Preparing for a Recession
It’s clear that we have hit a black swan event, something no one was fully prepared for. This was not due to a weak economy, loose borrowing or any other of the things that have caused previous recessions. We are now seeing an unprecedented amount of unemployment filings, just a few weeks after seeing the lowest amount of unemployment filings in the past 50 years. We are also seeing major government stimulus packages, including the $2 trillion package to benefit both the general working class and small business owners.
Along with that we are seeing mortgage forbearance allowed for homeowners and a freeze on evictions. Banks have also begun to freeze their commercial real estate lending and tightening lending standards for homeowners and businesses after a long bull run of easy money lending.
Right now, there is a lot of uncertainty. Uncertainty in the health of our families and loved ones and uncertainty in our jobs, businesses and the overall economy. This could still play out many different ways and we pray that it plays out in a way that hurts the least amount of people, both financially and economically.
While there is a lot of uncertainty in the market we understand that with all of this will bring opportunity. This certainly could bring about large changes that allow for us to purchase value add assets at rock bottom pricing. While that will be a great opportunity, it is the companies with the greatest amount of cash and willingness to act, while others are frozen, that will come out on top.
With all of that said, here are what we are doing to prepare for what is to come.
In the short term:
- Stop unnecessary capital improvement projects
- Hold on to cash reserves
- Delay maintenance that doesn’t negatively affect our property or tenants
- Reduce payroll if needed
- We have requested that our property managers apply for SBA Payment Protection Plan in order to keep staff
- Focus on tenant relationships
- In some of our assets that had a lot of tenants effected by layoffs we offered 15% off of April rent if they paid on time.
- Gave a roll of toilet paper to each unit with a note
- Sent a letter to all of our tenants with a list of resources to apply for assistance.
- Allow tenants to work with us on rental assistance to work out payment plans
- We are stressing the importance of paying rent so that tenants don’t get behind on rent
Tenant relationships are vitaly important at this point in time. We want to ensure that our residents feel safe and certain that they will remain in their home. We are all in this together and want to let our residents know that we care about them.
Where do we see opportunities in Future?
Many businesses and real estate owners may become distressed in the near future. What will happen is that the assets will come on the market and get purchased by investors, but as more hit the market, the demand will not be able to keep up. As the inventory grows and sellers become more desperate, the deals will get cheaper.
When do you buy?
That is hard to answer. You certainly don’t want to wait until the “bottom,” because you will miss a lot of opportunity, plus, you’ll only know when the bottom hit well after. I was fortunate enough to start buying in 2008 when the market was down. The cash flow was amazing and pricing was low. After I bought and renovated, I was able to create substantial equity. The market, however, continued to lose value and the equity that I created shrunk. Eventually, however, the cash flow increased and values more than doubled.
My answer is you need to take some risk. When you see the pricing get to a point that is 10-20% lower that it previously was, take some risk and jump in, as long as the cash flow is there and you can have your 9-12 months of reserves. You may lose equity, but that will go back up and then some as the market improves.
Financing gets difficult: When prices go down and opportunities flood the market, banks put their guard up and don’t want to lend. It’s the best time to buy and the banks should want to be lending. That’s not how it works. Banks lend when prices are high. In fact, their highest level of lending and risk taking typically happens right before the bubble bursts. When the bubble burst, they run for cover and wait to lend until the next bubble forms.
Cash is King: Distressed deals need a lot of capital. Even stable deals will require more capital, so having access to capital is very important. Now is a great time to call your investor contacts and discuss with them their plans, as well as your plans. People with wealth are still looking for great places to put their money.
Looking for trends: With what is happening, we may see a flight from large cities to smaller cities and suburbs. People are being forced to work from home, if that trend continues, people may not have as much desire to live in a densely populated urban area, where they have higher expenses and exposure to a future virus.
Opportunities: With each down turn comes new opportunities. There are certainly opportunities that will present themselves as things shake out. We are going to be keeping our eyes and ears open. Studying market trends and listening to what consumers want will allow us to provide solutions to people as things stabilize.
Right now, we are paying close attention to small to medium sized business in industries that we feel are growing. There could be some great opportunity coming down the pipeline with businesses that could not sustain through this time or businesses with owners looking to retire.
Strengthening our Business: More than ever, relationships will be key to growing your business. From building relationships with investors, to potential partners, brokers, lenders, property managers, etc you will want to connect with people. Even during this pandemic, you can connect via video conferences, phone, social media and so on.
Looking at our business during good times is important, but when a black swan event comes about, it really puts things into perspective. This is a great opportunity to look at the strengths and weaknesses of our business and make the strengths stronger and work on ways to fix the weaknesses.
Having the right processes and systems in place will help our business grow exponentially as we exit out of this. There is a lot of brainstorming and putting the pen to the paper in order to create a stronger and better business that can better serve our residents, employees, partners and investors.
What does the future hold?
We know the future will be different. We need to take the lessons that we learn and apply them into our business and life moving forward. Bad things are happening with COVID-19, but out of this we can become stronger and better business owners, parents, spouses, etc. Don’t let this opportunity slip by.