During the previous cycle, apartment owners were facing foreclosure and banks were coming after their personal guarantees. Small owners should keep this in mind when making deals today.

Dan Lieberman, President of Berkeley, Calif., -based Milestone Properties, has learned hard lessons during his 20-plus year career in the apartment business.

Lieberman, who documented his experiences in “The Effective Landlord,” owned 1,500 apartments during the mid-2000s. Then, the financial crisis hit in 2008 and he was forced to try to sell assets.

“The strategy was buy something where you can improve it, increase the rents, refinance, pull your money out and go to the next thing,” Lieberman says. “I always thought that, worst case, I could just sell one of the better properties to get the cash I needed. Then, when prices dropped and the economy declined, I could not sell because the values of all the properties went down at the same time.”

In the frothy environment of the past couple of years, Lieberman has stayed conservative.

“I have not been able to buy anything that made sense to me,” Lieberman says. “Every time I think there is an opportunity, I am overbid.”

Lieberman’s underwriting has also grown more conservative. His goal is 1.4 times debt service coverage (compared to 1.15 during the mid-2000s) and he is in good shape if his portfolio suffers a 10 percent to 20 percent decrease in rents. “I was highly leveraged the first time and that changed my perspective,” he says.

That’s a strategy that Gary Wilson, Owner, of A.R. Wilson Realtors in Springfield, Mo., says other owners should replicate.

“In today’s market, you need more skin in the game,” he says. “Make sure you have some equity.”

For Wilson, overleverage offered an opportunity to purchase properties. In 2008, he secured several homes because their owners found themselves in financial trouble.

“Most of the homes that were being foreclosed upon were leveraged at 100 percent,” Wilson says.

Lenders are now asking for more equity from their borrowers. “The banks have been pretty good this time,” Lieberman says. “Last time, they weren’t. They learned their lesson. It’s now the owners who will suffer in the next downturn, not the banks. That will help keep things stable.”

But, seeing the prices of recent trades, Legacy Community Housing Corp.’s Brent Sobol is not so sure owners have learned their lessons from the last cycle.

“People have a short memory,” he says. “People were getting foreclosed on left and right, banks were attempting to go after personal guarantees of the developers and take their homes. In a few short years, we have forgotten what happened and we might be on the cusp of that happening again.”

When it does happen again, small rental owners who underwrite conservatively will be the ones who survive.