Real estate gives me insomnia.
Seriously, it does — even when I have great results and am flying clear!
I recently sold all my properties at a very high price. My investors did extremely well – over 20% returns on an annualized basis. I made enough money that I can rest for a little while.
Yes. That major sale, for a little while of rest… What about when the little while is up?
We live in a world in which central banks have pumped out loose money for a generation. European and Japanese central banks are actually offering negative yields. United States banking is heading that way too!
That means you pay to own the bonds. This has caused a “search for yield” – investors everywhere are buying anything that produces a return.
No matter how small the return is – it’s raised the price of every asset. This is called the “everything bubble”, and it puts investors in a catch-22 situation. If you don’t buy deals, you don’t have an investment business… But if you do buy deals, you are paying historically inflated prices and all the risk is to the downside.
Sure, lower interest rates could push prices a little higher. Many are arguing that low returns on real estate assets are better than no returns. But! Continually lower interest rates will only work until they stop working.
When the inevitable recession occurs, consumers stop buying stuff, jobs are lost and vacancy rises, lower interest rates won’t help… That’s even if central banks CAN lower rates. They are so close to zero now, there is little room to lower further if a recession happens.
The Fed has no gas left in the tank, so it’ll go to negative yields, too. Not exactly promising considering the economic changes in Europe and Japan.
In Japan, real estate lost 90% of its value when the bubble burst. It’s been nearly 30 years, and prices have never recovered. So, what do I do now?
Do I just sit on cash and wait for the crash to buy? No deals, no business? How long do I wait for the crash?
The legendary economist John Maynard Keynes famously said, “Markets can remain irrational longer than you can remain solvent.”
You’re buying at the top, and hoping that the Fed can prop up asset prices long enough that you can ride out the recession that’s coming. Assuming your vacancy doesn’t rise to a level that prevents you from making your debt service.
(And, no, multifamily does not “do well” in recessions, despite what Parachute Man says to get you to buy more courses to 10-X your life and/or invest money in his high-fee (for him), low-return (for you) deals.)
If you have to buy now, then the only way out of this conundrum, as I see it, is to buy at low leverage so you have an equity cushion. You will be able to refinance even if asset prices drop without having to do a capital call on your investors.
This isn’t what the gurus and syndicators tell you. Why? They don’t believe rents can ever decline, vacancy can ever fall, or asset prices can ever fall. Never mind what we just saw in 2007 in a big way.
Of course, most of these folks weren’t even around then. They’ve never seen anything but a rising market fueled by cheap money.
Rising markets cover a lot of mistakes. But, as Warren Buffet says, when the tide goes out, you see who’s been skinny-dipping the whole time. If you want someone to give you real real estate coaching and advice, and not just blow smoke up your pipes to give you happy feels, my Multifamily Launchpad program is for you!
Do ya want the truth, or the happy feels?
Here’s the link for my email list when you make your decision:
www.apartmentinvestorsclub.com
