To Prey or Not To Pray

Earlier today, Tom Menacho with Kineo Capital summarized investor’s sentiment entering this 50th week of 2023, “With very little in the way of market forces wanting to deliver a merry holiday to all ??, an economic “soft-landing” in 2024 is the gift ?? that everyone wants for the coming year.”

That word "everyone" might be slightly more inclusive than Tom realized given the growing pride of lions ?? pacing along the sidelines of the investment real estate market.

Those pacing predators have seen these economic cycles before and have learned that many of the best investment opportunities result from the tired, worn-out, sickly, and malnourished investors. ??

Whether one considers the predator to be a pride of lions preparing to feed again or a pack of black bears ?? coming out of hibernation, the benefit of recessionary times is very similar to culling the herd: to separate or remove (usually by killing) inferior animals out of a herd so as to reduce numbers of the group as a whole.

The immediate visual that comes to mind are the wildebeest, members of the antelope family, also called gnus, that inhabit the Serengeti plains of southeastern Africa ?? and graze in the grassy savannas of Tanzania and Kenya.

Then when the rainy season ends in May or June, 1.5 million wildebeest migrate northwest in search of greener pastures. ??

Sadly, many of those wildebeest that start the migration do not finish it, succumbing to the long, excruciating journey and abundant predators eagerly awaiting their passage.

Whether it was the minivan-driving, soccer-mom toting wannabee Realtor from the late 2000s or the apartment syndicators of the 2020s, the last to join are typically the first to fall and this time around will be no different.

Those real estate investors who navigate changing economic cycles typically have one if not all three of the success characteristics: abundant capital in reserve ??, lower leverage than their peer group, less aggressive income forecasts, and more conservative expense forecasts and a bonus is deep lending or investment partner relationships that do not cave under the weight of economic duress. ??

Even one of these 3 success characteristics can be sufficient for navigating changing economic cycles, yet those who encompass all 3 surely bolster their balance sheets and willingly tradeoff the highest of leveraged returns for the security of not falling prey to vicious predators in a downturn.

Employing each of the 3 success characteristics is not deemed flashy or even cool by the ‘in-crowd’ because effectuating each characteristic comes at the expense of lower return on invested capital, lower net operating income or lower debt levels.

The direct result of one or all of these 3 immediately depresses financial performance yet strengthens operating performance risk during turbulent times as the asset does not have to produce magic tricks ?? to achieve their targeted yield.

Year after year, decade after decade, one thing rings true: The Only Constant Is Change in Real Estate Investing. More on that in the next article. ??

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