It is more important for continuous learning now than ever. As the CEO and Co-owner of a growing turnkey investment real estate company, it is important for me to absorb as much as I can about the trajectory of the industry. One common mistake when learning about economic factors and their potential effects is only relying on one source and an overly-optimistic viewpoint. It is not a negative to be optimistic, but it should come from an analysis and conclusion after cross-referencing both sides of the spectrum. That is why my business partner, Mike Palikij, and I attend numerous seminars and conferences that share opposing viewpoints.
I will draft a follow up post about what I learned about best management practices and increasing leasing efficiency with new tech in the next couple of weeks.
Quick Outline of My Post:
1. IMN SFR West Conference in Scottsdale
- Outline of my takeaways from my visit to Scottsdale- Optimistic industry specific point of view (not wrong, but optimistic)
2. Cross-reference and Outline of Yahoo Finance Interview with Jeffrey Gundlach, CEO of DoubleLine Capital
3. My Opinion of 2020
IMN SFR West Conference:
Future of SFR Takeaway: One of the panel discussions mentioned that it important to establish a niche strategy and be confident moving forward with it. They stressed that primary markets have peaked, which is why more investors are moving towards Midwest markets. They were optimistic and said it is a good time to start holding in these markets instead of reselling in primary markets. Also, research where institutional corporations are buying and look into those and surrounding markets. One of the most important aspects was that increasing your holdings currently is important to take advantage of the low interest rates and getting locked in for long-term financing with a high level of focus on capital cost.
Another topic was, with this focus on increasing holdings, they said investors need to be open to the idea of widening their "buy box," or their property criteria (1. my opinion of this below).
The conference also had a very strong presence and opinion that Build to Rent property is a good idea to look into (2. opinion below).
Also, they stressed that institutional corporations are buying in areas decreasing the inventory for individual investors to take advantage of the same opportunities.
There has also been a lot of chatter about the end of Federal Conservatorships. But, the panel's opinion is that the the fed, "doesn't want to pull the rug out from under the mortgage industry." This could lead to catastrophic effects to the economy that would not benefit anyone. There is a focus of balancing the economy the best they can. The doomsday rhetoric is not as accurate as the media portrays, but a more gradual shift to allow time to keep up with a shifting strategy and still taking advantage of lighter interest rate scenarios during the process.
My Opinion:
1. One item I did not necessarily agree with was that they mentioned being open to the idea of widening your "buy box." I think that depending on your acquisition capability, this could be a good or bad strategy. If you're growing at a modest personal level, I think that it is still important to be choosy with neighborhoods and areas to decrease the potential fluctuation in tenant quality and resale potential. There are still plenty of opportunities out there. It is important for out of state investors to find a team that has established relationships with market-specific wholesalers and agents with a priority purchase relationship.
We have spent our careers developing these types of relationships to continue our ability to provide clients with quality property without needing to be less quality focused.
That being said, if you are buying in high volume with a large asset base and cash flow to offset and allow for this diversification, it could be a good way to boost the portfolio, especially if a top-notch management team is established.
2. Build to rent is new. I am not sure I have the experience to have a strong opinion for or against this topic. I think there is a potential for an unjustifiable premium if you can get quality redeveloped property in already stabilized markets.
Overall, everything relies on an individual investor's risk tolerance. I still think it is the safest bet to find an educated and trust-worthy team with boots on the ground in your target market and get their opinion of growing sub-markets with higher appreciation potential if you have a moderate to high risk tolerance.
Yahoo Finance Interview with Jeffrey Gundlach, CEO of DoubleLine Capital
This interview focused on the trend of the bond investor:
"Gundlach is one of a few investors who sounded the alarm in subprime that led up to 2008's credit crisis. In June 2007, he said subprime 'is a total, unmitigated disaster, and it's only going to get worse.'
He successfully navigated the credit crisis for his clients and put money to work in beaten-down mortgage bonds in 2009 and significantly outperformed.
But Gundlach believes the next crisis will be more severe — and it will be in corporate credit, where companies are holding high record levels of debt on their books. He also pointed out that the corporate bond market 'probably significantly overrated, which sounds a lot like subprime in 2006.'
When the next downturn hits, companies won't address their leverage ratios, and there will be 'en masse downgradings' in the investment-grade corporate market, resulting in 'significant divestment of a lot of naive money,' the investor warned.
For that reason, Gundlach argued that now is the time for investors to be playing defense. He recommended that 'corporate bond exposure should be at absolute minimum levels right now.'
It's also Gundlach's contention that in the next recession, U.S. stocks will get 'crushed' and never recover to pre-crisis levels in the remainder of his career." - Julia La Roche Yahoo Finance Dec 9th, 2019 transcription of interview with Jeffrey Gundlach (quoted in transcript)
To me, this is not a good sign for traditional investing strategies, but he does not mention mortgage debt specifically being the issue, but corporate debt and inflated bond values. He does mention low interest rates, but focuses on this type of debt for the most part. But, this is why we have seen a shift of institutional corporations buying single family. The truth is it is an alternative investment strategy. Also, rental demand increases during economic downturns and moderately priced markets see a lot less fluctuation during periods of recession.
My take away is that it is time to take advantage of low interest rates and buy single family or small multi-family residential while mortgage interest rates are low. In no way am I a financial advisor, but this is my opinion. It is also my personal strategy right now.
