662: Effective Real Estate Investment Strategies for Today’s Volatile Economy

September 30, 2022bmanasseroUncategorizedNo comments

SHOW NOTES FOR EPISODE 662: EFFECTIVE REAL ESTATE INVESTING STRATEGIES FOR TODAY’S VOLATILE ECONOMY

The expression “Desperate times calls for desperate measures” means actions that might have been rejected under other circumstances may well become the best choice. In today’s podcast, Bill takes a look at today’s volatile economy and presents specific real estate investing strategies that can be both profitable and prudent.

Introduction

If you’ve listened to this show for any amount of time, you know that I have always said that real estate investing is ALWAYS a good investment – and I still believe that wholeheartedly! However, to clarify, that does not mean that all real estate assets and all real estate strategies are always a good investment! What that means is that, if you are looking for a good investment, you can always find a good investment in real estate.

But, when you talk about real estate investing, you need to think of real estate in terms of ASSETS and STRATEGIES.

For example, real estate assets can include:

Raw land
Single family homes
Apartment buildings
Office buildings
Warehouses
Self-storage facilities
Billboards
Deeds
Leins

Strategies can include various ways in which you can invest with assets:

Rental property investing
Buy ‘n Hold
Short-term rentals like AirBNB
Triple net leases
Flipping
Wholesaling
Hard money lending
Seller financing

Not every season is good for every type of asset and strategy. If you look at various reoccurring market cycles, it looks like a series of hills (or bell shaped curves), where, over-time, prices increase and decline — they look like hills with valleys and peaks that, over-time, get bigger and bigger, moving forward. The increasing size of the hills show that real estate will always increase in value – over time. And the valleys show that prices go up, peak, and then go down and then repeat.

It used to be that these cycles occurred ever 8 to 10 years, however, recent trends have broken that trend and have had sustained growth for a longer time period than ever in recorded history. This has created an anomaly that real estate investors need to be watching.

In light of current real estate market realities (i.e. rapidly rising interest rates, inflation, the economy in a recession, property prices flattening out or declining, and resale and new construction development numbers declining, new circumstances require new thinking.

Therefore, I wanted to highlight some practical strategies to contemplate in response to the changing Real Estate Investment (REI) market.

What we know from experience is that, during a real estate downturn, the key to success is risk management. So, regarding current circumstances, you may want to consider a different approach – perhaps trading some potential upside profit to reduce downside risk. However, each deal is unique. While it is obviously impossible to remove all risk, it is possible to reduce it substantially via calculated and well thought out strategic and tactical techniques.

When the market prospers or falters, our individual profits tend to rise or fall on the same financial tide. And right now, the tides over the next few years do not look that favorable for many real estate investors. Many financial indicators are showing that the real estate market is turning south. The next downturn will hopefully not be as draconian as what we all experienced in 2008-2012, but it is always wise to prepare for the worst and hope for the best so that we all come out of this in fairly decent shape.

One of the hallmarks of the previous downturn was that many investors leveraged themselves to the point of being overextended. Then, when the market turned down, they found themselves in a very vulnerable financial position. Rehabbers often wound up stuck with properties they couldn’t sell (for lack of buyers or tightened lending practices). Landlords suffered because, when tenants lost their jobs, they often couldn’t afford to pay rent. Flippers were afraid to make offers because they didn’t know if the prices were going to keep dropping over time—and they often did.

This doesn’t mean you should stop doing investing in real estate all together. Far from it. It just means reengineering your strategies and maybe even the assets you invest in. What this is about is reducing risk as much as possible, while still engaging the market as an active investor.

While there are multiple strategies you can employ – not only in strategies and assets — but in your approaches to debt and other practices associated with your investing.

So here are some strategic concepts, tactical ideas and suggestions for weathering the gathering storm and to re-think how your investing practices might be impacted and risk reduced.

