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What do we do in times of economic uncertainty? Steven is asked this question many times, especially in today’s economic downturn. In this episode, Steven takes a look at the current market situation and shares his knowledge and expertise on how you can still make the best of real estate investing.
- By holding on and sitting on cash in your bank account, you’re losing money every single day.
- When it comes to the current market, what is happening is that as interest rates go up, the cost of capital goes up, returns go down, and buyers and sellers continue to see a gap that is widening.
- If we move to a longer investment window, and we have longer term debt, we have the ability to wait out any type of storm that might be happening in the market.
- With locked in long term debt, with strong business plans with great operations, we can put ourselves in a position to greatly reduce risk and hedge ourselves against inflation, like no other asset class can do.
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 00:00
Investors Welcome back to the Investor Mindset podcast where we dive into business and investing strategies help you take your business and your portfolio to the next level. Today, I want to talk to you about one of the questions that I keep hearing from lots and lots of my clients, friends, family, those people who are circling around trying to decide where is the market going to go, and what should I be doing as a result. So we're gonna get into that, and more, so let's do it.
Steven Pesavento 00:35
This is the Investor Mindset podcast 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 01:01
Thank you for listening to investor mindset podcast Glad you're here. And if you're interested in investing alongside me, in the same type of real estate investment opportunities that I personally invest, and I invite you to head over to VonFinch.com/invest, where you can register to become a part of the VonFinch investor network. As a part of that process. I encourage you, if you're an accredited investor to schedule a real estate advisory call with me or a member of our team where we can dive in and help assess your current situation and help you understand what are those different options that are available to you whether real estate's the right fit for your portfolio, and help you determine where that financial freedom number is actually going to be. So head over to VonFinch.com/invest. schedule some time. And we look forward to building a relationship with you so that we can help you create something greater in your life. Let's get back to the podcast.
Steven Pesavento 01:59
All right. So looking at the market today, we're in a time of uncertainty. And why are we in that time? Well, in part because the Fed is pumped in tons and tons of money. Over the last couple of years, we've been in a decade of, of growth, we're in a position where the Fed just recently raised interest rates, it's currently the beginning of October of 2022. And as many of us know, the Fed has indicated that they believe they're going to raise interest rates at a higher rate faster than they had planned to before in order to get ahead of and try to tamp down inflation. Inflation numbers recently read above 8% CPI. And if you look at how CPI previously was measured back into the 1970s, before they made some changes, CPI is actually closer to 16% or higher. Depends on how you measure it. But realistically, inflation is high and it's impacting the world in a lot of different ways. So what do we know for sure we know sitting on cash is a bad idea. Ray Dalio has been saying this for years, cash is trash. And what does he mean by that? Well, what he means is that holding on and sitting on cash in your bank account, you're losing money every single day, if you've got $100,000, you've been holding on to it. If we take even that low CPI number, and let's just roll it up to 10%. For easy math, you've lost $10,000 of value, that means that 100,000, you had is now only worth 90. And realistically, as we're talking about, it's probably worth a lot less.
Steven Pesavento 03:35
So what do we do, we have to put ourselves in a situation where we can make a return on investment. But when we're in a time of uncertainty, we are looking at the market and we're asking ourselves, Well, where is it going to be? And what is it going to do? And? And how is that going to impact the decisions that I'm going to make? And so from my personal point of view, and let's be clear, this is a time of high uncertainty. It's a time where every single day, the market is changing and shifting, we've got the potential for we've got the war in Ukraine and the potential for escalation coming from that. We've got central banks around the world, looking at raising interest rates are currently raising interest rates. And generally we're headed into or already in a recession. So it's really clear, I believe, and hopefully you guys will see this as well. It's really clear that sitting on the sidelines is not the way to do it. It's important to have cash so that you can cover your expenses. It is important to have reserves it's important to have money that's available for you to be able to support your family and live the life you want to live and be able to sleep well at night but at the same time. If we believe and see that inflation is as high as it is we have to move that money into some part of the market. And so depending on who you're talking with, or or who you're talking to. Some people believe that the more market could be close to a bottom, some believe that we could be heading towards a bottom by March of 2023. We won't really know until well, we're well past that point. But when it comes to the current market, what is happening is that as interest rates go up, the cost of capital goes up, returns go down, buyers and sellers continue to see a gap that is widening.
