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Catskills - Sullivan County - Ulster County Real Estate -- Catskill Farms Journal

Old School Real estate blog in the Catskills. Journeys, trial, tribulations, observations and projects of Catskill Farms Founder Chuck Petersheim. Since 2002, Catskill Farms has designed, built, and sold over 250 homes in the Hills, investing over $100m and introducing thousands to the areas we serve. Farms, Barns, Moderns, Cottages and Minis - a design portfolio which has something for everyone.

August 6, 2022

Recession bullSh#t, Small business fiddling and Interest rates

I’ve always borrowed a lot of money.  Real estate is a leverage game, and hence why nearly all real estate players go bust at least once, get caught overexposed when the market turns against them, and get caught in a position where they can’t pay the bank - and you always have to pay the bank.  Jeff Bank’s lawyer said it simply enough - ‘keep paying us back and we will keep lending you money.’   Don’t pay them back and then all those documents-signed pages of the loan agreement quickly become referenced and quoted.  “Oh, you didn’t know that absolutely everything you own is pledged here, sorry, should have read the fine print.’

You can get caught behind the 8 ball in lots of ways.  Market downturn, interest rate hike, change in consumer habits, regulatory delay, lawsuit over something.  And then you just bleed and bleed and bleed, the money costs to the back, the carrying costs of interest and insurance, and legal, etc… can very quickly accelerate your basis past the projections and make making money through the project difficult.

I happen presently to be in my least leveraged position ever, and when I look back at some the leverage ratios I had in the past I can only shake my head at the naivety that made me think I could ever burrow my way out of some of those debt loads - but that’s a story for another day.  Today’s story/anecdote is about the increase in interest rates making my personal decisions easier - since at 7% borrowing costs from the bank, I can take any excess cash the business is throwing off and loan it back to the business, saving (or making) 7%, which is a good rate of return.

When rates are at 3 or 4% it seems worthwhile to pay the bank and look for alternative investments - be it stocks, or real estate or whatever - to earn more.  Honestly, I stopped doing that for the most part, I’ve pivoted to paying as little interest on anything as much as possible, be it cars, personal real estate, company working debt - it just all ads up, and the payment is a sure thing, whereas trying to pay interest and invest the money you could have used to pay down debt to invest in search of higher returns is not a sure thing.  It just really adds up.

I like debt.  Manage debt well.  Believe growth is made possible and juiced with borrowed money.  But for me, right now, I’m just playing it safe.  If these rates would have doubled last year around September, I literally would have owed $15-20k a month more, and that’s serious money.

I’m sure there are lots of people with lots of borrowed money feeling the pinch.  Maybe my dry powder will come in handy over the next couple of years.  My guess is it will.

Like I said 2 weeks ago, all this recession talk is bullshit.  528,000 new jobs. It’s a media creation.  Yes, higher interest rates will slow down economic growth and will slow down housing - but that’s a good thing - the housing market was insane and not healthy.  I work with literally 40 small businesses a week, and watch another 40.  They are busy, they are hiring, and the pipeline of work stuffed with opportunity.  If an economy is growing at 6% and now it’s growing at a rate that would have been considered great just a few years ago, - say 4% - but the decrease from 6% to 4% is a decline of a certain percentage that marks a recession - that’s just playing with numbers, not a real thing.  Anyone out there in the ring can see how strong the economy is, especially regionally.

As I said above, I work, and have worked with small businesses for years.  I hire, fire, coach, mentor, teach, and collaborate with a wide range of them, so I’m involved and get to see close up how they do their book-keeping, scheduling, employee management, quality control, etc…. A million little details of how they interact with us, and since we spend about $1.5m a month in paying small businesses, my perch from which I observe is well positioned.

And what is true, without a doubt, is the best small businesses never stop fiddlin’ around with their operations - trying this, trying that, reaching success with one trial balloon, and then trying another.  There are so many operational details of a small business that you can noodle and fiddle endlessly - with insurance, truck fleets, employee incentives, banks, software, legal, accounting, scheduling etc…. And a small business can actually impact operations pretty quickly with well-implemented pivots, as opposed to larger ones where the ship is harder to turn.

So fiddle away my small business friends.  Beside the cojenes to actually be in the entreprenuerial ring in the first place, nothing more important than messing around under the hood.

White modern home in North Branch

Sort of like when Dylan went electric - I'm sure there will be plenty of haters hating the idea the house isn't black on black.

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