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During a climate of economic uncertainty, you may find it hard to determine what investment strategy is best for you or whether you should be investing at all. Steven takes us through VonFinch’s investment strategies and their experiences as well as highlights the differences between highly liquid markets and real estate investing.
- It’s important that you have a strategy and sticking to it even when changes happen.
- Currently prices are staying relatively similar. There have not been huge cuts in prices.
- Some of the biggest economic growth and changes happen right after a major pullback.
- It’s as important to continue to purchase in the market today, as it was a year or two ago.
Interested in connecting with other like-minded individuals? Then join our VonFinch Private Capital Network. Learn more at http://www.vonfinch.com/invest.
Steven Pesavento 00:05
This is the Investor Mindset podcasts and I'm Steven Pesavento. For as long as I can remember, I've been obsessed with understanding how we can think better, how we can be better, and how we can do better. And each episode we explore lessons on motivation and mindset for the most successful real estate investors and entrepreneurs in the nation.
Steven Pesavento 00:31
Welcome back, and today's episode, we're gonna be talking about what to do during economic change, and uncertainty and how you can cultivate your investment strategy. During these times were we talking about how VonFinch thinks about investment strategy during times of economic change. And we'll talk a little bit about some of our experience in this area. And so when we're looking at the stock market, going down by a significant percent crypto markets down 40 to 50%, depending on the coin you're looking at, and single family housing market, that still has very low supply, but the cost of buying a single family home has gone up dramatically, because of the rising interest rates in that market. How is this going to impact and how does it impact the commercial real estate and commercial multifamily market? And what changes are we seeing today, as of June 2022? What changes are we seeing today that are actually impacting the investment market?
Steven Pesavento 01:30
So first off, when it comes to what's happening in the stock market, and what's happening in highly liquid markets, like stocks, crypto, REITs, etc, those markets are they act very differently than the real estate market. And there's a couple of reasons that they act differently. It's because oftentimes, when there's new news, those types of markets can make very rapid change. And oftentimes, those markets are being moved by emotional decisions of those people who are participating. Many of the retail investors, those investors who are trading their own portfolios, they make decisions where they get in at the top, and they get out at the bottom, or they get out at the sign of some type of economic turmoil changing. And so it's important that if you are one of those people who are trading in that market, that you're not making those decisions, unless you're moving your assets from something that might be growth focused into something that's going to be more stability focused, right, it's important that you have a strategy and you're sticking to it even when changes happen. And that's exactly what we're doing at VonFinch. And fortunately, the real estate market is more of like a very large, slow moving barge versus a speedboat, it takes longer for people to make decisions, and to make changes to their portfolio in the real estate market. However, what we're seeing is, although the single family market might be impacted by the changes to the rate, what we're seeing in the commercial, and commercial multifamily market is we're seeing a lot of the same, we may see some better terms from sellers in relation to money that's going hard day one due diligence periods, flexibility around financing terms, and the like. However, we are seeing prices stay relatively similar, we're not seeing a huge cut in prices or anything like this, currently, and part of the reason is rates haven't gone up that much, although there is a lot of uncertainty about where rates are gonna go. rate caps, essentially, where you're buying a cap on where the rate of your loan could go, if it happens to be adjustable. Like many of these bridge loans are the cost of those have doubled or tripled from say, 50,000 up to 250,000.
Steven Pesavento 03:56
Or, you know, more in some cases. But what we're actually seeing in the market itself is there's a lot of people who want to wait and see. And this wait and see methodology and believe it, it can make sense. It can make sense to wait and see what happens in the market. And for those who are sitting on the sidelines, absolutely no hard feelings to you. And you know, no shame in doing that. However, the risk that you are taking by sitting on the sidelines during times like this, is that during some of the biggest economic growth and changes happen right after a major pullback. In other words, by the time many people who've been sitting on the sidelines reenter the game, they have missed some of the biggest gains in the market. And this is true across stocks as accrue true across the real estate market. Many people who sat out since early 2020 have missed one of the biggest come ups in real estate valuations in history. And part of the reason for that was there was legitimately, almost no rent increases during the early part of the pandemic. And so many of those properties had dramatic and rapid raises to the rental rates as a result of having, you know, a year or two of not raising those rates on those rental units, as well as so much money being pumped into the system, and so many people looking for the security that large commercial real estate offers. And so we've been through this before, back in 2018, interest rates went up for the first time in nearly a decade. And we saw the sales in our portfolio at that time, we were buying, renovating and selling properties. And we saw sales drop off, you know, when you've got 16 properties on the market, when you have bought in 150, at that point over 200. During that strategy, what we saw was, all of a sudden, you know, these multiple properties that we're expecting to sell did not. And there was a lot of fear that was created internally at the company, because we are under that belief and expectation that this is going to continue. And so when those changes happen, what it did was it instilled a belief in us that we need to have economic reserves that we cannot expect a sale and exit or refinance to happen.
