Erion Shehaj

How to compound real estate investing results with a little extra effort

September 23, 2015 By Erion Shehaj Leave a Comment

If I could show you a way to compound your real estate investing results by investing a little extra effort over time, would you be interested? I know it sounds too good to be true but lend me your mind for a short while and I’ll explain exactly what I mean.

For the past couple of weeks I have been reading Darren Hardy’s fantastic book “The Compound Effect”. Darren is a protege of the late Jim Rohn whose teachings have had a great influence on me. (I like to think of Jim as a great mentor I never got to meet). In the last chapter of the book called Acceleration, the author talks about a simple but powerful concept that I find fascinating:

Real growth and acceleration in results happens when you apply a little extra effort after you have done the best you can do.

Let that sink in for a minute and reflect on it – It’s true and relevant in all areas of life. But it’s especially powerful in long term real estate investing. Let us consider a couple of common scenarios where a little extra effort can compound your results.

Saving a little extra

Imagine you are Jackie – through hard work and determination you have managed to climb the career ladder and now you earn a great salary. You could switch cars every other year or spend it all on the latest tech toys. But you don’t. Instead you’ve chosen a path of living below your means and are able to save $3,000 per month after all expenses. With that savings capacity, you will be able to save just over 100k in three years and would acquire 3 investment properties in that time frame for an total portfolio value of $510,000. After applying our Blueprint, in 15 years time after your acquisitions you would have a paid off portfolio worth approximately $800,000 producing $40,000 a year in pre-tax income. Not too shabby.

But now let’s look at the effect of doing a little extra. Suppose you manage to save just an additional 10% on a monthly basis. Cut out Starbucks, eat out one less time per week, what have you. Over 10 years you will manage to accumulate $35,000 to make a fourth purchase increasing the portfolio value to $680,000. It might take you a couple of extra years to pay off this last asset but at that time you will own a free and clear portfolio worth just over $1M producing 52,000 a year in pre-tax income.

Therefore, saving an extra 10% on a monthly basis increased the value of your portfolio and your income by 28% and 30% respectively!

Investing a little extra

Now suppose you’re John – you’ve just completed the acquisition phase of your Blueprint strategy. Five properties, $170k a piece cash flowing $3,000 per year (to keep illustration simple). In keeping with the plan you apply the positive cashflow from all assets to one mortgage at a time and you pay them all off in 17 years. Excellent outcome by any standard.

But now imagine that you decide to invest a little extra to make everything go faster. Like Jackie above, you cut out some non-necessities and manage to scrape together $250 per month that you apply to the mortgages on top of the positive cashflow. Because of that little extra investment of $250 per month, your properties are now paid off in 13 years. That’s 4 years earlier!

What could you do in 4 years if your portfolio allowed you the financial independence to do whatever you wanted?

I guess there are two greater lessons in all of this: 1) There’s incredible power in doing a little extra after you’ve done “your best” and 2) The future cost of today’s little expenditures is incredibly high so act accordingly.

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Last week I didn’t publish an article because I visited the Dallas Fort Worth area to explore market conditions, investment opportunities and the possibility of expanding into that market. Thanks also to the invaluable assistance of some long term Investing Architect readers it was a very productive trip and I can’t wait to share my findings with you in next weeks article.

What to expect when you are investing – Houston 2015 Edition

September 3, 2015 By Erion Shehaj Leave a Comment

Consider the following scenario: You are a successful professional and through hard work and living beneath your means you have managed to set aside some capital. Thus far, your career has been fine but you want something more. You wonder what might be possible if you were to invest the capital you have managed to save in real estate. Would it be possible to create enough of an income stream to achieve financial independence? Or put a different way, can this investment lead to an income stream that would give you the freedom to invest your time how you want, rather than how you must? You start reading and researching and after a while you are overwhelmed with different strategies pulling you in a thousand directions. Good old paradox of choice. But then you take a step back and look at the big picture: You’re not a gambler, or a speculator and you don’t like excessive risk. You want to invest your capital in real estate but don’t want to invest all your time (i.e don’t want it to turn into your full time job). Therefore you eliminate all forms of investing that don’t fit well with your investment personality and risk aversion. You come to the right conclusion that the best strategy to achieve financial independence is a long term investment strategy. Then one day, you read one of my posts on BiggerPockets or stumble on an article from Investing Architect. And it all seems to make sense. It’s a Lego-perfect fit. At which point, you dive into our archives and read until there are no more.

