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Investing: The Name of the Game is Cash Flow


In this article by Forbes there is a lot of discussion on how to use a recession to your benefit. Knowing you can buy low and hold until you can sell higher is an obvious answer but involves some Rainman type sense. The key point I want to focus on is cashflow. Cash flow is king. Purchasing assets that generate more income than the upkeep, initial investment, and profit on top of that. Rentals are a great and proven way to use this. When interest rates get high, and prices inflate, rentals fill up and become scarce. But remember no matter where you rent, you are typically paying someone else’s mortgage…and then some!

The Real Estate Walking Dead: Three Tips To Surviving Your First Recession

The S&P 500 declined 7% as 2018 came to a close, according to Investors:“That puts 2018 on track to be the market’s worst year since the Great Recession sell-off in 2008.” Many believe a recession is coming, yet no one knows when. Having been too young to feel the blow of the 2008 recession, I find that young professionals like myself are perplexed as to how to view the real estate market today.

Stories recounted to me by real estate veterans play on repeat in my mind as I underwrite new deals: They talk of 2008-2009 as if it was the Real Estate Walking Dead, brokers canvassing the streets of NYC like zombies. They share their insight to let me know that when you’ve only seen a rising market, it’s difficult to imagine the challenges of a downturn — even the wealthiest and smartest investors got bit.

Determined to do my best to predict the next downturn, I’ve read countless research reports about the causes of the Great Recession, only to conclude that a recession is only as bad as it is unpredictable. Instead of continuing to feel paralyzed by contradicting reports, I’ve done my research and developed three tips for investing in this unpredictable market.

Dream While You’re Awake

Many of the properties I have been underwriting for the last two years have been overpriced. That makes it seem like it may be easier to leave the investment opportunities sitting in my inbox unread during these unpredictable times. But the reality is no one will call to tell you when the market is at its bottom, so you have to stay alert. Some of my most successful peers began investing between 2008 and 2011. They looked at every deal with the same excitement and attention and developed consistent broker relationships.

When a downturn does come, it will be crucial that you know what properties are available and where things have been trading — brokers need to know you are still active. Dream while you’re awake: Look at every deal as if it is your dream deal, yet stay awake. Don’t buy if it doesn’t pencil today, but keep checking in with the broker to see if the deal metrics have changed.

The Name Of The Game Is Cash Flow

In 2015 and 2016, my associates and I were watching properties trade at twice the price they were bought for in 2010–2014. It seemed as if all we had to do was buy a deal and we would do well. While that may have been true then, the market has changed. Now, many properties are selling at breakeven and in some cases at a loss from their pricing in 2016; appreciation is no longer a metric to underwrite. Rents have been falling in major cities across the nation.

Now is the time to buy assets that are cash-flow-positive from day one after paying debt service on long-term debt. Underwrite stagnant rent and, in some cases, account for rent decreases — The days of automatic 3% annual rent increases are long over. Having to refinance or sell a property in a downturn can be miserable: Your rents are lower, your debt options are slimmer and your basis is greater than the value of your current debt. Having cash flow and long-term debt in a downturn is like having a closet full of bottled water and nonperishable food in an apocalypse.

Double Lock The Doors

Have a unit that is below market, but haven’t had the time to focus on it? Renovate and increase the rents now. Have a retail tenant on a month-to-month lease? Get a long-term lease with the best possible financial guarantee behind it. Have short-term or bridge debt? Explore long-term debt options. Even if you feel you could do better in a year, your sleep schedule will thank you when you secure long-term debt. Sell your assets that are in B locations with topped-out rents; the new construction building nearby in the A location will lower their rent expectations in a downturn and your building can expect to suffer.

The security of stable cash-flowing assets will allow you to focus on value-add inherent in your existing investments, thereby increasing your equity and property values. When deals are trading fast and opportunities are everywhere, it can be challenging to focus on hustling and trimming your portfolio — both of which are necessary for a strong real estate portfolio.

An apocalypse is coming. I wouldn’t dare suggest I know when, but if you double lock the doors, store cash and keep reviewing deals, I believe you will find yourself in a position to capitalize on the exciting opportunities that are possible in the challenging, natural and necessary market that is a recession.

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