First, it should be emphasized that what was during the 2008 crisis is not necessarily true these days. Infected with a different crisis of its kind that it had not before.
However, crises are always a time of learning, personal growth, lesson learned and an opportunity to improve the decision-making process for the future. Crisis is a type of stress test and puts our investments and strategy under a certain type of load and shows us whether our economic decisions are up to the load test.
While I had a lot of conclusions from the 2008 crisis, both on a personal and business level, also with regard to investments and more, I will focus on the main conclusions in terms of investments.
Maximum leverage
Assuming the purchase is made with a mortgage.
The mood in the United States before the 2008 crisis was that the realtor did not stop rising, so the obvious conclusion was to buy as many assets as possible and to do so to leverage personal capital as much as possible. This means mortgages with 5% or 10% equity were very common at that time. The implication is that self-financing is so low when combined with such a high mortgage the assets will not generate a positive cash flow, meaning that the cash flow that the asset generates will be negative, though not dramatically negative, between $ 100 and $ 400 negative cash flow per month.
For example, if you take an asset that generates an average of $ 300 a month, or $ 3600 a year (before tax), but at the same time, it costs $ 15 a year, we can well understand the benefit of taking a negative cash flow. The problem is that as long as the investor can cover his personal income from the negative cash flow he will not have a problem.
When did a problem arise? As soon as the source of income that was used to infuse the money into the property is damaged (such as a job, layoffs, etc.). Maybe $300 a month doesn't sound like a lot of money, but as long as there is one or two properties it might not be a problem. But if there are 20 or 30 such properties and at the same time the livelihood is affected - then it directly affects the portfolio of the properties.
Conclusion: Buy a smaller number of homes, put enough equity that each property generates a positive cash flow, and in fact the property is independent of its owner - that is, avoid a situation where the property owner has to inject money into the property on a monthly basis.
Note: Some readers read these lines and say to themselves "obviously, and how can it be that someone invests in such an irresponsible way" etc. But a few things need to be remembered. The first, was an optimistic mindset that led to such moves. Second, even today if you look at the conduct of real estate investors who have not gone through the recent crisis, you see quite a bit of complacency and high self-confidence that leads to decisions that do not always take into account that there is a crisis on the horizon. An Israeli who started investing 10 years ago and experienced successes feels like he has cracked the method because for the past ten years he has enjoyed a strong back wind. In this spirit she was able to make up for various mistakes, glitches, and decisions. This means that it is very possible that the back wind has offset 30 percent of the planned profit but still remains with a nice profit.
Obscene assets
The second conclusion was to invest in the most boring assets possible. And work according to a formula that adheres to the identification of these assets. In my world, boring properties are characterized as follows: BTSK (detached house) in a suburb of a large metro, ie a metro of over a million and a half people, a metro with the presence of not only many large employers but also businesses representing different and diverse industries, in middle class neighborhoods With good schools and sought-after areas, in countries where the laws favor the property owner rather than the tenant and in countries that show strong positive immigration.
I will give an example of a metro that almost fully meets these parameters and yet throughout my career I have avoided it - Las Vegas. Las Vegas meets almost every criterion according to the formula above. The only thing missing is a variety in the type of employers. It is impossible to say that Bogas does not have large employers but they all almost without exception represent one industry - the entertainment industry. Unfortunately and evidence Vegas these days is a kind of ghost town. That is, for me, only the lack of industrial diversity of employers prevented me from making investments in Vegas for more than a decade. And I know very well that there are quite a few people who have invested in Vegas and also made a lot of money. But one should always remember that everything goes back to the investment strategy. My investment strategy and the one I lead with the real estate investors I work with is to buy and hold for many years, i.e. at least five but probably more than ten years. Therefore an area like Vegas does not respond well to this strategy.
Short term rentals (IRB and IR)
Throughout my career I looked in this direction. Every time I look at the direction of a new investment channel, I always look at it not as a one-time thing, but whether I can create an organized investment plan from it. About six months ago, here at the company, we made a more in-depth move that examined the whole issue of investments in properties that are suitable for short-term rentals such as IR B&B. The conclusion was not to go into it. No, I have not seen a crisis of this type that would affect this category so much. I was mainly disturbed by the volatility of the local regulation. I have seen quite a few cities that decided to allow short-term rentals and then went back on the decision and I was mostly amazed that after so many years B&B was still operating the issue This one is not resolved. Today I look at Air B&B as a kind of bonus, meaning something I can do for short periods for these and other reasons but not a long-term solution.
How to identify a boring investment: My rule of thumb has always been - if an investment type sounds cool, exciting, cool - it's not a boring investment. For example, when someone came to talk to me about student housing files for me, it sounded the opposite from boring and to this day I have avoided it.
Is my truth the one and only truth?
I would like to say yes but that would be wrong. Each of us has to decide what is right for him as a real estate investor. Each of us has a set of values and there is his personal truth and financial condition. What is right for me is not necessarily right for you. And so the type of investment I am talking about may not be right for everyone, which is fine of course.
If there is one thing that has guided me since the last crisis in deciding where to invest and how to influence it is the starting point of this decision making. My starting point was and still is "What is the chance of the area or of the property surviving the next crisis?" I have no doubt that this is a question that stems from fear. But this is a question that is asked in order to protect the investment that I or one of my clients is about to make.
And here I want to open this question to you - What are the questions you ask yourself about investing at the strategic level? In other words, it is less interesting the age / size of the property, what the apartment is and what the return is, but what are the parameters of decision making?
Responses