Real Estate Investing: Preparing for Recession
“Where there is no vision, the people perish…”
Proverbs 29:18
Well, we started with a Bible verse, so it’s a good time to go into the story of Joseph in the Bible (located in Genesis 41).
To paraphrase, Pharoah, the leader of Egypt, had two dreams that no one could interpret. His chief cupbearer (and a former jailbird) remembered that he knew a guy in the joint who had (successfully) interpreted dreams for him and his buddy a few years back. He told Pharoah about this Joseph guy and Pharoah had him sent for.
Joseph said God had revealed both of Pharoah’s dreams to him and they had the same message; Egypt and the surrounding lands would have seven years of incredible plenty followed by seven years of devastating famine. He advised, “Let the Pharoah look for a discerning and wise man and put him in charge of the land of Egypt. Let Pharoah appoint commissioners over the land to take a fifth (20%) of the harvest of Egypt during the seven years of abundance… This food should be held in reserve for the country, to be used during the seven years of famine that will come upon Egypt…”
He concurs and appoints Joseph to head this newly created post and things go as predicted. Egypt is the only place that has food when the years of famine come, and Joseph is administering it on Pharoah’s behalf. The Egyptians and the people of surrounding lands are forced to sell Pharoah all their possessions and land just to get food.
To bring this back into the realm of real estate investing, landlords are clearly in the time of plenty as property values and rental prices have been on a growth curve for the last ten years. To boot, interest rates have been historically low (and really still are) which allow for low borrowing costs and has made for a robust sales market. Many landlords have used this as a time to sell some of their “dog” properties, make improvements and raise the rents on their existing properties, buy some new ones, and refinance/eliminate debt.
Recently, interest rates have more than doubled and many economists (none with divine inspiration like Joseph to my knowledge…) claim a recession is around the corner. If that’s true, the housing market could take a sharp correction which could be a great opportunity for prepared investors.
I have vague recollections from the last housing correction from 2008-2012. I did not buy any investment properties then; I was too concentrated on keeping my existing rental homes afloat as rents were low during that time period. I remember that selling homes was really hard; buyers were scarce! Many sellers were just giving their houses back to the bank or using “short sales” as the banks would take a loss on part of the loan during the sale. I remember thinking, “What’s wrong with me? As a wanna-be real estate investor, how am I not buying homes now? These houses are going for a steal and they seem to be all over the place!”
The thing that was wrong was that I could not get a decent loan and did not have much cash on hand. So, I needed to sit on the sidelines like most other people until the economic waves grew more favorable. But the buyers who were prepared got some great deals!
The investment challenge now is to be more like Joseph and be prepared for any possible famine while things are favorable. If the right investment comes along during any upcoming recessionary period, I’d like to be able to snap it up (while simultaneously staying solvent during any prolonged economic slump). Preparation now can pay huge dividends later.
Happy Investing & Landlording!
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Competition is for Sissies: Buy Straw Hats in Uptown Charlotte
“Buy straw hats in the winter because summer will surely come.”
Bernard Baruch
The competition for Charlotte-area homes is relentless from the buy-side. One local statistic really drives home the point: there is currently an 18-day supply of homes for sale (and 120-days worth is considered a healthy market)! That’s badly seller-skewed.
And I saw a Linked-In post last week from a member of our local Realtor Association, Jonathan Osman:
There are now more than 13,788 Realtor members in our local association of Realtors… and only 1,633 homes for sale in a 7-county region surrounding Charlotte. Happy Monday everybody!
That’s a lot of agents and buyers fighting over a few pieces of cheese. And that doesn’t even factor in the i-buyers like Zillow, OpenDoor, and real estate investment hedge funds that have non-licensed agents scouring the market for unlisted homes to buy. If they are not consistently buying a large quantity of homes, they are not doing their jobs. Supply versus demand is in full effect- Prices continue to climb! 20-30 offers per listing coming in fighting for attention! Competition is fierce!
But there seems to be a bastion of discounted properties located right in the heart of Charlotte in the 28202 zip code that sit undisturbed- Uptown condos! They’re nicely adorned living spaces located in beautiful, tall buildings in what was considered prime real estate. And no one seems to have any interest in them as prices drop. OpenDoor has no current interest and Zillow’s instant offer is at a steep discount to market price.
So why is this packet of Charlotte real estate getting the cold shoulder? I can foster a few guesses:
- “It’s the pandemic, stupid! Everyone is “Zooming” from home and Uptown (and downtown areas in cities everywhere) are obsolete now. Who wants to live in the City when you can be in your PJ’s in the ’burbs?”
Rebuttal:
- The suburbs (and home) can enjoy their time in the sun. Cities are still cool and have lots to do. Companies still value in-person collaboration.
