Today I want to talk about my personal opinion of what is going to happen to the economy, which will inevitably affect real estate prices. I’m just putting the pieces of the puzzle that I have together. And my puzzle is definitely missing a few pieces because none of us have access to 100% of the available information. The pieces of my puzzle are coming from: the news, what actual people that I speak with are going through, what is going with real estate investors, what the tech world is doing, what is happening to different industry, and most importantly: common sense.
If you are a listener of this podcast, you know that common sense is not common. And up until now I am not seeing a lot of common sense thinking out there. Starting with how the stock market is doing. Stocks are very high given what is happening in the world. On top of that, I don’t see too many people talking about the consequences of how everything is interconnected, everything. And they’re not talking about how, in my opinion, this will trickle down to what I think will be a very bad recession.
If you have been listening to this podcast for a while, you know that I’ve been saying that it is a great time to learn about investing so that when the opportunity arrives you will be prepared. Guess what dear real estate family? The opportunity has arrived!
First let’s go back to what our mindset was last year, so that you can remember that it’s important to stick with your gut, and not with what the rest of the world is doing. I want you to note that all of us face adversity for standing for anything. If you stand for A you will face adversity, if you stand for B you will also face adversity, so pick something to stand for.
Remember, a lot of people have been predicting a downturn since 2016, that's 4 yrs ago, a long time! Holding on to your beliefs that go against the flow can sometimes be difficult, going against the flow is not human nature, human nature is to go with the flow, human nature is to start buying into what other people are thinking, or saying.
Last year what I was going through was: everyone is buying real estate, and people were even saying that you end up losing money for not investing because a lot of people have been predicting a downturn since 2016, that’s 4 years of waiting for the downturn to arrive. I didn’t stop looking for properties, I wasn’t on hold per se, but the deals that I looked at just didn’t make sense to me. Obviously if you find a good property where the financials make sense, it is always a good time to buy.
I even had a couple of friends that don’t know anything about real estate almost making fun of me for not purchasing a property last year. Sometimes it can be difficult to be on hold for purchasing properties, it’s normal to at some point to even start wondering if you’re making the right decision. Even Robert Kiyosaki said a couple of weeks ago that he was sometimes beginning to wonder if he was sending the right message about his beliefs in the economy. Either way, I didn’t find good deals last year, so I didn’t purchase anything.
In previous podcasts I also said that some investors were losing sight, they were making irresponsible bets and buying properties at very high prices compared to the income they were getting, especially in the multi-family space. A lot of syndicators were very aggressive on their pro-forma, they were showing in their calculations and telling their investors that their rents would go up 5% every year, while vacancy would be at an all time low. They were not accounting for a possible decrease in rent, or in vacancy, which is very irresponsible and now these people will be paying the price for that irresponsibility. And their irresponsibility will make our responsibility finally pay off. We will be able to get deals from exactly these people!
For all of you who have been taking the time to hone your skills, to learn, to make connections in the real estate world, to build your reputation: congratulations, our time has finally arrived. Why? The best way to explain is for you to listen again to the episode that I did on Oct 24th, 2019 titled “How You Can Lose 50% of Your Property Value in One Downturn: The Quadruple Whammy". The reason why you can lose 50% of the value of your property in one downturn pretty much consists of four factors that are all correlated: rents going down, vacancy going up, cap rates going up and lending getting tight - which is exactly what is happening right now, and will continue to happen.
So why do I think things will get bad? It’s pretty simple, everything is interconnected, let’s take just one example, just one: if people cannot hold large events for at least one year, that alone is already a huge portion of our economy, so how can that be? It’s simple, it trickles down to everything else. Let’s take some industries that are connected to holding large events: the music industry with concerts, sporting events, conferences, the entire economy of Las Vegas, nightclubs, and every company that depends on holding live events, for example Tony Robbins. Most of the employees that work for these industries, will be let go or furloughed. These employees all have bills to pay, food to buy, they have kids, mortgages, rent, etc. Even with unemployment checks, they definitely won’t be splurging, going to restaurants, or going on trips. And with that, the restaurant business gets hurt, the travel industry, and that is obviously already happening, (Airbnb just got $2 billion dollars in loans at half of their last valuation, and they’re paying 10% in interest on that money!), the clothing industry also goes down, and every industry that is related to disposable income: nail salons, massages, buying new cars, etc. And now all of the employees in these industries get hurt: they are let go, or get furloughed. And these companies not only let go of employees, but they also cut their costs immediately, they won’t be investing much in new technology, in advertising, and so on and so forth.
