Real Estate Investing in a Pandemic World

The Big Picture

The Long Game

There are speculators and there are investors.  The one you chose defines your proper course of action when allocating your hard earned money to future expectations. Everyone at some point faces the reality that forces outside your control can strip away everything you thought you knew about tomorrow's plans.  It happens daily to thousands of people and we never give it a moment's thought.  When the same forces hit everyone everywhere at the same time, then we all perk up and take notice.

If you're a speculator, you either double down and take advantage of everything you can, or you sell everything and go cower in a corner waiting for the dust to settle.  Investors see sudden shocks like this as opportunities that only come around a few times in life.

For most of my life I thought of myself as an investor, when in reality most of the time I operated as a speculator.  Investing takes discipline, dedication, and focus on the right things.  For some people all that comes naturally.  The rest of us have to work on it.  In this pandemic world we find ourselves in as I'm writing this, some of the lessons of the past make excellent case studies to hone our discipline, dedication, and focus so we come out stronger on the other side.  Times like this provide the perfect opportunity to step back and evaluate our past experiences and our futures. Those past experiences combined with present realities strengthen us for the future that awaits.  We play the long game, and we rise above the tide of mediocrity.

Building on 2008

I've lived through about eight black swan events in my life.  Each one provided perspectives on the world inaccessible in a book or classroom. Nothing changes you like a real experience, and no real experience changes you more than one that strips away all your preconceived notions of reality.  As a child, the first black swan events simply sparked my imagination.  I was too young to personalize them.  The possibilities were no more real than a story book.  As a young adult, the possibilities became frightful and stirred me to take drastic actions out of fear.  After two or three events it became clear to me either the true worst case scenario almost never happens or when it does, human beings figure out how to adapt and get on with things.  By 2008 I had seen enough global crisis to carefully watch events unfold and ask relevant questions to prepare for the new world unfolding.

As I was processing and reevaluation all my life lessons on money and finance in 2008, the founder of the real estate company I now work with quickly discovered his real estate business model had some weaknesses. Some people give up when their world is shaken.  Other's pick themselves up and learn from it.  I'm grateful Robert Slattery had the internal fortitude to realize the defects were not in the real estate industry itself.  Instead, like a good engineer, Mr. Slattery took a close look at his design, identified the flaws, and redesigned his model to withstand inevitable exogenous events.

The lessons from 2008 suggested to me real estate was actually the safest place to invest hard earned money for the long game.  Before 2008 I believed Wall Street traders were real wealth makers.  After 2008 I realized real wealth exists only in assets you directly control and own completely.  Gold and silver obviously fit that standard. But gold and silver don't produce income.  Real Estate provides the lowest risk, highest potential of any other asset class.

Today I find myself still convinced, and fortunate to participate in the opportunities ahead that our present crisis provides.   No matter what happens, common people need a place to live.  The Blackwell model was designed for just that situation.  To enjoy those benefits going forward, we need to establish the basic principles that support and enhance that real estate model.

Basic Principles

First to Market

In every event like today the people who win big are those who are ready to go when the air clears.  One real estate investor I met last year hit the ground running after the Great Recession, targeting undervalued assets and distressed properties. Today he is financially independent. The venture capital world works like that daily.  Suppose an inventor comes up with a unique solution to a pervasive old problem that everyone needs.  Your Shark Tank lessons probably taught you by now once the word gets out, venture capital swarms the market like locusts.

The first to market reaps the biggest dividends.  We have at least a few months as of this writing before work and life will be called normal again.  We have a perfect opportunity to prepare ourselves, while there's no competition, to review our long term plans and goals.  Figure out why you involve yourself with real estate. Figure out where you want to be in ten years. Figure out what resources you will need to succeed. Then outline a strategy to get ready and hit the ground running when the coast is clear.

Historical Opportunity

We have seen truly unprecedented actions from governments around the world to stop the spread of the SARS-Cov-2 virus and the economic consequence to the lives of many, with more on the way.  The consequences of those actions will reveal themselves over time. While we don't know the extent or nature of the new rules, we know for sure there will be new rules. Some rules flow out of direct actions by government, like ultra-low interest rates, while other rules reveal themselves as several trillions of dollars of assets shift from one place to another.

The collapse of the Bretton Woods monetary system from the Nixon Shock in 1971 opened the door for Americans to buy gold bullion for personal use. It set the stage for floating exchange rates and changes how we think of oil as a commodity. Today professional and private traders and investors participate in large financial markets trading gold, oil, and forex.

