Here's How to Position Yourself for Maximum BTR Returns While Minimizing the Coming Risks!
The BTR crowd is ZIGGING HARD, yet few seem to be noticing the risks.
It feels a bit like 1997-98 prior to the internet bubble, that popped in March of 2000, sucking FIVE TRILLION DOLLARS in wealth out of investors pockets over the next 18 months.
With Wall Street, every major hedge fund, and private money groups all over the world chasing the BTR segment so hard, you can’t help but wonder, is everything really lollipops and rainbows?
Capital is flowing into BTR fast and furious…it’s like a giant Tsunami of cash! Never in the history of real estate has so much capital chased a single segment…so aggressively.
Here’s Another Clue
When the nightly news is talking about it, and your mother-in-law who’s never invested in real estate brings it up at dinner…something doesn’t smell right.
When that’s happening, it might be time to step back and consider some of the deeper systemic risks, and your 3-5-year risk/reward ratio.
Understand, I write this with some hesitation. It’s a tough position to take when virtually everyone else is like a kid on Christmas morning about BTR.
To cut against this grain is like telling a horribly offensive joke at a crowded party. People slowly start to back away and turn their heads.
But it's our business to advise our clients and help them grow their profits consistently and predictably, while hedging to the downside against risks others may or may not be seeing.
Granted, the fundamentals of BTR are very different, and the asset value of the underlying real estate won’t allow bubbles like 2000 or 2006.
However, what it can do is create a domino effect and wipe out otherwise healthy gains, that could have been protected if the risks had been met with eyes wide open and...
A Strong Plan B for Your Portfolio
For example, we have a client who got offered so much money from a Wall Street hedge fund, that he had to take the offer. He sold his entire portfolio. In his words, “They offered me such ‘stupid money’ I simply couldn’t say no.”
It’s happening with greater frequency all the time. And when that sort of thing is happening regularly, it’s time to take a deep breath, dive deeper, and do a full reevaluation.
That said, right now we LOVE, LOVE, LOVE...the B, in BTR!
Our long-term thesis is based on a 6-7-million-unit shortage in the U.S. right now. So, in our view SFR and small multi-family are unbelievably hot for the next 18-24 months.
We are lending more money than ever into these segments.
However, a crucial difference is we are taking a more cautious view of the 3-5 year time horizon, for several reasons. One is the U.S. 2 Year Treasury, which most DSCR products are pegged to.
In Just Six Months
In the last six months the U.S. 2 Year Treasury has shot up 135 bps, from 0.22% to 1.57%. That move alone has thrown off most BTR costing models we’ve been seeing.
Beyond that is inflation, the Fed, and a gloomy interest rate horizon. It’s not sticking a fork in BTR, but it’s concerning. The key is to properly adjust your costing models and be prepared to move quickly if the opportunity to cash out big comes your way.
You generally don’t get offered “stupid money” more than once. So, if it comes your way, we want to help you harvest big and make hay while the sun shines.
So, while we’re concerned about the risks on the 3-5-year horizon here's...
The BTR Outlook
BTR is looking great right now... especially the B in BTR.
Build good products, keep charging forward, but be ready to pivot quickly to a well thought out Plan B, should the opportunity present itself.
See you in Nashville!
David Huey, CEO
PS If you’re a builder coming to the BTR Conference in Nashville stop by our booth, say hello, and get a couple free tickets for cocktails. We’re hosting a “Happy Hour” Thursday, March 3rd from 4-6pm.
Hope to see you there!
Our Relationships Speak
The reputation of our clients speaks volumes, with our top clients averaging 587 builds, and many over 2,500 builds to their credit. They can get funds anywhere. Yet, they choose us again and again because you can trust us.