And that trickles down to the tech industry. I get a daily digest of what’s going on in the tech world, and today alone (April 22, 2020), the digest had the following news: Netflix sales are up, another tech company is cutting the salary of all staff by 25%, another tech company furloughs 600 people, another let go of 13% of its workforce, another one laid off people and cut exec salaries by 15%.
And this, dear real estate family, is how everything is interconnected.
Now, there’s a small number of people that get a disproportionate amount of media attention, and they’re asking for the economy to be reopened. I’m not going to share what my opinion is on that, but let’s just say that some businesses do get reopened: not everyone that has been laid off will get their job right away, it just doesn’t make sense. Last week we were at 22 million people unemployed! 22 million in just the four weeks since this was declared a national emergency. Do you think that all 22 million people will get their jobs back right away? There’s no way this will happen. And I think 22 will become 44 in less time than we got to 22, less than a month.
Let’s just imagine that even if a vaccine is found today, and all of us had taken a vaccine today, to-day, still, not all 22 million people would be rehired tomorrow, and that still has a trickle down effect everywhere.
But let’s stop dreaming that there’s a vaccine today and let’s come back to reality, a vaccine won’t be found for at least one year to 18 months, add to that another few months until a vaccine is made for everyone, and delivered to everyone. You get the picture.
Even if we do start reopening the economy slowly, there’s no way that the economy will come back right away to the levels that it was before. The vast majority of people, the people that don’t get media headlines, they actually don’t want to go to crowded spaces even if they were allowed to, they won’t be going to restaurants in the same amount that they were going to before, they won’t be going to any large events, they won’t be traveling as much, and so on and so forth. And all of that continues the trickle down effects for everyone, across all industries.
So what do we do with all of this information? The first thing to remember is that real estate is a lagger, it will take a few months for prices to come down, but we are already seeing things move, the retail sector cap rates already went up by nearly one percent. Multi-family is already hurting as some tenants aren’t paying rents and the operators won't be able to evict tenants, office is also hurting and a lot of companies are already talking about potentially moving their employees towards working from home permanently.
I just heard from my CPA on why he is delayed on doing my taxes, he said it's because he is super busy with SBA loans for his clients and that there are “Lots of struggling investors and business owners out there.”
Sophisticated investors are predicting that Q3 and Q4 will be a good time to buy. I want to remind you that buying opportunities like this happen once every 10 years or so. There are a lot of benefits from buying in a downturn, you not only get it at a discount, but when the economy picks up again in, let’s say 3 or 4 yrs, you will get that upside too. You get both ends of the table: the discounted price, and the property value increase which will inevitably happen when the economy comes back - this is amazing.
You might be wondering, when will be the absolute best time to buy? And the answer to that is nobody knows, and may be difficult to predict, but as long as you get a good price for a good property, with good fundamentals, and a good location, never look back and say “I wish I had waited 2 more months to get the absolute best deal” because we just never know.
Just remember that in Q3 and Q4 you may be very tempted to go with the flow, to start thinking that this downturn will never end - please make a note to yourself to come back to this episode, or do what you have to do to keep your eyes on the prize.
Lastly, I’m not sharing my opinion in order to have you agree with me or not, this is what I personally think will happen and I will be investing according to the data that I’m gathering. I know I didn’t even cover the inflation that will inevitably happen with all the money that has been printed, which is another great data point for us to buy real estate.
I’m curious to hear what do you think will happen? please reach out to me via the link below. And please comment on our facebook group with your thoughts. All links are below.
Listen to our How You Can Lose 50% of Your Property Value in One Downturn: The Quadruple Whammy episode.
Join our facebook group discussion here: https://www.facebook.com/groups/montecarlorei
Contact us here: https://montecarlorei.com/contact-us/