Another paradigm shift is around the corner. While you prepare an action plan, leave time to study the changing landscape. Keep an open mind for creative ways to solve problems, as problems reveal themselves.  In the United States we have opportunities unavailable to most people on earth. You've seen this taking place in the middle of the crisis: restaurants pivoting to serve in unique ways; a liquor distillery converting itself to hand sanitizer maker, a 3D printer engineering company producing 100 ventilator valves in a single day on a moment's notice, auto companies brainstorming methods to support production of ventilators. These are just the visible signs of free-market ingenuity, and the rapid response of creative minds applied to solving real problems.

I learned one of my guiding principles from an interview with Richard Branson, founder of Virgin Group. Asked how he figures out how to make money he replied, "I don't think about making money.  I look for opportunities where services and needs are lacking, and figure out how to meet those needs.  If I can do that, the money will follow."  I went to work for Blackwell Real Estate because they pursue that same goal. You can, too

Rules of the Game

Secure Your Home

Toilet paper is not your biggest concern.  There's nothing broken in the U.S. supply chain. In times like this, everyone owes it to themselves to evaluate the gaps and weaknesses in their living space and financial circumstance.  I like Dave Ramsey's advice. When faced with financial stress, make sure you prioritize the three most important parts of life in this order:  food, utilities, shelter.

I'm sure these last two weeks forced all of us to think carefully about what's most important in our lives.  Use this isolation in a constructive manner filling in the gaps of your lifestyle as circumstances reveal the needs. The biggest growth and change in the United States occurred after the Great Depression, as that generation learned to reevaluate the importance of essentials.  Many of you may remember seeing that attitude in your parents or grandparents even into the second half of the 20th century.  I believe our present situation will do the same for this generation.

After your home essentials, consider your personal qualities, strengths, and abilities, as well as your weaknesses and vulnerabilities, and the impact on your future. Talk about the bigger issues of self-sufficiency and readiness with your loved ones. Review your estate planning, as my wife and I have done. Ask what it looks like in your world to anticipate and prepare for lose of access to common supplies. Changing one's perspective regarding everyday life pays dividends where it matters most, in any number of exigencies of life: earthquakes, long-term power outages, severe storms, and all other man-made and natural disasters.  These actions remove significant factors that feed our fears in times of crisis.

Prep Your Resources

One of my favorite financial writers has two poignant pieces for our consideration.  Take a look at "A Crisis is the Worst Time to Learn Your Risk Tolerance" and "Three Things I Think I Think – Corona Edition" by Cullen Roche at Pragmatic Capitalism.  While his dialog centers around stocks and bonds, his principles apply to any type of investment. As he says in one of my favorite quotes, "Don’t do something you love. Do something other people will love you for doing."

When you have your essentials secured and your purpose defined, then you're ready to prepare your resources.  The internet provides a wealth of information on strategic planning and project management. Every personality type and learning style can find a system that resonates with them.  Use the extra time from isolation preparing a strategy for yourself.

While you build your plan, prepare a timeline that works regardless of timing.  This crisis will unfold and settle down in unpredictable ways.  Remember the first to market principle above.  I started my business in real estate for this very purpose, to help investors build solid plans.  I can't tell anyone what the right choice looks like for them, but I can ask relevant and useful questions to help anyone find the answers for themselves.  An epiphany three years ago opened my eyes to my knack for finding creative solutions to problems and clever techniques for saving time and money. If you can't work with me, find someone you can work with.  A coach, a mentor, or a roll model is invaluable to everyone.  Even the richest people on earth had and still work with mentors and coaches.

Lastly, I highly recommend The Only Basic Financial Advice You’ll Ever Need at Pragmatic Capitalism as a general educational resources for building your financial futures.  In the meantime, stay tuned through my social media connections.  I have other research coming regarding historical U.S. home prices based on Case-Shiller's work from Irrational Exuberance where I will demonstrate the stability of home prices through various economic changes and stress conditions.  I'm also working on collecting data on real-time changes in our local market, and other topics as events unfold.

Don't forget to share your thoughts below so others can learn from your experiences and I learn to address the thoughts and needs of my readers.

Notice to Small Businesses, Renters, and Homeowners.

Caveat: I have not used this before, so I'm learning, too. Just found out about it. Please share your experiences in the comments. As we all figure out how to operate small businesses and services to our community, you may find it difficult to pay your mortgage if this goes on very long.

The SBA will work directly with state Governors to provide targeted, low-interest loans to small businesses that have been severely impacted by the Coronavirus (COVID-19). The SBA’s Economic Injury Disaster Loan program provides small businesses with working capital that can provide vital economic support to small businesses to help overcome the temporary loss of revenue they are experiencing.

Who can use an SBA disaster loan

The SBA offers disaster assistance in the form of low-interest loans to businesses, renters, and homeowners located in regions affected by declared disasters.