Sound familiar? Read on.

After reading “How to create a six figure income with real estate investing” (one of our most popular articles) you look through the illustration of the Domino Strategy at work with nine investment properties. And you get really excited. But wait a second – this case study describes the purchase of nine properties priced at $105k each! A quick look at Houston listings for sale reveals that the properties in that price range don’t match the characteristics of properties I describe in these articles.

The source of your confusion comes from the fact that all case studies I’ve written about in the past reflected the property parameters at the time. The Domino strategy Illustration I mentioned above was prepared nearly four years ago when those property prices were available. Needless to say, things a changed a bit since then…

That brings us to the main question of this article: What should a long term investor expect when investing in the Houston area in 2015?

Property specs and price spectrum

First a quick recap of the property characteristics of the target investment property:

Located in a great school district
10 years old or less (unless well maintained)
At least 3 bedroom, 2 bath, 2 car garage
Between 1600-3000 square feet
Better than average finishes (think tile vs linoleum, laminate vs carpet, hard countertops vs formica etc)
Safe neighborhood with attractive amenities
Easy access to highways and employment centers
Offers a fair return on investment (more on this in a bit)

In the current market, properties that fulfill the above criteria fall in a price spectrum between $160,000 and $215000. Those are the outer price “borders” but most properties we are sending to our client’s inboxes these day fall in the $170,000 to $190,000 range.

Cashflow numbers

I know you can’t wait to see the cashflow numbers so I won’t take anymore time. Let’s look at a property I just sent to client before I sat down to write:

Asking Price: $178,900
2300 sf, built in 2002 (well maintained), 3/2/2
Projected Annual Rental Income: $21000
Annual Operating Expenses: $6837 (34%)
Annual Debt Service: $8830
Annual Cash Flow: $3407
Invested Capital: $39500
Internal Rate of Return (10 year hold): 19.64%
Cash on Cash Return: 8.66%

Obviously, not every property will fit those parameters exactly but this should give you an idea about what to expect when investing in single family investment properties in Houston in 2015.

In the end, remember this. Although property prices, interest rates, down payment requirements may (and often do) change, the investing principles and strategies remain the same.

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In case you may not know this already, I am a guest author for BiggerPockets Blog and write there on a pretty regular basis. In the weeks to come, subscribers to our email list will begin to receive those articles as well as they’re published.

The fascinating paradox with long-term real estate investors

August 19, 2015 By Erion Shehaj 2 Comments

There is this fascinating paradox I encounter regularly in our real estate practice. The overwhelming majority of real estate investors I have the privilege to help, fall on the conservative end of the investing spectrum. They are driven by unbiased logic, need empirical evidence and have a long term focus. If you haven’t left this site yet after reading an article or two, you can probably relate.

But with all that focus on logic, numbers and the “long game” they still succumb to doubts that run counter to all those things. See, we like to think of ourselves as rational beings driven by unbiased logic but the truth is we are hard-wired to respond to certain impulses and fears.

Let’s look at two related misgivings I hear frequently from our clients:

1. “I wish I had met you in … (2008, 2010, 2012 – you name it) so property prices would have been more favorable.”

2. “Shouldn’t I wait to acquire investment properties since we’re in a Seller’s market and prices are high?”

These statements indicate valid concerns but they’re paradoxical in that they run counter to the very core of the conservative long term investor.

