In this week’s episode, Michelle Bosch unpacks the current economic outlook, specifically relating to the recent yield curve inversion that happened on the 22nd March 2019. This has some very real consequences for investors and many people are asking what they should be doing. Never fear, Michelle is here! This is a perfect opportunity to discuss how leaders in the investment world thrive during uncertain economic times.
Discover how Michelle and her husband Jack act in an uncertain economy, drawing on lessons learned during the 2008 recession!
Listen and enjoy:
- Understand what the yield curve inversion means for you
- Discover how Michelle Bosch uses lessons learned from Warren Buffet when making investing decisions
- Find out how an uncertain economy can lead to huge profits
- Understand why you should be careful with your funds right now
Find out more!
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This episode today is about 2 things: The economic outlook based on the yield curve inversion that happened a few weeks back but also about What leaders do on an uncertain economy.
I just shared on social media a little bit ago an article that talked about the economic outlook over the next 18-22 months. More specifically this article talked about the yield curve inversion between the 3 month and 10 year Treasury note that happened on 3/22…. and a few people reached out to me and asked me what this means in general and how does that translate for real estate so I decided to do an episode on this and explain what a yield curve inversion is and what does it mean for us in real estate.
Let’s start with the basics. A treasury note is a government backed debt security where you can basically park your money or invest your money and in exchange for you parking your money with the government you are compensated with a rate or yield. The longer your money is tied up… the riskier it is for you as the investor and therefore your rate or return is higher. So usually yields for the 10 year treasury note which is Long Term Debt should be higher due to higher uncertainty of the longer time period than for the 3 month treasure note which is Short Term debt.
Having said that on Friday 3/22 the rate or yield on the 3 month and 10 year note turned negative, meaning investors were getting out of stocks and parking their money in government backed securities and willing to receive a lower rate or yield on the 10 year note than on the 3 month note because they are fearful about the economy. When this happens the curve is considered “inverted. The yield curve we are talking about is simply a line that forms when you plot rates for both of these securities on a graph.
Why is this significant you might ask? An inverted yield curve is an indicator of trouble on the horizon when short-term rates are higher than long term rates and it has been historically an indicator of an impending recession.
And in case you didn’t know a recession occurs when you have two consecutive quarters of negative Gross Dometic Product growth also called GDP. And It’s basically a period of economic decline and contraction.
So this means right now that traditional stock market investors are jittery about the economy and rather have their money in a government backed security even though it will be producing them less returns on their money.
How does this affect us in real estate is the next logical question? First of all let me start by saying that this outlook isn’t the end of the world…actually how I see it…it is ACTUALLY as an opportunity…and I say that from experience…
Back in 2009 when everyone was losing their shirts and everyone was panicking and getting out of real estate…We were in the fortunate situation of sitting on a good stash of liquidity and a nice chunk of monthly cash flow from our land notes and instead of running away from real estate we ran right into. We knew that an opportunity like the one we were witnessing back then was not typical and we had to ACT swiftly and seize the moment… we could get properties at a discount at below replacement values and we were ready, we were prepared, we had the knowledge, the sophistication, the operational know how AND go on a major acquisition spree because these were properties that could really TURBO CHARGE our Passive Cash Flow. Fast Forward this TIME it is no different…we have GROWN leaps and bounds as investors, as people, as leaders, as operators and we know we can rest on that STRENGTH to capitalize on the NEXT wave of opportunity by sticking to our guns which is to be CASH FLOW INVESTORS We have never been speculative investors… we are and will always BE cash flow investors.
And I have to say You have to be a contrarian and be a leader and march to your own beat in uncertain times. So back then we were able to buy up a nice size portfolio of single family homes in 3 markets for pennies on the dollar. We bought single family homes for 30-50K cash that are worth $150K-$200K and then rented them out for passive cash flow for anywhere between $900-$1100 because everyone was losing their home but still needed a place to live.
