You're about to hear my thoughts on the real estate market forecast and you'll probably be surprised by what I share. You may be expecting me to provide some unique foresight into the future of real estate which will help you make better investing decisions in the future. If that's the case, I may disappoint you. Unfortunately, I am unable to tell the future. In fact, many studies have proven that human beings are remarkably consistent in their confidence of forecasting the future followed by the harsh reality that they are oftentimes wrong. Regardless of our confidence in forecasting the future, humans are poor predictors of what is going to happen next. Therefore, as a wise and intelligent real estate investor, making investing decisions based on some pundit's prediction of the future is dangerous. In this video, you'll discover why forecasting what is going to happen in the real estate market is an exercise in futility and how to make smart investing decisions without the need to consult a real estate market forecast.
I'm going to share with you a unique perspective on real estate market forecasting. It's a very popular question I get. They want me to tell them what I think is going to happen in the future, either the short term future or long term future of the real estate market.
Now, from one perspective I think that's a great question to ask me because I am in the flow of deals. In fact I might be in more of the flow of deals than almost anyone in America because of all the different apprentices I have across the country, all of the different kinds of deals I'm seeing on a daily basis. We're talking hundreds and hundreds of deals on a monthly basis that are going, I'm looking at. Whether it be just deals that are under contract, deals that are closing, I'm seeing a whole lot of deal action. Certainly you would think I would have a great beat on what's going to happen in the near future. I'm going to shock you with this, but I don't know. I have no idea. In fact I don't try to pretend that I do.
You Can't Predict the Future
Furthermore I would argue that it is a fruitless and a waste of time for you to put any mental energy towards trying to predict the future, or forecasting what's going to happen in the real estate market. That is more on a national level, because on a local level you may know, and you may see some trends. We'll talk about that too, but let me start with this concept of a broad based real estate market forecast, and why I think it's a complete waste of time to even worry your mental energy with it.
First of all, humans have proven that we are lousy forecasters. Humans are lousy forecasters. Don't believe me? Let me give you some examples. Here's our first example, recall from the year 2007 that we were entering a global economic meltdown. It started in 2006, 2007 it was picking up steam, and of course by 2008 we totally had a collapse. The real estate bubble had burst, and there was mass changes in the economics around the world. Well, in 2007 there were signs of real trouble because the things were starting to tumble. Many of the economic advisors that many of the governments, and the large lending institutions rely on. Many of them had said that, "We weren't in the midst of a collapse", in fact they said it was, "Just a slight correction and everything was okay."
They made a huge mistake. These were people, that if anybody should be able to forecast, they should be able to. They got it wrong. You say, "Okay well Phil, but you know what? They didn't see what was happening, but we're smarter now, aren't we?" Well in 2011, 2012 when the interest rates were incredibly low, they hit rock bottom, many argued the reason why they hit rock bottom was because the market had collapsed and they were trying to keep the market from going to a complete depression. Well, that turned out to be a complete divergence from the way that most economic cycles work, whereby when the market tumbles the interest rates go up. That didn't happen. That wasn't forecasted either.
I'll go one step further. You now go from 2011 to today, you look at any of the news articles, or any of the economic papers that talk about where interest rates are going to go by 2014 or 2015, they're going to say, "The interest rates are going to go up." I don't know if you've looked at the interest rates in the United States as of the recording of this video, but they're at rock bottom. That was not predicted, that was not forecasted. Why? Humans are lousy forecasters. I hope we're on the same page here. This has been proven, I could go on and on.
Now, there's another reason why it's a waste of your time. Not only is it a waste because humans are lousy at forecasting such things, so for you to think that you're somehow going to be a great forecaster, that is probably completely incorrect. If you are that good at it you might as well just head to the casino and make your living guessing the future based on gambling because that's what you'd be good at because you could guess the future. Now, there's more to it. I don't care what the forecast says because my investing decisions, as should yours, should be based on today. Not only are we lousy forecasters, but investing decisions should be based on today. Investing decisions based on today.
How do we make money in real estate?
Either we buy the property, fix it up, and resell it. Buy it and resell it right away, so we trade it, we transact it, or we buy it and we rent it out and we make rental income. Either it's going to be a ... I'm just going to stay a flip, just for the purposes of this blog. There's a lot of different ways we could name it, or we're going to call it a rental. When you boil it down that's really how you make the money, rental to flip. Now, if it's a flip it's going to be short term, right? Well if it's short term basing our investing decision on what's going to happen in the future is a bad idea because it's going to be a short term flip anyways, right?
If we're going to make our money on the deal right away, then we have to make our money on that flip, we have to make our money, if you will, when we buy it. We have to buy it below value, below retail value, so that we can sell it for retail value. Make sense? I know, it's pretty basic, right? Well the rentals the same way. We're going to buy the property in such a way where we rent it for positive cash flow right away, correct? If it was a negative cash flow situation we'd be losing money. That's not a good idea when investing. That's based on today.