Silly Rabbit … Market Timing is for traders

Real estate prices in most markets (Texas included) were substantially lower in 2008-2013 than they are now. Furthermore, most investors that purchased during that time were able to lock in quite a bit of equity and very favorable price/rent ratios. That’s especially true if you consider the increase in rents during the same amount of time. Those are facts that no one can dispute. But our investor clients forget a couple of critical issues when they express the wish to have invested earlier.

First, investing in 2008-2013 seems like a given now that we know “how the movie turned out”. However, at the time, it didn’t seem as such a no-brainer to most investors. I know because I was on the phone with them trying to get them to see it. When the whole nation was curled up in a fetal position waiting for financial Armageddon, it was hard to think about investing for even the most visionary of investors. When you drove into a neighborhood and saw 15-20 foreclosure signs back to back on the same street, it was hard to imagine the time when they would be worth so much more.

But most importantly, that wish disregards a critical truth: The long term investor is fundamentally not an opportunist.

A long-term investor invests to achieve financial independence regardless of the market he’s dealt. That doesn’t mean that a long-term investor cannot or should not take advantage of an especially advantageous real estate market. They absolutely should. However, they should NOT invest only when there’s “blood on the streets” and “going out of business” banners are aplenty. So ask yourself this essential question: Are you a long-term investor or an opportunist and then act accordingly.

Seller markets come with the territory

The average Blueprint plan we devise for our clients entails an investment timeframe of 7-20 years (depending on the resources and goals). Take any 7-20 year period and look at the market conditions over time. It’s not only highly likely that market conditions will change over time – it’s to be expected! As a matter of fact, a scenario in which market conditions remain the same over a decade is almost implausible.

But there’s another fear at work here – no one wants to be the sucker that invests at the top of the market only to ride it downward. That’s understandable. But did you know that the Houston area has been in a “Seller’s market” since the Spring of 2012? What if the investors that purchased properties during that time had succumbed to the same fear and waited for a price drop? They would find themselves wishing they had invested in 2013 when prices were lower. Sometime in the future, investors will speak of 2015 as the ideal time to have purchased because conditions may be less favorable then (read: interest rate hikes).

As long as property valuations are supported by economic fundamentals and we are not in a real estate bubble, the long-term real estate investor keeps her focus on the main goal (financial independence) and executes her Blueprint plan regardless of the market. Sometimes the market is extra favorable, other times it is not. Over the long term, the market will do what the market will do and our goals are still there for us to accomplish. So accomplish them we will.

Should you sell your investment property? A comprehensive guide

August 12, 2015 By Erion Shehaj 1 Comment

If you are a real estate investor that purchased well-located investment properties between 2008 and 2012, you are faced with somewhat of a dilemma.

On one hand, you have watched the value of your property rise significantly in recent years on top of any built-in equity you may have secured at the time of purchase. Not to mention that in this market properties sell in a heartbeat for full asking with multiple offers. So you look at the current market value, then look at your mortgage balance and can’t help but feel that it may be time for you to “cash your chips” and go home. After all, no one ever went broke making a profit…

But on the other hand, rents have also risen significantly and you have enjoyed great returns on your invested capital. If you sell, you “kill the goose” and forget about the golden eggs. Positive cashflow, value appreciation, mortgage pay down, depreciation – they all come to a halt.

So what’s the right call – sell or hold on, cash out or stay invested? To be sure, it’s a good problem to have but a problem nevertheless. Below is a methodical way to think about it.

Goal Clarity Above All

Every decision you make in regards to your investment portfolio has to be aligned with the overall mission of that portfolio. Ask yourself: What’s the principal goal you employed your portfolio to accomplish? Is it income, or wealth accumulation?

If the main goal is income, liquidating an income-producing asset without a proper plan to replace it with better income producing asset(s) is counterproductive. Instead, if the goal is to accumulate wealth, selling an investment property to lock in equity gains makes sense.

