The real estate market is over cooked. Here’s why and what to do about it.
There seems to be a consensus that the real estate market has reached its peak. However, in a normal market cycle it takes oversupply to drive down prices. And we don’t have that, at least in the first-time buyer, or should we say affordable, markets in which I invest. Why? Two driving forces - baby boomers and new construction.
Baby boomers aren’t moving. They are sitting on tons of equity and a big ranch home with a finished basement that is only used for the occasional holiday celebration. Previous generations, when they reached the retirement age or mid 60’s, sold their family homes and downsized to a condo or much smaller home. Now they just shut the vents in the bedrooms they aren’t using and say, “bite me housing market.” https://www.cbsnews.com/news/housings-big-problem-boomers-arent-downsizing/
This creates a supply gap since first-time buyers or move-up buyers can’t find a home without outbidding each other. Most of the buyers in this class are priced out of new constructed homes. Over the last few decades, less and less affordable new homes have been built because builders found out they can make more money with the high end and McMansion homes.
In my opinion, the canary in the coal mine is the high-end condo market. For example, Miami has a four- to seven-year backlog of overbuilt luxury condos. If that seems familiar, it should... This is exactly what happened before in the last real estate crash.
Compare this article below from 2007 to a recent 2018 article echoing from the past
Interest rates have the power to drastically alter this high-end condo and housing market. Not just because it’s harder to afford these homes, but because it’s harder for builders to hold these homes as well. Builders and businesses rely on credit lines to provide them with time to sell their products. When it costs more to hold, you need to reduce the price in order to sell faster.
“Sorry neighbor trying to sell your home, but the new subdivision next door just dropped their pants. Why should I buy your four-year-old home when I can buy brand new for less?”
This can create a ripple effect. Now that neighbor can’t sell without lowering their price and they can’t buy another home either.
So… what do we do about it?
I have another article I’m finishing that deals in timelines… However, in the short run, the answer is SELL! If you have followed my previous articles, then you know that I have sold everything other than my primary residence. I’m completely out of the stock market and I’m in cash or in deeply discounted mortgage investments.
What I mean by discounted mortgages is that I’m the bank. In the simplest form it looks like the following example...
Homeowner owes $80,000 at a higher than average interest rate mortgage on a home that is currently worth $100,000. In this case, I would buy the mortgage from a bank or hedge fund at around $60,000 or below depending on the situation. As an investor, I’m protected from most of the issues that a market correction will throw at you. And since I bought at a discount and it’s a high interest loan, I make anywhere from 13.5% to 25% on my money every year depending on the situation.
If the market goes down 20%, the borrower still isn’t overpaying for a home. If the financial markets collapse and it goes down 40%, then I’m still OK. Even if this market drops 50% I would still be OK. Why? I own the invest free and clear and can offer whatever terms I want (depending on Dodd Frank and other consumer protection laws).
Let’s look at the worst-case scenario – the market drops 50% and I’m left with the property I paid $60,000 for that is now worth $50,000. I’m going to have some rehab costs and legal fees, but let’s stick with the $50,000 example. Warren Buffet once said, “Price is what you pay, value is what you get.” I would rather have the $50,000 left in real estate than to have it wiped out if it were stocks or other investments. Why?
Because I have something I can work with. If my stocks go down I can’t call Apple and offer my advice on how to get it to go back up. But I can take this property I own and put in a new kitchen, which would receive higher rent or make it sell for more. Or I can do a combination of things, such as offer mortgage terms that are attractive and raise the purchase price to compensate for any loss. I could also just rent the home and create cash flow.
The options are almost endless… Or I can buy stocks and pay, pray, and stay. Unfortunately, we have been programmed since birth to listen to financial advisors who receive a commission of 1-3% whether your investments go up or down.
No investment is risk free, but protecting your downside is what it’s all about. I have created this fund around the principle of protecting the downside. It offers a level of security and protection I can’t find in other investments.
However, I can’t do this well without having like-minded investors for basically two reasons. First, I only have so much of my own money. I must constantly sell and flip investments to keep the money flowing into new opportunities. I would prefer never to sell and instead create long term wealth. See this video of how I lost out on $250K by selling a $80K home early. (See video)
The second reason is how I am finding these investments. Before, I would be on ten different real estate foreclosure search sites and constantly out bidding the competition. Now, I avoid these sites by working my way up the ladder. I don’t care who is trying to sell it. I want to know who owns the debt. Because that person is in control of the deal.
Unfortunately, there is a pecking order here as well. Government and big banks sell non-performing mortgages (pre-foreclosure) to hedge funds who sell to smaller hedge funds who eventually sell ones they don’t want to me. The reason I created Expand Capital Fund II, LLC is to move up the ladder a few rungs. No bank is going to sell me one non-performing mortgage. They sell in packages known as pools of mortgages. To get into this big boy club you need to have $1M+ to get anyone’s attention.
I have spent the last year designing a business that will be able to capitalize on a market downturn and now we are knocking on the door. Actually, I’m knocking on your door. Not because I have to, but because I want to win big. The last market cycle caught me and everyone by surprise. I want retribution.
I’m not going to be on the sidelines watching the game. I’m going to be a player in a position to win.