Dry Powder Through Financially Unstable Times … What Category Will You Fall Into?

December 15, 2022

Dry Powder Through Financially Unstable Times...What Category will you fall into?

There has been a lot of political and economic debate about whether or not the US is officially in a recession. Regardless, it is no secret that the financial situation in our country is turbulent and the future of the economy is uncertain. Stock portfolios have dropped into the abyss for institutions and individuals alike. Borrowing money to make investments is getting more expensive every day as The Federal Reserve continues to raise rates, and the once booming markets are beginning to see a rise in uncertainty. While some may see this situation as a time to pull off the gas, those with “dry powder,” or high levels of liquidity, know that now is the time to invest and “lean into these economic headwinds.”

Not the First, Not the Last

We have seen financial crises come and go, and we’ll see them again. While stories of investors and developers losing their entire net worth are plentiful, there are also stories of investors making millions … if not billions … in times like this. During the 2008 financial crisis, Warren Buffet had enough cash on hand to make hearty investments when everything was sitting at record-low prices. To him, this just meant there was a sale, and by 2011, he had made substantial profits from the crisis.

Dry Powder’s Bargaining Power

There’s a common phrase that “cash is king” during a recession due to the liquidity of an asset. Investors that have money tied up in other assets that are less liquid often end up with their hands tied. It’s unsavory to pull out of less liquid assets when their value is hitting a floor, and borrowing money during a recession, especially in an upward-trending interest rate environment, is usually much more difficult and costly. So, without enough cash on hand, getting those “sale” prices for available assets is next to impossible.

In real estate dealings, having large sums of cash on hand can set you apart from other buyers or developers because these funds allow you to move quickly. In short, take advantage of market conditions while they last. Recessions don’t last forever, and the long runway that many development projects command, will require quick action for them to be favorable when the market recovers.

The last several years revealed several individual buyers and development firms who were all focused on buying; borrowing was cheap, and savings were flush with cash that was begging to be spent. Now, the landscape is changing. Borrowing is expensive, savings accounts are held tightly, and investors are getting scared. But, to make money like Buffet, you have to think like Buffet who says, “Be fearful when others are greedy. Be greedy when others are fearful.”

Find Opportunities, Close Deals

Liquidity during difficult times will set you apart from all those surrounding you. It’s unclear how long we’ll be seeing falling prices for properties and raw materials, so when you feel the time is right, use your liquidity to benefit your future. Those who have enough cash on hand will recover more quickly when these times come to a close, and leave this experience with higher levels of market share. Challenging times for the masses are when a few legends are created – which category will you fall into?

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December 15, 2022