But wait – I hear you asking – what if my goal is to accomplish both income and wealth? Hence my emphasis on the word “principal”. If you want to maximize income, you don’t want to arrive at “retirement” with a lot of wealth but no way to convert it into income without cannibalizing your principal or subjecting it to high risk of loss (read: bonds). And vice versa. The principal goal determines how many assets you should own to reach it and subtracting an asset (without replacing it) when you should hold on or add on is not a smart move.

Return on equity vs Alternatives

The next thing you want to do is think past the sale.

Let’s say you sold the property and took home a chunk of cash. What’s your alternative investment plan for this capital? If there is another investment you are considering (i.e opening a business, purchasing other investment properties or securities), what’s the expected rate of return of those investments? In some cases that’s easy to calculate based on prior history or cashflow analysis – in others it’s much more abstract and unclear. But you must have at least an idea of potential scenarios (pessimistic, realistic and optimistic). Then, you compare those returns with the current return on your equity.

Equity = Current Market Value – Current Loan Balance

Return on Equity = Annual return (net cashflow+debt paydown+ realistic appreciation)/ Equity

If your alternative rate of return isn’t significantly better than what your capital is currently earning, you’re doing yourself a disservice by selling, regardless of the profit. Even worse still, if you don’t have an alternative plan for the capital but simply like the idea of selling something at a profit, then you’re really selling yourself short.

Past performance and hassle factor

Secondly, you want to consider how this investment property has performed for you during the time of ownership. Is this a solid investment that rents quickly to long term tenants and doesn’t turn over often? Or is this the redheaded stepchild of your portfolio that you dread every time it becomes vacant? Further still, is this a property that stays relatively repair free or does it break every other day and twice on Sunday?

Past performance and hassle are major factors in considering a disposition regardless of the equity and profit. Or put a different way, if you could go back in time, knowing what you know today, would you have purchased the property in the first place? If the answer is no then it’s time to sell and put that capital to better use.

Long Term Discipline in good and bad times

Mama said there’d be times like this.

When we speak of discipline in a long term portfolio, your mind typically defaults to unfavorable markets. If times get tough you must have the guts to hold one and ride the storm. But, if times are great, you must also have the strength to resist the siren calls of cashing out and keeping your eyes on the prize. So perform the analysis above and determine:

What’s your portfolio’s principal goal?
What are the replacement or alternative investments and how do their returns compare to your current return on equity?
How has this property performed for you in the past? Has it been a pleasure or a never-ending hassle?

The logistics of selling

Now let’s say that after performing the methodical analysis I described above you determine that you will sell the investment property. In that case there are a couple of important logistics you must consider:

What’s the best way to sell a tenant-occupied property?
What are the tax implications and how should you structure the sale?

When your investment property is tenant-occupied there are two strategies you can use to sell the property. First you could wait until the lease is up and once the tenants move out get the property show-ready and put it on the market. This strategy will likely make you really nervous because a) you don’t want to pay the mortgage while the home is for sale and b) the timing of the lease expiration may not allow you to bring the property to market at a favorable time of the year. But on the plus side, if you choose this strategy, you could provide full access to the property at any time and to any category of buyer (regular or investor). The second strategy is to sell the property while rented to an investor. For most investors, having a tenant-occupied property is a great plus since they would have no vacancy from day one. That’s especially true if the tenant has been in the property long term and is interested in renewing. The major obstacle with this strategy is that tenants have zero incentive to provide access to the property to prospective buyers. But don’t fret, we have a solution for that, too. On all tenant occupied investment properties we list for sale, we do not allow any showings until a contract has been executed. Since the Buyer is likely to be an investor, they understand why we don’t want to disturb the tenants until the intent to purchase has been put on paper. And there’s a 10 day inspection/feasibility period in which the Buyer can perform all their due diligence and determine if they want to move forward. By restricting showings in such an active market as the current one, you avoid a major disturbance for the Tenant. Instead of asking the Tenant to accommodate as many as 15-30 showings in two weeks, they will simply accommodate a home inspection and appraiser access. Most of our clients are still in acquisition mode, but on all the investment properties we have liquidated in the past 12 months we have employed the second strategy with great results.

