Navigating Uncertain Times
be “Fearful when others are greedy and greedy when others are fearful." -Warren Buffett
Greek philosopher Heraclitus, is quoted saying "change is the only constant in life." And isn't that true. Within the last couple of years we have witnessed the effects of coronavirus, an uncertain and turbulent stock market, rising inflation and interest rates, increased political polarization and much much more. And along with these changes, we've also seen the downfall of businesses and industries, and the rise and flourishing of others. In other words, when things change fast, some people lose big while others win big. One thing that hasn't changed is our appetite for respectful and affordable housing. Through the turbulence, our portfolio has continually proved to be strong. This includes strong collections, occupancy and overall financial performance. The simple truth is when times get hard, affordable housing only increases in demand. And times are getting harder.
Inflation - A growing reality caused by recent printing of the US dollar.
As of this writing, our lawmakers recently passed a $2.2 Trillion stimulus bill in response to the Coronavirus outbreak. This is unprecedented printing of money in our country. Because of this, it is our belief (along with top economists), that our country will see inflation rise from the current 3.5% - 4% to 7.5% - 9%. That represents a substantial decline in the power of the US dollar. Other than buying commodities like Gold, real estate is the most powerful vehicle to hedge against inflation.
Furthermore, the Feds have decreased the Federal Fund rate to near 0%, which has a direct impact on commercial lending. It is our intention to capitalize on this perfect storm. By acquiring properties with extremely low, long-term fixed rates, we will set the course for long-term profits. As inflation increases, so will the cost of living and rental rates. Low and fixed debt service paired with rising rental rates will allow us to increase yields and greatly grow the value of our assets.
Why will there be deals in the upcoming market?
Fear and emotional response
Decreasing rents/Occupancy - Rapid value decline
Negative cash flow
Lack of financing
Difficult financial positions, due to owner's outside business interests
What is our strategy?
Buy into value & below replacement costs
Focus on strong cash flow
Finance properties with long-term, fixed interest, non-recourse debt structures
Purchase in areas with strong demographic fundamentals (job/population growth, employment diversification, etc.)
Focus on the ability to force appreciate/add value (see our investment thesis)
Hold properties through the up cycle
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Fear and the velocity of fear will create opportunity. And this is precisely when great wealth is built.
As we approach the market, we as a company are gearing up to capture the unprecedented value created by this turn of events. Our investment thesis stands strong. We are focused first on strong cash flow, followed by the opportunity force appreciate the asset. By acquiring assets at a discount (below their replacement costs), we will be rewarded greatly for holding through the next market cycle.