Why 99% of You Will Not Make Money During a Downturn
And why some of you will create generational wealth
During a boom, people often say they cannot wait until blood is in the streets. However, despite their incessant signaling, 90% will not take advantage of downturns.
Therefore, why is it that no one is willing to take the leap when push comes to shove and a downturn arrives?
It comes down to a few reasons:
To Catch the Falling Knife:
At its core, it is basic psychology. No one wants to catch the falling knife. Or, put in another way, no one knows if prices will continue to fall.
Most people are so concerned about not buying the bottom. However, no one is worried about purchasing the peak. Our brains are wired, so we believe prices will always trend upwards.
Anyone objective in 2021-2022 easily saw that values were too high. People were buying buildings that stabilized at a 3% cap rate.
Where is that going to go? Will cap rates go down to 1%, maybe 2%? Unless our financial system turned into Europe, this was not going to happen.
Low rates were an onset of COVID-19 funny money. Yet some of the most intelligent people you know bought into the idea that this wasn't the peak.
However, where are these people now? If they were buyers at 3-4 Caps, why are they not buyers at 7-11 caps? At its core, they aren't buyers because of psychology. They are afraid to go against the grain and catch the falling knife. Capital is expensive, and the funny money is gone.
Our core programming tells us values always rise, but when they fall, they will keep falling. You have to actively ignore that instinct if you want to make money in a down market.
Capital:
Capital is the second biggest reason most investors do not take advantage of a down market.
During downturns, Liquidity dries up. Therefore, access to capital becomes increasingly difficult to access for a few reasons.
1.) Due to high treasury yields, more people would instead invest in treasuries.
2.) Liquidity was used during the boom; therefore, no excess is left.
3.) Banks tighten/stop lending
4.) Everyone who invested at the peak is losing their shirt.
5.) Less money circulating through the economy in general. (Ie, wealthy investors are making less money)
Crisis Mode:
Operators who bought near or close to the peak are in full firefighting mode. They are doing everything they can to keep their current company alive.
The last thing they want to do is go and invest in more deals. This means another chunk of participants who are out of the down round.
The Proposition:
Capital and leverage have entirely dried up, operators are underwater, and no one wants to catch the falling knife. Therefore, who is making generational wealth during the downturns?
The successful people in a down round push past the herd mentality. They find and see value when there is blood in the streets.
They also have a large amount of reserve liquidity in cash. You must position yourself well during the boom to take advantage of a downturn. Levering to the gills during the boom is a surefire way to miss out on the downturn.
When you buy property during a downturn, there is a significant chance that you will have to carry the building with no cash flow until the economy returns. This means you must buy the property in cash and have enough carry reserves to sustain until the economy returns.
Investing during a downturn takes a person who is not risk-averse. The operator or owner must be okay with the risk and ready to return this building to the boom or lose it all. These are risky bets most are just not willing to take.
Thoughts:
These were my thoughts on why people never take advantage of such times. However, if you can swoop some deals up for 11%+ YOC, you will be humming in 10 years. Just focus on fundamentals and stabilizing well above rates. Forget the peaks and the lows.
We did not buy any 5 or 6 caps in the last few years and were not market participants in 2021-2022.
Therefore, we are gearing up right now. The long hours start now for us rather than during the boom.
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