America is filled with problems, from economic collapse due to Covid-19 to severe weather events. However, these events – like all before them – create opportunities to make money. In fact, there’s no more important time to be creative in real estate than when things are in a state of flux. In this Creative Real Estate Mastery podcast, we’re going to review the creative options to make deals happen during a crisis and how to harness the power of the situation.
Episode 9: Being Creative In A Crisis Transcript
America has seen a lot of crises in recent years. You had the dot-com bust, you had the Great Recession, you had COVID. It seems like we always have these things popping up, these giant issues, problems, recessions. And when those occur, you have two things you can do. You can either curl up in a ball and give up, or you can get out there and fight and make money using that crisis as a tool to financially profit from it. Now, in the world of commercial real estate, there are many, many different examples of people who took a perfectly good crisis and made it into a huge opportunity and a huge win for them. One was a guy named Don Carter. Don Carter, rarely hear his name today. His mother owned a small business. Not small, it was larger. It was called Home Interiors and Gifts. They sold hokey things like brass unicorns and things in a mail order catalog. But when the savings and loan crash happened in Texas, what did Don Carter do? Don Carter surveyed the situation and thought, wait a minute, there's got to be some way to make money in this mess.
So, he started buying these almost completely vacant office buildings, something that nobody else did. So, he would buy an office building that might be at 20% occupancy and would buy them from the federal government, because under the savings and loan crash, the government took a lot of these foreclosed real estate assets and then tried to get rid of them literally on a penny on the dollar. So, Carter became a very liquid buyer of these office buildings. Why? Why would he do that? Well, because he figured that ultimately the occupancy and the rents would come back. But there was a moment when people thought, oh my gosh, that guy is crazy. He was buying office buildings. There was so little demand for the space, they started using them for self-storage. What happened? Fast forward, years later, these buildings that were 20% occupancy were now suddenly at 85% occupancy. These rents, which had gone as low as $5 a foot, were back up to 30 and $40 a square foot. He looked like an absolute genius because he knew that he could harness the power of that crisis to make money.
And we all have that capability. But what separates the good investors from the bad investors is the bad investors just give up. But the good investors realize this is the moment they've been waiting for. This is their chance to buy things cheap. Now, the first thing you have to know about any crisis in world history has been ultimately the economy recovers. It happened in the Great Depression, Texas savings and loan crash, dot-com crash, oil embargo of the '70s, Great Recession, we've seen it over and over again, even COVID. We all thought in COVID that, Oh gosh, it's all over, the world is ending. But it didn't. It never ends. We just have these little pockets of misfortune where things go way down, but then they gradually or suddenly come back up. So, a crisis is not a permanent feature. But what happens during a crisis is you have a huge write-down on asset values, massive write-down on asset values. And that is your ability, your moment, your timing to strike when you can buy things for a penny on the dollar.
J. Paul Getty, one of the wealthiest people in American history, in fact, the wealthiest back in the '50s and the '60s. He loved recessions. If you read his biography, he thought recessions were the greatest thing ever, because in recessions you could buy great assets for very, very little money. Conrad Hilton of the Hilton Hotel chain, he had a whole chain of big beautiful hotels and lost them all during the Great Depression. And he learned a lesson from that. His new theory, don't build anything, wait for a crisis and buy it for a penny on the dollar. Over and over again, there have been so many American real estate fortunes that were created basically on the back of a downturn. So, when you look at investing in real estate, you don't want to be investing during the boom times, because during the boom times, more than likely there'll be a downtime and the values will come down and the rents will come down and your ability to handle that will be much reduced. When you want to buy things is when times are bad, and then you want to ride them up like a ship, riding the tide up. That's the best way to invest.
Now, what is our current crisis in real estate that you can use as a tool, as a lever to get good buys in? Well, you have the micro side. We all know office buildings are struggling terribly. Huge vacancy, big reduction in rents. And that may never be solved, because the problem is today most companies have some percent of workers working remotely. But on top of that, you have the simple issue that the modern human has given up. They don't really like or treasure the concept of working in a building far away from home. And many businesses like this change because it saves them the cost of the office space. Retail is also in trouble because most consumers, myself included, buy most of what I buy today online. Why should I bother going to a store and buying a dehumidifier and lugging it out to my car and then lugging it back to my house from my car, when I can buy the same darn thing on walmart.com or on amazon.com and have it delivered to my door? Almost everyone has now figured this out. So, the retail landscape, strip centers, malls are doing terrible. I was in a mall just yesterday. I've never seen so many pop-up shops. They literally can't give the space away now. So, anyone can open a T-shirt shop in what was formerly class A blue chip mall, as though it is some kind of garage sale. So, retail is in trouble, lodgings in trouble.
Lodging has real problems right now because a lot of people are likely not to travel, particularly business travel, because they can just do it on a Zoom meeting. So, that's struggling. But then you have the industries that are poised to always do well: mobile home parks, apartments, RV parks. These are basically steady commodities that are defined by providing a service that's inexpensive. And right now, we all know that's a key item in America right now is trying to get things done at a lesser cost. But here's the big issue. Even in the world of mobile home parks, apartments, RV parks, you still have one macro crisis going on right now, and that's American interest rates. Our rates have never been higher in the past 40 years. And it came out of nowhere with the lowest rates ever till the first quarter of 2022, and then they just went berserk, just almost straight up. But the good news is they're about to start coming straight down.
Jerome Powell, the Fed, the guy that raised the rates so aggressively, he's leaving office in May. Everyone hates him. Trump has been trying to get him fired or thrown out since before he was even elected. When Powell goes, Powell is literally holding back rates. He hates Trump so much he can't help himself. He refuses to lower rates simply because Trump wants them lower. But when he's gone, you should see the damn break and you should start seeing lots of lower rates. If you buy real estate at a time when rates are coming down, values of those real estate keep going up. So, the best time to buy any form of commercial real estate is in an environment where the interest rates are coming down. That is this moment.
So, while we all have to wait around for crises to occur, and crises come in many form and fashion. Right now in the world of real estate, the crises you can profit from is simply buying properties at a time of higher interest rates. As the interest rates go down, your monthly payments decline, but most importantly, the value of the assets go up. This is the perfect crisis to be buying in. This is Frank Rolfe. Hope you enjoyed this. Talk to you again soon.