This week I'd like to share another insightful article with you that was written by Don Zech, founder of CDC Commercial Inc. He colorfully addresses inflation, the recession and what might be next.
Sincerely, JR
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Double-Digit Cap Rates? What Is The Real Inflation Rate, and Will We Have a Pot To Pee In When The Coming Recession Is Over?
By Don Zech
They used to use urine to tan animal skins, so families used to all pee in a pot, and then once a day it was taken and sold to the tannery. If you had to do this to survive you were “piss poor.”
But worse than that were the really poor folk who couldn’t even afford to buy a pot. They “didn’t have a pot to pee in” and were the lowest of the low.
Historically, when the Fed begins to consistently increase its benchmark interest rate, a recession follows 18-36 months behind.
Thus, even as the job losses of 2020 have yet to be fully recovered, the economy is heading for a second recession.
The average interest rate has increased such that the amount of mortgage money available to a typical investor has fallen nearly 25% from December 2020. Absent other changes in circumstance – say, income increases or sudden cash windfalls – investors today are at a major disadvantage compared to just a year ago. Rate increases will lead to reduced demand for properties – and while the drag on prices is not yet perceptible in mid-2022, the decline is imminent.
The irony is that the Fed has been charged to fight the very problem it has helped to create. But, you have to thank them for the best recovery that $6 trillion could buy! Now, the Fed must prove it can control inflation at any and all costs. Maybe it is the old guy in me, but I am a bit worried about the “born in a bull market” generation who have not ever seen a real recession in their adult working life. I am afraid they are confusing brains with a bull market when it comes to their future expectations.
Ultimately, it comes down to knowing the difference between trading, speculating and investing. If you are trading, you value the property, the cost of adding value (construction, re-tenanting, raising rent, etc.) and what you can resell for (you know your profit going in). If you are speculating (buying and assuming it will go up) – stop or get out now. If you are investing, know what your free cash flow is – that’s after inflated expenses and higher debt service. What is your cash return on your cash investment?
On the good news front,...
