When the 2008 financial crisis hit, the mortgage industry was at the epicenter … and the disruption of funding feeding real estate crushed housing values.
But it’s important to remember, the problem was NOT real estate.
After all, people still needed and wanted places to live. So the demand for housing remained stable.
It was credit markets that failed. And in a credit-based economy, everything stops when credit markets seize up … including home loans.
Without a steady influx of fresh debt to fund demand, prices collapsed … taking trillions in equity with it. And it wasn’t just real estate. Stocks tanked too.
Mortgage and real estate is just where it started.
The double-whammy of teaser rate resets … and the resulting big monthly payment hikes which sunk a lot of homeowners …
… and then the negative equity led to a rash of defaults by even prime borrowers …
… all of which caused a credit market contagion that scorched financial markets world-wide.
Of course, this all created huge problems for Wall Street, the banks … and for Main Street.
So Uncle Sam and the Federal Reserve got heavily involved to “help” … and to no surprise … Wall Street and the banks came out on top.
The banks needed relief from realizing their losses on their financial statements, while finding a fast path to re-inflating values.
After all, property values are the collateral for all those mortgages. And when values drop, borrowers walk … along with the prospects of loss-recovery.
So Wall Street rallied and raised many billions of dollars to buy up Main Street houses …
… even as millions of homeowners were being demoted to the rank of tenant.
So now instead of collecting mortgage payments, they collected rent.
As a real estate investor, you probably think that’s better. Who wants to be a lender, when you can be an owner … enjoying tax breaks and building equity.
But Wall Street doesn’t think like you … and that’s our point.
Today, those Wall Street buyers are landlords. And by some accounts, they’re not doing a very good job for the Main Street tenants.
Don’t get us wrong. We’re all for investors stepping in to clean up a mess.
Investors are like the white corpuscles of the economy … bringing capital to damaged areas and healing blight and distress.
It’s one of the reasons we’re excited about Opportunity Zones.
We just hope Main Street investors and syndicators don’t get pushed aside again by the wolves of Wall Street.
The issue is there’s a BIG difference between the way Wall Street money and Main Street money behaves. And it’s not about savvy … it’s about heart.
Big money guys (and gals, we suppose) have a way of looking at things.
Remember this classic 2012 quote from mega-multi-billionaire and legendary investor Warren Buffett …
“I’d buy up ‘a couple hundred thousand’ single-family homes if I could.”
Of course, we all know money’s not the gating issue for Buffet. He can buy anything he wants. So what could his hesitancy be?
Maybe he agrees with Sam Zell, who’s been quoted as saying this in 2013 …
“An individual investor can buy 25 houses and monitor them. I don’t know how anybody can monitor thousands of houses.”
Really? We know Main Street investors like Terry Kerr at MidSouth Homebuyers who successfully manage thousands of houses.
So it’s not impossible to manage a big portfolio well. You just need to be committed to doing it … one tenant at a time.
The folks we know who excel at single-family property management really care about their tenants as human beings … and deal with them as individuals.
They’re focused on creating cash-flow as the PRIMARY investment result … as opposed to simply a necessary evil to offset holding costs until a capital gain can be realized at sale.
Buffett and Zell are smart guys. Buffett saw the opportunity in single-family homes … but had the good sense to know he wasn’t the right guy for the job. Ditto for Zell.
Big money moves in broad strokes, which is fine when you’re dealing with commoditized assets and you can buy and sell in bulk.
But real estate … especially single-family homes … is not an asset class and can’t be effectively commoditized. And neither can property management.
We think Main Street tenants are much better served by Main Street landlords … like YOU … so long as you remember the main thing is happy tenants.
Happy tenants means longer tenancy, less turnover and vacancy, and better real-world cash flows.
Of course, you don’t need to be a small-time investor to build a portfolio of single-family homes.
When you learn to syndicate, you can combine bulk money with individual property investing … and build a portfolio of hundreds or even thousands of homes.
Being big isn’t bad. Wall Street’s problem isn’t its size. It’s its mindset.
As the legendary Tom Hopkins says …
“Don’t use people and serve money. Use money and serve people.”
Because when you do, you’ll end up with both.
Until next time … good investing!
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