How are real estate investors successful during times of extreme uncertainty? What do successful investors do differently than those who struggle?
Real World Experience
The Coronavirus has affected almost everyone in some way, causing fear and uncertainty. I’m not going to touch on the very sad health side of this pandemic. Instead, I’m going to share wisdom learned from experience investing in uncertain times.
I began in real estate during a recession. The dot-com bubble had burst, and the 911 terrorist attacks had just happened. By 2008 we were in the great recession and I was beginning to mentor others. I made it through both of those periods, which they said were unprecedented. This time is unprecedented too however they share similarities. Here are my 5 powerful tips for investing in uncertain times.
Tip #1: Be Greedy When Others Are Fearful
Listen to the sage wisdom of the greatest investor of all time Warren Buffet.
“Be fearful when others are greedy,” which is where we were for the last several years. “Be greedy when others are fearful,” and people are fearful right now.
He’s not talking about taking advantage of people who are down and out. What he’s saying is that during this time you should be focused on looking for opportunities. It’s the difference between having a consumer mindset and having an investor mindset. In fact, I have a great video on this subject.
Most people think like consumers, and they’re the ones that
are fearful right now. In contrast, those who have an investor mindset look for
opportunities in uncertain times because these are when the best opportunities
arise. You need to meet this head on and be greedy when others are fearful. I’m
not talking about being irresponsible, but now is the time to focus on looking
for opportunities, not running away like a consumer.
Tip #2: Separate Signal from Noise
Signal in the Noise is a brilliant book written by Nate Silver. He makes the point that humans are terrible at predicting the future and often allow emotions to push them way too far in one direction or the other. Right now is not a good time for you to get overly emotional. Instead, you need to focus on signal. Signal are facts that you can verify. Facts that help you see where things may be going. When investing in uncertain times, you don’t have be predictors of the future, but you can have a foundation based on facts.
Noise in Uncertain Times: Everyone Will Lose their Job
Signal is that even during the most difficult times of the recession in 2009, our unemployment rate never went above ten percent. This is a high unemployment rate, but ninety percent of people still had a job. If we look back to The Great Depression in the early ’30s the unemployment rate was near twenty percent. Even if we hit the jobless rate of the Great Depression, eight out of ten people, or four out of five still have a job. So, in the worst-case scenario many people will still have jobs. As real estate investors trying to flip houses all we need is one buyer.
Remote Working and Other Measures
We are also in a different world than we used to be. Many people are working hard right now and plenty of companies can function with their employees working from home. That means a lot of people are still gainfully employed. Everything I do with mentoring is done through distance learning, so that has remained unaffected. For those industries that are impacted in a major way, there’s a federal bailout bill to help them.
The signal here is that there will be an enormous amount of employed people who are able to buy houses or pay rent and all those things in between.
Noise in Uncertain Times: Real Estate Values are Going to Plummet
The second example of noise is that real estate values are going to plummet just like the stock market. To begin with, the real estate market is different from the stock market. It doesn’t drop in a matter of minutes based on public panic.
The signal is there is an affordable housing crisis in America right now, which I have shared with you previously. There are so few houses that people can afford. The truth is that a lot of people want to be homeowners but can’t because of what they earn versus the cost of houses. Not even this crisis will make a dent in the problem.
Supply and Demand
We’ve always focused our energies on affordable houses because that’s where all the demand is. Even now, I’m getting multiple offers for some of my apprentice’s deals. I can’t be sure of the future, but because there’s such a difference between supply and demand of affordable housing, the idea that it would lose value is slim.
However, this is not the case with higher price ranges and other property classes. They could experience a downturn, but they were already beginning to decline. It was already difficult to sell a $900,000 home in suburbia. That was a tough sell because there’s so much more supply versus demand. If this continues to be a prolonged recession, people will not be buying homes in the higher price points.
People Need a Place to Live
In 2009, at the height of the recession, people were still buying houses. They weren’t oblivious to market conditions, but they weren’t completely focused on it. They were buying a home because they wanted a place to live.
If you look at what’s happening right now and the concern over so many people being close together, that could be a motivator for people to move out of crowded apartments. One could argue that the prices of real estate may go up in those affordable price point ranges.
So, this idea that real estate values are going to plummet is noise. Signal is that when you look at supply and demand and the fundamentals of how real estate pricing is done and fluctuates, it appears that not only could it remain stable, but it may go up for certain price points.
Noise in Uncertain Times: This is Going to be the Worst Recession Ever
The noise is that we will have a global depression. Let’s look at this from a signal versus noise perspective. This pandemic is not something that has to do with our economic machine. It’s not a system error in real estate like 2008.
