Definitely great things to consider Nicholas! And I agree staying disciplined this late in the cycle is very important. We’ve already seen some seasoned investors begin to get more lax in their criteria. I think one important consideration on the commercial side is the debt structure being used today. We’re using 3,1,1 on our bridge debt. So we will begin implementing our business plan on day one, hopefully in two years we’re ready to refinance and put long term agency debt on. With the bridge debt we’re using there’s typically no prepayment penalty like agency debt. So if we are all done with our business plan in two years, the economy is still good, debt terms are favorable then we refi. If the economy is deep in recession we can wait because not only would we still have another year left on the debt but we would have two one year extensions. So that structure gives us about a four year window to refinance out of bridge into long term agency debt. That’s a big window, most recessions last about eighteen months so there’s plenty of a window of time to secure proper long term debt.
I think another concern I’m seeing today is the lack of risk adjustment being placed on C class and D class assets. Five years ago the spread between A class and C class was about two hundred basis points. Today it’s probably about twenty basis points. I think as we get into our next recession I think you’ll see why that risk adjustment was placed on there years ago and I think you’ll see those spreads widen up again but that’s just my opinion. The census data puts out weekly household pulse surveys and the last one I saw gave me the impression that households making under $25k was at higher risk of evection than those of higher incomes. I’ve heard people give opinions of which class will be hit harder but so far the data looks like class C. Sorry for the long winded answer but I hope that helps. Just FYI I began in 2005 so I was invested in several flips that I got stuck with through the GFC, so I’m being more cautious now too.
