This will be one of the biggest wealth-building opportunity of our lifetime

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The commercial real estate correction is one of the biggest wealth-building opportunity of my lifetime

Barry Sternleich, or “Billionaire Barry,” as we refer to him at One Rental at A Time, says the banking crisis is not over and predicts we’re going to start to see one bank failure a week.

While Barry’s estimate seems a bit too aggressive to me, he isn’t necessarily wrong. Higher for longer rates will cause tremendous pain for the banking industry, particularly for smaller firms that have loaned a lot of money to commercial building investors for office space. We will probably see at least 20 bank failures in 2024.

What’s happening now to commercial real estate is a repeat of what happened to the residential market in 2008, and will result in plummeting prices for commercial property.

1. Many investors who can no longer afford to pay their short-term adjustable-rate mortgages

2. Many investors have made bad assumptions, as buyers assumed property values “only go up”

3. We have non-operators, people who are flipping multiple properties and contracts

4. Current commercial property sellers are already taking substantial cuts, selling well below their purchasing price

5. Banks are starting to check out and make lending much more difficult. In the case of residential, that drove prices down. 

6. I expect private lenders will step in, but those interest rates will be high. If buyers have to pay, say, 12% for their capital rather than 6%, that will drive down property prices as well. 

So, as an investor, how do you take advantage of this? I think the pain headed for commercial real estate will be the biggest wealth-building opportunity of my lifetime. In my conversations last week with multifamily real estate investor Jonathan Twombly, we discussed how investors should prepare.

You should get your cash ready. Either alone or with partners, get together a few hundred thousand dollars and buy a small multifamily property (5 to 40 units) in all cash, hold it, and get operations in order. Then when the lending environment loosens up, you will have a more valuable property and be able to finance out all of your capital. 

Don’t be put off by asking prices. Just make an offer for what you think the building is actually worth. We are already seeing commercial buildings go up at “wishful pricing,” These prices are higher than what these buildings are worth now, as owners who can no longer afford the capital are trying to get out before they are forced into foreclosure.

But in time, these prices will drop substantially as loan maturity dates arrive. Make disrespectful offers. 

Lastly, getting a good deal when banks are reluctant to give out loans requires networking. In my conversation last week with Steven Dao, we talked more about the work to find “motivated” sellers in a difficult market. You should be doing the work now to meet with brokers, lenders, and small banks and make sure you are on their list of potential buyers. 

Number of the week: 231,000

I heard a quote this week that pretty much sums up my feelings toward the U.S. Department of Labor’s most recent weekly unemployment claims number.

“Weekly unemployment claims are the timeliest indicator of an economy that could be cracking.”

We’ve been bouncing around 210,000 jobless claims for a while, so the unexpected bump up to 231,000 on May 9 should raise some alarm bells. It’s nothing to get too excited about just yet, but the former trend is broken. 

To be clear, this is still way below the red flag number of about 300,000, but this is the highest weekly unemployment claims number since August 2023. It was just weeks ago we had multiple inflation ratings that came in and were very hot, and now we have had a couple of job numbers go the wrong way. The April jobs numbers came in weak at 175,000, down significantly from March.  

A few data points are telling us that the economy could be worsening, but weekly unemployment claims are the first and most frequent indicator that a problem could be at hand. Following this uptick, I will be monitoring these reports even more closely.

ResiClub chart of the week

Last month, ResiClub's Lance Lambert explained the "lock-in effect" using two essential data points:

1. The current average 30-year fixed mortgage rate: 7.09%

2. The effective mortgage rate on outstanding U.S. mortgages: 4.0%

While the lock-in effect appears to be easing up a little in early 2024, it is still very much in play. The “housing switching costs” of going from a 3-handle or 4-handle mortgage rate to a 7-handle mortgage rate doesn’t feel like a good deal for many borrowers.

Join the One Rental at a Time community on Skool

I want to let you in on something I’ve been thinking about for several months.

I have just created the One Rental at a Time community on Skool. Why? I wanted to find a place where I could create more interaction with those of you who keep up with all of the work we are doing on YouTube, X, and beyond. 

Community access allows you to be a part of my weekly calls with your favorite millionaire, starting with my chat this Wednesday, May 15 at 8 A.M. PST with Matt and Dion. I’ll also be hosting monthly Q&A calls. The first one is scheduled for Sunday, May 19 at 8 A.M. PST.

This is only the beginning, as we will continue to find even more ways to provide value and create a place where we all learn and grow together. Join here. 

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