{"id":154520,"date":"2023-06-26T13:09:20","date_gmt":"2023-06-26T19:09:20","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=154520"},"modified":"2023-08-06T05:12:32","modified_gmt":"2023-08-06T11:12:32","slug":"maximize-profit-with-fear-and-greed-during-these-volatile-times","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/maximize-profit-with-fear-and-greed-during-these-volatile-times","title":{"rendered":"Maximizing Profits With Fear and Greed: 10 Important Thoughts Investors Should Know During These Volatile Times"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm\/?e=BIGPOC8097851319\" width=\"100%\"><\/iframe>\r\n  \n\n\n\n\n<p><span data-preserver-spaces=\"true\">Understanding and applying these three sentences could make you wealthy:<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">\u201cIn bad times, securities can often be bought for prices that understate their merits. And in good times, securities can be sold at prices that overstate their potential. And yet, most people are impelled to buy euphorically when the cycle drives prices up and to sell in panic when it drives prices down.\u201d &#8211; Howard Marks (<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/www.oaktreecapital.com\/docs\/default-source\/memos\/2013-01-07-ditto.pdf\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">2013 Memo \u201cDitto\u201d<\/span><\/a><span data-preserver-spaces=\"true\">)&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">I\u2019m excited to share some thoughts about fear and greed. But I\u2019ll start by sharing a few comments on the current economy to set the stage.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Not long ago, I opened my computer to a startling CRE email subject line:&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">\u201cPrices Plummet to 2010 Levels\u201d<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">It was a great attention-grabber but was inaccurate. The publication went on to say that the sharpness of the decline in CRE values (not the prices) had not been seen since the Great Recession, which is still disconcerting. (Note that&nbsp;<\/span><a class=\"editor-rtfLink\" href=\"https:\/\/newsletter.credaily.com\/p\/cre-prices-experience-sharpest-annual-decline-since-2010\" target=\"_blank\" rel=\"noopener\"><span data-preserver-spaces=\"true\">the headline was changed<\/span><\/a><span data-preserver-spaces=\"true\">&nbsp;at some point since the original publication.)&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">But it makes sense since we witnessed a decade of ever-rising asset prices fueled by low interest rates, skyrocketing attention from a whole new community of CRE investors, and irrational demand from a host of Newrus (new gurus running syndications, mainly in the multifamily arena).&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">The value decline was indeed significant, reported at 28% year-over-year.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">\u201cYikes! Isn\u2019t that alarming?\u201d you may ask.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">It is quite alarming for many syndicators and investors. But we find it not at all surprising. And we see a potential opportunity on the horizon.&nbsp;&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">How Did This Sharp Decline Take Place?<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">It is a simple matter of math. It is based on decompression in <a href=\"https:\/\/www.biggerpockets.com\/blog\/cap-rate-real-estate\" target=\"_blank\" rel=\"noreferrer noopener\">cap rates<\/a> resulting from the series of 2022 interest rate hikes. As a reminder, here is the value formula for commercial real estate:&nbsp;&nbsp;<\/span><\/p>\n\n\n\n<p><em><span data-preserver-spaces=\"true\">Value = Net Operating Income \/ Cap Rate<\/span><\/em><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">As you can see, and as most of you know, the value is directly proportional to the income (which operators have some control over) and inversely proportional to the capitalization rate (the market\u2014which operators have virtually no control over).<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">The interest rate directly influences the cap rate. While interest payments are not part of the calculation of <a href=\"https:\/\/www.biggerpockets.com\/blog\/net-operating-income\" target=\"_blank\" rel=\"noreferrer noopener\">net operating income (NOI)<\/a>, interest directly affects net cash flow to the investor and, thus, the value the investor places on the asset. Other factors impacting the cap rate include the availability of debt and the desires of the buyer pool (i.e., competition to acquire these assets).