Jim Rogers, the famous investor and republican supporter who called the last recession, recently said “there was a 100 percent probability that the U.S. economy would be in a downturn within one year.” (see articles below). I’m not convinced we are 12 months out, but based on historical metrics it will happen in the next 36 months or so. What should you do today to prepare? I’m not talking about stocking up food to get ready for the apocalypse but steps everyone involved in real estate should take today to ensure financial success through the next downturn. I joke that I’m still “walking a bit funny” after getting beat up in the last cycle! Although, not a pleasant experience, it was a life altering learning experience.
Having personally been through many bubbles including the tech bubble and the last real estate bubble that imploded in 07 here are some key learnings. In the last cycle, we were in the lending business (fortunately we still are) and thought we had positioned ourselves for any downturn. Boy, were we wrong. What did we learn from the last cycle that will prepare us for the next one?
4 steps everyone should take today
- Begin deleveraging: Leverage is great when the markets are going up. You can make substantial profits when everything is good. The same holds true when the markets go down, your losses are magnified. Now is the time to reduce leverage. We are now 100% deleveraged holding all of our loans in cash so we don’t have the “drama” of having to deal with banks, lines, securities, etc…
- Make sure you have plenty of cash: Notice I said cash not liquidity. In the last cycle, we had tons of liquidity on our lines which was more than enough to help us through the last crisis. Unfortunately, many of the lines became useless during the crash as banks pulled back which became a big issue for liquidity. This is why cash is king.
- Watch your risk profile: We are at the end of the cycle so now is not the time to be starting new projects with long life cycles like a new development. Now is the time to start winding these downs so you have capital to ride through the next cycle
- Limit fixed overhead: Now is the time to make sure your operation is very lean so that you are flexible in the next cycle. When possible shy away from heavy fixed overhead and focus on variable overhead that you can quickly adjust to the changing market conditions. For example, instead of bulking up staff, outsource non critical functions so that you can scale your business at a moment’s notice.
Regardless of whether the next cycle is today or 2 years from now, it is clear that we are somewhere near the tail end of the current cycle. Everyone in real estate needs to begin preparing their business to ride through the next cycle with minimal damage. The 4 steps above are a good place to start based on what we learned from the 07 recession.
Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all they need is their simple one page application (no upfront fees or other games).