Clues in the News — Bears, Bailouts and the 3-Headed Monster

The global shutdown from COVID-19 concerns have spun headlines that scream of businesses small and large under EXTREME distress. 

This leads us to ask a question you’ve heard us ask before … is it possible to see the forest for the trees?

We’re trekking into the headlines to discover bears, bailouts … and a 3-headed monster. 

In this episode of The Real Estate Guys™ show, hear from:

  • Your intrepid host, Robert Helms
  • His imaginative co-host, Russell Gray

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Finding Clues in the News during COVID-19

With so much going on today … it’s time for another edition of clues in the news!

When the world changes, investing strategy changes. With COVID-19 disrupting economies, financial systems, and daily life, we’re experiencing something like nothing we’ve seen in modern history. 

Sheltering in place might protect you from the virus … but taking the same wait and see approach to investing is like pulling the sheets over your head while the house burns down. 

Now is not the time to be complacent. 

Even though there are a lot of things to be concerned about in the news right now … there’s also a lot of things to be excited about. 

Rent and unintended consequences

The big question on everyone’s minds is what happens when the rent comes due. When $81 billion in rent payments come due … and many Americans can’t pay … what do landlords and tenants do?

Several governors have put moratoriums on evictions of any kind for a month or several months. 

But that leaves many real estate investors and property managers thinking, “Is that just giving everyone license not to pay rent?”

We can’t say what’s going to happen … but we know that this situation is going to change things. 

What we can say is that a theme that we are going to see throughout the rest of 2020 and beyond is going to be … unintended consequences. 

At the end of the day, everyone is under intense scrutiny and under tremendous pressure. Sometimes, this can cause what we call an “icy road” reaction. 

If you’ve ever lost control on an icy road … then you know that humans tend to overreact. Then that overreaction creates another reaction that you overreact to again. 

The result … you’re fishtailing out of control. 

One of the biggest lessons YOU can take as an investor is to stay calm, divorce yourself from your feelings politically, and look at what is really happening. 

Only then can see what choices you are going to have to make and what aspects are in your control that you can respond to. 

As this first month comes and goes, it may be a good idea to take a look at your rental portfolio, see the effects … and make plans and predictions based on the clues you see. 

Mortgages and the Fed

Many of the same lessons apply to the folks who can’t make their mortgage. But some unique considerations and clues lie here, too. 

The mortgage industry is seeking billions in federal help as homeowners stop paying their loans. 

Here’s an industry that was at the epicenter of the last downturn … and the perfect example of those unintended consequences. 

If the tenant can’t work, they can’t pay. And if they can’t pay you, you can’t pay the mortgage. 

The challenge is in the Fed’s zeal to keep interest rates down and to keep people borrowing to prop up real estate prices, they’ve stepped into the market as an artificial player. 

They’ve purchased around $183 billion of mortgage-backed securities … which means they bid up the price of securities to push interest rates down. 

That act, which the Mortgage Banking Association seems to have not anticipated, now means they are getting margin calls … having to come up with lots of cash. 

We don’t think the Fed went in planning to blow up the mortgage banking business … but the unintended consequences mean they might. 

Keeping an eye on the Fed and on bonds can yield valuable clues as we move forward. 

The goings on in oil   

What about what’s happening in oil?

When oil prices are lower … then there’s less incentive for producers to pull the oil out of the ground and send it anywhere. At these prices, it’s difficult to make money. 

But when oil prices are low, it can be a boon to your tenants. 

The reason oil is low and available is because no one is consuming it. We’re not going to work. Airlines aren’t flying. Demand is down. 

But Russia, by refusing to participate in OPEC has driven the price down, too. 

That’s going to hurt the U.S. … which just achieved energy independence in terms of being a net oil exporter on the backbone of shale. 

But here’s the dirty little secret … most of that was driven by debt. The shale industry is horribly in debt … and that debt is all potentially in danger of going bad. 

We’ve been very concerned about the level of debt in the oil industry and whether or not the industry would actually become profitable enough to be able to service it without being able to roll it over. 

This is one that you should be paying attention to … not just for the oil jobs and not just for the cost of production and cost of living for your tenants. 

The industry hasn’t broken yet, but it’s definitely showing signs of weakness. 

Now, the backside of doom and gloom is opportunity. And if you can secure cash flow and be on the right side of events as they happen, opportunity can be found. 

For more clues in the news … listen to our full episode!

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