All Forum Posts by: Ronan Donnelly

I would be wary about drawing general conclusions from single data points that make good media soundbites.

NYC is down but definitely not out and it will bounce back. There are long term macro trends at play like remote working (Bill Gates predicted that this would be a big trend in his 1995 book "The Road Ahead") which will definitely be accelerated as a result of this pandemic. Ultimately though, the people who choose to be and remain in NYC understand that they are selecting a densely populated and expensive location but for whatever reason see benefits that outweigh this.

@Kasey Libby, congrats on starting investing now for there will be bargains to be had, and less competition over the coming year. Since you are starting out I would strongly recommend focusing on your ‘why’ i.e. what do you want to get out of real estate investing. That analysis will better inform your subsequent decisions.

If you start with the end in mind you can then engineer the optimal path to get you there. Study the different ways of investing from single family through syndication, lending, flipping etc. They all require different skill sets. I would also recommend studying the macro picture to see what specific asset class suits you best whether it’s residential, industrial, land, hotels, retail etc.

Lastly, like any other profession the more you do it the better you get at it so plan to get some experience by making mistakes. Real estate is a team sport too so make sure you know what team members you need to compliment your skill set.

Good luck!

Ronan

Great to see activity, the world hasn’t ended but there is likely a ways to go yet before we understand the full impact of the counties slump in economic activity.

Congrats on finding a deal. I would try to speak to the seller to see what ways you could make yourself more attractive as a seller. They may care about price, certainty of closing, high earnest money deposit, speed of closing or something else entirely. Ask open ended questions and then listen. Good luck

This downward move in the market is to some extent a relief as it had to happen at some point, and now that it has happened, opportunities will present themselves.

From my perspective I think that things need to play out for another month or two before we can better assess how the market will be impacted and where the opportunities are. It’s a time to tighten the screws on your existing operations and hold on to you cash for the inevitable opportunities that will come. Good luck!

Yes, credit worthiness and availability decline in this kind of situation. The Fed is stepping in to provide credit for corporations but nothing yet for individuals

It’s really a case of specialization of skills and appropriate scale. A company than manages 10 buildings will be more efficient than each of those 10 building owners self-managing.

Hi @Tyler Tronson, I would suggest starting with the end in mind. Set a goal for yourself, likely a cashflow number to cover your current expenses, and then figure out how much real estate you need to own to generate that cashflow. Good luck!

Recent market volatility will undoubtedly impact real estate though not all asset classes and strategies will be impacted equally.

The Coronavirus is creating a demand shock and with approx 70% of the US economy being based on consumerism this will cause a significant drop in earnings. This drop in expected earnings is what you are seeing price declines given the P/E ratio valuation of most stocks.

Industries most hit will be retail, food service, manufacturing, hospitality and travel. Industries that are well suited to remote working, finance and technology are examples, should be less impacted.

In response to stock market volatility we see a flight to safe assets and that is why the entire US Treasury yield curve is below 1%, something that has never happened before.

Some of the impacts to the real estate business model will be:

-higher unemployment amongst tenants in impacted industries

-lower financing costs

-likely greater challenges with equity financing as investors ‘freeze’ in the face of uncertainty or are reluctant to liquidate stock holdings that have fallen dramatically in order to fund real estate investments

-cap rates - downward pressure from lower interest rates (cap rates tend to be a spread over treasuries), upward pressure as debt and equity financing become less available (less buyers in the market)

I think the greater concern is the oil price war given it is a fight that the US does not have direct influence over.

We are at the end of an approx 12y bull market so some kind of correction is healthy long term, even if it is painful short term

Here are some additional insights into how you might want to position yourself at this time:

1. Focus on the right asset – I like the multifamily asset class because multifamily real estate is popular during times of uncertainty because during these times, people prefer renting and because it is valued intrinsically it is less prone to large swings in sentiment which can impact the value of single-family homes.
2. Diversify your Portfolio – real estate has low correlation to stocks and bonds and this makes it a hedge against the stock market. Acquiring below market and implementing a value-add improvement plan will result in a portfolio of properties that appreciate over time and that also offer significant tax advantages
3. Pick the right market – not all housing markets were impacted in the same way during the last recession. If you select a market with population growth, jobs and wage growth, a balance between supply and demand and a diverse range of employers you will do just fine. If you invest in a stagnant market with just one big employer then you will be exposed
4. Buy for cashflow, not appreciation – this is a cardinal rule of real estate investing. If you have a cash flowing asset you can hold onto it indefinitely, if you have negative cashflow and are hoping for appreciation you will end up being a forced seller in a down market. We can create equity in multifamily real estate by investing in our assets to grow rent, improve vacancies and by cutting expenses
5. Avoid high end real estate – high end real estate always gets hit first in any downturn as people migrate from more expensive to less expensive homes. By focusing on class B/C properties we expect to see an increase in demand and in rental rates during any downturn
6. Lock in long term financing – lack of available credit was the downfall of many homeowners and investors during the last recession. By locking in our funding, we can eliminate one source of potential distress and we can also 'fix' one of our major expenses by locking in the financing rate
7. Increase your cash position – there will be opportunities to buy distressed assets from people who were not prepared, but you will need cash
8. Reduce Leverage – leverage can be used to provide higher cash on cash returns however along with leverage comes greater sensitivity to any loss of income. If we reduce leverage we may get lower cash returns however we do increase our ability to 'stay in the game' and not be forced sellers should rental rates decrease or vacancies rise. Being a distressed seller during a downturn is not where you want to be
9. Be more conservative underwriting – multifamily properties are priced based off their current financial performance only. When we are underwriting deals we can plan for a downturn in our assumptions e.g. increase expected vacancy and decrease rents to avoid overpaying
10. Dispose of weakest assets – this is simple portfolio management, it's key to let go of underperforming assets to free up cash and credit required to buy better performing assets. Don't wait until the recession arrives to sell underperforming assets
11. Increase cash reserves – whilst this can decrease returns it is all about being able to weather the storm, cash is king!
12. Have a range of exit strategies – If it isn't a good time to sell then you do have other options with multifamily real estate, provided that it is cash flowing. You could, for example refinance to get your cash out.

Here’s my $0.02. The Coronavirus is creating a demand shock and with approx 70% of the US economy being based on consumerism this will absolutely cause a drop in earnings. This drop in expected earnings is what you are seeing price declines given the P/E ratio valuation of most stocks.

Industries most hit will be retail, food service, manufacturing, hospitality and travel. Industries that are well suited to remote working, finance and technology are examples, should be less impacted.

In response to stock market volatility we see a flight to safe assets and that is why the entire US Treasury yield curve is below 1%, something that has never happened before.

Some of the impacts to the real estate business model will be:

-higher unemployment amongst tenants in impacted industries

-lower financing costs

-likely greater challenges with equity financing as investors ‘freeze’ in the face of uncertainty or are reluctant to liquidate stock holdings that have fallen dramatically in order to fund real estate investments

-cap rates - downward pressure from lower interest rates (cap rates tend to be a spread over treasuries), upward pressure as debt and equity financing become less available (less buyers in the market)

I think the greater concern is the oil price war given it is a fight that the US does not have direct influence over.

We are at the end of an approx 12y bull market so some kind of correction is healthy long term, even if it is painful short term