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Episode Three: Executing on a Real Estate Strategy

It is amazing how quickly the world changes.

In 2020, I had an idea for a running “live series” about how I was approaching some of my very own investment deals. Since January 1 of 2020, the world and the real estate market has had one wild ride up then down, and back up again.

Major moves have occurred, and, they have happened fast.

As things have changed rapidly, my perspectives and real estate opinions have changed with it. And, much faster than I could have ever imagined from when the pandemic was in its infancy.

A few quotes that I want to highlight:

Malcolm Gladwell: “I feel I change my mind all the time. And I sort of feel that’s your responsibility as a person, as a human being – to constantly be updating your positions on as many things as possible. And if you don’t contradict yourself on a regular basis, then you’re not thinking.”

As a Realtor, I constantly need to be thinking, adapting, and changing my perspectives on the marketplace as it changes as well. That is what I am paid to do. The same goes for running my real estate investments (and the same should be for yours as well).

Gary Vaynerchuk: “Changing your mind based on the context of the current situation is a strength not a weakness.”

The world is changing, faster than ever. And, the same goes for markets.

You need to be able to adapt and adjust to shifting conditions.

Advice to a Clients on Condos

Two separate clients recently called me about potentially purchasing a condo. Both were tired of paying rent, but were also considering a move out of state next year.

They really wanted to buy and then reevaluate their prospective moves in the following year.

First off, I told them, “No, keep renting,” because to own for one year is just too speculative. Sure, we are seeing double-digit appreciation, but the market rarely sees those types of gains. It would be pure speculation to buy for one year and hope for outsized performance.

Selling costs alone are 6% and your property taxes, interest, closing costs, moving expenses, etc. will amount closer to 10%. What if the market goes up just 3% in 2022? One would be taking on undue risk.

Both referenced my fearless predictions blog and early year podcasts about condos surging in the second half of 2021 and being a great potential buy.

Wow. I loved it and appreciated that they read, listened, and absorbed my advice early in the year.

Outside of an automatic counsel of “no” to one year of home ownership, they had been reading and listing to my opinions. Guess what? My opinion had changed because the market had changed too.

The condo surge has already started in earnest, and while I think it will continue to run, a big chunk of gains has already materialized in the South Bay. I explained that to my clients, thanked them for following my content, and also reiterated that this is the reason why we always discuss specific strategies for every individual’s unique scenario.

One year of ownership in hopes of a condo surge is not the right call, especially with the surge well underway earlier than anticipated.

The real estate market is a living, breathing, ever-changing exchange and you must be adjusting your opinions constantly, or you might make the wrong move.

I am not always able to update blogs or newsletters when my opinions change since the world/marketplace is changing faster than ever. So, PLEASE…call me to talk strategy or confirm advice for what is right for you and your individual real estate portfolio.

And, I can assure you that I can provide better individual advice, along with a detailed breakdown of your options that would be just too hard to share on a general blog or podcast.

Episode Three and an Early Conclusion

The theme of change is what brings me to “Episode Three: Executing on a Real Estate Strategy.”

For reference, I wrote two “live series” blogs last year in hopes of a new type of format that was fun, informative, and completely real…

Episode One (June 2020): Click Here

Episode Two (August 2020): Click Here

Essentially, this was a live series of divesting a property or two in a portfolio to enhance ROI via ADUs and restructuring debt. Not to mention, it was a conservative way to plan for if the worst of the pandemic were to really affect our low-income tenants.

If you look at the thought process in Episode Two, formulated well-before the August 2020 post, you will see the main points:

  1. Cash on hand for worst-case scenario.
  2. After 11 years (now 12 years), it was time to improve ROI/ROE of the portfolio.
  3. Utilizing ADU laws to become more efficient and more profitable.
  4. Timing construction prices and mitigating risk.

The plan was to sell the properties in the lowest growth sub-markets and build ADUs in the best locations of our low-income investments.

That was the plan at the time, and in short, it is now scrapped.

“Changing my mind based on the current context!” Ha…And, I am hopeful that it is truly a strength and not a weakness, as Gary V. notes.

Here is what has changed and why the plan is done for the medium term, and maybe forever.

  • Cash on hand for worst case scenario.
    • Very worst-case scenario has not happened, but this is truly a split economy. Lower income communities have been left behind in this recovery. And as a result, more of our tenants have recently stopped paying to take advantage of the COVID-19 relief provisions that expire at the end of June. Our rent has dropped to 50% collection. Thank goodness we sold a property to get liquid, paid down debt, and still operate just fine even under 50% rent collection. (I cannot imagine being a landlord that purchased just a couple of years ago with a single building.)
  • Improve ROI/ROE.
    • While this still can be done, low-income tenants are struggling more than ever, so the investment of time and money makes this option less compelling when there is still huge rent risk. Some of those reasons are clogged eviction courts, fewer job opportunities on the low income side, and tenants aware that landlords have little rights if they do not pay rent…these all offset reward due to greater risk.
  • Utilizing ADU laws.
    • This still is true and allows for much more profit. That said, the challenges in low income areas make building in higher income areas even more attractive with less risk, and potentially greater profit, at this point in time.
  • Timing construction.
    • This has obviously changed from thinking there would be great deals in the construction during a recession, only to see materials and labor prices skyrocket for new residential buildings (i.e. lumber up close to 300%). This aspect alone kills most of the plan in and of itself.

Long story long, the aspects of what made this look like a great move in the middle of 2020 are now completely different. To move forward with the plan would be hard-headed and foolish.

You need to reserve the right to see things in real time and change your position.

Conclusion

For now, the “live series” and promising enhancement to ROI via ADUs in our South Los Angeles properties is on hold and likely will be scrapped.

Unfortunately, just three episodes in and it is done…for now. I’ll be sure to keep you posted on the next steps, if any.

The takeaway here is that you have to make the best decisions possible with the information at hand. And, you have to be willing to adapt (and adapt quickly) when the information changes.

It is not about pride, belief, or giving up. It is about prudence.

I am thankful and proud we sold one building to prepare for a potentially great plan, but it was also done with the utmost care in case things got worse. They have gotten worse. But, we are far better off today as a result of actions a year ago, and now, ready for anything. Both worst case and best case scenarios.

And finally, please make note that our local South Bay markets changes quickly as well. You need to adapt to this housing market like never before.

I am so honored to have followers that not only read and listen, but truly absorb and plan to act on my advice. But, like the two clients I spoke to recently, be sure to call and chat with me directly because the market changes in an instant. I am here to help navigate and advise you on these changes for your specific search.

The best plan six months ago might not (and probably will not) be the same plan today.

DRE: 01779425

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