Should You Be Investing With The Current Market Conditions?

“Ladies and gentlemen, buckle your seatbelts. There will be turbulence ahead.”

When I think about our current economy, I think of it like an airplane flying through a rough patch. The Fed adjusts their flight controls based on economic data similar to how a pilot adjusts their speed (size of rate hikes) and glide slope (terminal interest rate) depending on what the visual glide slope indicator shows – the lights beside the front of the runway that tell a pilot if they’re coming in too high (high inflation) or too low (overtighten and break the economy). 

Over the last year, the Federal Reserve increased interest rates several times causing markets like the S&P 500 to drop about 12%, and the DOW down about 20%. These past couple weeks were a bit of a mixed bag coming off the heels of good CPI news that triggered a rally a little earlier in the month. It’s been volatile, nonetheless. We feel it in real estate too, with the cost of debt increasing substantially cutting into the net income of properties.

However, turbulence does have an end. The good news in Jerome Powell’s speech today is while there will still be rate hikes in December and early into 2023, the hikes will be smaller at around 50 basis points in December. While the future is uncertain, there is hope for a soft landing. Only time will tell.

“Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level. It is likely that restoring price stability will require holding policy at a restrictive level for some time. History cautions strongly against prematurely loosening policy. We will stay the course until the job is done.”

Jerome Powell (Nov 30, 2022)

So with this, is now still a good time to invest in real estate? Well, this certainly isn’t just a yes or no question. Here are some of our considerations:

  • Shift expectations – Changing expectations should be adopted across the board among sellers, buyers and investors. Deals are to be underwritten and approached differently from even just earlier this year. Many deals now are retrading with price negotiations, as sellers must change their expectations on their pricing. Double digit cash-on-cash returns are no longer realistic in today’s climate for investor returns.
  • Diversify and educate​ – Now is the time to educate ourselves on the changing tides, because the playing field is different from where we were in the past couple years. Multifamily has been tried and true, and undoubtedly stable over time; however maybe it’s time to look at other higher yield opportunities with data supporting its growth.
  • All eyes on debt – Debt and leverage are more important now than ever! As the interest rates are rising, this subsequently is causing the debt service to eat up cash flows which affects the debt-service-coverage-ratio (DSCR). The DSCR is what the lenders use to determine whether the asset is spinning off enough cash flow to make the monthly debt service payments. Lenders prefer a minimum of 1.25 DSCR, and when it drops below this point they lower the loan-to-value percentage (LTV%).​

​There are always opportunities to buy assets in any market condition. In my opinion you should always be looking to invest, as money sitting in a bank account does nothing for you except lose value due to inflationary pressures.

One of the best things you can do is find a general partnership team that has skin in the game and that is using conservative measures to find assets that meet the criteria for solid returns. Also, an operator that sets up their assets with ample operating reserves that should allow us to weather most economic storms that may be on the horizon. This mitigates the potential for capital calls in the future.

I truly believe this is a great time to invest your hard-earned money to see some great quality returns during these times. We, at Noblivest, are continuously monitoring the market conditions and tracking the data that support our investment opportunities. We are tightening our due diligence on not just our deals, but also the asset classes, market conditionals and partners & sponsors we work with. 

If you still have questions, I encourage you to schedule a call with us so we can provide answers to your questions or simply talk through a situation that you may have right now.

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