Today we're going to talk
about four things that all real estate investors must do for this recession.
So there's been lots and lots of discussions here
at my company with my partner.
And of course, you guys know
we've been in business for 21 years and we have a staff of 300.
What are the top four priorities that for us?
The first one is evaluate your management.
This has been extremely timely, easy for the last few years.
Property managers have gotten very soft over
the last couple of years because the economy's been so hot.
What happens during very good times of high occupancy
is people think that property management is easy.
So there's a couple of things that I want you to be very cognizant of.
What is is your property professionally or are you self-managing?
And you have to understand why if you're self-managing it
because you need the money, you really need to take a look at that
because professional management companies can bring a lot to the table
and they can even save you a tremendous amount of time.
But one point of caution here,
you really need to understand how to manage a management company.
And that is a whole nother skill.
As you take a look at your investments or people that have invested
what you should be looking at, these three things are you hitting
your financial goals and are you being realistic about that too?
What does 2023 look like?
Realistically, if you're over here on the self management side
and you think that things are going to be the same as they were in 2022,
then you're in big trouble.
And the last thing is, is how much time where you're actually spending
on the asset itself.
Because when things are going up and occupancy is high
and everybody's making money, this doesn't seem like much.
But now what's happening is rats are flat.
We're starting to see concessions and expenses are starting to grow.
And that's where professional management comes in.
If you don't know what you're doing,
you're going to lose thousands and thousands of dollars.
So the second big issue is you need to assess your risk
for both your debt and your equity.
And a lot of people don't think about their equity.
They kind of focus on their debt.
But if you think about it, debt is much less riskier than equity.
And equity is very important.
The reason why debt is much less riskier than equity
is because if somebody loses a property, for example,
and there's a mortgage on it, the equity gets wiped out first
and then the debtor takes over the asset as collateral.
So there's all kinds of debt.
There's fixed debt, variable debt, bridge debt and hard money.
You guys know these all have variable interest rates, but you need to take
a look at the loan maturity date because that is the most important thing.
If you have a loan maturity date that's coming up soon, even next year,
when the Fed is still saying that they're going to raise rates,
you could be in big trouble.
And you need to calculate what that potential new increase
in your mortgage payment might be, because it's really going to affect
your cash flow and you could be in a negative cash flow situation.
The second thing is the equity.
Now, if you've taken money or raised money through a fund, private equity,
Wall Street, which could be a insurance company, it could be a pension fund.
It doesn't really matter a family office or even family and friends
that all of that equity has a maturity date to it.
All of this money wants their money back, whether it's in one year,
two years, three or four or five year, it doesn't really matter.
But this money typically is in the form of a down payment,
and you need to be really cognizant as to when this equity wants their money back.
So go back to the terms of your acquisition
and pull out that paperwork and take a hard look at this
because a lot of these are based on IRR or internal rates of returns
and they have complex waterfalls and you actually might be out of the money
right now.
Number three is taking a look at the 2022 performance versus the 2023 budget.
Now, there'll be a lot of people that will simply just take this
and increases, say 2023 is going to be better naturally.
But that that might not be the case for a lot of people.
2023 is facing headwinds right now
on both flat income and higher expenses.
So the first thing is you take a realistic view of
where are you going to be at the end of 2022?
And then that income number where you are
occupancy, where you are in possession and where you are.
I read that is the number
that starts January of 2023, not some pie in the sky number.
And a lot of people missed this.
You need to take because it's just one day later then
you need to mirror up that with what did you project?
What did you project for your investors, if you have any?
And are you hitting that?
You're not hitting that you need to take a hard look at how you possibly can.
And one of those things
might be going out to a third party or a professional management company.
Realistic income and expenses for 2023 are going to be the nemesis
for most real estate investors, because a lot of these investors
do not have a lot of experience, and they're simply going to go back
and look at the trends from 2022 and 2021
and expect that those continue into 2023.
So take a hard look at these numbers based on your submarkets
and all your expenses and everything that's happening right now.
And you might have a very different picture, maybe even less than 2022,
as I continue to say, cash reserves are king.
You need to have cash reserve to make sure that you're hedging some of these latter
income potentially or higher expenses potentially, or the last thing
which I have here, debt, which is the biggest variable,
which could be a big unknown for many of you,
especially if you have variable or bridge kind of debt
and you're doing some kind of value add.
You've already experienced higher mortgage payments and lower cash flow
and this cash reserve item on your own through self
compounding is going to save your budget for 2023.
Number four is cash is king, which I just barely touched on in the last one.
But Ross and I,
we were originally three months, but now we've got a six months reserves.
And here's how that work.
You got your income.
We're projecting that income is going to be flat for 2023, largely.
And we're also projecting that expenses are going to be anywhere from 7
to 10% increasing, depending on the line item we're already seeing.
We had a 26% increase in just our property insurance.
We've had increases in property taxes and utilities
and so the expenses are definitely going up guys.
Labor's going up, supplies are going up, materials are going
up, so everything's going up and you need to budget for that.
The last thing is obviously your debt, if your debt is fixed,
your goal, you have a great, great load.
In fact, I would even say that that loan is now an asset.
If you've got a fixed rate loan, it's a three or 4%.
That loan is an asset.
There are investors that are actually looking to buy property like yours
because they can step into that debt payment of three or 4%
when interest rates are six, seven, maybe even 8% and inflation's at 7.7.
All of this has to do with do you have a positive or negative cash flow?
Because even in my company on some of the value add projects
where I've had debt escalation, I've had expense escalation,
our cash flow is less than we originally projected.
Luckily, we've had cash reserves to be able to mitigate some of these issues.
As a general rule, let's say your debt service is $25,000
a month right here, and it's affecting your cash flow.
Maybe it's going to go to 26, 28, 30.
You never know with the interest rate you need to have six months of cash
or $150,000 in the bank for this particular asset.
And this is trust me, guys, is going to save you guys going into 2023.
The Federal Reserve is meeting again on the 13th to the 14th of December,
and then they have many meetings through next year.
And of course, their objective is to get to 2% inflation.
We're still over five percentage points away from that.
So we believe that that is going to continue to climb
and that's when these cash reserves are going to save your butt for 2023.