This is an external to the economic machine like 911, which ended up not being a prolonged recession. So, is this going to be the worst recession ever? Obviously, we can’t be sure, but the signal suggests this will be temporary similar to what happened in 911 versus what happened in 2008.
Noise in Uncertain Times: Now is Not a Good Time
I’m hearing some people saying that now is a bad time to invest. They advise waiting a year to jump into real estate. Let me give you some real signal about timing. Here are four reasons why now is a good time to invest in real estate:
- iBuyers like Opendoor, Zillow Offers, and Redfin are dropping all existing offers and not buying any houses: Their business model couldn’t adjust to the changes in the marketplace, whereas creative real estate investors can. They’ve left homeowners high and dry and our apprentices are helping homeowners that were abandoned by big traditional real estate investors.
- Other competitors are dropping out: My apprentice and I are getting more leads than ever and gaining market share rapidly. In fact, our marketing costs have dropped dramatically.
- New opportunities are going to arise: Unfortunately, some people will need to sell. Some have been talking about a foreclosure tsunami however I disagree. We’ve had the lowest foreclosure rates in recorded history, and it takes eight months to a year to foreclose. Considering the postponements that most mortgage companies are allowing for borrowers, I don’t predict a foreclosure boom occurring at all.
- Some people want to sell: Recently we had a call from someone wanting to sell property so he could invest in stocks because the stocks are low.
There will be opportunities that arise from these uncertain
times. We don’t know exactly what it will look like, but as far as timing, it
would be nonsense to say now is a bad time. In fact, signal would prove that
now is a great time.
Tip #3: Be Creative
When investing in uncertain times you need to be creative. You can fulfill obligations of social distancing and self isolation while still being productive.
- If you’re working with a seller and you don’t want to go to the property, do a tour using FaceTime, SKYPE or ZOOM. Another option would be to have them email pictures to you.
- Many hard money lenders are tightening up, but not all of them. Some are looking to grab market share and are still very aggressive in their lending practices. For the typical retail buyer, mortgage lenders have slowed down, however larger banks are well capitalized and operating at peak performance.
- Maybe the appraiser can’t go out, however they may be able to do some desktop appraisals.
- Title companies are still working, even in those areas where the recorder’s offices have shut down. Title insurers know how to handle this. They understand that there could be a gap from the day that the recorder’s office closes to the day it reopens. They’ve priced that risk into their title insurance policies.
Tip #4: Be Practical
Account for Additional Costs
Holding costs might increase because have to sit on a property for awhile after you buy it due to lockdown. Or maybe the hard money lenders you’re working with are charging a little more. You need to factor that into your offer perhaps by offering a slightly lower price.
What if the property has a tenant who hasn’t paid rent in three months? It could be months before you can get them out because eviction postponements. Either you skip on deals that are already occupied or you price in the risk knowing it might be months before you start your rehab. You need to be practical.
Be Wise and Respectful of Others
If you are in a state that has restrictions and you are going to look at a house, you need to be respectful and practical. We had an apprentice that went to look at a deal for a homeowner that was in her late sixties. He wore gloves and had her wait outside while he walked through the house. So be practical and wise about the situation, knowing that there could be delays.
Put into the contract that the coronavirus could delay things and you want to extend the length in the case that happens. I wrote up a specific clause with my legal team and gave it to my apprentices for them to use for their contracts.
Tip #5: Be Productive
Many people tell me how they don’t have enough time to get through some of the trainings that I provide. Well, for many of you, you have the time right now. Use it wisely and be productive.
- Download and read my audio book, How to Be A Real Estate Investor. It is fundamental to understanding how to be productive as a real estate investor.
- I have another book called Real Estate Investing Gone Bad which is available on Amazon. In it I teach you what not to do by including all the mistakes that others have made so that you don’t make them yourself.
- I recommend you go through my free video course. Even if you’ve been through it, I am constantly adding to it and you may want repeat it because you’ll hear things you didn’t hear the first time.
- Check out my video on the impacts of coronavirus on real estate investing. Even though it was shot awhile ago there’s still a lot of wisdom in there.
Now is the time to sharpen your skills and be productive with the extra time you have. That way you can take advantage of any opportunities that’ll present themselves as a result of this.
Signal (True) News Investors Can Use
- Essential Businesses: Homeland Security includes real estate in its list of Essential Businesses, along side grocery stores, pharmacies, etc.
- Mortgage Payment Deferral: Federally backed real estate loans (Fannie Mae, Freddie Mac, FHA, VA, USDA Rural, etc) along with many private lenders, are allowing investor-borrowers to defer mortgage payments to help offset the costs of tenants not paying their rent.
- Small Business Financial Aid: Small business grants of up to $10,000 and flexible loans of up to $100,000 are rolling out at the Federal level and additional aid may be available at the State level too, to help keep small businesses alive during the extended lockdown periods.