A lot has changed in the Real Estate markets in just the last 30-60 days. From brokers and house-flippers to buy-and-hold investors, the COVID-19 pandemic is affecting the entire economic system for real estate investors. There’s no better time to stop than now to stop and think through what these changes could mean for you. Here's my attempt.
Securing debt has gotten much trickier.
Obtaining debt is a massive part of being a real estate investor. It’s the oil that keeps the entire system running. And late last year, lending requirements were super relaxed.
You could buy a mid-sized building for just 10% of it’s value in cash. Lenders would loan you the rest of the money to buy it and finance all of the construction costs. (Sometimes without even seeing any docs to secure the loan!)
Those rising tides can be helpful because mostly everyone get ahead.
Contractors get more work, experienced investors get a chance to sell, newcomers pay top dollar because they don’t know any better, and banks will lend to you all the same. Everyone and their mom looks to buy real estate. And I sure as hell wasn’t gonna miss out on that wave.
When things are good, it starts to feel safe to assume they’ll get better. You flip one more house, one more risky project. Why not? You haven’t been burned that bad before. Plus, you don’t need that much cash to get it going anyway.
Until the music stops.
Now look. I’ve never professionally navigated through a down-turn myself so I really have no reference point other than what I’ve read about ‘08. That said, I now perfectly understand what Gary V told me when we first sat down. He said: “You’re doing well now. But can you survive the shit storm when the soccer field turns to a hockey rink?”
I see what he meant.
It is generally much more difficult to operate now than it was before. There is less money available. Corporates spend less, people spend less, investors buy less, lenders lend less.
It was easy for me to develop a false sense of “Damn, I’m good.” But these hard times will reveal to you how well you actually did or didn’t do. Did you take on too much risky debt? Were you over-zealous in what you paid for property? Did you pick good, cash-flowing real estate? The present market conditions will answer those questions for you.
For me, I can say I shook out about 50/50. I picked good markets and chose fundamentally sound real estate, but definitely over-paid in some cases. Another critique I have of my investment approach was confusing optimism for a lack of cautious scrutiny. Learning to underwrite the risk in a project and how much it could potentially cost you is vital. Especially because I’ve learned through experience that a lot of what can go wrong in this game, will go wrong.
So, to all my fellow investors caught in hard times right now - I empathize with you. I just narrowly was able to stabilize my projects as the worst of it came, but I recognize that I could have just as easily been caught in the middle.
The takeaway here isn’t to be scared or to judge yourself. But rather, to develop an awareness about your own skills, judgement, and character, now that the over-stimulus isn’t there to disguise it.
I, and I think a lot of you, will walk away from this all with a much healthier dosage of common sense and returning back to the basics.
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