&nbsp;&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Currently, these factors are all trending to raise the cap rate, thus lowering commercial real estate values.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">But another issue is at play here: the cap rate\u2019s recent starting point. Back in \u201cthe good ole days\u201d of 10% cap rates, a 1% increase to 11% (with no NOI change) would decrease the asset value by about 10% (1% \/ 10% = 10%). (I say \u201cabout\u201d because some subjectivity is involved in the actual value.)&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">No longer.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">In these recent days of 4% cap rates, a 1% increase could decrease the value by about 25% (1% \/ 4%). With interest rates rising by a few points, it isn\u2019t surprising that we have seen cap rates expand by over 1%. And thus, it is entirely possible to see property value decreases of 28% or more.&nbsp;&nbsp;<\/span><\/p>\n\n\n\n\n\n\n  <div class=\"lg:block\" x-data=\"{ ad_block_block_6499e254488fb: popAds(1) }\">\n      <template x-for=\"ad in ad_block_block_6499e254488fb\">\n        <a\n          :href=\"ad.linkURL\"\n          class=\"no-underline text-black\"\n          x-on:click=\"adClicked('https:\/\/www.biggerpockets.com\/blog\/maximize-profit-with-fear-and-greed-during-these-volatile-times', ad.sponsor, ad.title, ad.id, 'blockAdClicked', 'blockAd', '')\"\n          target=\"_blank\">\n          <div\n            class=\"py-4 border-b flex flex-col flex-nowrap text-sm border-t px-0 rounded-none\"\n            x-init=\"\n              analytics.track('blockAdLoaded', {\n                referrer: 'https:\/\/www.biggerpockets.com\/blog\/maximize-profit-with-fear-and-greed-during-these-volatile-times',\n                sponsor: ad.sponsor,\n                ad_title: ad.title,\n                ad_page_location: ''\n              })\n            \"\n            x-intersect:enter.once=\"adViewed('https:\/\/www.biggerpockets.com\/blog\/maximize-profit-with-fear-and-greed-during-these-volatile-times', ad.sponsor, ad.title, ad.id, 'blockAdViewed', 'blockAd', '')\">\n            <div><span class=\"text-xs text-slate-light block bg-slate-50 p-1 inline-block rounded-md\">Sponsored<\/span><\/div>\n            <div class=\"flex items-center text-sm space-x-4\">\n                <img :src=\"ad.imageURL\" :alt=\"ad.imageAlt\" class=\"h-10 w-10 object-cover rounded-full\">\n\n                <div clas=\"text-sm\">\n                    <span class=\"font-bold block\" x-text=\"ad.sponsor\"><\/span>\n                    <span class=\"text-slate\/80\" x-text=\"ad.description\"><\/span>\n                <\/div>\n            <\/div>\n\n            <div>\n                <span class=\"font-bold\" x-text=\"ad.title\"><\/span>\n                <p class=\"mt-2 text-slate\/80\" x-text=\"ad.body\"><\/p>\n                <span class=\"mt-2 text-themeBlue block mt-2 underline\" x-text=\"ad.linkTitle\"><\/span>\n            <\/div>\n          <\/div>\n        <\/a>\n      <\/template>\n  <\/div>\n\n\n\n\n<h2 class=\"wp-block-heading\"><span data-preserver-spaces=\"true\">Ten Thoughts for Your Consideration<\/span><\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">Cap rates are on the rise. Commercial property values are falling. Here are 10 resulting thoughts for your consideration.&nbsp;<\/span><\/p>\n\n\n\n<ol class=\"wp-block-list\">\n<li><span data-preserver-spaces=\"true\">Cap rate moves usually lag interest rates and other economic factors, so we expect these value declines to continue. Further interest rate hikes will compound the descent.&nbsp; &nbsp;<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">This average decline includes malls, hotels, and other asset types that may have adversely impacted the average, so not all asset types, and certainly not all individual assets, are impacted equally.&nbsp;<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Flattened rents in 2023 will make matters worse for most since syndicators are desperate to proportionately escalate NOI (the numerator) to offset burgeoning cap rates (the denominator) to maintain their asset values.&nbsp; &nbsp;<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">This environment is a case for acquiring value-add assets from mom-and-pop sellers. We are investing with an operating partner to acquire a self-storage asset in a location we are very excited about (market rent of $148 for a 10\u2019 by 10\u2019 unit) with current rates at&nbsp;<\/span><em><span data-preserver-spaces=\"true\">about 60% below market<\/span><\/em><span data-preserver-spaces=\"true\">&nbsp;($60 per unit). This asset is part of our Wellings Real Estate Income Fund.