Newsletter from the Fund Manager Boris Dorfman: Inflation, War, Interest rates and Future of the Real Estate Market

We are living in turbulent times. It is very difficult to find inspiration to do YouTube videos and write during these times when the war came to my birth country of Ukraine, but I MUST and I WILL. I will talk about global and local finance, financial markets, Real Estate, the economy, and of course MONEY.

Many of you, are like me and have a hard time concentrating on multiple things at the same time, especially my fellow males out there (didn’t mean to sound sexist, but my lifelong observation shows that women can think in different directions, while most men can’t). So let’s get away from our daily world watch and talk about the state of the economy and what steps we can take in today’s environment to preserve and multiply our 1. INVESTMENTS 2. ECONOMY. 3. RESERVES. 4. MONEY 5. REAL ESTATE.

Many in our society still feel uncomfortable talking about the money, feel ashamed of having more than the neighbor or simply don’t care or don’t care to talk about it. A lot of things that I would like to say would sound like plagiarism of Francisco d’Anconias speech in Ayn Rand’s classic “Atlas Shrugged”, so I won’t. The point is that money is NOT the root of all evil. Money is a tool to feel good, feel safe, and DO GOOD. What is the ultimate height of Maslow’s hierarchy of needs beyond self-actualization? It’s helping others. Many of the people that never donated have started now. To do that on a grander scale, we need to make sure your family, your future looks secure. It’s ok to talk about MONEY without feeling ashamed. Lots of business leaders, celebrities, and common people like you and me are making a difference by donating to various causes in Ukraine, as we speak. Let’s dive in, in no particular order:

1. Inflation. The United States has not seen such a level of inflation in the country in almost 40 years. We have all the indications that the government will try to stabilize rising inflation with the increase in interest rates, but they are too slow. Your money in the bank is losing its value, while goods, rents, and services are getting more expensive. How much is a movie ticket? I don’t even know, but I know that gas, food, cars, and pretty much everything are more expensive. Rents and Real estate prices have been skyrocketing. The good news is that incomes have been rising too – people are making more money. In addition to rising wages (wage inflation), the gig economy has been increasing every day and people can supplement their income by doing gigs like Uber, Postmates, Task Rabbit, etc. There are apps out there looking for nannies, personal trainers, cleaners, massage therapists, etc for hire. Anyone can take a few hours a day and supplement their income. Inflation is here, but it will not be here forever and it should PEAK this year – 2022.
2. Interest Rates. Mortgage Interest rates have been rising over the past year and are almost 2% higher than they were at the lowest point. We are talking about mid-high 4% for most loan products. We did get spoiled by abnormally low-interest rates, but rates today are not that bad historically. Keep in mind that mortgage rates adjust in anticipation of what our government will do to real estate rates. The market is pricing in future interest rate hikes and a lot of times, market rates start dropping as soon as our government starts being more decisive and starts doing proper things to level the economy. Prediction: Interest rates will rise a little more in a short time, will level off, and will drop towards the end of this year and next year. But please err on the conservative side
3. Recession? Sure, very likely in the next 2 years. I would have to get very technical, but long story short – Inflation causes Recessions
4. Real Estate Prices? I’ve been pounding this point over the past 2-3 years that the only real threat to the real estate prices is rising interest rates (most likely coupled with another event). Rates have risen substantially and we need to be careful. Any real estate correction, in my opinion, will be just that – correction and will not be significant. That being said, I do not see lower real estate prices in the next 12 months. Inventory is still extremely low and the money supply is extremely high. Add additional money flow into the United States from the instability in Europe and you still have supply/demand imbalance. Labor and materials inflation makes it a lot more expensive for builders to build and we are still seeing shortages of housing. Again, proceed with caution, but DO NOT be afraid.
5. Reserves. In periods of greater uncertainty, to keep our psychological well-being, we need to have additional reserves for personal, business, and investment needs. If you see a profitable real estate deal – GO FOR IT! BUT…make sure you have 9-12 months reserves to get you through the rainy day. Real Estate is a LONG-TERM INVESTMENT! Don’t think about tomorrow and don’t think about timing the market. We’ve been repeating this famous quote many times “Markets can stay irrational for longer than you can stay solvent”. Get a Line of Credit against your business, equipment, or Real Estate (Get a HELOC) or do a Cash-Out on your primary and investment properties so you have cash ready to get accessed, have extra reserves, extra dry powder for future investments.

To wrap this up, I would say we need to tone down our market aggression a little bit, take a conservative and mid-long term approach to investments. Moves need to be made – absolutely, but you need to have at least 2 exit strategies. If you are doing the Fix-N-Flip project – please have a plan B. We also need to make sure we are properly diversified across various asset classes even if those asset classes are Real Estate related (Industrial, Office, Multi-Family). Proceed with caution, get proper advice, and DO NOT be afraid!!!!