The year was 2007. Interest rates were starting to rise and there was a softening in the real estate market. I had been an investor for six years by this time but had only really seen appreciation. During my short six years, I was able to witness the amazing risks lenders were taking with 125% loan to value loans, no documentation 100% financing for investors, low credit score subprime, and anything else they can think of to get more money out of the door. Real estate always goes up in value, or at least it had, so these lenders were confident in their lending decisions. Worst case, appreciation would bail them out. Rates were super low on top of all this.
I was naive and was buying as much real estate as I could. Hitting a peak of 55 units and I was not even 30 years old. I took full advantage of the 100% stated income loans with adjustable-rate mortgages. Many adjustable-rate loans back then adjusted every month and were interest only. As rates started to increase, we saw a softening in the market and rent rates started to go down. Rents going down with mortgage payments going up was a recipe for disaster for a young entrepreneur like myself. Each time a tenant moved out, it cost me money to replace them, and I replaced them for less income. Turn overs were common because people were losing their jobs and could no longer afford the rent. As this continued, eventually the rent I was able to collect was no longer covering the mortgage payments and my credit cards were maxed out. I was using them each time I had a tenant leave to fix up the property. I started selling everything I could but still got caught when the crash finally hit in 2008.
We have gone through a pretty amazing boom. In fact, the crash was so long ago, most investors I speak with were not even in the business at the time. More than a decade of fantastic times as a real estate investor. Low rates and appreciating properties combined with high rents and very low vacancies. Life is good!! Can this continue forever?
I am not saying it is time to hit the panic button. I actually believe we still have some legs, but what I am saying is it is time to start thinking about it. Here are some ideas to keep in mind as we head towards a shift in the market:
Busts Are Amazing Opportunities But Devastating To The Undiversified Investor
Honestly, we can use some cooling in the market. Especially the housing market. It is an amazing time to be an investor if you own property but a challenging one if you want to buy. Low inventories have pushed prices through the roof, making it hard to find discount properties or cash flow. A bust of some magnitude would ease the market giving investors more opportunities. Are you ready? One way to be sure you are ready is to be diversified. This means having access to cash, either through liquid assets or just having some cash on the side. It also means spreading your assets around so if one asset class you are in takes a dive, you won’t lose everything. In fact, by being in different investments you will see the movement firsthand and may be able to move assets around to take advantage of what you are seeing. A good friend of mine always says “Never let a good bust go to waste.”
Busts Hurt People In Or Near Retirement Because They Don’t Have The Time To Take Advantage
Savvy investors would welcome a bust but what about our friends and family in or close to retirement? If you are getting closer to retirement it is probably the time to start thinking about being in safer assets. Big moves in the market can kill a retirement because you don’t have the time to recover. It is not worth the risk. Even diversification without the time to recover is not enough. If you don’t have time to take advantage of a bust, get yourself into safer assets. Fixed income assets like our mortgage fund are certainly something to consider when you are looking for quality.
Busts Normally End With Lower Interest Rates
It is interesting because as I write this, we are seeing interest rates go through the roof. They must to help fight back inflation. Inflation is at a 40-year high and the best way to correct that is to slow the economy. Less liquidity and higher rates will do this. The problem is, if we move too fast and rates and liquidity become more challenging, it could throw us into a tailspin. This is exactly what many experts are predicting. It is important to note that when a bust comes, we will see additional liquidity in the market through quantitative easing and you will see interest rates start to come back down. This is when us as investors pounce on opportunities. High inventory and low rates are when you will find your best deals. Lower interest rates, though, push inflation higher. Therefore, we love buying real estate in these times because real assets tend to do well with inflation. You can lock in great prices with great financing terms and ride it out. You will see the jump in rent and values as the market recovers.
Low interest rates are used to pump up stock values and real estate values. If rates are low, no one will be investing in bonds or your typical fixed rate investments. They will pursue better returns and take more risks. Which is exactly what we have seen over the last decade.
Inflation Follows Busts Which Further Hurts Retirement
We are seeing inflation now which could be a primary cause of a bust but in general, inflation comes after a bust because of the interference the government runs with stimulus packages. Pumping money into the economy to help with recovery is the cause, much like we saw with COVID and the reason we are seeing inflation now. Inflation kills retirement because investors closer to retirement flee to quality like annuities, bonds, and savings accounts. Because these are fixed rate investments, they lose value to inflation. You will lose buying power faster than your money will grow with the returns you are earning on your investments. Safe investments you would want when you retire are the exact investments that get hit the hardest with inflation. Maybe the safe savings accounts aren’t so safe!
We know something has to change at some point. The key to navigating it successfully is to not panic. Be sure you are buying assets now that can weather the storm. Cash flowing real estate, dividend paying stock, a mortgage fund are all great examples of being prepared for market movement. When you see your real estate values going down, don’t panic and dump your portfolio. You knew this could happen and you know it will go back up over time. Stick with it for the cash flow and don’t dump it for a loss because you got nervous. Stay patient and look for opportunities to build a larger portfolio.
If you are interested in a promised 8% return, please let me know. I would be happy to send you more information on our public mortgage fund. Let’s be prepared!