Steven Pesavento 06:23
And so that's really led to our belief at mon Finch about being very conservative and underwriting the properties early on, while keeping large reserves in order to pay any of those types of debts, expenses are things that might come up during times of economic instability. Now, I don't believe we're in a 2008 type of crisis. I don't believe we're in a 2000s crisis, I don't believe we're in a 1980s economic crisis, where I think we're at is I think we're going to see a little bit of a slowdown, I think we're going to see interest rates start to taper out and stay at some kind of consistent place. And I do think there's going to be some great opportunities in the market from syndicators and sponsors and owners who still want to sell or those who set business plans that were based on growth purely, and where we're gonna have an opportunity to go in and buy those properties. With that said, we are not waiting around in order to see what happens in the market, we are not waiting around, in order to see if there's an opportunity to buy something at a slight discount. Yes, we will buy at a slight discount when that opportunity comes up. But it's as important to continue to purchase in the market today, as it was a year ago or two years ago, when we're able to find opportunities that have value add, and we're able to execute that business plan securely, or in the types of properties that already are stabilized that have a little bit of value add and will actually continue to grow in value, despite whatever is happening in the market. Those types of areas are a class or B plus type areas that are very highly desired by the tenants who want to live there, the people who are going to continue to be able to afford living in an apartment during economic change. And for those people who wanted to buy a home and have been waiting to buy a home, but they no longer can afford to or are fearful about doing so because of some of the economic changes, those people are being pushed towards multifamily. And that is why I think we're going to continue to see growth within the multifamily sector, there's a lot of capital looking to be placed. We're one of those firms that is placing a lot of that capital in these types of properties that have either heavy value add, which are typically shorter term in their hold period, or those with very small amounts of value add but have a much longer hold period, we're really looking for that cash flow. And so what we're really excited about is the type of growth that can happen during times of uncertainty. When everybody's want running in one direction. It's important to stop and ask the question, well, what would happen if we went the other way? And that's where investors can create huge gains, while limiting the amount of risk that they're taking going after some of those gains.
Steven Pesavento 09:31
And so it's important for you as a passive investor to really sit down and understand well, what is my risk profile? What am I actually truly looking for out of these investments? Am I looking to live off of the cash today and therefore I need something that's going to have a fixed income or a high level of certainty that that income is going to come in every single day, or by somebody who's looking for that opportunity to grow that wealth. And it's not as important to me whether that turn As over in the next six months, or in the next three years, as long as you understand what that strategy is, you're able to then make a decision to go and invest that money with the right operators, or if you're an operator yourself to be able to make those intelligent decisions. And, you know, after going through what happened in 2020, we pulled back a lot of our capital, we ended up putting together a security fund for ourselves to make sure that we could pay any type of expense that came up. And since then, we've been able to acquire quite a few properties. Because we know that no matter what happens in the market, we're going to be in a great place to protect ourselves and our investors. So with all of that said, I'm really excited about what is coming down the pipeline at VonFinch. But I'm also excited to see where things go economically, none of us have a crystal ball and none of us know exactly what's going to happen. But at the end of the day, it's important that we continue to check in day after day. So if you're not already registered, head over to Vonfinch.com/invest You and get our monthly newsletter. We're releasing economic updates and sharing information from our chief investment officer from our research team. And of course, from yours truly, myself about where we're at what we believe is coming next, and how together we can face whatever, whatever kind of economic uncertainty we see. So thanks so much for listening, and I look forward to seeing you guys on the next episode.
Steven Pesavento 11:42
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The Investor Mindset Podcast & President VonFinch Capital
Steven Pesavento has always been obsessed with understanding how we can think better, how we can be better and how we can do better. He is an active real estate investor who curates Commercial Real Estate Investments for clients.
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