Strategically Planning for Adverse Outcomes
What are the odds of a lightning strike, fire, and flood all happening simultaneously? Common sense dictates that this is astronomically unlikely, right? When it comes to risk scenarios…well, when it rains, it pours.
When one thing goes wrong, there will often be systemic failure.
Nick experienced this firsthand as a software technologist. His company had phone lines and backup phone lines, internet lines and backup internet lines. They were supposedly prepared for anything. As it turns out, all of these telecom lines ran through one critical conduit. That conduit was washed out in a flood and the entire campus lost phone and internet for days.
It’s the same in medicine. Oftentimes when your liver stops working, your kidneys stop working, and so on. This is how organic systems work. This is how software systems work. You guessed it–this is how economic systems work.
When one thing goes wrong, there will often be systemic failure.
What does this mean for real estate investors?
By preparing for the worst-case scenario, we ensure that even in the face of “black swan events” – unpredictable incidents – our investments remain resilient.
We know lightning actually can strike the same place over and over and over again, and that lightning starts a fire, and perhaps the firefighters start a flood while putting the fire out…so we find value in being prepared for disasters.
What are the odds that there would be a decline in real estate values, interest rates would go up, and lending would pull back all at the same time? Seems impossible, right? Except of course that’s what happens, because they’re all related to each other. We know that when one bad thing happens, all the bad things happen.
When we do underwriting, we don’t look at all the ways we can make money. Instead, we look at all the ways we could lose money. When we can put together a deal where we’ve eliminated every possible way we can lose money even in the event of a catastrophic failure–that’s when we do the deal. As a result, Black Swan is in an exceptionally favorable position today despite rising interest rates and the changing economy.
By exceptionally favorable position we mean…
- No variable rate debt
- No rate caps
- All debt is fixed for 5 years, often 10 years
- Incredible liquid reserves
- No insurance exposure in disaster prone climates like Texas and Florida
- Vertically integrated
- Invested in temperate blue ocean markets with significant barriers to entry and because of that, limited supply and therefore limited risk of rents falling
By strategically planning for adverse outcomes, we come out ahead.
While some may dismiss the possibility of lightning striking twice, we choose to be vigilant and well-prepared.
How do you approach risk scenarios?
We hope you’re prepared to weather any storm, fire, or flood that comes your way.
Yours in disaster preparedness,
Elaine & Nick
Black Swan Real Estate