There are
four things that I've studied a lot to try to figure out where things
are going to be in 2023, because I, like you, want to buy real estate.
I'm a real estate investor.
I do not believe that inflation will be any lower than 4% in one year from today.
Right now, we're at 7.1.
And if you take a look with six rate increases, we only brought it down 2%.
This would be a 3%.
I think that's a bit of a stretch.
I do believe, as we just saw in the chart before this, that the federal funds rate
will continue to rise and will be well over 5% in 2023.
Right now, it's four and a quarter to 4.5.
But I think we're going to see a series of half a point and quarter
point increases as they start to tackle this inflation number
and get it down to the 2% mark that they all want it to be.
You take a look at the notes from the December committee
and the things that they've said in the prior committees.
You'll see that this is the majority vote, that most of these people
are all voting for these rate increases to try to tackle inflation.
This is not a contentious issue at the Federal Reserve Committee level.
I do believe that real estate values are going to continue to drop.
We've already seen
single family housing drop, as I've talked about in my prior videos.
We are now seeing commercial values drop as we start to see cap rates
increase and interest rates increase as buyers are able to pay
less to the sellers of many of these big commercial projects.
And the last one is this lag effect that I think
is going to continue into 2024.
And I'm going to give you
a little bit of a peek at what I'm going to do in my video for next week.
But this is what I'm calling the lag effect.
So if you drop a pebble in the pond, you have these reoccurring rings
that happen and that's called precession.
If we start with the 9.1 inflation in June of 2022
and we take a look at the 7.1% inflation
in December of 2022, in six months,
we have seen five rate increases from that period of time.
Now there are actually six because one of these is not included.
That actually happened prior to June.
So the real question is how long will it take
for these interest rate increases to lower the inflation rate?
And that, of course, is bound in what I call the lag effect.
There are different things that are happening at the same time
with regard to these interest rate increases credit
cards, automobiles, real estate refinances.
All kinds of things are a result of these rate increases,
and they're all happening at a different time in 2023.
One of the things that you can watch and one of the things that you can do,
the first one is that you need to be watching some of these foreign buyers
as they come into the United States because of our strong dollar.
This has happened before because foreign investors will look for the U.S.
to park their dollars because the economy is strong.
So this is something that you need to watch.
The second thing is you can acquire properties with fixed debt.
So, in other words, debt is now an asset.
You can actually minimize your borrowing costs by buying somebody
else's debt, if you can, on an assumed will basis.
A lot of that is a syllable.
So think of it as you stepping into somebody else's shoes.
So somebody has a 3% loan on some proper knee somewhere.
That is an asset right now.
Of course, interest rates are in the six and 7% range.
And so that is a great way to still buy real estate.
You do have to come up with more equity.
However, but that debt is now an asset.
I did a video on this.
You need to focus on your operational finances and your income for 2023.
This year is going to be primary and going to be one of the things
that's going to flush out a lot of bad operators
and make sure that you have plenty cash reserves.
The last thing, if you are investing, you want to make sure
that you do not have a defined exit.
So what that means is a defined exit is if a loan is a maturing.
So let's say you have a loan maturing in 2023
and the rate is say three or 4%, you're going to be in trouble
because you either have to sell that property to a buyer
who has to get a higher priced loan or you might have to refinance
and you're going to have a higher priced loan.
The next thing is manage equity.
You might be sitting behind that manage equity,
and that equity is going to want their money back.
And it might not be an opportunistic time for you to sell
based on the current market conditions
where we're starting to see some of these prices go down.
The third thing that affects me personally are
what I would call rising capitalization rates or cap rates.
Cap rates are rising because interest rates are rising.
And if you have a defined exit and your cap rate is actually going up,
then you might not be able to get out of this property.
And all that hard work that you put in before
is going to be compromised because of the higher cap rates.
So these are all the things that you need to take care of before the interest rates
continue to go up. And I believe that they will.
And of course, the borrowing costs continue to go up.
If you have some kind of variable or some kind of bridge
loan, you're definitely getting killed on the cash flow.
And that's why these cash reserves and all these things
are important to look at right now and start to recapitalize
or make some decisions on what you're going to do for 2023,
because I don't see this getting any better in the next year.
And it's really a best time, I believe, to just put your pencils down.
So here are three strategies that we could do in 2023 that you can do
before the end of this year to try to get yourself into a better situation.
The first one, we talked a lot about this, but your income must rise
higher than your debt.
This is very, very important
because right now the cost of debt is going up a lot.
But your income must rise higher than that.
For you to stay ahead of this number to evaluate your debt costs.
So if you have credit card payments that are 18 or 20%,
you need to take a hard look at that and figure out how you can lower that
so you're not falling behind.
As I talk to you about in number one, same thing with real estate.
If you have variable rate debt that has gone up a lot,
you need to be looking at fixing your debt costs today.
You need to hedge your payments today and grow your income for 2023.
And then the third thing which I talk a lot about, cash, is king.
Do not worry about inflation.
Grow your cash savings account as much as you can.
You're going to need cash for all kinds of reasons.
First, you should always just prudently have a reserve.
You should have at least six months of operating expenses
to you cannot control unless you own the company.
What's going to happen
from a corporate profit standpoint and who's going to get laid off next?
So you need to have enough cash
to buffer you in case you have a job loss and you can go find another one.
Three, you need to have enough cash to be able to pay your rent
or your housing or whatever else you need to be able to
hold on to or sustain through 2023.