Steven Pesavento 05:27
And so as an operator, we have to go out and search for opportunities to bring to our investors that can create a great return, and that we're confident that we're going to be able to do that. And so this is why I believe real estate is a phenomenal asset to invest in is because we have the ability to do something which I'll call insider trading in real estate, when you're investing in the equities market, you can inside trade, if you know more information than the next guy, technically, you're not legally allowed to take action on that information. As a result, you have no advantage. And as an individual retail investor, or someone who's not at a big institution, whether you're investing with a couple 100,000, or a couple 100 million, you're not an institutional investor. And so you're not going to have access to the information that these giant hedge funds have access to. And in some ways, the information they have, they're making decisions on just a very small margin, but because they're working with such big dollars, they're able to make great returns. So one of the reasons why I think real estate makes so much sense is that if we zoom out from a short term perspective, and we start looking at things from a long term viewpoint, we start projecting on a five to 10 year hold schedule, what's happening today, and next week, and next month, and over the next year is less relevant as long as we're being conservative in our ability to be able to pay that debt service for a year one, two, and three, while we're executing the business plan. And so why is this is important, because the biggest advantage that we have buying an operating real estate is that typically, the deals that VonFinch Capital was doing the deals that majority of you, my listeners are investing into our value add deals, their deals where we are going and finding an opportunity, we're discovering that opportunity. We're defining what we believe the upside potential is. And then we're going in and we're forcing appreciation. we're renovating units, we're improving efficiencies, we're reducing expenses, we're putting better teams and management in place.
Steven Pesavento 07:45
All of these things are things that we can do in a market. And they're things that we can do in a declining market. This is something that I learned early on in my career back in 2016, when I began flipping houses at scale, and in that first year, we had flipped 75 houses and over 200 properties over that two and a half year period before we expanded into larger properties. And what I learned on an individual property level is that when you're turning through those properties on a very quick basis, it's all about getting to that exit and being able to hit that within that timeline. However, if we move to a longer window, and we have longer term debt, and we have the ability to wait out any type of storm that might be happening in the market, even if we end up being in a period of long flattening, meaning a lack of growth over 23456 10 years, as long as we're going in and we're buying value, and we're creating value, meaning we're buying it for a price that's better than what the property is worth today. And we're adding value in a way that increases the income on that property and therefore increases the value of the property over a long term, then what we get at the end of the day, as we get alpha, we get a an ROI, we get an increase on the value of our dollars that we're putting in. And it's so critical that we put our money into opportunities that are going to create that alpha that are going to create that additional return above and beyond what current inflation is today. So we can look at the market and we can watch and and try to time things to be perfect and and we can pull our money out and we can sit on the sidelines and try to make that individual decision of when we believe we hit market bottom whether that be in the equities market, whether that be in hard assets like real estate, but the end of the day, what's most important is understanding this strategy of adding value. Right.
Steven Pesavento 09:52
So if we have a strong understanding of that local market, we have insider knowledge, if we have the ability to buy properties that other People are not seeing or getting access to. And we can create an advantage in that local market in that specific type of asset class knowing the individual neighborhood and how it's currently performing. And we're able to conservatively hold on to reserves from a property level and do this from a company level, then we can be in a position where we can create alpha or ROI, regardless of what we are seeing in the market. So this just goes to say that it is absolutely important that we're paying attention to what's happening on a day to day basis. And it's absolutely important that we are modifying the strategy that we are bringing to market and we are looking to increase security through deal structuring and increased security through negotiating terms with salaries and increased security by establishing aligned interests, relationships with contractors and property managers, and partners. And through doing all of these different individual activities, we can put ourselves in a position where we can create a return despite the uncertainty in the market. Even if we see the market going down. At some crazy rate, like 5% a month, we have the ability to project out where we believe that floor could be and we can then go in and buy property with those assumptions. Now, our current assumptions is nothing close to property value dropping at that type of rate. In my personal belief, we are in a situation where we may see some additional softening, we may see sellers begin to come closer to buyers and be more realistic about where the current debt market is. We also may see an increase in interest rates over the next few months or maybe into 2023. However, with locked in long term debt, with strong business plans with great operations. And with the ability to Insider trade in real estate, we can put ourselves in a position to greatly reduce risk and hedge yourself against inflation, like no other asset class can do. buying real estate is simply buying a business and understanding how to operate more efficiently. And currently, what we're seeing is that the latest reports show that nationwide, we need at least a minimum of 3.3 million more housing units to support the population that we have today. We're not building that much owning this asset. Regardless of where the market goes. So long as you have the right pieces in place and you have the right business plan and you're adding value to hedge against what other kinds of changes might happen. I believe you're going to be in a great spot.
Steven Pesavento 12:59
So with that, thanks for listening, I appreciate you being here. And if you've been listening to the investor mindset podcast for any amount of time, one of the greatest ways to show your support is to head over and drop us a review on Spotify or Apple five star review. If you love what we're doing, drop a written review and tell us about what you love about the show. Share it with a friend. And of course, I appreciate each and every one of you. We'll see on the next episode. And for those of you who are interested in getting involved in the exact same type of real estate investment opportunities that I'm talking about, right here, I encourage you to head over to VonFinch.com/invest and schedule that real estate advisory call so that we can dive in together to help understand how to position you for success moving forward into the future. Thanks so much.
Steven Pesavento 13:59
Thank you for listening to the Investor Mindset podcast. If you liked what you heard, make sure to rate review, subscribe and share with a friend. Head over to the investormindset.com to join the insider club where we share tools and strategies from the top investors and entrepreneurs and how to take it to the next level.
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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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