Last but not least, you must not forget about pesky Uncle Sam that tends to get really cranky around liquidation time. The major consideration when it comes to taxation at the point of sale is the alternative investment plan for the sales proceeds. If you are planning to use the proceeds to open a business or purchase securities, then simply ask your CPA to calculate your tax liability so you know the after tax proceeds of the sale going in. As with anything else where the government is involved the calculation isn’t as simple as figuring out your profit times your tax rate. So in order to avoid surprises, do yourself a favor and sit down with your CPA. If instead you plan to purchase other investment properties with the proceeds, then it’s time to consider whether a tax deferred exchange (1031 exchange) makes sense for you. In such an exchange, the sales proceeds are never transferred into your bank account but are kept in an escrow account while you line up replacement properties. By structuring the deal in such a manner you defer the taxes you owe on the profit and invest the entire sales proceeds in replacement properties. That’s the short and sweet version and obviously there are many more nuances and technicalities. But no worries, if a 1031 is right for you, we have and can execute it to perfection.

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Do you own an investment property and are trying to determine if selling it it today’s appreciating market is the right move? Contact us (or if you’re seeing this in your email, hit Reply) and we would love to sit down and perform the analysis together to evaluate all the options.

Regret > Loss

August 4, 2015 By Erion Shehaj Leave a Comment

The current strategy most Americans use to save and invest for retirement is fundamentally flawed. In order to evaluate the effectiveness of any strategy in an empirical way let’s look at the final results. Then let’s compare them to the results you employed the strategy to achieve.

We will go through that very process using two well known and often quoted studies.

First, a 2007 study performed by the Employee Benefit Research institute found that the average Baby Boomer had an average balance of $75,000 in their retirement account at retirement age. The same study performed recently, found that average balance has risen to $127,000 following the bull market of recent years.

Second, a 2009 study performed by the US Census found that the average college graduate (undergraduate) earns a little over $2M in their lifetime. Graduates with higher level degrees earned $2.5M (masters) and $3.5M (doctoral). But let’s stick with the undergraduate figure for the purposes of this article.

The math here is shocking and unforgiving! After 40+ years of working, earning, saving and investing the average “retiree” ends up with a little less than 2 years salary in their nest egg?! After four decades of tax-deferred 401K contributions, employer matches, double digit average market returns you arrive to find an account with 6% of your lifetime earnings?!

I know, I know. Yes, many boomers invested when the market was at the peak and pulled their money out at the bottom because they were fearful. Yes, they may have neglected to invest during the early years because they weren’t thinking about retirement then. Yes, their portfolios were probably not as diversified as they should have been. And finally, yes, they could have had much more money at retirement if they had the discipline of a robot and were completely unfazed by a 30-40% drop in the market.

All that considered, some pesky questions remain. Is this the outcome Baby Boomers signed up for when they invested their hard earned money? If given a do-over, would they do it again?

Of course not.

Sadly, for most retirement age folks in this predicament the only remaining option is to work much much longer than they had anticipated. But what about future retirees who are 15, 20, 30 years from retirement? After seeing the sad ending to this movie, do you follow the same path on purpose or do you shift strategy, direction and ultimately destination?

America has been called the “land of opportunity” and nowhere is this more evident than the above example. Unlike most countries around the world, an average college graduate earns a couple of million dollars in their lifetime. Think about that. Not the outstanding, exceptional college graduate – the average.

If this average graduate simply saved a dime out of every dollar she earned and never invested it at all, she would end up with 2-3 times more in their retirement account than the average retirement-age Boomers. How’s that for pathetic results?

