Beginner Series - Understanding Market Cycles - The Real Estate Espresso Podcast

Episode Transcript
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(00:02):
Welcome to the Real Estate Espresso Podcast, your morning
shot of what's new in the world of real estate investing.
I'm your host, Victor Minash on today's show.
We're doing another in our monthly beginner series.
Real Estate Espresso Podcast is unlike other podcasts in that
it's mostly focused on a very experienced audience.
Our listeners are sophisticated.Many of them own large
portfolios of apartments, but you also have people in your

(00:24):
life you're interested in learning more, and maybe they
don't have access to high quality information.
Idea of sending your spouse to $199 weekend boot camp for
beginners where they're going tobe abused by sleazy salespeople
Sounds unthinkable. So where do they go?
We'll look no further. We're going to dedicate a couple
of shows a month to topics that will accelerate the learning for
less experienced investors. And it might give the most

(00:46):
sophisticated investors a new way of explaining a concept that
is otherwise complex to describe.
On today's show, we're talking about market cycles.
Market cycles are the result of the delay between perception and
reality. The best analogy that I can use
is what happens when you drive acar.
Imagine for a moment that if there was a large delay between

(01:07):
turning the steering wheel and the car actually turning.
If it's not instantaneous, you would have a tendency to over
steer. You'd be continually wavering in
your lane because of that delay between cause and effect.
While the same situation exists in almost every market,
including real estate. We see it in retail, where
retailers rush to build inventory in order to get ahead

(01:28):
of possible tariffs, but then they're sitting on tons of
excess inventory in the manufacturers witness a cycle of
feast and famine, huge orders, and then the orders dry up.
That's essentially oversteering.The pattern repeats itself in
many places in the economy. For example, takes 15 years on
average to bring a new copper mine into production.

(01:49):
The decision to start a new mineis presumably based on a
sustained mismatch between demand and supply.
What will the market look like in 15 years when that new mine
opens? Well, nobody knows.
You might be in the middle of a building boom, or in the middle
of a crippling recession. It's hard to tell.
A specific real estate market might appear to have a shortage
of housing, and people rush intothe market to satisfy that

(02:10):
demand. It takes time to plan and build,
and by the time these get built,the market conditions could have
changed and all of a sudden whatseemed like a shortage only a
few years ago is a surplus. Well, this is precisely what
we're seeing in many major markets.
We saw this huge demand for vacation properties during the
pandemic. If people needed to be socially
isolated anyway and work was virtual, then you might as well

(02:31):
be working from the lakefront home instead of a one bedroom
apartment on the 30th floor of ahigh rise building.
Demand for these vacation properties shot through the
roof, many were converted into short term rentals and the
income from those rentals was strong in response to the white
hot demand. Office work of course is
starting to normalize to more pre pandemic patterns and demand

(02:52):
for those lakefront homes is down and prices have plummeted.
This is just another cycle was ashortage of RV's during the
pandemic, manufacturers ramped up production and today the lots
of RV dealers are busting at theseams with new product.
So what does this mean for you as a real estate investor?
It means you need to look forward and not backward.
Many sellers have the memory of what their property was worth a

(03:13):
couple of years ago. Most have not accepted the
prices should have dropped maybe30% in some areas.
And some sellers are acting as if there's still a shortage in
those markets. Some brokers are acting like
there's still a shortage. This is the part that's most
troubling. When people come to the
negotiating table armed with data that's two years old and
then use that data to justify their position, it's a problem.

(03:36):
The polite term for this type ofdisconnect is called price
discovery. Rookie investors often rely on
more experienced people to educate them on the dynamics of
the market. Relying on those sources can be
dangerous for the beginning investor.
Brokers are often proposing an operating budget to the buyer.
That budget should never be relied upon by the buyer.

(03:56):
When we perform our own underwriting, we never rely on
just one source of data. We create our own financial
model. We get a third party market
study commissioned, we get a financial model from our
property manager whose boots on the ground experience in local
market and we also get a financial model prepared by our
lending contacts. In an ideal world, all four of
these should match and in practice we find the generally

(04:18):
they do align pretty closely andif they don't, there's a
detective process to understand the differences and assumptions.
It's only through that process that we get an objective view of
what's happening in the current market and how the market cycle
has changed or is changing. As you think about that, have an
awesome rest of your day. Go make some great things happen
and we'll talk to you again tomorrow.

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Beginner Series - Understanding Market Cycles

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