Now, what happens if you buy a property for rental purposes, long term, and it goes down in value? What happens? Well, if you're positive cash flowing, it shouldn't matter because you're bringing in money each and every month. In fact I would argue that if you're positive cash flowing, it would be very difficult for it to truly drop in value all that much because the value could always be based on your cash flows. Does that make sense? That starts to make a lot more sense when you start talking about multi family and commercial real estate as opposed to a single family home. If you're positive cash flowing, it can't go down that far in value because you're making money. Rental rates don't typically take a nose dive either.
Regardless of what the forecast is, it's okay because you're winning. You're winning from day one, from today. If it's a flip and it's short term, you're not going to own it long enough for any sort of market collapse, if you will, to make a huge impact because you're in and you're out. You may say, "Well Phil what if I own it for 7 months or a year and the market goes down?" Well you should have done your homework and you should have only bought the property where you had enough of a margin of error. I have an entire video on that, so that you did have the room in case things change. It's not just the market changing, it could be it needed more fix up work, it could mean all kinds of different things that could have happened.
I don't care what the forecast is, because either I'm buying the property for a short term purposes, then I'm going to make a quick profit on it, or I'm buying it for rental purposes. Either way the forecast doesn't matter to me. In fact if I had to base my investment on forecasting, well then I'd be a speculator, I wouldn't be an investor. That right there is a huge distinction between what we do, what I teach, what I teach my apprentices, and why we're so successful. Versus so many of the investors out there that try to make gambles.
This is not a gamble, every real estate deal you do should be calculated, and each one should be successful. You can determine all kinds of details before you ever buy. To reiterate what I've mentioned here on this video said a different way, one of my favorite sentences by my mentor was, "You make your money when you buy." You make your money when you buy. What he meant by that was ... I just bought a property today by the way. I make my money today because I bought it low enough so that there is no way I'm going to lose money. There is no way I'm going to lose money. You make your money when you buy. Now, you actually collect your checks when you either sale or you rent, but the key is buy right.
This is just not effective flip, this is also for rentals too. You can buy right, meaning you select or you structure creative financing in such a way where you cash flow. Maybe you structure it in such a way where you do an interest free owner financed loan, and each money the principle goes way down so that over time you build tremendous amounts of equity from equity pay down, okay? From the loan being paid down, and each loan is like 100% principle payments. It's not just the purchase price, it's also the terms, if you will. What's the forecast for the real estate market for this upcoming year? I don't know, and frankly I don't care.
Now that's on a global level, that's on a national level, if you will. A 30,000 foot view level. Now, if we take this down to a more local level, I will say that when you are active in the real estate business. I'm not going to use the word forecast, but I'm going to use the word trends. There are certain trends you can pickup on a local, local level that could have an impact on some of the investing decisions you make. Here's an example, what if there is going to be a major employer is building a huge plant, or a headquarters in your area? That can make a big difference. Now, often times they will announce this, and then it will take like 3 years before they start building. Just because they announce they're going to build a new plant doesn't mean that's going to happen.
Once you see the bulldozers out there, and they're actually constructing the headquarters building, that's a different story. A major employer coming into town could make local news, and what that could do is that could impact some of your decisions. You may want to pick up more rent to owns close to that property because of the fact that you're going to have more people looking to rent, things of that nature. You may just notice that there are certain things happening locally that are in your favor, or vise versa. Maybe you see just a ton of commercial vacancy, and it seems like every single week there's another vacant commercial property down the road. That would indicate that there's a population shift, and people are moving away from where you are. That could play a role. That's not you being a good forecaster, that's you noticing local trends that could have an impact on the decisions you're making. Does that make sense?
Notice Your Own Trends
I tend to notice the trends not from the news, but from my own activity, from your own investing. This is how you pick up on this. When you're out in the field and you're out there doing deals, you're going to run into situations, and you're going to see things that are happening. Yes, you can talk to local agents, and maybe the chamber of commerce and you can pick up some data. At the end of the day the true signal, and you've heard me use that phrase in other videos, versus the noise. The true signal usually comes from your own personal experiences in your local marketplace, and some of the trends that you pick up on. That may impact some of the decisions that you make.
I may have disappointed you in this blog because you were hoping I would give you the real estate market forecast. I'm definitely not going to do that because I'm not going to try to predict the future because I'm lousy at predicting the future, and most humans are as well. These principles I share with you in this video can have long lasting effects on your investing decisions. Don't try to bet on what's going to happen tomorrow, definitely try to see certain major trends in your local area. That can help, but most importantly make sure your deal works today. It's a profit deal today regardless of what happens tomorrow.