Building Through Uncertainty: Mastering Tariffs, Inflation, and Market Shifts
“Let me get this straight, the fire marshal is demanding we install an additional $40K of sprinklers beyond what is required by code?” I had to repeat what the architect said because I simply could not believe it. On the previous project, our custom patio door order was screwed up, (vendor’s fault, but I couldn’t prove it) adding $10K in expenses. During COVID, the price of lumber on our project at that time jumped by more than $20K, nearly 50%. There is always something lurking in the shadows ready to mess up your well laid plans.
For most people trying to grow their real estate investment portfolio, success tends to bring its own challenges. There are times when more is better and easier, as in economies of scale, and times when more is just problems at scale. No matter what type of business you're in, economic winds will impact you. We often overlook these trends at our peril. We all put up our economic sails to catch the flowing winds of capital, from exchanging our time for a paycheck to collecting profit from an investment. To navigate our way to success, we have to be observant of the direction the winds carry us. There are too many outside forces to name that could blow your economic ship off course, but they are so significant as to be unavoidable. You'll know it when you live through it. As we live through the era of tariffs and the Ukraine war, we remember COVID, Brexit, inflation surges, and the Euro debt crisis as just a few examples.
Dealing with economic headwinds is never fun. You really can't anticipate these events, but you can be ready. You cannot know what bad things might happen, but you can prepare financial reserves and stay flexible in implementation. Today's tariff headwinds are just a different flavor of the same uncertainty we feel periodically. In the context of real estate investing, tariffs have little impact unless you are doing a major renovation or development. While many basics like plywood, lumber, and wallboard are generally made in the US, a good portion is still imported from Canada. For finishes like light fixtures, door hardware, appliances, and flooring, nearly all products available on the market are imported, most from China. In this case, tariffs will be significant. As of late May 2025, there is still no certainty about the magnitude of tariffs. If you are in the midst of a project, how do you overcome this challenge?
Enter the contingency reserve. There is an old Yiddish saying that roughly translates to "Man plans, and God laughs." This saying helps crystallize this lesson: you can't predict the future. In construction and renovation projects, surprises are the norm. But as we said before, we may not know what the surprises may be, but we know we will probably get a few along the way. So, we prepare and protect by holding back budget as a contingency. A good rule of thumb to remember is 5 to 10%. The older the building and the bigger the project, the closer you should be to that 10% reserve. The reserve is there to help absorb changes in material prices, the repair of undiscovered defects, or to pay for change orders along the way as we learn that the real world demands something other than what was drawn up by the architect. As the classic American idiom goes, "Shit happens."
Our market-based culture frequently creates significant swings in markets and sentiment. Alternating waves of fear and jubilation taunt investors into making wrong decisions at the worst time. The reality is tough times breed survivors. Tough times force you to think and problem-solve in non-obvious ways. In short, figure it out. While it may feel scary not having the answers at hand, take comfort in your problem-solving abilities. When the market throws you for a loop, hunker down and grind through. So when it comes to dealing with tariffs, the most recent flavor of market chaos, what tried-and-true playbook are we applying in this situation? My formula is simple: slow down, study the situation, estimate the impact, and choose a path forward.
While I have had more than my fair share of procrastination, slowing down is different. Slowing down is a recognition that the real world develops and changes much more slowly than the news and information space we are exposed to every day. Unlike Wall Street trading, split-second decisions are something you will probably never have to make when investing in real estate. In this world, getting a loan takes weeks, buying a property takes months, and building a property takes years. The time scales in real estate are different. In this industry, slow and deliberate planning is critical. Success in this business is all about forethought and being ready for the unexpected, even if we have no idea what specific challenges we may face. The easiest way to apply this little gem of wisdom is to stop taking the advice of experts and influencers at face value. Take the extra time earned from slowing down to think through and compare advice to your specific situation. It isn't about questioning the wisdom of others' advice; it is about making sure that your situation is the right one for applying their advice.
While we rely on expert advice to learn and grow, in real estate, good advice applied in the wrong situation will not get you where you want to go. It is important to understand the unique situation of your property given its age, construction type, local law, and state laws. To accomplish this, we study the situation, the second step in our formula. Using the time created by slowing down, learn about what makes your locality unique. Are property taxes high or low? Are local schools good? Are there polluting industries in town? Are you in a high-regulation urban area, low-regulation rural area, or somewhere in between? How are your state's housing regulations? These are just a few questions to keep in mind. Following the advice of a Texas-based property manager on handling evictions could land you in court with a fine if you try the same thing in New York City. Learning what makes your property unique will help you identify all of the elements to consider when applying expert advice.
With the list of elements unique to our property, we have a framework to understand how the advice of others may or may not apply in our situation. Investigating each of these elements and putting together the findings across each element provides a baseline for estimating the impact. This estimation could be as simple as pulling your best educated guess out of the air or as complicated as building a financial model—how deep you go is up to you. Even taking the simplest path of making an educated guess will likely be good enough to guide you toward the correct path forward. At some level, all you really need to know is which elements may have a significant impact and whether it's big enough to knock your plans off course. For example, doing significant renovation to a property will nearly always increase the property tax bill, but will a $500 increase stop you from moving forward? Probably not, but a $10,000 property tax increase will probably make you reevaluate the whole deal.
With a decent understanding of how our different decisions may impact our business moving forward, we are ready to make a decision about moving forward. When we first started seeing evidence that tariffs may impact our business decisions, we took a best guess at where things may be in the future and moved forward accordingly. In our case, we estimated that impact as increasing our cost by as much as 5%. It's an educated guess that still required a good amount of thinking through. If one thing has remained constant through the centuries, it has been the fact that what politicians want and what actually happens can be two wildly different things. We may have high tariffs, low tariffs, or no tariffs. It could start tomorrow or be delayed a year. The court could uphold or strike down some or all of the law. Congress may reverse course, or one of the many other realities that make forecasting the size and timing nearly impossible. As of the writing of this post in late May '25, the US trade court had struck down all of the current tariffs. Will it be appealed? Will Congress act? Maybe...
Uncertainty and risk come in more colors and flavors than we could possibly detail. As we learned from Murphy's Law, "Anything that can go wrong, will go wrong." Today it's tariffs, but on your next project it may be inflation, a pandemic, a change in building code, discovering a huge defect, or getting cheated by a vendor, the list is endless. In the face of shifting economic tides, the key is resilience and adaptability. Tariffs, market swings, and uncertainty will always be part of the game, but success lies in embracing the challenge, thinking critically, and staying prepared. As investors, we don't get the luxury of perfect foresight, we get the ability to plan, pivot, and push forward. So take a deep breath, assess the situation, and move forward with deliberate action. Because in this business, survival isn't about avoiding turbulence, it's about navigating through it.
If you've found value in these insights and want to continue your journey of real estate wisdom, please subscribe to The Property Alchemist.
Don't let your real estate dreams remain just dreams. Empower yourself with the knowledge and insights that can turn your investment visions into concrete reality. Subscribe to The Property Alchemist today and take the first step towards becoming a Master of Real Estate alchemy. Your next successful project is just a subscription