New year resolution?

January 4, 2023

As you’ve probably seen and heard, all three major US stock indices had their worst year since 2008—-and we all remember what happened during that year, right? And even the role that real estate played in that awful year?

In 2022, the Nasdaq lost 33%, the S&P 500 19%. As for the Dow, a strong 4th quarter brought it back from the precipice of a 20% loss to a more modest 9% loss. Not a great showing for any of them.

You can read as many explanations for this bad year as there are pundits, but the most straightforward (and correct) reason is simply that assets were over-valued. Investors have simply been overpaying to own many different companies, going back well before 2022. Eventually, that catches up with investors, if/when other investors choose to sell (or are forced to). Unlike 2008, we can’t blame real estate (or lending policies) for what happened to markets in 2022, but we can recognize that real estate suffered similar trends of overvaluation. We think it’s fair to expect real estate values to drop in 2023, in a fashion similar to the losses stocks had in 2022. 

With such expectations, how should long-term real estate investors proceed in 2023? In our opinion, the best path forward is to stick tightly to some new years resolutions. Here are ours (and note how they apply to long-term stock investing, as well):

     1. Have cash on hand. There will be good deals for those who can make all-cash offers (and avoid having to pay interest rates of 7-8%+).

     2. Do whatever it takes not to sell in a bad market. That means keeping healthy reserves and good access to credit (and/or to additional equity investments), and ensuring that cashflow can meet debt obligations as long as the coming storm may last.

     3. Keep buying, even at the risk of overpaying. Real estate values may have a sustained downward trajectory for the next 12-24 months…or they might not. We might make a purchase in early 2023 just to see it’s value drop by 10 or even 20% before the end of the year. That might make me uneasy this year or even next. But what about in 2043, when I’ve owned that property for 20 years and have watched it cashflow and appreciate? I can guarantee that whatever margin of overpayment I made back then will have been long forgotten, and instead I will dwell on the properties I could have had, if I had only offered $10k or $20k more. Just like dollar-cost averaging with stocks, real estate will be rewarding if you buy throughout the ups and downs of any cycle. 

We’d love to hear your new year resolutions!