How do the most successful real estate investors operate during times of extreme uncertainty? What do they do differently than the majority? In this video, you'll discover 5 powerful tips for investing in uncertain times. As the CoronaVirus continues it's destruction, everyone has been affected in one way or another. There is tremendous fear and uncertainty right now. This video clarifies how the top real estate investors are approaching the situation and how you can too.
In this post I'm not going to touch on the very sad health side of this pandemic. My thoughts and prayers go out to any of you who have been impacted by this awful virus. I pray that everybody practices extreme social distancing, self isolation and stays disciplined so we can put this thing to bed as quickly as humanly possible.
Real World Wisdom
Instead, I’m going to share wisdom from the real-world experience of investing in uncertain times. I got my start in real estate during a recession. In 2001 the dot-com bubble had burst, and the 911 terrorist attacks had just occurred. Then by 2008 and the great recession, which was created by real estate, I was beginning to mentor others. I made it through both of those periods, which they said were unprecedented. This time is too, they're always unprecedented, however they share similarities.
5 Powerful Tips for Investing in Uncertain Times
Tip #1: Be Greedy When Others Are Fearful
The sage wisdom of the greatest investor of all time Warren Buffet goes something like this, "Be fearful when others are greedy," which is where we were for the last several years. Then, “Be greedy when others are fearful," and others are fearful right now. He's not talking about taking advantage of other people who are down and out. What he's saying is that instead of running away, you should be focused on looking for opportunities.
I would go further and say that it is 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 so they're running away. In contrast, those who have an investor mindset look for opportunities in uncertain times because these are when the best opportunities arise.
Meet This Head On
I’ll give you an analogy of this using car racing to help you better understand. When there is an accident in car racing there is often a big ball of smoke on the track. The drivers are taught to ignore their human inclination, which is to run away from the problem. Instead they're taught to go straight at the smoke. Why? Because typically the accident has already moved, and the safest place is right down the middle.
The same is for you during this crisis. 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 Nathan Silver. One of the things he writes about is the fact 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, it's a time for you to focus on signal, which are facts. Signal are things that you can verify and give you a glimpse into where things might be going. When investing in uncertain times, you don’t have be great predictors of the future. However, you can have a foundation based on facts.
Example of Noise: Everyone Will Lose their Job
The idea that everyone will lose their jobs is noise. Signal is this; even during the hardest times of the recession in 2009, our job unemployment rate never hit above 10%. This is still a large number, but when you consider that over 90% had a job, that's nine out of ten people. If we go back almost a hundred years to The Great Depression in the early '30s the unemployment rate was near 20%. Even if we hit the worst-case scenario, the Great Depression, eight out of ten people, or four out of five still have a job.
As real estate investors trying to flip houses all we need is one buyer. So, in the worse-case scenario we have a four out of five chance. When it comes to this idea that everyone's going to lose their jobs, when you look at the truth and the facts of the matter, even in the worst of the worst, many people will still have jobs.
Remote Working and Other Measures
Also, we are in a different world than we used to be. A lot of people are working hard right now, including me. Everything I do with mentoring is done with distance learning, so it's business as usual for me. There's a lot of people like me. Plenty of companies can function with their employees working from home. That means a lot of people are still gainfully employed. For those industries that are impacted in a major way, there's a federal bailout bill to help them. The signal 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.
Example of Noise: Real Estate Values are Going to Plummet
The second example of signal versus noise is that real estate values are going to plummet just like the stock market. First and foremost, the real estate market is very different from the stock market. It doesn't drop in a matter of minutes based on public panic.
What's really happening out there is what was happening a month ago, which I shared with you previously. There is an affordable housing crisis in America right now. There are so few houses that people can truly afford. Even this crisis is not going to make a dent in the problem. The fact is that a lot of people want to become homeowners but can’t because of what they earn versus the cost of houses.
Supply and Demand
I kid you not, right now I'm getting multiple offers situations for some of my apprentice's deals. Of course, we're seeing that in the areas that don't have a complete lockdown. We've always focused our energies on those price ranges for houses because that's where all the demand is. I can't completely tell the future, but because there's such a huge disparagement between supply and demand of affordable housing, the idea that it would lose value is slim to none.
