Is it time to put our head in the sand and wait?

In the last few months, mortgage rates have gone up like crazy. They went up a fourth time last week. Unprecedented. This is the biggest change in interest rates in years! And it only happened over 7 months!

In most of our properties, this has resulted in our debt payment DOUBLING. We care about interest rates, because when we put together a capital stack, a big chunk of the capital is the loan. The debt service on that is determined by the interest rate, which is very important to your bottom line and cash flow.

What’s unprecedented about these hikes is that it happened fast, happened multiple times, and the market hasn’t had time to adjust to it, resulting in minimal and even negative cashflows.

This is a sledge hammer that the federal reserve is taking to what they perceive to be “red hot, out of control inflation”.

No one has a crystal ball. It would have been impossible for anyone to predict this scenario. Despite multiple “what if” scenarios that we play out when we are underwriting a deal, we couldn’t have predicted all the factors affecting today’s economy such as: the credit markets, the federal reserve, inflation, energy costs going up, and supply chain disruptions.

The good news is that real estate is cyclical. We are currently in a down cycle.There are less sellers, less buyers, and the debt market is unstable because lenders are hesitant to lend!

So, is it time to sell and get out? Is it time to put our head in the sand and wait?

The cycle is neither bad nor good…it just is. For current real estate portfolios it requires pivots in strategy and requires the courage to keep going! No, you shouldn’t sit this one out.

The truth is that a recession brings HUGE opportunities for those who can overcome their fear and prepare to take action!

Cap rates are expanding and real estate is at a discount. Debt is expensive but real estate prices are coming down! I’m seeing prices go down by several millions!

As long as the deal makes sense financially, you can bake in the interest rates.

Remember, interest rates go up and they go down. They won’t stay up forever, they will come down.

We just need to make sure we are able to play a longer game and ride it out.

Exciting things are coming. Let’s get ready to go bargain shopping!

Wait & See? or take ACTION??

Many people ask me:

Is this the right time to invest in apartments?

Aren’t we in a recession?

Shouldn’t I wait for things to settle down?

It isn’t about whether it is the right time or not…

You should be thinking “is this the right deal or not?”

Recessions aren’t always times of darkness. They can be seen as opportunities!

Many smart business people have thrived in times of recessions. They have found opportunities and capitalized on them. Not surprisingly, a ton of amazing companies were formed during times of recession.

Remember 2008-2010 recession and financial /housing market collapse?

Airbnb, Warby Parker, Venmo, WhatsApp, Uber, Pinterest, Instagram, Slack were all formed during that time. Now they are all billion dollar companies and are thriving!

These founders weren’t sitting around debating if they should wait and see , they thought about it and took action!

Same goes for savvy investors. There’s no shortage of smart investors who found lucrative deals during times of recession. Remember, people’s circumstances change, and economic volatility causes lots of distressed sellers and properties to go on sale.

Just today I was contacted by a broker letting me know that a property he listed 3 months ago has recently reduced its sales price by a few millions! From my perspective, it went on “sale”.

Ben and I are not planning on putting our my pencils down, we’re going to keep looking until we find a deal where the numbers look amazing! Because we’re not sitting on the sidelines, we’re not going to miss out on amazing opportunities.

In closing, this is the best quote to answer if this is the right time…

“The best time to start was YESTERDAY.

The next best time is NOW”

5 Keys to winning in a Recession

Recessions can be scary. But they don’t mean you should “sit this one out”.

The “wait and see” strategy guarantees you might miss out on amazing deals!

Here are FIVE Keys to winning in a recession

Pick the BEST Markets

How do you do that? Look for GROWING markets. Population growth is key!

We also want multiple economic drivers. We want markets where many employers are moving and there is diverse job growth!

Another important thing we look for is diversity of employers. The last thing you want is one factory employing most of a city, then it shuts down, and the tenants all move out of your apartments.

Dallas, a market we heavily invest in, has diverse employers like Toyota, McKesson, Abbott, Lockheed Martin. These are all huge companies in different spaces, different industries.

Debt Selection

When purchasing during a time with economic turmoil, it’s important to choose the right loan. There is no “one size fits all”. But if the interest rates are fluctuating, consider the importance of either a fixed rate debt and taking less leverage (Loan to Value of 65%).

Don’t assume there isn’t risk with a fixed rate debt, there is. For example, if you have fixed rate debt and then interest rates drop, that could equate to hundreds of thousands of dollars in debt payments that you’ve left on the table!

Conservative Underwriting

Underwriting is the financial analysis and plan for the business. It’s when the sponsors are trying to predict rent growth and net income over the life of the project. It’s important to use conservative numbers and not “generous” ones. It’s important to estimate tax growth projections appropriately and understand that expenses go up.

All of those factors need to be baked into the financial plan

Cash Reserves

When investing during times of uncertainty, make sure that you have “just in case” funds. Experiences sponsors will plan for cash reserves in order to be able to financially address the unexpected.

Strong GP team- Strong operators

During uncertain times, you can see people’s true colors and their values do matter. You want your sponsorship team committed to the project and ready to do anything for the project, even fall on a sword for the project.

You also want a team that has experience with different market downturns and cycles. You want operators who can think strategically and can address problems head on.

Believe it not, this isn’t as common as you might think it is!

BONUS: Be on the lookout for Great opportunities!

Real Estate is ON SALE!

Properties are trading at significantly lower prices than they were months ago…on sale!

But of course, this isn’t the new norm either. Just like in stores, sales do end. You want to be ready to look at properties and keep analyzing, especially in times of uncertainty….because that’s when you find great deals!