- Huge organizations (Bank of America, Wells Fargo, Duke Energy, Carolina Panthers, etc.) don’t have billions of dollars in leases and real estate office holdings that are going to sit empty one more minute than they have to. When things are thought to be feasibly safe, doors are opening.
- Here’s the path to never getting promoted at work: when the Uptown office opens up and the option comes to work from home or go in, take the home option and continue to work by video. All top leadership will be required to be in the office, so your co-workers will enjoy lunching and working closely with the decision-makers in-person. I wonder who gets promoted… The person who they laugh with at the water cooler or the person they have to sit through yet another Zoom call with to see and never seems to be around? Hmmm…
- It’s tougher to cash flow condos with high monthly HOA fees and, to boot, rents seem to be lower.
Rebuttal:
- True that on the HOA fees to a point. Just keep in mind a few expenses that HOA fees save owners from paying: buying a new roof, monthly insurance, exterior house maintenance, pest issues, water/sewer bills (when vacant), and the threat of vandalism. The actual hit is lighter than it seems.
- Rents are lower because the demand is not there right now to live in Uptown Charlotte with offices largely closed. But that’s why investors buy those straw hats in the winter!
- There are a lot of Uptown condos for rent. There have not been any new Uptown condo buildings built in over a decade, but many apartment buildings have been. That’s a lot of rental competition!
Rebuttal:
- But the rental price points on the newer apartments are higher (and need to be due to higher land/construction costs when they were built and investment cash flow required for the financial institutions who own the buildings).
- The newness factor has largely worn off and now the older units for rent are on largely equal footing (most with better locations)
- There are not many Uptown units that can actually be owned. To your point, no condo buildings for private owners have been built for over a decade. At some point as renters come back to Uptown, they will want to be owners and have limited supply to choose from.
Competition is for sissies! Investors may want to buy the unpopular Uptown condos now and then wait to reap the benefits in the summer when straw hats are back in vogue.
Happy Landlording!
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Noah’s Ark & Real Estate Investing: Can You Persevere?
Noah’s ark is a crazy story. God tells Noah, some ordinary guy, that He is heartbroken with how sinful mankind has become and is going to flood the Earth and start again. He tells Noah that he is going to spare him, his family, and all the animals if he builds an ark. Noah takes God at His word and builds the ark, gathers the animals and provisions, and loads the ark up.
Everyone knows it rained for 40 days and 40 nights, but Noah and his crew were safe because they were floating on top of this massive amount of water. The lesser talked about part of this story is that they did not walk out of the ark on Day 41 ready to repopulate the Earth; there was way too much standing water (they were floating above mountains, for goodness sake!). They were actually stuck on the ark for over a year before it was sufficiently dry enough to get out on land and walk around.
The children’s Bible I was reading my son surmised that it wasn’t boring because they had so much to do. They had daily routines to feed and care for all the animals, put out fires (so to speak), and take care of themselves and the ark. Wash, rinse, repeat. If anything was neglected, there were problems. Survival for mankind and the animal kingdom was at stake and duties needed to be carried out diligently or there would be dire consequences. The carrot was that if they kept to the plan, they would be free of the confines of the ark at some point and the whole beautiful world would be waiting for them to enjoy.
It reminded me of real estate investing.
Like the ark, rental homes require constant diligence. They need to be fixed up, repaired, and maintained. Tenants need to be acquired, serviced, and replaced. The mortgage, insurance, and taxes need to be paid. The HOA and government entities need to be catered to. These duties need daily attention; if they are neglected, the financial boat can start taking on water and sinking can become a real possibility.
The carrot of real estate investing is owning the property someday. As it rains (roof needs replacing, tenant evictions, tenants not paying because of a pandemic), it seems like that day is far off. Sometimes it seems like it would be better to abandon the ark and swim without it.
But persevering and waiting for the ark door to finally open to dry land has its benefits. Free cash flow, a higher net worth, and assets that can be liquidated for college tuition or passed on to children are great financial prizes.
But tending the smelly animals is a pain day-after-day (ever try to pick up after 1,000’s of animals?). The lightning is scary. The boat rocks a lot and causes sleepless nights and sea sickness. Some boards on the ark look like they are breaking down. Drowning is a real possibility. Why did I get on this thing to begin with? My friends who stayed behind at least seemed merry before the torrential downpour.
However, amidst the doubts and setbacks… there is belief that one day in the future the sun will come out, the water will recede, and the dove will return with a leaf clenched firmly in its beak. The remaining mortgage payments will be made, the appraised home value will be high, and the financial statement will be solid. Landfall will make it all worth it.
Noah persevered and he and his family were rewarded. Hang in there!
Happy Landlording!
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