#1. Pursue lower LTVs (Loan-to-Value)

Put greater bid emphasis on notes and properties where the owner is DMF: Distressed, Motivated and Flexible. These are usually where the owner is facing obvious and serious problems such as: in pre-foreclosure, clouded title, liens (HOA, mechanic’s, tax) lawsuits, judgements, probate, etc. Lower LTV’s mean that you are offsetting the risk that comes with higher LTVs.

#2. Use Other People’s Money (OPM)

Decrease the total amount of your cash committed to deals, and increase the use of OPM. During hard times, Cash is King. Start thinking about holding your own cash back as a rainy-day reserve, i.e. for emergencies. OPM can include: private debt or private equity; Joint Venture deals; “Subject to” funding; seller financing; and seeking out investor-friendly sources who will provide 100% of your funding needs.

#3. De-leverage

During normal or improving economies, it is wise to leverage as much as you can to maximize ROI yields. However, if and when the market starts heading south in your area, you might want to give serious consideration to reducing investment-related debt. De-leveraging can include: selling off assets for cash or bringing in an equity partner to pay off any debt. Another idea is to consolidate from multiple properties with debt on each one, to fewer properties with no debt on any of them. This way, you will wind up with no debt that the bank can hold over your head. If needed, when you have no bank debt, you can even temporarily reduce your rental rates in order to keep good tenants, then raise them down the road when the economy improves.

#4. Switch from property-related rehab or property flips to (wholesale) note flips

Notes take less time, you make your profit faster, they reduce your risk, and you can do more deals in a shorter period of time.

#5. Convert from a buy-and-hold/long-term rental strategy to an owner-financed/lease option type of installment sale

If you have been a landlord long enough, you know that two things normally occur, #1, You eventually pay off the mortgage; #2, You wind up suffering from “owner fatigue” associated with the “5 T’s” of rental property management: trash, tenants, taxes, toilets and termites. For example, say you have had a rental property long enough that you own it free and clear, you are getting up in years, and have decided to sell out.

When you do a lease-option purchase, the buyer/leaser deals with all maintenance and repairs issues. They also can do improvements to the property (at their cost, not yours).

And if selling your properties while prices are high, is part of your strategy, here are some things to think about:

Avoid selling your property for all cash.

Instead, you can lower your tax burden via an installment sale, by offering seller financing. You get a good-sized down payment to start with, followed by monthly payments spread over many years. You are essentially acting as the bank. You receive a first position note/deed; the buyer receives a deed to the property. Obviously, before undertaking such a sale, it is strongly recommended that you enlist advice from tax, legal and real estate professionals who can help you get the best deal possible for yourself.

Advantages of taking back a note, via seller financing, include:

Limiting your tax liability
Maintaining needed cash flow via the monthly payments
The down payment (DP) you receive may in fact be “tax free” to you as the result of the ATB (Adjusted Tax Basis). This can be accomplished by carefully adjusting the amount of DP money received to roughly equal how much total money you have ever put into the property.
Potentially higher selling price. By making it easier for buyers to purchase a property via seller financing, this can serve to increase the pool of available buyers, which in turn can result in a higher overall selling price for the property.

This is, by no means, a comprehensive list of strategies you can employ during difficult times but, hopefully, it will give you some ideas and approaches for consideration.

I am also going to include, in my SHOW NOTES, some additional links. .

Here are some of our previous podcasts and blog articles highlighting more successful strategies you can employ during difficult financial times that can help you to not only reduce risk but also profit significantly:

IF YOU LIKED THIS PODCAST, we would love if you would go to iTunes, Stitcher, GooglePlay, or iHEARTRadio and Subscribe, Rate & Review our podcast. This will greatly help in sharing this podcast with others seeking to learn real estate investing as a means to achieve a successful retirement, property management,

Check out our other podcasts at olddawgsreinetwork.com.

Get a free copy of our 3-Minute Rental Property Analyzer at olddawgsreinetwork.com.

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bmanassero

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