In case you missed it at least 3 Trillion dollars of economic stimulus has been flushed into the system.
Could this be what is pumping the stock market with fake money?
When is the air going to be let out of the stock market again?
Do you remember how you felt back in March 2020 when stocks lost a third of it’s value? Don’t forget that.
The Cares Act now allows for a 100k withdrawal from your 401k or TSP penalty free till the end of 2020 and possibly till you file your taxes in 2021. This is the time to get out of frothy paper assets and into real hard assets.
Never forget! Do yourself a favor and get out of fake assets and into real assets that produce cashflow.
Why real estate? Is this another 2008?
The great Recession of 2008 was a systemic failure in the real estate market caused by bad mortgages, rampant home flipping and speculation, and overbuilding all contributed to the last financial meltdown.
NINJAs (No income no job no asset) were being approved for multiple home loans on the belief that housing prices would just keep going up and these loans were packaged off and sold as Wall Street derivatives.
Today, it is difficult for even high paid professionals like you to qualify for Fannie Mae/Freddie Mac loans. Credit scores need to be higher, debt-to-income ratios need to be lower, and lenders verify incomes much more carefully. Join our Remote Investor Incubator and we can connect you with the lender that we use.
This time around, there is a growing demand for affordable rentals housing due to increasing population, less homeowners, and the constant separation of the haves and have-nots 🙁 the much-stronger housing market isn’t the driver of the crisis—it’s the effects from COVID-19 a medical crisis. It is a true Black Swan event.
What Could Cause the Stock Market to Fall?
Is this a time to sight tight and not invest?
You could do this and make 0% on your money or load it into deals that make sense, tie up good long-term under 4% debt, and hedge against inflation as the country looks for revenue sources such as taxes or debt minimizers with inflation.
I have taken a “load and stabilize” approach to my investing where I…
Some may even see this as the “dollar-cost-average” approach which is similar to what were taught in stock investing 101.
I have seen pricing on assets increase every year since 2009.
I felt what you are feeling back in 2012… if I would have stopped I would have missed out on another great run!
I felt what you are feeling back in 2015… if I would have stopped I would have missed out on another great run!
I felt what you are feeling back in 2018… if I would have stopped I would have missed out on another great run!
After seeing this phenomenon happen for a few times and seeing a lot of people who never got started, I realized and had proof of concept that as long as I go into conservatively underwritten deals that cashflow I am pretty much untouchable or going to do a lot better than waiting on the sidelines.
COVID19 came and I was a little worried to see how April and May collections were. But collections remained strong and came down only 2-8% across the 3,500 unit portfolio. In some assets, collections improved! Commercial real estate pricing was pretty much unchanged and experts say that at most Cap rates went up only 0.25%. (Excluding commercial retail storefront and short term AirBNB type rental who got killed)
Now, you can see where I am coming from in my neutral-aggressive stance.
Combine that with the fact that I am around higher level Accredited investors these days who have seen the ups and downs and they say NOW we see the separation between the faint of heart and those who take their family’s legacy to the next level.
Of course… don’t be silly and choose investments in good sub-markets and have sound underwriting to ensure cashflow.
Warren Buffet said “be fearful when others are greedy, and greedy when others are fearful.”
John D Rockefeller said “The way to make money is to buy when blood is running in the streets.”
The Fed has pretty much doubled down and planning for additional stimulus plans which is ensuring the nation moves past the current COVID crisis with Infinite Quantitative Easing commitments through the year 2022 and beyond. Get on this wave now!
We were able to get a lot of interior footage on Harbor Village units on this last trip out to Huntsville!
Also included are drone shots of all recently acquired properties.
2nd half of video is Garden Place and upgraded and non upgraded units in Treehaven which are our other class C properties.
The population is still going up…
Between 2010 and 2017, population growth averaged 5.5% for the US as a whole. Delaware boasted the highest growth rate, 15.3%, over these years. A state with a relatively small population, however, needs fewer new residents to achieve such a high growth rate. The double-digit rates recorded by Texas (up 12.6%) and Florida (up 11.6%), both high-population states, are therefore that much more impressive. There were three states that posted population decline between 2010 and 2017: West Virginia (down 2.0%), Vermont (down 0.3%), and Illinois (down 0.2%). – ITR – 19.02.28
Since I feel we are in the 9th inning of an 11 inning ball game, I decided to pass on a recent Class-A apartment deal in a secondary market.
Here is my thought process…
Real estate is one of the best risk-adjusted investments out there. In private placements or syndications, we are able to crowd-invest in larger & more stable assets while maintaining control with operators who are aligned in our best interests. By going into a project properly capitalized with adequate capital expenditure, budget, and cash reserves, you are able to remain steadfast through softness in the market where rents stagnate and vacancy decreases.
Pause there. In troubled times what happens?
People lose their jobs and there is a bit of shuffling, let’s take a look at different the different property classes:
Yea, people need housing, but there will be some vacancy as some people will lose their jobs and be displaced elsewhere.
