Our Adjusting JB2 Sentiment
We continue to have volatility in the market, and interest rates have now hit new highs we haven't seen in almost two decades. We keep our pulse on things in real-time, reading daily and interacting with different players in the market. This article will share how we are adjusting our strategy to help us stay two feet ahead.
Looking back in time
We will start by looking back a bit. We began our career in the grips of the last great recession. In 2009 we went full force ahead, conservatively buying foreclosure homes coming to market though many people were still afraid to play in this space. In retrospect, things were uncertain, but we felt it was the best time to jump in. We think there are some hints here in 2022, though it feels a bit more muted.
There were three to four years of fantastic buying opportunities, and we experienced insane returns from 2009-2013. Then fast forward to March 2020 when COVID hit. Everyone thought this was the black swan event that would take down the market. That couldn't be further from what ended up happening on the back of government intervention. About six months after March 2020, many buyers were in a wait-and-see approach. During that time, prices came down some while rates plummeted. It was a tremendous small window of opportunity.
It was around his time that we bought Norman Creek, this property we are now selling for more than two times what we invested initially (which we will 1031* into an asset 30 years newer). The market started taking off right about when we closed that deal.
Moving forward
We have bought two more and are about to close on our fourth complex in OKC. We continued to have conservative underwriting compared to other optimistic buyers. We felt during this period that many times we were slamming our heads against the wall and getting beat out by more optimistic buyers (projecting higher rents), which made sense because people had access to ripe cheap money. Further, bull run optimism was in full swing. Now with all the volatility, we are sitting pretty because we bought great deals on real fundamentals, which continues to be proven by meeting or significantly beating projections.
Monitor and adjust when needed
Operationally we are keeping a closer eye on things, now monitoring the budget weekly instead of monthly. This strategy allows us to adjust, address, and tweak things in near real-time, which shows because our properties are running the best out of all complexes our management company oversees. We haven't seen a hit to rents in workforce housing because people need a roof. We have seen a small impact on occupancy but nothing significant. And this is all still well within the zone we want to be in. We continue to have confidence in our ability to operate the properties in our market.
What the future holds
So, the question is, what's next for JB2? We were at Reconvene Real Estate Conference in Los Angeles a few weeks ago. The general sentiment was fear of the market shift, with many on the sidelines holding cash for what's to come. At this time, we are easing off the gas. However, if a solid deal comes our way, we will still buy it. We are seeing more opportunities, along with brokers/sellers realizing they need to play ball more, especially with any sellers with any variable debt.
We are starting to see more exciting deals with loan assumptions. We need to bring more cash to the table, but the interest rate we can assume in comparison to today makes the difference, along with some adjustments on pricing for it all to make sense. On top of that, putting more cash down inherently makes it less risky. In no way are we pushing the envelope now. We have a price, and if it doesn't work, we move on. We know there will be more opportunities, and for this reason, we stay patient. From what we have learned from the past, you need to jump in when others are in fear cautiously, and this window may likely be short. It depends on when and if the FED brings down rates. Some things are still in the air, but we are not scared and are just trekking lightly.
Keeping tabs
We will continue to keep close tabs on everything. We will use our past experience to inform our present. We will adjust our strategy as needed. Bottomline, our business was built for times like these. We are more excited for what’s to come. And at the same time, we continue to operate the shit out of properties and deliver good returns to our investors.
*A 1031 exchange allows investors to swap out an investment property for another, deferring capital gains or losses or capital gains tax that would have otherwise been paid at the time of sale.