2023’s Best Opportunities

Posted at January 17, 2023 Posted In Equity Insights Newsletter

Victory comes from finding opportunities in problems.” – Sun Tzu

For most investors, identifying the current problems in the real estate market is easy.

  • Cheap money has over-inflated real estate values
  • Tenants are squeezed by inflationary pressures on their budgets
  • Higher mortgage rates eat up positive cash flow
  • Supply chain and labor constraints delay most projects

To be fair, real estate investors have had some really big wins in recent years.

  • Massive equity growth
  • Reduced debt-service with fixed mortgage rates at record low levels
  • Impressive rent increases

(To discuss harvesting your gains, Schedule a Personal Strategy Session here)

Taking a broader perspective, to feel doom n’ gloom about real estate investing may hint of unseasoned entitlement (as the quote below highlights).

Most people miss opportunity because it is dressed in overalls and looks like work.
– Thomas A. Edison

What? Work?!? Who needs to do that?

After the ride we’ve had on the coattails of massive QE (a.k.a. money printing), it’s no wonder we’d prefer to wait for the next rescue rush to jump in and ride our assets higher (Fed pivot, anyone?).

The hard truth is that sustainable financial gains are a derivative of productivity gains.

The era of decreasing productivity (ex. health-based economy shutdown) and yet, increasing returns in stocks, bonds, real estate, etc… has been sending investors false signals.

It’s been telling capital you’ll be easily rewarded in low-productivity sectors.

While there’s nothing wrong with some entertainment, if we shift our investment and workforce toward building apps to share pictures … Where’s the essentials, like energy, housing, and food, going to come from?

Today, as higher borrowing costs dry out liquidity for excess speculation …

There’s good news! A return to true investing is underway.

True investing (as opposed to gambling) does not base its success on speculation in regard to Fed policy. When the tide goes out (as the Fed pulls the easy-money rug out), true investors are still clothed (their investments are still standing strong).

Fundamentally sound investments do not need mortgage rates to come down, asset prices to inflate, rents to rise, etc… in order to create a risk-adjusted reasonable return. While there’s no risk-free investment, there’s a difference between well-underwritten investing and gambling.


Finding 2023’s Best Opportunities in Real Estate …

  • Value-Based (vs. value-add). Rather than needing a renovation project to go as planned and on time before your interest carry costs increase, value-based investments work as-is and any improvements are icing on the cake.
  • Cash-Flow (vs. equity growth). Passive equity growth is primarily driven by loose fiscal and monetary policy infiltrating into housing that’s in high-demand. With The Fed raising interest rates, they’re creating headwinds for price appreciation. Investors gaining returns through cash flow, don’t require new equity growth to get a return on their investment.
  • Steady Returns (vs. unsustainable returns). Nothing about the last few years has been sustainable. Good for you if you seized the moment to lock-in fixed rate debt at more than half the rate of inflation! Going forward, average investors might expect returns on investment that beat inflation by a much smaller margin. Chasing higher returns will either come with much higher risk, or much harder work.
  • Hidden (vs. easily available to the public). There’s a lot of capital searching for yield. Competition is still strong and most investments available to the masses will result in prices being bid up to “dumb money” levels. The best opportunities will likely be found being networked with local wholesale and property management teams.
  • Active (vs. passive). This is where the return to real, hard work comes into play. In order to get higher yields, it’s going to take effort. Examples could be better management teams, short term rentals, shared housing, assisted living. For more passive investors, partnering with a syndicator who is putting in this effort on your behalf may be the way to go.
  • Affordable Markets (vs. high end markets). There’s not much evidence to support a reversal in the trend of folks moving to more affordable markets. Recessionary pressures ticking up will only further shift demand unequally toward low-cost, low-tax, business/job-friendly markets. On the contrary, to go against the grain of where businesses, people and investors are flocking could have its rewards, but this would be a rare deal (in that case, knowing you’re “against the grain” would be crucial).
  • Creative (vs. traditional). Typically mom and pop investors buy a single family home to rent out on a long term, annual lease. In some markets with the right property management teams, this is still working well. But to increase yields, it may be time to look at offering tenants lease options, renting out rooms individually vs the entire home, repurposing or adding a bedroom or two. Another idea could be shifting some of your portfolio to the debt side through trust deeds or seller-carry backs.

Smart money is accepting of a much-needed correction in the real estate market. Savvy investors remain poised and ready to take advantage of real, valuable opportunities as they are discovered.

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