Here’s how to make sure your investment is recession proof:
Don’t bank on appreciation, focus on cash flow
I wrote about the weight of appreciation in calculating future returns for a real estate investment. When looking at the potential returns, pay close attention to the appreciation factor, which has a significant impact on your investment. The problem is that appreciation is an educated guess – you can’t know for sure how much your property will appreciate in the future, and when the economy shifts – it’ll be harder to sell at a profit; there will be fewer buyers in the market, because many lost money and lenders are striker with loans. That’s exactly what happened in 2008. So an investment that looks promising with a high appreciation factor might turn to be a losing deal if you need to sell it in a bad economy.
However, a conservative approach can show you if your investment is solid. When factoring appreciation, for an exit cap (the cap rate your property will be sold to a new buyer), I use cap rate that is 0.5% to 1% HIGHER than the cap rate I purchased the property with. A higher cap rate means a lower purchase price. Basically, I am assuming we will be in a down market when I need to sell (in 5-7 years from now). This approach is supported by economists projections that show increasing cap rates in the future. If your investment still shows good returns even if you sell it in a down market – than you are most likely to do well during a recession. This way, you are focused don the cash flow that the property is generating and not the future appreciation, which is not entirely known with high level of certainty.
- Actionable advice for passive investors: ask the syndicator to share their exit cap assumptions and the purchase cap rate and compare the two – if the exit cap is higher or equal to the purchase cap, ask them why and use your knowledge of the market and your judgment to determine if it make sense.
Look at worse-case scenario - 0% rent increase
A significant part of any real estate deal, especially multifamily and office space, is rent increase. In a turn key deal, where no improvement to the property is needed, there is a certain rent increase that reflects the market trend, and is usually 2%-4%. That is to say, that the investor believes that because rents increase in the market, s/he will be able to do so as well. Some markets have a phenomenal rent increase, such as Orlando (with around 7% rent increase compared to last year). In a value add deal, the rent increase is projected based on investors assumption of post-renovation rent bumps. A rent bump of $75 - $150 per unit per month is pretty common with multifamily properties.
Rent increase significantly affects the projected returns of any deal. However, you should consider a scenario where rents have peaked and will no longer increase, which is a likely scenario in a recession. I believe this will be a harsh reality for many investors, and especially since we already started seeing a decline in rent growth across the US. A recession-proof property is one that is still cash flowing even when the rents are steady. When my team analyzes a deal, they run multiple scenarios, including a scenario where rent growth = 0%. It’s important for me to see how lack of rent growth affects the returns, and if it's still positive, then I know it is a good investment.
- Actionable advice for passive investors: ask the syndicator for a sensitivity analysis with 0% rent growth and observe the returns in such case.
Look at the history – how did the area and the property perform in 2008?
Nobody knows what the next recession is going to look like, and hopefully the next part of the cycle will not be a sever as the previous recession, but looking into the history books of any investment will give us a better idea of how it will behave in the future.
- Actionable advice for passive investors: before investing in a certain area, look up for information about how it during 2008 (even a Google search will be helpful). In addition, try to understand how the property performed during 2008; ask the syndicator what s/he knows about the property’s performance back in 2008 and ask to see financial reports from that period. You don’t have to be an expert to notice a loss in a P&L, and it’s important to inquire about it before you make a decision to invest.
Summary
In order to ensure your investment is recession-proof, make sure that:
- Cash flow is impacting the returns, not a high appreciation factor
- The investment is still solid even with no rent growth
- The property was performing well even during the last recession
About Ellie Perlman
Ellie Perlman is the founder and CEO of Blue Lake Capital, a woman owned multifamily real estate investment firm focused on partnering with family offices and accredited investors to build and preserve generational wealth. Since its founding in 2017, Blue Lake has successfully acquired and operated multifamily assets across high-growth U.S. markets, completing $1B+ in transactions.
At Blue Lake Capital, Ellie and her team work exclusively with family offices and accredited investors, offering carefully curated investment opportunities that emphasize long-term wealth creation, stability, and risk-adjusted returns. A defining aspect of Blue Lake’s investment strategy is its integration of advanced AI-driven analytics and data science into the entire lifecycle of acquisitions and asset management. By leveraging cutting-edge technology, the firm executes data-driven forecasting on market trends, asset performance, and tenant behavior, ensuring strategic decision-making and optimized returns.
In addition to leading Blue Lake Capital, Ellie is the original founder and host of "REady2Scale - Real Estate Investing" podcast, which provides insights into multifamily real estate, alternative investments, and finance.
Ellie began her career as a commercial real estate attorney, structuring and negotiating complex transactions for one of Israel’s leading development firms. She later transitioned into property management, overseeing over $100M in assets for Israel’s largest energy company.
Ellie holds a Master’s in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.
You can learn more about Blue Lake Capital and Ellie Perlman at www.bluelake-capital.com.
*The content provided on this website, including all downloadable resources, is for informational purposes only and should not be interpreted as financial advice. Furthermore, this material does not constitute an offer to sell or a solicitation of an offer to buy any securities.
