INVESTMENT

Here’s why I’m pro-real estate এমনকি even in 2021


Real estate has some special and important features that make it more attractive than any investment option.

Stocks are terribly overvalued, and running a business requires all sorts of risks and headaches such as volatile consumers, employee problems, and wazur competition.

Real estate is very wide, and lets you choose specific assets, markets, submarkets, tenants, leverage points, partners, asset classes and strategies. These variables allow you to fine-tune a strategy that can work in all kinds of economic situations.

There is a demographic tailwind in the workplace combined with government policies and supply issues that all support a warm thesis of residential real estate. Industrial, manufactured homes, senior housing and self-storage also have some of these features in varying degrees.

I believe that the last recession has left a false impression on many people who believe that real estate will crumble with the next recession. Here I show that a lot of real estate works quite well during a recession, and if you do it right, the recession can actually present exciting shopping opportunities.

Denial

  1. I think in some cases it’s okay to call it another housing bubble, in the sense that prices are going out of control. This means it will pop violently and soon. I hope the show is a tough call.
  2. I think the stock market is in a bubble of epic proportions and could actually spread violently in the near future. The stock could crash without an economic downturn, but if it does erupt, it could have a psychological impact on the economy.
  3. I think a recession is certainly possible, but I don’t necessarily think it will crush real estate investors who are smart.

The largest segment of the U.S. population has now reached the age where they will begin to look to buy a home. On top of that, the government has just started sending monthly checks up to $ 300 per child per month. A family with three children will receive 750 to $ 900 per month for the rest of the year. I believe this credit will be renewed in January, or indefinitely as a backdoor method to move towards UBI.

Much of that money is going to housing. And builders can’t literally build homes for the average buyer at an affordable price.

What happens when demand is high and supply can’t keep up? If you answer “price goes up,” go to the front of the class.

Looking ahead, we may see for the first time homebuyer credit, student loan waivers, and political infrastructure projects. All of this will increase the demand for additional housing by raising funds directly into the hands of housing borrowers or by increasing the cost of materials and labor in the construction industry.


More about today’s economy from BiggerPockets


What about the recession?

It turns out that real estate usually does quite well in a bad economy. Not necessarily in a severe recession, but in an economy where growth is low, and inflation is low.

Because? In that environment interest rates are low because there are a lot of bank deposits and there is a lack of good places to invest, so capital flows into areas that have moved steadily without high growth. People will always need places to stay and keep their things, so capital flows into high growth, exciting investments and real estate.

Let’s take it on the chart. Here is the real GDP per capita during each recovery since 1950.

You will notice that if we omit the two very short recovery times sandwiched between the mid-50s and the mid-1980s, our economic growth over the last 20 years has been lower than the star and above all other recovery. Less. .

The root causes here are manifold, but the main ones are the reckless Federal Reserve policy and high government spending and deficits, which increase private investment and allocate resources to less productive areas of the economy.

And how has residential real estate done in that time?

Quite strange, everything has been considered.

Fred 12

Now let’s see what the prices have been like during the recession.

The average price of a house

Generally speaking, housing prices don’t hurt too badly during a recession. The recession of 2008 was different because housing was the root cause of the problem, and housing was subject to revision.

What is different this time?

We all know that now there is no 100% LTV no-dock “false loan” mortgage. Most of the mortgages were given to highly creditable buyers, especially as the epidemic grew.

Ultimately, as crazy as it may seem, housing can be more affordable than you think.

The first time I saw this chart, I had to take a double, rub my eyes, slap myself, and then look again.

Mortgage payment

Here’s how I got the data.

I pulled out quarterly mid-sale prices, 30-year mortgage rates, and disposable personal income data. I have estimated 20% down payment on the value of the house over time and applied interest rates when bringing the payment to the middle house. Then share by disposable personal income and voila!

Due to extremely low interest rates and a decent increase in disposable income, housing (at least in terms of cash flow) is more affordable than ever.

This does not mean that down payment is incredibly difficult at this level, or that people do not have any other bills that they did not have before such as student loans, auto loans and more money towards cell phones and other technologies.

Given the Fed’s policy on interest rates, it’s also quite artificial, and if interest rates rise significantly over the long term, it could collapse.

Even so, owning one is still beyond the reach of the average person.

When I put all of this together – multiple reasons for increasing demand, limited supply, general real estate performance during a recession – I start to feel pretty bright, and I’m not afraid of a recession.


How to be v5

How could it be wrong

You can learn what goes wrong and how to avoid it if you are going to navigate this sticky water.

The two main things that can really hit us here are 1) the steady rise in interest rates and 2) a severe recession that is long enough in the eyes of the bank to bankrupt our assets, and therefore unable to reschedule or reschedule.

Interest rate

I could see a spike in the 10 year treasury. It may even come back to 3%, but I don’t see it lasting. Remember, we have got this horrible economic situation.

The current statistics are as good for housing as they are for the larger economy. And the more debt there is in an economy, the less likely it is to grow quickly.

