Thoughts on a real estate recession
Here are some thoughts that come to mind in the current market we face, I don't want to go into much detail here but give you guys some core foundations to think about as you are investing in real estate right now and things that have served me well in every market correction
I've always stuck to my guns no matter how tempting to only invest in residential real estate. Not everyone needs to go to the local burger joint or a Starbucks, not everyone needs senior living, not everyone needs to visit a hotel, not everyone needs office space. There is one thing everything needs however that's a place to live! This is why I have always been adamant about only investing in single-family and multifamily real estate.
I think cash flow is very important. In 2008-2009 I was very cash-heavy but no cash flow, cash runs out no matter how much you have. I did very well anticipating the market and responding to the market however my cash reserves took a hit , I vowed to fix the problem and focus on an even balance of cash and cash flow and you should too. When work dries up, economies change, life events happen you cannot produce income you will be very thankful you have cash flow!
If you have considered selling, I'd sell now at the peak of the market and rent until the market corrects. I personally like to always hold real estate usually if I sell it: 1) an incredible offer and a no brainer to sell or 2) I want to purge my portfolio or problem assets or assets with mediocre returns. Otherwise, I'll find a way to hold the asset.
Recessions usually last up to 24 months hitting rock bottom before climbing back up. You will notice the climb back up with the climb in interest rates going back up and everything “Settling out”
One reason I decided to raise another fund this year our Borland Capital fund IV is because in a market correction cash is king. Lending will dry up, lenders will be ultra conservative and opportunities to fund and buy distressed assets will be ripe. If you don't have a stockpile of cash or cash relationships you will be at a severe disadvantage. I suggest you figure this out now and learn the skill of raising capital to go after upcoming opportunities. Even if it's just you and a bunch of friends pulling money together do it. Wait until the market hits mid to rock bottom and start deploying. Markets may fall as much as 30-60% of value peak value. Consider comps now peak value.
If you are investing do not buy anything at market value you should be buying at a discount to market value always and with some value add component .
Keep leverage low, restructure bad and expensive debt with new low rates, keep a lot of equity in property i.e. low LTV. I recommend LTVS 75% or lower. The least amount of debt the better.
If you are investing make sure you focus on either short term plays like fix and flip or wholesaling anything 6 months or less. Real estate values do not move like the stock market where you could be wiped out in 24 hours they generally move in 6-month swings. Anything shorter than 6 months you should be fine. Be ultra-conservative on your MAO and the price you purchase. For example, if your criteria were to buy at an 80% MAO max you may consider now nothing more than 70-75% to account for any potential fall in market value. If you do buy at 80% MAO and comps say the house would sell for $100k then plan to buy 80% MAO and sell for $90k. Do not expect values to climb or improve. If you don't know what may means head to my youtube channel and search “MAO” www.youtube.com/c/dylanborland
I've never been a stock guy however I've said it now and will say it again I'd personally sell my stocks right now and never go back. I'd put my capital into real assets. If you didn't learn from the 2008-2009 melt down then I can't help you.
If you are not interested in short term plays then you can focus on long term, Anything you underwrite plan to hold and exit at least 5 years from now. Pay close attention to your exit caps as they will slip in the opposite direction. If you are buying at a 6 cap today they will likely be a 7-7.5 cap in 5 years. ½ pt minimum to 1 point slip if not more.
If all of this is too much for you to consider investing alongside others who are focused on opportunities, i.e. an opportunistic fund etc. you can earn nearly the same returns investing capital in a fund or syndication like Borland Capital Partners and not have to deal with it. However, make sure this person or firm is taking the same approach and focused on a lot of what we are discussing here. Value add, knowing their numbers and exit, being ultra-conservative in underwriting, anticipating cycles, and values, keeping leverage low.
Update to article: Since my first post.
I've had a lot of questions about the market right now . Is it a good time to invest right now ? Absolutely however it will require confidence, no fear, discipline and skills, there is an abundance of opportunities and more to come. Though you should be more conservative and ahead of the market fall. For example if comps are showing the value of the home is $100k I would take at least 10% off of that to start to account for a drop in the market. So I would make an offer and buy that same home at $90k not $100k.
Be patient right now don't make a bad buy and don't be to “scared” not to buy. The numbers don't lie, let the numbers speak to you, if they say this is a slam dunk do it! Follow the numbers not emotion.
If you are a buy and hold person really no price matters to you if you plan on holding 10+ years
Remember real estate is not the stock market, it typically does not move in dramatic swings very quickly like the stock market. The trends show big adjustments in value happen about every 6 months. If you are investing in fix and flips, wholesale etc make sure to buy right being ultra-conservative on your buy price and sale price and be in and out asap. If it takes you longer than 6 months to buy, close, renovate and sell you could be in trouble as the market would have caught up by them
Usually in a decline we see values drop at a rate of 1-3% per month depending on the market. This is why it's critical you start 10% less off the top. Adjust your investment criteria and stick with it!
Keep in mind and plan for longer days on market as well, this means more utility, insurance cost etc (Holding cost) make sure you add in a buffer for this. You will have an abundance of inventory it will become a buyers market once again .
If buying a multi-family property make sure you are only buying value add property at a good price , keep leverage as low as possible. Plan for higher cap rates at exit. For example, if you buy at a 5 cap now plan for a 6 or 6.5 cap or more at exit.
For multi families now would be a good time with ultra-low rates to refinance any property with bad or unfavorable debt.
For multi-family property prepare for dips in occupancy and dips in rental rates. Stress-test your properties now and make adjustments ahead. What if rents fell 10% and occupancy fell to 90%? What if defaults increase by 5-10%? May be wise to make sure your security deposits are good and at maximum allowable in your state, if not upon renewal ask tenants to bring them up to max security deposit, and be proactive on your renewal leases now.
Moral of the story it's good to
Focus on short term 6 months or less fix and flip or wholesales
If renting, buying for strong cash on cash return and cash flow. Who cares about value if you are going to hold focus on what you want to earn on your cash while tenants pay the property off
Raise capital , have cash on hand for some great opportunities that will pop up on the blink of an eye.
If buying commercial, focus on what everyone needs , that being a place to live! Buy properties with strong value, add components and know your exit well . Plan for a slip in cap rates and a different lending environment at exit. Keep properties running lean and cash-heavy to weather any storm, pay down or restructure debt.
I learned something in 2018 studying billionaires, that was “the person with the cash makes the rules” cash is king.
If anyone would like to speak with me direct about the state of the current market and how to best prepare take advantage of a free strategy call with me at webinar.theuric.com , or join me in the Ultimate Real Estate Investing Course (™) and get weekly coaching and mentorship direct from me at vsl.theuric.com
For those looking to master investing in real estate, I've made The Ultimate Real Estate Investing Course (™) & Coaching available to everyone. I've combined our single-family fix & flip, rental and wholesale course and our multi-family and syndication course and coaching into 1 . Get all 3 now at https://dylan-borland.mykajabi.com/F1CaseStudy