When you are an investor in a joint real estate venture such as a multi-family building, cash calls come with the territory. They can happen at any time but tend to occur more frequently when the economy is bad and multi-family investments start to suffer. When you pick up the phone, be prepared to pay.
What are Cash Calls?
Cash calls are when investors are asked to put more out of pocket capital into an investment. Desperate times call for desperate measures, and when times are tough, the spotlight is shone on investors. In a multi-family joint venture, the managing investor will determine if and when a property needs one. Depending on how long a recession lasts, investors may be subject to multiple cash calls to keep an investment going while riding out an economic slump.
Even when the economy takes a hit, there are still bills to pay and obligations to meet. The monthly mortgage bill, utility bill, and regular maintenance will not stop because times are tough. Vacancy rates may rise, which makes it even harder for multi-family buildings to survive. During this time, the expenses of the building exceed the income generated. This is when cash calls take place to help a property stay afloat. If a cash call happened to you during this recession, you weren’t the only one.
Planning for Upcoming Cash Calls
If you haven’t yet received that phone call asking for more capital, it’s best you start preparing for one. Even if it never comes, it’s better to be prepared than left scrambling to come up with the money. It’s also critical to keep in mind that there could be more than one cash call, which means you’ll have to budget your money wisely to fulfill that obligation when it comes. Investors need to plan for the next two to three years of a bad economy and budget accordingly.
During a recession, it’s critical for investors to manage their multi-family building and assess its needs properly. During this time, investors should not be engaging in any capital enhancement projects. These projects should be delayed as long as possible until the economy has once again normalized. Nice to have upgrades are exactly that—nice to have, not necessary. Delaying them will help lighten the burden on investors. Plus, you will not be spending money on upgrades that will not be fruitful in a recession. Instead, save the cash calls and spending on repairs that can’t be delayed like a worn roof or malfunctioning furnace.
In an economic downturn, it’s critical to keep your multi-family property performing. If it’s performing now, it will stay performing when the economy rights itself. If it’s currently underperforming, it will be much more expensive to correct it once the economy has strengthened. Therefore, the perfect balance must be found now instead of only cutting expenses. If you plan on selling the building or refinancing it within the next five years, maintaining a performing property is crucial to meeting those financial goals.
Investors do not like to hear that cash calls are coming, but that is part of multi-family real estate investing. They need to be prepared for those calls even if they do not come. As long as the economy stays weak and vacancy rates remain high, they need to budget for and expect a cash call to keep their multi-family building performing. They also need to carefully assess the property to determine what projects can be delayed, along with the overall health of the investment.