See sba.gov/disaster and Coronavirus (COVID-19): Small Business Guidance & Loan Resources

Money From On High

WASHINGTON—The Trump administration said it backs a plan to send checks directly to Americans, likely within the next two weeks...
Source: WSJ

In another series of unprecedented moves, Congress and the Administration announced plans to send money directly to Americans and extend income tax due dates by 90 days, including waiving late filing penalties.  The cash grab has bipartisan support, with $1000 being floated as the amount per person.

Meanwhile, over at the Small Business Administration, Treasury Secretary Mnuchin said the administration seeks emergency loans administered through the Small Business Administration.  The Treasury is also considering deferring quarterly tax payments to help small firms conserve cash.

Being unprecedented, it's impossible to predict the outcome.  Personally, I wish creative thinking existed in political realms.  What we need is a 90 day weekend.  Financial markets don't crash when they aren't open.  Hedge funds can't algorithmically compress 3-months of change into 3 hours of trading activity.  Shut everything down like a national holiday. Use the extra time in the financial markets, businesses, and agencies to figure out how to tally up the consequences and process the rapidly changing dynamics of normal life, whatever normal is going to become.

Obviously complex questions have to be addressed.  But controlling consequences of drastic moves when a train is out of control and running above maximum speed likely does more damage than than just putting on the brakes.

Meanwhile, the Federal Reserve keeps churning out options. 

The Federal Reserve said it would set up a lending facility to support short-term commercial debt markets to prevent intensifying funding strains from accelerating economic damage from the coronavirus.

The U.S. Treasury will provide $10 billion of credit protection from its Exchange Stabilization Fund (ESF), funneled through the Commercial Paper Funding Facility (CPFF).  A similar CPFF was used for the 2008 financial crisis.

The commercial paper market operates by providing short term financing needs for large business operations, typically with loan terms in weeks.  The commercial paper assets make up most money market funds.  Money market funds are supposed to be as safe as cash, although they don't carry FDIC insurance like cash in the bank.  Without stable commercial paper markets, money market funds can break the buck, creating more difficulties downstream for investors, 401(k)s, and pension funds.

G7 Leaders’ Statement

Issued on: March 16, 2020

The Group of Seven just released a blanket policy statement regarding coordinated response to the COVID-19 Pandemic.

I'm speechless. This seems like the very definition of 'unprecidented'. I don't think anything like this came out in 2008.

Federal Reserves Global Response to COVID-19 Outbreak

Today the Federal Reserve made a series of surprise announcements to support the credit needs of households and businesses. The Federal Reserve announced measures related to:

• The Fed Funds Rate
• The Discount Window
• Intraday Credit
• Bank Capital and Liquidity Buffers
• Reserve Requirements
• U.S. Dollar Liquidity Swaps

This follows on the heals of a policy statement from March 9th setting the stage for banking policies to accommodate the shocks to the global economy caused by a pandemic.  It's not unprecedented for the central bank to surprise the financial markets. It's very uncommon to happen on a weekend, indicating something very serious afoot. However, the response appropriately addresses the broad realities and long term understanding of this present situation.

As pointed out in the surprise FOMC statement, before SARS-Cov-2 swept the globe, the U.S. economy macro-statistics were very strong.  Consumers did what consumers do: consume.  Employers did what employers do: employ. Banks did what banks do: lend and spend. There were no fundamental flaws in general, daily, normal economic activity.

However, uncertainty breads fear, and fear breads panic, and panic breads unpredictable and irrational human behavior. That's not to say everyone's decisions are bad.  It says a flood of unexpected data (money) hits institutions' computer management models without warning.  The systems that manage and keep banking and economic activity flowing smoothly contain alerts and notifications. Those systems primarily help bank regulators identify weak banks in need of behavioral change to avoid default and bankruptcy. When panic ensues, those indicators become untrustworthy.

The lessons from the Great Depression informed central bankers that banks must operate by different standards than normal human beings.  Individuals grab all their stuff and anything they can get their hands on to make sure they aren't left holding an empty bag.  That's how bankers in 1931 behaved as well - demanding everything that was rightfully theirs (the "money owed them" by mortgage debtors). Just when common folk need a little grace and understanding, the banks laid down the law!

Today central banks operate as the steady hand of reason behind the financial systems that otherwise swing out of control by the financial decisions of an out-of-control swarm of human actors all demanding what is rightfully theirs.  If we could call a time out, put life on hold everywhere, and wait for the virus to dissipate, we could all make rational adjustments for whatever the new normal becomes.

Today's series of policy changes achieves the same thing - buying time for everyone to discover the new normal. Let's see how that works.

Joint Agency Press Release

On March 9th, six bank regulatory agencies together published a response to the stress unleashed by the coronavirus on financial institutions.

Federal financial institution regulators and state regulators today encouraged financial institutions to meet the financial needs of customers and members affected by the coronavirus. The agencies recognize the potential impact of the coronavirus on the customers, members, and operations of many financial institutions and will provide appropriate regulatory assistance to affected institutions subject to their supervision.

