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.
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.
More about Africa (and some house stuff)
Houses -
I truly put so many deals together that I don't even keep count anymore - or more accurately, it's just all part of my daily routine that there is no high five moment. In just the past 45 days, I've put together about $5m of deals, very diversified with the narrow lane we work - 2 houses that we are building on other people's land, a house nearly finished (Fremont/North Branch), and house just starting (North Branch), and a house that is finished (Narrowsburg). The deals come together so seamlessly between my skills, my attorneys efforts on our behalf that I have to be careful not to overbook and leave Amanda once again on the hook for more homes than she can reasonably manage and design.
Prices and volume in the real estate market appears to remain strong for good homes. It is correcting some in terms of what people are willing to pay, but that's a good thing and we welcome the new price points where interest remains robust.
Africa -
We've all mostly seen Out of Africa, but I read the book while traveling there, and if you go in looking for a mirror of the movie, you will be disappointed - the movie seems to have used the 'creative license' to the full extent in changing facts, timelines, events, etc...
If you read it on its own, as a meditation of life, Africa, life in Africa, loss, celebration, appreciation and gratitude, then it is worthy indeed. The tone and pace and style reminds of Verilyn Klenkenberg, a columnist for the NYTimes for years and author of The Rural Life.
Highly recommend both. When the writing of a piece captures the pace of the story or environment, then that is valuable. For instance, Isak Dinesen, the Danish baroness who wrote Out of Africa, takes her time with her book, lets it meander and lose its path, a lot like the people of Africa at the time lived their lives - not in a future target ambition of some sort, but a live in the present ability lost to most westerners.
Why Zebras weren't domesticated (and other useless information)
Zebra
It didn’t take long in Africa to be confronted with a lot of questions as we toured the cities and bush. One that I asked myself, seeing all the zebras, but seeing none put to work like the donkey, the horse, the oxen. I guess the same could be asked of the water buffalo, though that seems easier to answer since its closest North American relative is always undomesticated, unlike the horse.
So I started asking around, when you read and see all the human labors and efforts that could have been aided and assisted by a strong animal - why not the zebra?
So I didn’t get very far with human inquiry, so I delved into that all-knowing source of information - Google.
Turns out, the zebra is too jumpy, too ornery, too high strung, too ‘mean’, too stuck in its ways to domesticate. After living its entire history in the African Savanah where quick predators lie in the tall grass, the zebra’s fight or flight instinct is so fine tuned, is tightly wound, that a few impatient attempts from the English colonists had no chance to overcome and supersede the hair-trigger response of a zebra to stress.
“To be domesticated, animals must meet certain criteria. For example, they must have a good disposition and should not panic under pressure. Zebras' unpredictable nature and tendency to attack preclude them from being good candidates for domestication.” (Google result).
From Science Alert -
All equids are herbivorous prey species with a well-developed "flight or fight" response. But to survive in an environment where there is an abundance of large predators including lions, cheetahs and hyenas, the zebra evolved into a particularly alert, responsive animal that flees in the face of danger but also possesses a powerful response if captured.
The kick of a zebra can break a lion’s jaw. They can be savage biters and possess a 'ducking' reflex that helps them avoid being caught by lasso. Familiarity with human hunter-gatherers may also have fostered a strong avoidance response in the zebra.
All of this means that zebra are not really "people friendly" and as a species they do not fit the criteria for domestication.
According to the English explorer and polymath Francis Galton (a relative of Charles Darwin), these requirements include displaying a desire for comfort, being easy to tend, being useful and showing a fondness for man.
Galton uses the zebra as an example of an unmanageable species, stating that the Dutch Boers repeatedly tried to break zebra to harness. Although they had some success, the wild, mulish nature of the animals would frequently break out and thwart their efforts.
Although it appears possible to tame individual zebra, this species was not a good candidate for domestication. In addition to the intractable nature of the zebra and its strong survival instinct, the fact that this species is 'lion fodder' may also have made them appear less attractive 'partners' to early humans."
So, the moral of the story is some things just can't be tamed - I could have told anyone who was listening that was the case from my hiring attempts over the last 20 years.
Recession (and sold Ranch 56 in Saugerties)
Recession (and sold Ranch 56 in Saugerties)
I still have some stuff to write about re the travel adventure but first I want to write about all the recession talk going around.
So weird, just 2 months ago we sailing along and now all anyone can write about is about the looming recession which may already be here.
I remember way back reading an article in the Financial Times that studied the correlation between the frequency of the word ‘recession’ used in journalism and the news (not necessarily the same thing) and the likelihood of a country going into recession.
Seriously, if the news wouldn’t be shouting it, or say you were in say Africa and didn’t have access to news, there is nothing in the day to day that would give you any hint of a recession.
I know in my business, there is zero indication that anything has changed. I nary a colleague in any industry reports anything other than busy busy can’t return all the calls environment.
Sure, interest rates are up, prices are up, but wages are up and employment is full. And there is so much money out there, from god knows where I haven’t a clue.
We just put another $3m in contract in the last 30 days, which continues a winning streak that started in Mid-2020. A lot of this is covid related but since our sales to completion cycle takes 8+ months, we are still just beginning to monetize what most in the real estate industry long ago pocketed. In fact, getting a little rocky out for the real estate pros who were printing money just a year ago - low inventory, pickier buyers, and rising rates.
Ranch 56 on Rivka Road in Saugerties sold today - this was a project I was hesitantly buying in early 2020, then really foot-dragged when Covid hit, then the 16 lot purchase was the best thing that ever happened to me (this is hyperbole but ranks up there for sure).
16 affordable building lots in the prime-est markets in literally the whole nation. Bought just before they would have doubled or tripled in value and would have had interest out the from investors, speculators and families. When I made the commitment, I was certain 2020 was going to be a tough year for real estate and we had 4 or 5 homes under 900 sq ft going up.
Then Covid hit and I occupied my historically profitable contrarian position and thought all was over, and things were going to tougher, making my purchase of these lots all the more the bitter pill to swallow. Then it turned out I was wrong - Covid propelled real estate as we all now know, and I was holding gold on my balance sheets with every piece of property I owned.
The same scenario with the Crest in North Branch NY in SuCo (Sullivan county for you none hipsters not mentioning any names Eric Goldstein (square)) - some big league world-wide property owners who owned 25 lots in North Branch, decided to get this money losing decade old development off their books, right onto my books.
Seems easy in retrospect, but it was certainly a combination of being in the game, luck, and old fashioned risk-taking, good timing - luckily being in the market for land just prior- and of course I always have my bank - Jeff Bank - there to finance my decisions and choices.
Ranch 56 is a beaut.
https://www.thecatskillfarms.com/homes/saugerties-real-estate-ranch-56
These houses sold for $510k in 2019 and before. This one just sold for $710k. You do that a dozen or more times a year and you really start to have something to show for your efforts.
(this is the way it formatted when posted from Notes, and I'm just going through it)
