My father wrote this piece for our new Stewardship Properties Facebook Page on how we survived the 2008 financial crisis which sunk so many other real estate investors. Anyone interested in real estate investment and how to manage crises should gain from it:
We routinely get asked this questions by new private lenders, banks, and other industry professionals.
Well, sometimes it's better to be lucky than good. While that somewhat provides the answer to this question, there is more to the story.
Stewardship's initial real estate financial foundation rests on campus rental properties primarily around the University of Oregon in Eugene. I (Bill Syrios) have been investing in campus rentals there since 1989. This sub-market has experienced tremendous appreciation since then and we have done a good job to keep our properties rehabbed and current with the times.
In a downturn, people go back to college because they are out of work, want to upgrade their skills, or just have nowhere else to go. This means campus properties usually fare quite well in a recession and, as a matter of fact, they were the only locations in the country that saw an upturn rather than a downturn during the Great Recession of 2007-2010.
But there was another factor at work for Stewardship. Even in a downturn, buy and hold investors (which we primarily are) experience financial stability or financial peril on the basis of their rents and cash flow, not property values. Our properties produce lots of positive cash flow and so were basically immune to valuation drops (if they would have taken place in our market.)
And, what is true for buy and hold investors in campus locations, is generally true in other rental markets as well: as buy and hold investors, we are all about increasing cash flow by upgrading and keeping properties well maintained. It would be possible to experience difficulties in a recession but ONLY if the rents went significantly down, something that is unlikely to happen except in the very worst of times.
As one friend of mine likes to say, "people have gotten used to living indoors." Because of this we will always have renters, even if we might have to occasionally drop our rents to accommodate a severe downturn. So, as long as our rents and therefore our cash flow is relatively solid, we will have no difficulties.
One final epilogue to the story is this: stock investors often do something called "dollar cost averaging." This means they put a certain amount of money into the market (say $5,000 a quarter into an index fund) no matter where the market is in any given moment. Over time, the market goes up as does their particular stock investment. Something akin to this happens in real estate for buy and hold investors.
We keep on keeping on (since 1989) investing in real estate. The early investments have appreciated, and their mortgages have been paid down. This allows us to keep investing with more confidence because, although prices are now higher, we have other, older properties that were purchased at much lower prices. It's a form of dollar cost averaging applied to buy and hold real estate investment.
"Every day is a new life to the wise man."
The Righteous Mind
Star Slate Codex
Consulting by RPM