The regulators also will work with affected financial institutions in scheduling examinations or inspections to minimize disruption and burden.

Bank regulators have authority to demand certain actions by bank managers when financial institutions assets become threatened.  Essentially this press release tells those regulators to stay calm and take it easy on the banks.  It acknowledges the inevitable difficulty of bank customers as the virus spreads through our communities, putting the regulators on notice that the governing agencies expect them to be team players for everyone's welfare. This buys time by allowing banks to extend grace periods and additional credit to customers that have always been reliable and stable, not holding them responsible for matters outside their control.

March 15th Series of Actions

Federal Reserve FOMC statement

In a surprise move to drop the federal funds rate (Fed Funds) to virtually zero, the federal reserve (The Fed) points out correctly the fundamental strength of the economy before the virus started making headlines: "Available economic data show that the U.S. economy came into this challenging period on a strong footing."  They also point out, "The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States."  In response The Fed plans to increase U.S Treasury holdings by $500 billion and $200 billion of mortgage backed securities (MBS) over the next few months.

Lowering the fed funds rate lowers the cost of working through this period for business and households.  Think of the fed funds rate like the wholesale price of credit. Buying MBS pulls mortgages off the books of banks, motivating them to extend additional mortgage credit to households.  This ensure those who need to move can repurchases homes elsewhere, and makes funds available to those who need to pull equity out of their homes to get through the cash shortages caused by temporarily closed small businesses.

Purchasing Treasurys is most intriguing. The combination of increased federal spending and reduced tax flows creates rapidly expanding deficits. A weakened economy won't have capacity to absorb that debt, which would otherwise increase interest rates from the flood of new securities (higher supply producing lower prices, and bond interest rises as bond prices drop). These purchases also buy time, because moving Treasury debt to the balance sheet of the central bank removes it from the economy at large.  The combination of federal payments to cover coronavirus expense while simultaneously moving the Treasury debt out of the economy eliminates the dilutive effect of excess spending, keeps pressure off of inflation when the economy needs all the help it can get, and eliminates the cost of new debt on the Treasury.

Actions to Support the Flow of Credit

Four specific banking tools were simultaneously adjusted to essentially grease the skids and simplify credit flows without banks violating traditional constraints imposed under normal market conditions.  The Fed adjusted the discount rate, encouraged the use of intraday credit, acknowledge the appropriate use of capital and liquidity buffers to support prudent solutions to the present economic strains, and lowered reserve requirements to free up additional credit.

Since the global financial crisis of 2007-2008, U.S. bank holding companies have built up substantial levels of capital and liquidity in excess of regulatory minimums and buffers. The largest firms have $1.3 trillion in common equity and hold $2.9 trillion in high quality liquid assets. The U.S. banking agencies have also significantly increased capital and liquidity requirements, including improving the quality of regulatory capital, raising minimum capital requirements, establishing capital and liquidity buffers, and implementing annual capital stress tests.

It's important to understand all that money and those assets, by regulation, are unavailable to banks for lending.  It would be foolish, though, for those reserves designed for this time of economic stress to be the very instrument that exacerbates economic stress because of regulatory restrictions binding the banks and preventing them from the necessary response to keep businesses and households from collapse.

Without delineating the regulatory framework of these tools, suffice to say this combination ensures banks and regulators both understand the changes in bank policy since 2008 were specifically established for times like this.  Therefore, it's appropriate in the view of the central bank and agency regulators to use the resources accumulated over the years to provide banking services to businesses and households in a prudent manner for the welfare of all.  Just like a stockpile of grain "reserves" accumulated in the fat years feeds the masses in years of famine, those "reserves" in the banking system were designed to feed the lending requirements in lean economies.

U.S. Dollar Liquidity Swaps

U.S. Dollar Liquidity Swaps represent central banks lending to central banks. In our global economy, banks around the world convert foreign currencies between each other.   Currency is a sovereign asset.  When a European business needs dollars, or an American business needs Euros to settle transactions across borders, someone with extra dollars or euros must be found to provide the currency.  Under market stress, finding and moving those currencies can be hampered by institutions dealing with other issues, market or regulatory requirements making the currencies unavailable for lending, or higher demand for a foreign currency than normal in one sovereign jurisdiction.

This announcement simply indicates the central banks of Canada, England, Japan, Switzerland, the European Union, and the United States all agree to lower the cost of liquidity swaps, and also provide 84-day arrangements in addition to the existing 1-week arrangements.  Everyone knows this crisis is not going to resolve itself in a few weeks. Offering 84-day terms improves efficiency of liquidity swaps by allowing counter parties to focus resolving internal affairs rather than returning weekly to process and monitor swap agreements and currency requirements. In short, buying time for international currency demands to normalize while stress conditions unfold and eventually unwind.