However, this is not the case with higher price ranges and other property classes. They could potentially experience a problem, but they were already going down that road. A month ago, it was already difficult to sell a $900,000 home in the suburbia of Atlanta. 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, people were still buying houses. For example, newlyweds moving out of their apartments and growing families looking for more space. 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, the concern over so many people being close together could be a motivator for people to move out of apartments and get their own home. 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 ranges.
Example of Noise: This is Going to be the Worst Recession Ever
The noise is that it's going to be a global depression. Let’s approach 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 like it was in 2008. That was an error of the system where people were getting loans for homes that they should never have bought and there was a huge, massive extra supply of houses being built for people that were buying as second and third and fourth homes that they were never going to move into. That was a systemic problem and that created that recession.
This is an external to the economic machine like what happened with 911, which ended up not being a prolonged recession. So, is this going to be the worst recession ever? Obviously, we don't know for sure, but the signal suggests this will be something temporary akin to what happened in 911 versus what happened in 2008.
Example of Noise: Now is Not a Good Time
I'm hearing some people saying that now's a bad time and to wait a year to jump into real estate. Let me give you some real signal here about timing.
- iBuyers across the country, like Opendoor, Offerpad, Zillow Offers, Redfin are all dropping out: They’re dropping existing offers and not buying any houses right now. They've left homeowners high and dry and we're getting a lot of leads right now as a result. Our apprentices are picking up and helping homeowners that were screwed by big traditional real estate investors. You see, their business model couldn't handle these kinds of changes in the marketplace, whereas a creative real estate investor can.
- 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. I disagree because we had the lowest foreclosure rates in recorded history just a month ago, and it takes eight months to a year to foreclose. With 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. An example would be when you're working with a seller and you don't want to physically go to the property. Instead you could have them FaceTime, SKYPE or even use ZOOM to do a tour. Alternatively, you could have them take pictures and email them to you. You can fulfill these obligations of social distancing and self isolation while still being productive.
Many hard money lenders are tightening up right now, but not all of them. Get on the phones and call different hard money lenders. Some are looking to grab market share and they're still very aggressive in their lending practices. For the typical retail buyer, mortgage lenders have slowed down for a several reasons, however bigger banks are well capitalized and they're operating at peak performance.
If it's a lockdown, then maybe the appraiser can't go out, although they may be able to do some desktop appraisals. Again, there are ways in which to be creative and how you reach out to the right organizations.
Title companies are still working, even in those areas where the recorder's offices have shut down. That's because 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. We're closing deals every day. These things are happening even during uncertain times. You just need to be a little creative and think outside the box. You may have to go to different lenders, mortgage brokers, or different closing companies to get some of these deals done.
Tip #4: Be Practical
Account for Additional Costs: You need to price in additional costs in a time when holding costs might increase because you buy a property and then need to sit on it due to lockdown. Or maybe the hard money lenders you're working with are charging a little more, you need to price that into your offer perhaps by offering a slightly lower price.
Be Selective: What if there's a tenant in the property 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 of knowing that it might take several months to get that tenant out before you even start your rehab. You need to be practical.
Be Wise and Respectful of Others: If you are in a state that is in lockdown and you are going to look at a house, you need to be respectful and practical. You don’t know if you're carrying the virus because it incubates for some time. 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, keeping a safe distance. So be practical and wise about the situation, knowing that there could be delays.
Extend Contracts: When you're getting a property under contract right now, put into the contract that the coronavirus could delay things and you want to extend the length in the case that happens. In fact, I wrote up a specific clause with my legal team and gave it to my apprentices for them to use for their contracts. One of the nice things about real estate is, if you start a deal today, it typically takes 45 to 60 days to complete. So, hopefully if you start one today, Lord willing 60 days from now some of this will be behind us.
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 also 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 put together a free video course that I'm constantly adding to. I recommend you go through it. Even if you've been through it, you may want to do it again 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. It was shot a couple of weeks ago. This is an update to that one, but 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 full economic advantage of any opportunities that'll present themselves as a result of this. Hopefully it gives you an opportunity to stay healthy as well.
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.