I live in Austin, Texas. It’s a great town and I’ve been here for 50 years.
People are moving here by the thousands. I understand why. It’s a hip town, with plenty of options. There are seven lakes within an hour’s drive. New restaurants pop up every month. The music scene is electric. And the weather is great.
Our average temperature is 72 degrees. It might boil to 108 degrees in the summer, but it infrequently dips below freezing, so you can usually get through the winter with a light jacket and occasional layering.
It snows maybe once every 4-5 years and that might last a few hours until it quickly melts off. It “never” snows hard, accumulates, or causes us more than a day of inconvenience. I even did a video recently when it snowed here – just because it was such a novelty.
Well, never say “never.”
We are on day five of the big freeze of 2021. Most of the country is frozen and businesses are crippled. My internet is down, the streets are frozen and empty, and the propane that heats my house is almost gone. I have not seen this in 50 years.
It reminds me of the movie, The Day After Tomorrow, where the main character, past Austinite Dennis Quaid, predicts a global climate shift, and the top half of the world freezes with the dawn of a new ice age.
I don’t think we are going to need to evacuate the folks north of the Mason Dixon line, but this freak storm can remind us that you never know what might happen in the future.
At the beginning of the Great Recession in 2008, I was confident that some of my holdings would stop producing cash flow. I was right. I was also very certain that one or two were insulated from the perils of the financial market. I was wrong.
That miscalculation caught me by surprise, and it cost me money. Because of the lack of cash flow, I had to get creative in order to fulfill my promises to my investors. I was forced to borrow money personally to pay my investors their interest, plus principal.
It all worked out and every one of them got paid. Unfortunately, that put a big dent in my liquidity, and I missed a good portion of the real estate sale that began after the dust settled.
I write this because some of today’s investors have not yet been forced to weather a recession. (Pun intended!) Others have short memories, or possibly have developed amnesia.
I vividly recall a new apartment investor telling me that multifamily will “never’ be affected by a recession. (He heard that in a seminar.) His real estate investing tenure was approximately two years, and he had never invested in real estate prior to that time. This was in 2016. He had never been an investor during a recession, and he had only experienced an up market.
The scary part was that he was sponsoring syndications for multifamily deals. I haven’t seen him since, but I wish him and his investors the best of luck. I hope he is right about apartments, and I believe they will be strong for the foreseeable future. But history would indicate that eventually there will be headwinds. I’ve seen it with my own eyes.
Life is waves and typically what goes up, will come down. History does repeat. You and I are not bulletproof.
This has been a great run and it might go a bit further. I hope we continue to reap the benefits of this great market, but it would be worth your time to put some sensitivity tables in your underwriting to stress test for potential calamity. At least you will know ahead of time how you will fare if things turn the wrong way.
Don’t be timid or lulled into inaction. Only action produces results. But please be wary of the false security of saying “never.”
Until next time!
Tom
P.S.: If inflation rears its ugly head, will you prosper or suffer?
