How to Prepare for an Oversold Market
Author: Shawn Parker Sr, March 6, 2020
- (By a Broker who thrived in the last over sold market)
Real estate has been on a hard and fast run for over 5 years now. Many people are asking themselves “How high is high?” and “When will the crash come?”
First off, lets talk about the reality of the market we are in and what is the driving force behind it.
In 2012 we had TARP 1 and 2, quantitative easing, and various economic stimulus packages directed at Wall Street Investment Banks. These were the people that brought us the artificial exuberance that put us in the mess, so I still laugh that they were the same folks who went to the Fed and Treasury and offered the “solution”. At the time I told our investors that a massive bull market in real estate was forming as the trillion dollars plus packages would be absorbed in a feeding frenzy on Wall street, then they would seek safety and real estate would return to its proper throne as the basis of the free market economies. That is exactly what happened!
Today we see world markets clamoring to get into the US markets with the investment grade places they understand. The challenge is that the world sees the US as five or six name brand city markets. Just like we don’t understand that China has 160 cities with populations over one million people (try to name 10 cities in China, then realize that you don’t know the next 100 plus!).
America is, and remains since WWII, the gold standard of all investment. At our core basis it is our freedom and justice that they want, protected by our strength. That is why today cities like Madison WI, Columbus OH, and Indianapolis IN, are the smart plays, for those that understand our demographics. These are recession-resistant markets that wont rise nearly as high, or fall as deep in a hiccup or problematic market. They are now part of the global inflow of capital!
Cap rates continue to be the best measure of risk as it relates to real estate. Astute investors understand that a capitalization rate is the barometer of change and that is much more than a number.
How do you protect your investment and your money?
Over- leveraging is the 6000 pound gorilla in the room. Every book you read talks about the power of leverage. It is true; it can and does often work, but when it doesn’t it doesn’t. Plain and simple.
The vast majority of real estate failure and Wall Street failure are the placement of capital and hopes into the same bucket, and then foolishly believing that the hopes can protect the capital when misfortune happens.
Think twice about taking an 80% mortgage when 70% is nearly as comfortable. Your banker will like you better, and should a storm hit, they will work more closely with those they believe are smart and can manage money. They too assess the quality of their loans and the quality of their clients.
They will decide who their efforts are best spent on to save and who needs to drown!
Buy quality and have a portion of your portfolio in high quality!
Did you ever drink a cup of great coffee? We've all had a cup of regular coffee, and occasionally a bad cup. People will always want and pay extra for the good stuff. Same in real estate; you might make more money in the commodity side schlepping the “stuff”. But then, there is the person who holds the keys to the good “stuff.” You will pay more, do more and act differently to get the good “stuff.”
Same principle in real estate investing. Problem is the golden deals don’t float around openly. Consider overpaying from time to time to get some AAA quality properties in your mix. These are the properties that you will retire with, and so will your kids/ grand kids if you teach them to value the real estate portfolio you have built for them!
So effectively, buy smart, convert to quality as you grow your holdings, and sleep well at night. Along the way, enjoy a cup of the good “stuff” too!
Shawn Parker Sr. - Principal
Lonicera Management, LLC
March 6, 2020
More about Shawn Parker Sr.
Shawn Parker is Founder of Parker Realty Associates, and a Managing Partner in Lonicera (Private Equity Real Estate funds). Past President of the Ohio Commercial Real Estate Exchangors, and co- founder of the Ohio Neighborhood Preservation Association. Shawn has serves as Receiver to the Courts of Common Pleas and Municipal Courts on multiple real estate and operating business matters.