All Forum Posts by: Jonathan Twombly

Unlike the stock market, real estate is really slow-moving.  In the stock market, because there are so many investors and liquidity is normally high, it is almost always easy to find a counterpart to trade with.  

In real estate, what happens is that buyers become more cautious but sellers are stuck on yesterday's prices. So nothing much happens.  The market largely shuts down.  (Except for the people who fear not buying now because they think the market will resume its climb soon. There are always people who think a 10% discount off peak pricing is a great deal and don't understand that the market may give away another 20% before it's all said and done.)

People with assets that are cash-flowing, or at least paying their costs, have no incentive to sell when the market starts to crash.  But, eventually, as things go on, there will be owners who are forced to sell because they are losing money month by month or some life event intervenes and they have to sell. Or because they are forced to raise money to cover other investments gone bad.

Eventually, the sellers will capitulate to the new reality and more buyers will start to buy again.  This is when the market bottoms out, and it's a great time to invest, if you have cash available.  Some very sophisticated investors understand, too, that it's this point in the market when it's really best to 1031, not at the very top, like most people think.

For what it's worth, I sold my entire $25mm portfolio last year.  When people started offering me way more money than I thought the properties were worth, and we reached our 10-year prices in just 5-years, I knew it was time to get out, take chips off the table, and get cash ready.  I realized that the risk of missing out on peak pricing was far greater than the risk of letting things ride a little while longer just to try to earn a few more points of return.

Of course, I never thought we would see what we are seeing now.  I thought we would have a run-of-the-mill recession/correction. I feel more relief than anything at getting out last year.  And now, rather than focusing on holding things together in the face of the crisis, I can focus on preparing for the next cycle.

@Chris Mason Thanks for your posts above.  I think you made some really good points.

I differ a bit in that I actually think that the more pressing problem is deflation. The money flooding into the system is not coming on top of a normal economy and increasing the money available to consumers (except for those low-wage unemployed earners who are temporarily doing better on unemployment - and they were given that money to prevent a wave of home mortgage and rental housing defaults).  It's replacing money that has suddenly been withdrawn from the economy and would have been completely destroyed.

On top of that, whatever actually happens with Covid, it will accelerate deflationary trends, particularly the adoption of labor-saving technology. This happens in every recession. And, what we saw coming out of the last recession over time was the eventual creation of a lot of jobs, but 40-50% were very low-wage jobs.  I would expect this trend to continue and accelerate.

Even if we have a successful de-coupling with China's supply chains, it doesn't mean that all those jobs are coming back to the US. A large part will go to Mexico, Vietnam, Cambodia, Bangladesh, etc. - wherever labor is cheapest.  And a lot will go to robots and computers in the US.

Already, you see Fedex, UPS, Uber, etc. looking to go driverless. UPS wants to fly its entire fleet of aircraft remotely from a central location with 10 people.

Many businesses are already gone and won't come back.  And, as long as some percentage of the population remains wary of crowds after the economy opens up, it will have a depressive effect on the economy, and that will ripple through the economy negatively.

It's hard to recall now, but if you look back at the Great Financial Crisis, you see many economists and politicians denying that we were in a recession, and then denying the recession would last long; denying there was a housing bubble, and then denying that there was a housing crash.

I think it's just too early to make any solid predictions, other than long-term trends continuing or accelerating where the driver is cost savings.

Though I would buy a heavily discounted multifamily property a block away from an Amazon distribution center right now. . . .

Great post, Greg, and thanks for adding the long perspective. I'm actually seeing something slightly different, which is that the very sophisticated and cash-rich investors are being cautiously opportunistic, but the people who are too young or new to remember the last downturn are convinced the bottom is already in and the time to move is now - or you'll miss out on the rebound!

I don't look at states per se, I look at markets.  And I want them to have the following criteria.

1.  Population growth, preferably above the national average.  If there is no growth, or the growth is near zero, I don't bother. You'll soon be fighting for tenants with other owners.  You need to look at this on the local level as well as the MSA level.  State level doesn't really matter.

2. At least 250,000 in population in the MSA.  You want the MSA to be big enough that the economy is diversified. You also want there to be enough product to buy and a market to sell into. If the market is too small, and you find yourself in a situation where you must sell, you could be in for trouble.

