouble. They're late, they're behind some even get evicted, even with government moratoriums in place. Eventually, you still can evict tenants, for the most part, they are still legally obligated to pay their rent. So it looks like the assumption that I made at the beginning of the year for plexes being recession-resistant. It's holding up today, right, we've still got those loans that you can survive with there.
Nothing is maturing during a really bad time in the economy. And then, in addition, it looks like the tenants are holding up and they're making their rent payments. We, of course, have seen that not be the case in things like office and retail and hospitality. That's been much more difficult. What I'm watching for is when all of that fully comes home to roost, which is not yet.
Does it have a domino effect on the tenants? we rent these fourplexes too so we'll check in on that in a couple of months and see how it's coming to pass and we'll definitely let you know.
- Steve Olson, Director of Sales at FIG