It’s morning coffee time again, so for those of you who are tired of reading about Covid-19, this missive will be refreshing. We are firmly in mid-April, and the “tides of March” have shouted…LOOK TO THE FUTURE, NOT THE PAST!
I have lived on the ocean for 45 years, waking in the morning and retiring in the evening to the sight and sound of the sea. Observing waves large and small, and tides rising and receding, I am impressed by the reality that each wave and each tide is uniquely different. That’s life…constant motion and continuous change.
Last week I had a lot to say about the CARES Act and the new tax provisions, which I believe will immediately (and in the future) provide huge incentives and economic benefits for real estate investors. While that letter was a bit technical, it was meant to share with you the significance of this $170 billion-dollar tax windfall for real estate investors. What’s not to like?
So, let’s have a look at where things are:
Many of my colleagues in the real estate world have been quick to send re-assuring letters to their partners, investors, and lenders in a sincere effort to assuage concerns regarding their investments and loans. Of course, by the time those letters are delivered and read, new events have occurred, and the status has changed. Just like those ocean waves, constant change. Good managers with solid experience and great properties generally know what they are doing and will navigate the changed environment so as to come out on top. The rush to communicate that they are “doing all they can, and it’s not so bad thus far” is a nice touch. But let’s do a reality check here…it is bad! With our government leaders encouraging tenants to neglect their responsibility to pay rent plus laws enacted by decree to protect tenants from eviction, etc., it’s nearly impossible for any real estate sponsor or manager to say, “we are ok.” I am not insensitive to the difficulties of businesses that are closed and individuals without work and unable to pay for their basic needs, but there is no matching relief for property owners. We feel the pain too!
Real estate investing is generally not a great activity for individuals seeking to make a fortune. Fundamentally, it’s the path for those who have already realized their fortunes and desire to preserve and grow their wealth in a safe, durable, and tax efficient manner. Short term real estate funds and property flippers come and go, just like those waves. Some are successful, especially in good markets, and some fail. Investment involves risk, and the risk/return ratio must be evaluated rationally, as well as intelligently.
Unlike other investments (stocks, bonds, etc.), real estate is not liquid. A property cannot be sold in a split second with a click of a mouse. This is good news! Buildings last longer than people, and land was here long before humans. You’re stuck with the real estate…that’s reality, and, if you’re invested in great real estate with the right sponsor, it’s also a benefit. I have been asked the following question countless times: “What is your greatest career regret?” This is always my answer: “My number one regret is having ever sold a property.”
Being stuck with great real estate is fantastic. Being stuck with lousy real estate sucks!
Sure, there will be good times and not-so-good times, but I can’t remember the British royal family ever selling any of their real estate.
As the tide recedes and exposes real estate investments that were structured as short-term holdings, financed with short-term loan maturities, and poorly tenanted (bad tenant mix, little or no credit history, over exposure to one or more large tenants), we will likely see opportunities to purchase properties at a discount to real value. This begs the question, “what is the real value?” I could write a book on this but will hold off on the deep valuation theory for today.
I spent my entire career investing in the Westside Region of Los Angeles. As much as I may claim to know the market here better than most, if for no other reason than my decades of experience and knowledge, I admit that there is way too much real estate in this market to “know it all.” However, I know enough to discern value without the use of a computer, an appraiser, or a real estate valuation expert. In no way am I bragging. But, as a lifetime manager and sponsor with an eagle eye fixed on one of the best locations in the world, I see this as a golden moment to cheers our wise investments, nurse them through change, and prepare for the new opportunities that will be knocking.
There is no doubt that we’re heading towards a new reality. But let us not forget, it will be one with phenomenal tax incentives, trillions of newly printed dollars, and interest rates at or near zero.
The tides they are a changin’ and my nose is twitching with excitement.