When you first consider investing in real estate long term, fear of loss promptly ensues. After all, there are many unknown variables:

How do you know if it’s the right property?
What if the tenants are a major hassle?
What if it doesn’t rent quickly?
What if there’s a major repair?

I wrote this article to make one simple yet crucial point: Regret > Loss.

When you live in a country where the average college graduate makes over $2M in earnings in their lifetime, that’s a major opportunity. If you squander the opportunity to make something beautiful, to become financially independent and built wealth, the regret will be way more painful than any temporary fear of loss. If all you have to show for millions in earnings is 40 years of expenses, that will be a shame.

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References:

http://www.census.gov/prod/2002pubs/p23-210.pdf

http://www.usnews.com/education/best-colleges/articles/2011/08/05/how-higher-education-affects-lifetime-salary

http://www.fool.com/retirement/general/2015/01/10/the-typical-american-has-this-much-in-retirement-s.aspx

Why did oil prices drop in 2014

February 5, 2015 By Erion Shehaj Leave a Comment

Last year, on the morning of June 12, the market price for a barrel of West Texas Intermediate Crude Oil was $107.12. When the ball dropped to announce the arrival of 2015, the price of oil did a spot-on impression and dropped 51% (to $53.45). As I write this article, the price sits even lower at $44.80.

As you read through those numbers, you are probably asking yourself two critical questions:

Why did oil prices drop in 2014?
How will the drop in oil prices impact the real estate market in Houston and across Texas?

If you own investment real estate in Texas (and especially Houston) you might be substantially more interested in the answer to the latter question vs. the former. However, in order to understand the impact that a significant change in market conditions can have on real estate demand and prices, you must first have a clear understanding of the causes behind the drop in oil prices as the two are deeply interconnected.

Over the last month or so, I’ve been answering those questions almost on a daily basis in one-on-one conversations with clients and long term real estate investors. In this article I will share the answer to the first question backed by empirical data in Greater Houston Partnership’s annual report.

Why did oil prices drop in 2014? Too much of a good thing

Have you ever heard politicians of both sides of the isle talk about “reducing our dependency to foreign oil” during presidential election campaigns? They might disagree on exactly how to do it (more exploration/production vs green/renewable energy), but the idea of reducing our dependency is as bi-partisan as they come.

Did you know that we’ve been significantly reducing our dependency on foreign oil since 2008? Courtesy of innovations in oil exploration and extraction (i.e. hydraulic fracturing or “fracking”), domestic oil production has gone from 5M to 9.1M barrels/day since 2008. The result: In 2005 imported oil accounted for over 60% of U.S oil consumption – ten years later, that figure is expected to be lower than 20%.

Wait a second – you thought reducing our dependency on foreign oil was a good thing. It is… however, oil is a commodity and as such it is governed by supply and demand. While the U.S increased its domestic production, other oil producing countries (read: OPEC) didn’t stop or taper their production. So if we weren’t importing 40% of our oil consumption anymore, what happened to those millions of barrels? They either got directed elsewhere (see: growing economies of China and India) or got stored. In fact, OPEC’s surplus in 2015 is expected to be 2.7M barrels/day!

In a nutshell, we have too much supply and not enough demand to absorb it. So what happens to price when supply is excessive? Second half of 2014 happens.

But what about demand? Well, demand for fossil fuels rises when there’s economic growth. The U.S economy has shown signs of solid growth during the last three quarters but that’s the exception to the rule these days. The Eurozone has fallen prey of their austerity measures that have stifled growth while China’s growth is gradually falling with the latest annual growth at 7.7%.

Therefore, the fall in oil prices is primarily due to a glut in supply as a result of increased production without increased demand.

Who controls Supply?

Unlike supply-demand dynamics in a free market, oil supply is controlled by a handful of nations – with Saudi Arabia as the headliner. In the past, OPEC (Oil Producing and Exporting Countries) have cut production as a way to shore up oil prices pretty much immediately.