So what Is happening now is not the end of the world but a time of GREAT opportunity. Why Because on the Multifamily sector it will bring a lot of seller expectations back to realistic levels. Stupid money will lose their shirts just like they did in 2008, prices will come down probably NOT to the levels we say in 2009 because the fundamentals this time are stronger…meaning there is no subprime debt crisis and there is no shenanigans going on the swap agreements front…. BUT The upcoming correction in the market will be a time of opportunity for SURE!
Warren Buffett famously said to be greedy when others are fearful and fearful when others are greedy. Right now people in the market are greedy, so we are operating extremely cautiously.
But when such a economic adjustment comes and with it some of these greedy operators start losing their properties, then it will be time for us to jump in the market in a massive way and take advantage of the increased amount of distressed properties and the lack of demand.
Most people out there follow the herd. When the market is up, everyone jumps in, when the market is down everyone is afraid and stays out.
But as Warren Buffet, the 2nd or 3rd richest man in the world said, the path to wealth is the exact opposite!
When the market was down he invested billions because essentially America was on sale. And now when the market is high he is treading very carefully.
So my recommendation if you are both a LAND and MULTIFAMILY INVESTOR would be to continue to buy at a discount and buy very selectively real estate assets that already cash flow from day 1. This will make your balance sheet strong because your balance sheet will be made up of assets that actually produce cash flow and put money in your pocket vs get money out of your pocket.
Specifically for land continue to focus on acquiring at a discount to continue to be able to flip at a discount…When you buy at 10- 25 cents on the dollar you are pretty much recession proof… and during the time of a correction expect slightly longer periods for properties to sell…on land you’ve sold on seller financing maybe a 5-10% default rate if at all due to the longer term horizon of land buyers in general and to mitigate this you can always offer loan modifications if necessary to maintain cash flow on notes.
Specifically for multifamily If you are an active or passive investor my recommendation would be to be conservative and make sure whoever you are investing with is conservative in their underwriting or modeling of future cash flows, of rent rate increases, and holding periods…. because if lending contracts…refinancing may be difficult and properties will need to be held for longer periods of time.
ALSO… so make sure your cost of capital is low… and that you are using the cheapest debt out there…preferably of course fixed rate debt and that your loans are amortized for a longer period of time.
Also Don’t be a ding dong right NOW…if you are in the market buying right now please stop buying speculative real estate in the hopes of appreciation of market rents because that might not happen in a contractionary economy…only buy if a property cash flows NOW and your properties are below market rents….its easier and possible to optimize properties to catch up with existing market rents…but don’t count on market rents continuing to go up.
We continue to buy and underwrite over a hundred deals to find the gems. All properties we have purchased so far have been underwritten so conservatively that we are absolutely certain that they will continue to do well in such an adjusted market.
We don’t operate in the highly volatile Class A space (which will be hit the most) and instead operate in the extremely stable class C and C+ markets.
We also never assumed 3% or 4% rent increases but only focus on below market rent properties where we are pretty much certain we can reach our financial goals by just adjusting rents to the current market rates. In other words if we experience a 0% rent increase in the market we can still make our numbers work.
While the other guys are modeling highly optimistic and aggressive CAP rates (translating to very high sale prices) we model extremely conservative exit CAP rates which really resembles a worst case scenario.
So in summary remember success occurs where preparation meets opportunity and that is exactly what we have been doing by buying, operating, improving and optimizing our current rental portfolio. This is preparing us for exactly this upcoming opportunity to LEAD and make huge returns for our investors.
Opportunities like this don’t happen often. So please be careful with your funds right now. The market is high, lots of people underwrite properties with unsustainable expectations, but don’t be scared of investing when the market turns. That WILL be the time to make a fortune.
Hope you find this message of value and I look forward to spending time together again on a future episode of the InFLOW Podcast. If you liked this episode please leave me a 5 star Review. Thank you and until the next time.
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