Home price indices have a lot of people spooked about investing in real estate, and rightly so. However, if you’re worried about residential home prices cratering before you invest in cash-flowing multifamily assets, YOU’RE DOING IT WRONG. We’ll break it down:
- First, real estate investment is a long-term wealth play. If you’re looking for 1-2 year organic appreciation, you’re not investing… you’re speculating. The ‘buy and hope’ strategy is never a great approach, no matter if it’s stocks, bonds, real estate, or alternatives. We on the other hand don’t worry about what the market does today, tomorrow, or even 6 months from now. We simply focus on buying, financing, and operating properties as effectively as possible with the thought that, over the next 5-10 years, there will be an opportune time to sell (or perhaps many).
- Second, this may sound crazy but to a large degree, we don’t care what residential prices do. That’s because we’re investing in cash-flowing commercial multifamily which is valued as a function of its income NOT home prices. The market is a pendulum that swings from excessive greed to excessive fear. It’s not our job to predict nor time markets. IT IS OUR JOB to underwrite to the downside, to not overpay on ‘the entry’, to finance prudently, and to operate these assets like the businesses that they are. The former is outside of our control, the latter is wholly within it.
- Third, we understand that short-term market gyrations & downturns are a feature of capitalism and not a bug in the system. Greed and fear are human emotions and, when inevitably carried to excessive levels, they create boom and bust cycles. Recessions happen, it’s a natural fact of life. You can’t prevent them, but you can mitigate your portfolio from them. While the average recession lasts 17 months, most of our assets are financed on 5-10 year debt. That means we don’t have to sell during tough times: now that’s true staying power! We have options including the opportunity to refinance at likely lower rates (which usually follow recessions due to Fed intervention). As long as we buy well, finance correctly, and operate effectively, we’re never backed into a corner during a downturn.
- Finally, and we’ve posted about this recently, but it’s often at points at maximum pessimism that real fortunes are made for the savvy investor with their eyes on the long-term horizon. When everyone else is doing their best Chicken Little renditions, the level-headed investor sees opportunity and cautiously gets to work. Zoom out: today’s rates of 7%+ on debt are a real shock to a market that has experienced financing in the 2-4% range for the past few years. However, we’re still a far way away from the hyper-inflationary period of the late 70’s and early 80’s when rates were in the mid-teens. Ask someone who bought real estate during that period and held for 5-10 years+ if they regretted that decision. No way.
We hope the above frames why single family home prices are largely irrelevant to prudent, buy-and-hold, cashflow investors like ourselves. We’ll post soon about why we believe any correction will be shallow and not resemble the ’08 crash in magnitude.
