By Jeffery S. Watson
This was the most frequent response I consistently heard from younger investors when I would remind them about the 1986, 2001, and 2008 to 2012 real estate market corrections. I would urge them to “stress test” their portfolios, meaning would their portfolio still cash flow if their operating expenses increased by 25% and rents fell by 30%. “Yeah, but….”
Have you noticed the big increases in real estate taxes and property and casualty insurance premiums? Expect those costs to continue increasing.
It is a fallacy to believe that tenants will be able to continue paying higher and higher rents. Wages are not keeping up with inflation. In the upcoming “stagflationary environment”, be prepared for rents to fall and vacancies to increase as more residential cost-sharing arrangements occur among friends and families. We saw it in 2008. Expect unemployment to increase as well.
If you are overleveraged and undercapitalized, you might have some time left to adjust. GET BUSY! Sell your weakest properties. Refi all of your hard money loans and short-term debt that you can. Attack all unsecured debt with urgency. If you have BRRR deals in the hopper, urgently complete the work and refi them or sell them.
If your LTV is above 65%, then I consider you to be at material risk of loss over the next 2-3 years. Hopefully I’m wrong, but it is better to mistake a large rock for a bear than a bear for a large rock. If you follow my advice and I am wrong, then we only lost some opportunities. If you ignore my advice and I am right, you could end up bankrupt or worse.