However, this time it’s different. If OPEC cuts production while U.S producers keep their supply steady, prices would rise but OPEC would lose market share. They have a very different idea on how to cut supply. Saudi Arabia would like to see U.S production reduced rather than their own. But how can they do that? The Saudis know that the very innovations that we’ve employed to increase our production (i.e. hydraulic fracturing and shale oil) carry with them a higher cost of production. Namely, if the Saudis can extract oil at a cost of $10/barrel (making essentially any oil price profitable), wells that utilize some of the new technology have breakeven points at $50-$65/barrel.

Therefore, their plan goes something like this: Let’s keep prices low for an extended period of time and U.S production will blink first because their cost structure is so disadvantageous. While that might prove effective, low prices come with a high price to the majority of OPEC members. In fact 9 out of 12 member countries need oil prices to be between $70-$120/barrel to balance their oil revenue dependent budgets.

Deja Vu of 2008?

“But wait a second” – some of you might say – “haven’t we seen this movie before, not too long ago? In 2008 oil prices dropped in similar fashion from a peak of $145 in July to a low of $30/barrel. Then a year later, prices were back up to $89/barrel in 2009 and hit $100/barrel again in 2011.

There’s a fundamental difference between 2008 and 2014. The former drop came as a result of a substantial drop in demand due to a global economic crisis. When the economic conditions improved, so did demand and the price of oil rebounded. Last years drop came as a result of too much supply. The only way to re-establish balance between supply and demand in such an environment is to taper supply until glut is absorbed or for demand to rise sharply due to economic growth.

Impact on Economy and Employment

A sixty percent drop in oil prices will have a substantial impact despite the fact that the local Houston economy is much more diversified now than it was in the woeful 80s. According to the GHP annual report, “broadly defined, Energy accounted for 38.1% of Houston’s GDP in 2013. Of which, Oil and Gas Extraction (mining) accounted for 19.8% and Other sectors that are typically identified as part of the energy industry (chemicals, refining, oil field equipment manufacturing, fabricated metal products, pipelines and engineering) contribute another $83.9B or 18.3% of total”.

The energy sectors that will be impacted the hardest from the drop in oil prices are new exploration, oil field services and oil field equipment manufacturing. And that makes sense: Once the investment has been made to find out whether or not there’s oil in a particular area, the cost to drill and extract crude oil from the ground is very low. So existing wells will continue to produce at max capacity as their cost per barrel still affords a handsome profit even at $40/barrel oil. If instead an oil company has to invest money into new exploration that increases the break even cost for that new well 20-30 fold. Therefore it would no longer be feasible for the company to make that investment. That’s why you have probably heard news of capital expenditure budget cuts across the board from all the major oil companies.

But let’s not get it confused. Integrated big oil companies (Exxon, Shell, Chevron, Conoco etc) will be least impacted by the current economic conditions. They sit on impressive piles of cash (always handy in a situation like this) and have hedges in place to weather longer term storms. In fact, 2015 will be somewhat of a Black Friday Sale for big oil companies as they look to pick up struggling smaller outfits on the cheap.

Since budgets for new exploration will be cut and unfeasible rigs will be shut down, oil field services and equipment will bear the brunt of it. As a matter of fact, some of the big players like Schlumberger and Baker Hughes have already announced layoffs. In 2015, there will be job losses coming from this subsector. In addition, smaller companies with unsustainable debt levels will have to merge or fold – in either case, that will result in layoffs.

However, the GHP expects net employment in the area to rise by 69,500 jobs in 2015 with the bulk of growth coming from sectors outside energy: Construction, health care, retail, professional services, public eduction etc.

Materials:

Employment-Forecast – Source: Greater Houston Partnership

Economy_at_a_Glance – Source: Greater Houston Partnership

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Next Up: We will take a look at the impact of this climate of lower oil prices on the real estate markets in Houston and across Texas. Stay tuned.