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What can Real Estate Investors do now in Preparation for the Next Cycle?

In today’s market, with deals not making sense with valuations so high, real estate investors need to stay focused on the one thing that will get us through the next downturn, and that is cash flow.

I am John Lloyd, President, CEO, and Co-Founder of Fidelis Private Fund

Regardless of the type of business we are in, cash flow is king.

There is currently no oversupply in residential housing, no lack of demand, no high vacancy, nor high unemployment that would signal a market correction.

What I believe could trigger the next market cycle is another global crisis, which no one can predict, or an increase in interest rates, which may be likely as a way to curb inflation.

The market is used to historically low interest rates that have existed for the last decade. This has escalated real estate values and lowered cap rates.

There is little room for error in the current market environment for real estate investors. Therefore, an added value component should be considered when investing in a property that includes increased future cash flow to generate a cash on cash return well over the cap rate.

How can we still invest in today’s overvalued market and protect ourselves at the same time?

Maximize a property’s highest and best use to create added value and additional cash flow.

For example, subdivide a large parcel that includes existing improvements into more than one lot and maximize the allowed density with additional income-producing improvements to boost the net cash flow. This will increase the value and create a buffer for a possible market correction.

The reliance on selling a property at these high valuations as the primary exit strategy may end soon. As a hedge against a rising interest rate environment, focus on generating excess cash flow to increase the debt service coverage.

If you have questions on real estate financing, please call me at 702-379-3468 or see our website at Fidelispf.com for more information.

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