AMA - Three questions - Making Sense of the market

Braxton here from the Greater New Orleans area. I am a long time listener to your show and I find great value in the breadth of content. I really enjoy the show format and this is the one podcast I can commit to on a daily basis. Thank you for all that you do for the Real Estate community. I know it must take an immense amount of effort to produce this on a consistent basis.

My question today is on the topic you hear often these days on the great debate between inflation and deflation.

It feels like we are certainly departing from the status quo of the past 10-20 years. I have taken cash out of some of my small rental properties but struggle to re-deploy in more investment properties because prices continue to be pushed upward. There is a mountain of liquidity and increasing competition for investment at low yield. My personal view is we may see near term inflation, but I am concerned we could also be at the doorstep of another debt crisis like in 2008. It appears as though speculative mania has taken over in many markets. How do you view the inflation vs deflation risk and balance you near term investment decisions? If there is inflation it would make sense to buy assets as the housing rents should keep pace with prices, however if there is deflation retaining cash may make more sense. I would like to know how you are thinking through this scenario as each path will likely have very different outcomes.

Braxton,

This is a great question. In my view, there are three major elements to be considered here separately.

The first question is a little like asking, are there any bargains to be found in today’s hyper competitive environment.

The second question is related to inflation versus deflation.

Your third question relates to whether we’re going to experience another debt crisis in the near future.

These are such good questions, that I’m going to answer them over a couple of episodes so that we can do each one justice.

Let’s start with #1. There’s no question that we are seeing an auction environment in many segments. The winning bidder in an auction almost always pays more that if there is only one buyer at the table.

The key is to focus on a specific stream of investment types. When you are well positioned in the marketplace, you will find lots of special situations that appear without showing up on the market. I’ll give you an example. We have millions of small businesses that are hurting in the current environment. The business owner may be looking to exit the business, but wants to keep any marketing of the business a secret. As soon as the owner markets the business, they damage the business, their employees go looking for another job out of fear for their job security. Often those businesses have real estate associated with them. We’re evaluating one right now as we speak where it might be possible to separate the real estate from the business and lower the cost of acquisition to a fraction of the asking price.

Off market deals happen as a result of special situations. It might be a death in the family, or a divorce. Sometimes it’s a medical emergency that precipitates a financial problem. Coming in to save a situation for a family in financial distress can be an opportunity to do well and do good at the same time. You might pick up a property at a fair discount to the market, while preserving a good chunk of the seller’s equity.

Finally, we look for opportunities to add value, to transform a property from something that’s not in very high demand into its highest and best use. This way we're not competing based on the existing market.