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. But we currently have very few homes for sale compared to the demand. 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.” www.cbsnews.com Click on article.
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?”- New Buyer
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 can’t speak to what is best for you. However, I’m completely out traditional real estate and stocks. Instead I’m in cash or 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. 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 investment 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 a brick and mortar investment 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. Moreover, 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 advisers 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.
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 us to win big. The last market cycle caught me and everyone by surprise. I want retribution!
Below is a video that illustrates what happens when you don’t have investors. In this case, it didn’t pay to sell. But the new owners had a windfall of over $250K eight months later!
Are you curious of how this works with real life examples? I can email you a copy of our plan. We show you what happened behind the scenes during the last housing bubble and how you can be prepared for what is to come.
You can’t control Wall Street but you can control Main Street. It’s time to get back to simple investments secured by brick and mortar real estate.
Interested in hearing more? Set up a time to talk click here.
Kyle Zimpleman, Managing Member