“Be fearful when others are greedy, and greedy when others are fearful” - Warren Buffett.
The advice has been encouraging for real estate investors, especially during the post-2008 recession when shrewd investors stepped in and acquired properties during the depths of the recession when others were still wondering if real estate would ever recover.
The question then becomes with the near-term future of real estate values uncertain, how could you prepare for the future to capitalize on any potential opportunities?
As famous and cliched as the above statement by Buffet is, it’s often misconstrued and misused because there are no cardinal rules and the abstract nature of the statement makes people jump in without proper guardrails.
So in today’s newsletter, I want to give you a high-level mental framework that I have had for a while in anticipation of this downturn by studying how the investors capitalized in the last recession.
Here is an example from Sam Zell's biography:
If you’re an investor looking to do your first deal at this time, these times can present some of the best buying opportunities available like they did for many prolific investors.
But note a prerequisite to any of the options I mention below is having a critical mass of investing knowledge. If you have none, I suggest you ammo up before, or you will most definitely strike out in a frenzy.
Assuming you have the baseline knowledge, these are ways investors like Sam Zell and others capitalized in the last downturn.
1) They sought out distressed properties
That is, they went where property owners were struggling the most.
Looking for well-located, well-built assets that were experiencing cash flow issues or that are potentially over-leveraged could present a huge opportunity.
I know it’s not a good form to even suggest this option but you are only helping those owners get out of their tricky situation.
Recession-resistant product types that might be over-leveraged, such as multifamily, may have significant buying opportunities over the next six to twelve months, especially if the current owners took on leverage with variable rates and rates jumped on them recently.
Obviously, this involves risk, and it takes a confident investor to go in, stabilize the property, and fully capitalize on a project to ensure that the property is leased up and renovated as needed.
That brings us to the second point:
2) Be well-capitalized
Real estate is cash-demanding. Finding distressed properties is no use if you do not have the capital.
I don’t mean to say that you have to use your capital; you could simply find equity partners who can maintain a strong cash position and reserves while the market stabilizes.
This could be an existing relationship with one or more high-net-worth individuals, a family office, or institutional capital partners who are familiar with your skill set and have expressed interest in partnering with you.
For, eg - In the last year or so, I have been building relationships with larger PE firms looking for deals in exchange for capital. I did this in anticipation of the recession, so I am ready to scoop up the right deals without having to solve for capital.
You are still not late in the game - why it’s critical to seek out capital investors now and perhaps network with other investors to let them know what you’re up to or what you’re looking to do when the next opportunity arises.
I can’t emphasize enough how important it is to be well-capitalized when buying distressed deals. If you’re buying properties with high vacancy rates or other cash flow-related issues, you may be required to weather the storm for six months or more, which involves cash reserves and working capital to fund until you stabilize that deal.
If you do not have capital backing, you are just inheriting someone else’s issues, and that could pose serious financial threats to you.
This could mean putting money aside for future tenant improvements or for a property with deferred maintenance issues, it could mean raising capital or having the equity upfront to ensure that you can perform those renovations without relying on cash flow to fund those capital improvements.
A lease-up or a capital project can often take much longer than expected and be much more expensive than anticipated. So having the appropriate capital available to ensure that you’re able to weather the storm and potentially even pay for basic operating expenses is critical when buying distressed deals.
And investors who can do that and go into these deals with an ample amount of cash on hand will come out winners when rent and values eventually start to rise.
3)Lock in a long-term fixed-rate debt.
This is again a risk mitigation strategy like the last one.
Needless to say, markets are sensitive, and getting variable interest rates introduces a level of volatility in your mortgage amount, which is exactly why the existing owner might be in a distressed position as I explained in my last newsletter on the floating rate loans.
So, those are three of the most common ways that real estate investors make money during a downturn and what you might want to focus on today if you’re looking to capitalize on opportunity three to six months down the road.
If you are not there yet, I suggest you completely block any market news, get to work, and start building knowledge, team and a network so you are ready to capitalize on any opportunities and build your portfolio with a high growth rate.
That’s a wrap - I hope this helps.