Following this train of thought…
In a recession, the high end or class A will be hurt the most. It is Class A workers who fulfill much of he discretionary services. We are already seeing softness in rent by rent decreases in class A of the high-end markets such as Seattle and San Francisco.
For example a once $1,700 one bedroom is now $1,625.
Most deals model for 1-5% in annual rent increases or escalators. Other than the Cap Rate to Reversion Cap Rate truck, this is the second most manipulated assumption in investment modeling.
In this unfortunate but natural event, the A-Class renters will fall to class B housing. Some homeowners will even lose their jobs creating foreclosed investments for smaller investors in the single-family home scale.
What’s happens to the B and C class renters?
It is likely that they will also lose their jobs at higher or lower rates, but that is up to debate. In the same fashion as the A-Class renters, the Class B/C renters will downgrade to make ends meet.
I imagine this similar to a game of musical chairs (where the chairs are getting crappier and crappier). Or it looks a lot like the natural housing shuffle in the summer near colleges with people moving in and out. The landlord/investor is likely to see increased vacancy.
Multifamily occupancy varies from 85-95% in stabilized buildings. Some markets are hotter and some are colder. It is important to use the correct assumptions depending on the markets. For example, Dallas typically sees 92% occupancy while Oklahoma City sees 89%.
One of the reasons we love multifamily is because of the decline of the middle class and the need for more scalable workforce housing. [And those millennials can’t save] The population is increasing too.
[I like to use this image cause I make fun of millennials… this is the millennial version… cause they can’t seem to afford (or want) to own anything]
When I travel to Asia (which I see as a more mature society, for better or worse) there is a much larger wealth gap than in the USA. People are living in cramped apartments or very rare single-family homes. And they are driving a Mercedes on barely enough money to share a family moped. This is the trend that the USA is following.
As with many things, you need to look past the headlines and the general data. Instead of analyzing a whole asset class, as the media likes to do, let’s break down vacancy in terms of classes.
Here are some typical vacancy rates (notice the spread).
Class C 4.5%
Class B 5.0%
Class A 5.5%
Why? Because there is just more demand for the lower class properties because there is more demand than supply.
Many times the business plan is the be the “best in class.” For example, businesses want to be the best mobile home park or best high end remodel because you attract the richest customers in that niche.
I like to monitor the number of new units coming online because that is your downward pressure. It is rare that new builds are for Class C or Class B.
The micro-unit trend is an attempt to build for Class C and B tenants due to the need. But often the numbers don’t make sense when you have purchased the same building materials and mobilized the same crews to build a Class B asset as opposed to a class A asset.
Let’s go through that Armageddon example again.
Class A will have to drop rents severely and see great vacancy.
Class B and C will see vacancy come up too as people are losing their jobs but should see some absorption from ex-A Class tenants.
Mom and dad will also see some absorption as deadbeat son or daughter move back home.
Note: one can argue that class A+ will not be affected at all which I believe is true. That’s why we are trying to invest right to enter that untouchable status.
I remember when I sat through the same economic presentation at work from 2010-2014. The sentiment at the time was that it was going to be an extremely slow recovery. It makes sense that the length between the 2008 recession and now is very long which is why I mentioned an 11-inning ball game.
This is why I took a step back from some pretty Class A deals because I asked myself the following questions:
1) What will happen to the rents if IT should happen?
2) Is the modeled 90% vacancy rate going to get blown up?
Class B and C apartments in strong submarkets will perform best over the long term. If you ensure the loan term is long enough so you don’t get hurt then you should Outlast the bumpy ride ahead.
Beware of the self-destructive behavior of not investing. You know what I mean… are you someone who self-sabotages?
Understand the micro and proceed if the numbers make sense.
I have to admit Class C and B assets are boring but work especially in a seller’s market because 1) they cashflow and 2) have a forced appreciation value-add component to give you levers to pull in tough times.
Again going back to Mr. Kiyosaki’s three-sided coin quote, investors go through three stages:
Go into MFH… Duh (I did well at single-family rentals let me try apartments)
Be a contrarian investor so go into other asset classes most decent investors are afraid or don’t even know about
Do special projects such as Affordable house taking advantage of tax credits or specialized operators (ie take abandoned big-box space like movie theaters and convert to the latest consumer needs)
- Historically low-interest rates
- Historically high rent increases (not 8% anymore but still 2-4%)
- Historically low vacancies
[Sophisticated Investors know interest rates and caps go up and down together and their money is made in the delta between the two] – REI.com – 19.03.4
Of course, all the Pro-Apartment publications will say this: Get Ready: Recession-Proofing An Apartment Portfolio – National Apartment Association 19.03.7
But enough of this doom and gloom because most gurus out there call recession everyday just so they can have Tweetable content. And they make a living selling subcriptions to their $79/month newsletter. But we are better than the average investor! And understand that future softness could very well be slowdown before the next great bull market.