<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">This environment is also a case for fixed-rate debt. Many syndicators\/investors with floating-rate debt are in a world of trouble right now. Many will lose their assets to the bank or a bargain buyer and watch their investors\u2019 equity go up in smoke. Many are already cutting distributions to fund new reserve requirements mandated by their loan agreements.&nbsp;&nbsp;<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">In perhaps the worst timing imaginable, multifamily syndicators are not only enduring rising debt costs and flattening rents but dramatically higher operating expenses. Some of this ties to inflation, but for many, skyrocketing insurance costs and property taxes are hamstringing cash flow. Some Texas and Florida apartment operators have seen insurance double or triple.&nbsp;<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">This environment is a case for long-term holds. Syndicators with debt needing refinancing or equity investors expecting to get out on short order may be forced to sell at an inopportune time for a discount or refinance with lower LTV and higher rate debt. The latter could lead to slashed distributions (we\u2019re seeing this weekly now), capital calls, or worse.&nbsp;&nbsp;<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">This is a case for preferred equity. Warren Buffett made a calculated $5 billion investment in Goldman Sachs in September 2008, when other investors were running for the hills. His investors scored big. Following Warren\u2019s example, my firm is now pursuing several preferred equity opportunities.&nbsp;<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">This is a case for short-term, high-interest debt (wait\u2026what?). Not as a borrower but as a lender. We recently made a substantial investment in private debt. This hedge provides us with cash flow for now and the flexibility to exit into distressed (or other) equity deals when they occur. We believe this will happen within a year or less.&nbsp;&nbsp;<\/span><\/li>\n\n\n\n<li><span data-preserver-spaces=\"true\">Speaking of distress, this whole situation is not something for you to get distressed about. This is a normal aspect of a normal cycle. Those who anticipated it should be less affected by the negatives and ready to capitalize on the positives (opportunities for preferred equity and to acquire distressed assets).&nbsp;<\/span><\/li>\n<\/ol>\n\n\n\n<h2 class=\"wp-block-heading\">Conclusion<\/h2>\n\n\n\n<p><span data-preserver-spaces=\"true\">A lot of wealth is being destroyed in this time of fear and uncertainty. History tells us that a lot of wealth will also be created. Greed is often the enemy of wealth creation during good times. And fear is certainly the enemy of wealth creation in times like this.&nbsp;&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Warren Buffett, Howard Marks, and other great investors have taught us this:<\/span><em><span data-preserver-spaces=\"true\">&nbsp;our ability to avoid giving in to fight or flight, to fear and greed, is the cornerstone of investing success.&nbsp;<\/span><\/em><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">As an entrepreneur in decades past, I tried to get the same thrill from investing that I got from starting a company. That didn\u2019t go well. Investing should be like watching paint dry or watching grass grow. Thrill seekers should not apply.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">I was in the Alaskan wilderness last summer and found myself continually rehearsing what I would do if the nearby mama brown bear came after me. This was appropriate fear, aka caution.&nbsp;<\/span><\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"1728\" height=\"876\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/06\/Screenshot-2023-06-26-at-3.04.40-PM.png\" alt=\"pack of bears\" class=\"wp-image-154523\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/06\/Screenshot-2023-06-26-at-3.04.40-PM.png 1728w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/06\/Screenshot-2023-06-26-at-3.04.40-PM-300x152.png 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/06\/Screenshot-2023-06-26-at-3.04.40-PM-1024x519.png 1024w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/06\/Screenshot-2023-06-26-at-3.04.40-PM-768x389.png 768w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2023\/06\/Screenshot-2023-06-26-at-3.04.40-PM-1536x779.png 1536w\" sizes=\"auto, (max-width: 1728px) 100vw, 1728px\" \/><\/figure>\n\n\n\n<p><span data-preserver-spaces=\"true\">You\u2019ll notice I wasn\u2019t in this photo. I took it from behind the safety of our cabin\u2019s sliding door.