How you can actually benefit from the upcoming downturn in the real estate market. In these times you will have the possibility of borrowing money at a very ridiculously cheap low rate that it’s almost non-existent and that makes the money really cheap.
When we have a low supply that means that whenever the properties are hitting the market, they’re already hitting the market at a really high premium.
There’s very little housing available in the market and everybody wants to get their hands on it because of that cheap money. Because of that, what it creates is a bidding war situation. A bidding war simply just means the following: You see a house and it costs $200,000. You really want that house, you’re giving into your emotions.
You definitely don’t want to lose that opportunity, what you want to do is just bid $205,000 on a $200,000 home. Next thing you know, somebody comes in and finds out that you’ve bid $205 K. That person could offer $210 K. The next person bids $215 K to or 220, 225 and you see where this is going. That creates prices to go up even a lot more in addition to the fact that they are already expensive as it is.
The internal migration in the USA
What’s happening is that in big cities, such as California, New York which is highly dependent on Silicon Valley, you call it, Wall Street. These are people who would normally have the flexibility to work from home. Now with everything that’s happening with the pandemic and living in an overpriced area, a tiny little apartment, because you get to see those a lot in California and in New York.
A lot of these families are actually wondering if it makes sense to keep living where they are now that they can work from anywhere in the world? If you can work from anywhere in the world, then why not get the most bang for your money?
Then the second group of people are rich people, people who are migrating their money from the big cities to the rich states. California, New York, New Hampshire, they’re taking all that money and they’re parking it elsewhere. Why? Because they’re realizing that property values are coming down in those areas.
The internal migration it’s what’s causing all the housing prices to just basically boom and go up. Some people have lost their jobs and what it did was just the migration of investors. Instead of having the local people invest in real estate, they were getting people from other states to invest in real estate.
Bankruptcy as a result of the pandemic
One of the examples that they use in the article are companies like Neiman Marcus, Brook brothers and JCPenney. They were on their way to bankruptcy because they’re having a hard time attracting people to their stores. Everything in real estate, it’s a ripple effect. It always starts somewhere.
Then the fall of real estate is just basically a consequence of everything that has been piling up over time. Let’s just think about it this way: Neiman Marcus, they need customers, they need people coming into the stores, and buying their products. That’s how they pay their bills.
Amongst those bills, it’s the rent that they have to pay for the establishment that they’re using. If they don’t get customers, they don’t get money, they don’t accumulate enough money to cover their bills. Therefore they don’t pay their rent, which means the landlord is suffering as well because now that landlord has a lender to pay to, but how can they pay the lender if they’re not receiving rent money from their retail customers from Neiman Marcus, from Brook Brothers and JCPenney? This was something that was already happening because we live in a very digitized era.
Long story short: Malls are closing, and that means companies like Neiman Marcus, Brook Brothers, and JCPenney are not getting any sales. That has a ripple effect on everything that is happening.
What can you do?
You have to monitor the market. Monitoring it’s a very important component of investments. Why? It’s not just real estate, it is in any type of investment because you need to see the direction of where things are heading. The same thing with the property houses, you need to know where it is going to continue to go up, or when it is going to continue to come down.
It is very important that you monitor not only because of that but also because real estate is very local. States like California and New York, they’re experiencing the downturn versus other States in the South were experiencing massive growth because of the demand and the lack of supply and the excess money, and also cheap money.
Why do you need to do all of that?
You need to be ready. You need to be able to identify when is the perfect timing to jump in and also have the capital to be able to invest at the perfect time. Your options are to either sell or refinance, and once you get access to all of that liquid cash, you can reinvest it in another asset in the meantime, so it can continue to grow, and then when the time is right, then you can liquidate all of that and use that cash to invest. If that doesn’t work, you can work with companies like Fund & Grow.
What can we expect to see within the next months?
Within the next months, what we’re going to see, it’s an increase in the supply of properties. Why? Because tenants will eventually stop paying the rent and there’s certain categories that you need to pay attention to.
- The first one: Shopping centers and malls. Those are by far the ones that are going to start defaulting, and therefore we’re going to get more and more of that supply available in the market..
- Properties that are highly dependent on entertainment: Hotels are a great example of that. Hotels are located nearby stadiums. All of that has been shut down. We have restaurants, some of them are still closed and just working on delivery. Some of them are working at half capacity because of the restrictions on how many people you can sit in the restaurants. Clothing stores are now opening up and everything has been digitized.
As you know, hotels are highly dependent on entertainment, not a lot of people are actually traveling because of COVID, and on top of that theaters are closed and everything that’s related to that field is somewhat closed, so they’re not getting any guests.
These hotels also have mortgages, and because they’re not getting access to customer or guest money, guess what they have to do? They actually have to go to other lenders who are borrowing at a much higher rate just so they can take that money over here and have enough cash available to cover the mortgage
3. Offices: Why office spaces? The lease with office spaces, they worked a little bit different than when the usual residential leases that we all know about. Residential leases usually can go for a year or two. That’s on average how long they last, but anything that’s commercial, office space-related, retail space-related, those leases could go for five, 10, sometimes even 15 years.
4. Corporate tenants: They’re dumping excess office space, sending shivers through the market. A lot of these people, a lot of these corporate tenants, don’t have people working in their offices. Most of them are working from home, so they need to figure out a way.
What can I do to make things better and maximize my investment?
Well, if you were able to get a hands on a single family home, then you’re pretty much set because there’s always going to be demand for single family homes. Everybody needs a roof over their head, so single families and the funeral business are the only two businesses that will never go out of business, regardless of whether you’re in a recession, a depression, because everybody once again need a roof over their head, and people always want to send their loved ones off properly after they are diseased.
Second, if you get access to hotels, you can convert those into multifamilies. If you were able to get access to either hotels or office spaces, you can turn those into local storage. They have excess stuff that they’re going to need to bring back into a storage facility and keep them there because it’s not so easy to get rid of it.
We’re seeing a decay in malls and shopping centers, and that is a fraction of commercial real estate falling, but then we have this other fraction of commercial real estate going up in value.
People will probably have the need or the tendency to want to come back or need to come back to the city, so that’s where the multifamilies come in quite handy.
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