3. Something that makes the market recession-resistant, like a state capital, major hospitals, and major universities (though we need to see whether this last one will continue to be an anchor going forward).

4.  Ease of being an owner.  Is the state tenant or landlord-friendly.

5.  Good schools in the submarket.  The best quality renters, regardless of asset class, are drawn to good schools like moths to a flame.

5.  Below the radar.  Is it a market everyone is talking about?  Then it's probably better to go look for another market that meets the critical criteria.

6.  Ease of getting there for you.  It has to be a place that you can get to without too much trouble or you will start neglecting your assets.  Even if you hire third-party management, you must visit the asset periodically to see it for yourself.

 Hi Antonia:

As a former NYC lawyer-turned-syndicator, I know what an accomplishment it is to pay off your student loans - you are an unusually diligent person, which will serve you well in this space.

I'm based in Brooklyn and run the occasional real estate meetup in the City, so keep an eye out!

~ Jonathan

 Real estate brokers.

Yes, and it even works with brokers. Brokers tend to give their best deals to the people they know, like and trust.  Those deals never hit the websites because they are already gone to those favored clients.  The only way to get on those favored clients lists is to talk with the brokers, get to know them, become friends with them.

The added advantage is that, the better you get to know them, the more likely they are to believe you can close.  It's just human nature - we tend to attribute characteristics we like to people we like.

Markets that are dominated by major universities are very recession-resistant, and can be excellent markets for the long-run. Just two examples - Ithaca, NY (Cornell) and Charlottesville, VA (UVA) - are dominated by their large local university. During the Great Recession, unemployment never went above about 6.5%. They were excellent stabilizers of the local economy.

Madison, WI, with the double benefit of state government and a major university also did very well during the last recession.

Here's how I do it.

First, and foremost, I want to make sure there is good population growth, at the MSA level and the local level. (MSA is metropolitan statistical area - what the census bureau considers the economic unit of the area).

The state doesn't matter, because some states have poor growth overall, but MSAs within the state are healthy.  You want to make sure that you are investing in a growing area within a growing MSA, because growth within MSAs can also vary.

Next, I want to make sure that the market is big enough to have enough liquidity, meaning that there are enough transactions going on that you can buy and sell when you want.  Usually I want the MSA overall to be at least 250,000 in population.

Third, I want to make sure that the area near the property, or the area I am focused on if I don't have a property in mind, is economically diverse.  I don't want to invest where too many people are dependent on a single employer, which could go out of business or leave.  I don't even like it if the single employer is the US government, because it can pull out at any time.

Fourth, I want to make sure that the schools are good.  All things being equal, good schools will attract good tenants, regardless of the class of renter.  Good schools also make your property sticky, in that people don't want to leave if the rental gives them a chance to send their kids to school in an area where they cannot afford to buy a home.

Some other things to consider - what I call "anchors."  These are economic drivers that won't go away, regardless of the economic situation.  State capitals, major universities, major health care complexes, logistical hubs like inland ports (though these are subject to economic ups and downs, they are so expensive and time-consuming to build that they are not abandoned and they are hard to compete with in the short-term.)

Hope this helps.

Great post. You forgot one more dumb scenario from the penny-wise and pound-foolish, which is sticking all their properties under one LLC.

Everything under the roof of a single LLC is reachable by a creditor of the LLC. So the more you stick under one LLC, the more vulnerable you make yourself.

Chances are, if you have built up anything of a portfolio, it constitutes the bulk of your net worth. There's little of value to protect outside the LLC other than your home. So sticking all your real estate under one LLC makes almost as little sense as having no LLCs at all.

There must be some guru out there telling people they only need insurance, or to stick all their RE under a single LLC, because the myth that insurance is enough persists on BP. I've been fighting this battle for years, since the days of Joe Gore, who got banned for repeatedly posting that LLCs were worthless and all you need is insurance.

I’m also willing to bet that the people who are too cheap to structure their businesses properly are also too cheap to buy good insurance. They are probably very under insured and have bad insurance policies from companies known for disputing all claims. So they’re going to find themselves in a world of hurt. 

However, there is a very Darwinian solution here: let the anti-LLCers structure things the way they want. And let the rest of us buy their assets in liquidation sales.