<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">But fear has no place in good investing.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Controlling our fear is perhaps the number one step for successful investing in this environment. We should recall that not everything is scary, even if it feels that way. There are good deals and bad ones, just like in good times. Harnessing your fear will allow you to find good deals, some that are only available in times like this, and potentially create significant wealth in the process.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">My firm is practicing the same level of \u201cfear,\u201d aka caution, now that we practiced in good times. We do this for our investors, and we are quite happy with the results we are achieving.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Lastly, it\u2019s time to practice patience. I was deep in residential real estate investing during the Great Recession. Though we commonly refer to it as \u201c2008,\u201d recall that there was actually a long timespan from the peak (mid-2007) to the trough (early 2012).<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">We take no joy in the failures of other players. But we expect and are preparing to acquire distressed assets at prices we couldn\u2019t dream of in this past decade.&nbsp;<\/span><\/p>\n\n\n\n<p><span data-preserver-spaces=\"true\">Are you?&nbsp;<\/span><\/p>\n\n\n\n<div id=\"hero-block_62ee867235a1c\" class=\"first:mt-0 hero-block py-4    has-background has-slate-300-background-color has-text-color has-slate-800-color\">\n    <div\n        class=\"gap-10 lg:gap-20 flex flex-wrap lg:flex-nowrap max-w-screen-xl mx-auto px-4 relative lg:items-center \">\n\n        <div class=\"relative z-30 lg:w-2\/3 \">\n            <main class=\"py-4\">\n                \n\n<p class=\"has-theme-slate-color has-text-color has-large-font-size\" style=\"font-style:normal;font-weight:800\">Prepare for a market shift<\/p>\n\n\n\n<p class=\"my-3 md:my-5 lg:my-8 has-theme-slate-color has-text-color\" style=\"font-size:16px\">Modify your investing tactics\u2014not only to survive an economic downturn, but to also thrive! Take any recession in stride and never be intimidated by a market shift again with <em><a class=\"rank-math-link\" href=\"https:\/\/store.biggerpockets.com\/products\/recession-proof-real-estate-investing?utm_source=blog&amp;utm_medium=blog%20banner\" target=\"_blank\">Recession-Proof Real Estate Investing<\/a><\/em>.<\/p>\n\n\n\n<div id=button-custom-event-block_64138705d4d27 class='button-custom-event'>\n      <a href=\"https:\/\/store.biggerpockets.com\/products\/recession-proof-real-estate-investing?utm_source=blog&#038;utm_medium=marketing_block\" x-on:click=\"window.analytics.track(&#039;Blog Block | Publishing: Recession Proof Book&#039;, {\n      referrer: &#039;https:\/\/www.biggerpockets.com\/blog\/maximize-profit-with-fear-and-greed-during-these-volatile-times&#039;,\n    });\" class=\" btn-shape inline-block no-underline has-background has-theme-blue-background-color has-text-color has-white-color\" target=\"_blank\">Get Yours Now<\/a>\n  <\/div>\n\n            <\/main>\n        <\/div>\n\n                <div class=\"lg:w-1\/3 first:mt-0 relative h-full lg:flex lg:items-center\">\n            <img decoding=\"async\" class=\"object-cover w-full relative z-20 my-0  rounded-md hidden lg:block\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/04\/recession-proof.png\" alt=\"\" title=\"\">\n        <\/div>\n            <\/div>\n<\/div>","protected":false},"excerpt":{"rendered":"<p>These are volatile and uncertain times. How do you maximize your bottom line when it&#8217;s harder than ever to know what&#8217;s coming next? Here&#8217;s what you should know.<\/p>\n","protected":false},"author":214608,"featured_media":154529,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4433,7119],"tags":[],"class_list":["post-154520","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-opinion","category-biggerpockets-daily"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/154520","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/214608"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=154520"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/154520\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/154529"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=154520"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=154520"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=154520"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}