When the economy is strong you get high interest rates and there are plenty of investment options – when banks have to compete hard for deposits and there are plenty of opportunities to lend money. We’ve got debt, the working age population has shrunk, and banks have a lot of deposits and some high-quality nnding opportunities.

Fred 2
Fred 3
Fred 4

I think interest rates will probably compound but generally remain in the long-term downward trend that we have seen over the decades. Yes, if politicians really evade it, interest rates will probably be even higher. But I can’t bet it as my base case.

Economic / re-schedule risk

The way we avoid this problem is to structure our agreements properly. In short, this means moderating leverage, focusing on long-term fixed-rate debt, and ensuring that you save a lot of capital for short-term disruptions to capital expenditures or cash flows.

Here is an example for you. Suppose you pay 5% cap for a contract with a 60% loan, which is fixed at 3% interest for 10 years. Assume a 3% rent increase and a 2% cost increase and you are planning to hold on to the long term. What would it look like here.

Years D 2 3 4 5 6 7 8 9 10
Rent $ 2,000,000 $ 2,060,000 2,121,800 2,185,454 $ 2,251,018 2,318,548 $ 2,388,105 2,459,748 $ 2,533,540 $ 2,609,546
Cost $ 1,000,000 $ 1,020,000 $ 1,040,400 $ 1,061,208 $ 1,082,432 $ 1,104,081 $ 1,126,162 $ 1,148,686 $ 1,171,659 $ 1,195,093
Net operating income $ 1,000,000 $ 1,040,000 $ 1,081,400 $ 1,124,246 $ 1,168,585 $ 1,214,467 $ 1,261,942 $ 1,311,062 $ 1,361,881 $ 1,414,454
Loan service 607,110 607,110 607,110 607,110 607,110 607,110 607,110 607,110 607,110 607,110
Cash flow $ 392,890 $ 432,890 $ 474,290 $ 517,136 $ 561,476 607,358 654,832 703,952 754,771 807,344
Service and service coverage ratio 1.65 1.71 1.78 1.85 1.92 2.00 2.08 2.16 2.24 2.33
Cash Cash 4.91% 5.41% 5.93% 6.46% 7.02% 7.59% 8.19% 8.80% 9.43% 10.09%

Now let’s see what happens if a 3% rent increase due to an unusual recession leads to a 5% rent reduction for three years straight before resuming (much worse than what happened in 2008).

Years D 2 3 4 5 6 7 8 9 10
Rent $ 2,000,000 $ 1,900,000 $ 1,805,000 $ 1,714,750 $ 1,766,193 $ 1,819,178 $ 1,873,754 $ 1,929,966 1,987,865 $ 2,047,501
Cost $ 1,000,000 $ 1,020,000 $ 1,040,400 $ 1,061,208 $ 1,082,432 $ 1,104,081 $ 1,126,162 $ 1,148,686 $ 1,171,659 $ 1,195,093
Net operating income $ 1,000,000 880,000 $ 764,600 $ 653,542 $ 683,760 $ 715,097 $ 747,591 $ 781,281 $ 816,206 $ 852,409
Loan service 607,110 607,110 607,110 607,110 607,110 607,110 607,110 607,110 607,110 607,110
Cash flow $ 392,890 272,890 157,490 $ 46,432 $ 76,651 107,988 $ 140,481 $ 174,171 $ 209,096 245,299
Service and service coverage ratio 1.65 1.45 1.26 1.08 1.13 1.18 1.23 1.29 1.34 1.40
Cash Cash 4.91% 3.41% 1.97% 0.58% 0.96% 1.35% 1.76% 2.18% 2.61% 3.07%

Here, even at the bottom of the rock you are covering the debt with some cushions. Life goes on. You are not happy, but you have cash flowing. But see if you are a wise man and you decide to use 70% leverage.

Price to an Minimum debt service coverage ratio
50% 1.29
55.00% 1.17
60.00% 1.08
65.00% 0.99
70.00% 0.92
75.00% 0.86
80.00% 0.81
85.00% 0.76

In 70% LTV, you are not covering your cover. Now you need to raise new capital, sell in a weak market, or return the key to the bank. Boom. The face is torn.

The same is true if you use a variable loan or take out a short loan. You can get caught and become a seller by force. But with long-term fixed-rate debt on a moderate LTV, if you buy a good deal in a good place with good fundamentals, you can come out right on the other side.

In that case suffering other people is your gain. You can be a buyer when their fire sale happens because the bank is shutting down.

I am really bright in real estate because the supply / demand dynamics is in favor of more profits; Because the crappy economy will benefit real estate on a relative basis and will attract a lot of capital; This is because interest rates are likely to remain low without a real fixout on inflation; And because good real estate investors can structure and acquire unique contracts based on a given asset, market, situation and investors to reduce the biggest risks if we can get a recession.

Yes, there are risks. There are black swans that no one sees on the internet except those guys who have been screaming about this every day for 10 years until they are finally “right”. But that is investment. Taking appropriate risks to create strong returns. If you are not comfortable with this, stay with the treasury bill.

For me, I feel comfortable taking smart risks that are managed through a robust investment process, from research to evaluation to structural management.



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