Beware of bubble genius …

Hard to believe it’s nearly 10 years since Fannie Mae and Freddie Mac collapsed and were taken over by Uncle Sam.

Time flies when you’re getting rich.

It’s been a GREAT run for residential real estate investors … especially apartment investors.  Free money in the punch bowl can really juice up a profit party.

But after 10 years of equity happening to real estate bull market riders … it’s a good time to think about where we are, where things are headed, and what to do next.

And looking forward comes in two parts:  external and internal.

The external is the world of variables outside your control.  Like driving down the freeway, there are lots of other drivers whose actions affect YOUR safety and progress.

But the key to your success isn’t what’s going externally. It’s how YOU navigate those external circumstances … based on what’s going on inside of you.

It’s about financial and emotional intelligence.

Because what you think and believe affects what you do … and what YOU do has the greatest impact on the results YOU experience.

One of the biggest dangers of riding a wave of easy money into gobs of equity is thinking you’re an investing genius.

We know … because it’s happened to us … and we see it happen all the time.

It’s much harder to be humble, curious, teachable and innovative when you already think you’re smart.

It’s important to know the difference between luck and skill.

True financial genius is being able to make money when everything externally is falling apart … like a pro race car driver deftly navigating a multi-car melee at 180 miles an hour.

That’s REAL skill.  Anyone can rocket down an open road.

Fannie Mae’s chief economist Doug Duncan told the audience at Future of Money and Wealth he thinks recession is likely in the not-too-distant future.

And Doug made those comments after reminding everyone his last year’s Summit predictions were all essentially spot on.

So based on both his pedigree and track record, Doug’s qualified to have an opinion.  And we’re listening.

“The time to repair the roof is when the sun is shining.” 
– John F. Kennedy

The sun’s been shining on real estate investors for ten years now.  Maybe you’re one of the many who’ve made tons of money.  We hope that trend continues.

But as our friend Brad “The Apartment King” Sumrok reminds us … it’s time to approach today’s market with a little more sobriety.

Money and margins are both getting tighter.

This means paying better attention to detail, increasing your financial education, and being careful not to rationalize marginal investments to bet on positive externals.

In other words, beware of being a bubble market genius … and thinking what worked in a bull market will work when things change.

Better to work on sharpening your skills at finding and creating value.

Of course, real estate is FULL of pockets of opportunity … the polar opposite of a commodity or asset class where everything’s the same and moves together.

Real estate’s quirkiness befuddles Wall Street investors … but thrills Main Street investors.

A case in point are apartments …

On the one hand, lots of brand new inventory is coming on the market … and it’s putting pressure on landlords to offer profit reducing concessions.

On the other hand, more affordable existing stock is attracting lots of interest… from both tenants and investors.

So “housing” isn’t hot or cold.  And neither are “apartments”.  Real estate defies that kind of simplistic description.

Of course, it takes financial education to recognize the difference between momentum and value.

It also takes time, effort, and relationships to actually find the markets, team and properties to invest in.

For most people, that’s way too much trouble.  They’d rather sit in their crib with their trading app … or turn their financial future over to a paper asset advisor.

That’s all peachy until rates rise, recession hits, and paper prices plunge.

History … and Doug Duncan … says the inevitable bear market is getting closer.

Of course, as we’ve previously commented … when paper investors get nervous, one of their favorite places to seek safety with return is real estate.

So for active and aspiring syndicators … it really doesn’t get any better than right now.

Think about it …

MILLIONS of baby-boomers are retiring.  They need to invest for INCOME.

And they’re sitting on stock market equity, home equity, and retirement accounts …

… holding many TRILLIONS of wealth needing to (literally) find a home withreliable income and inflation protection.

Their paper asset providers will try to meet the need, but their toolbox isn’t properly stocked.  They can’t do private real estate.

But as boomers struggle at squeezing spendable money out of sideways or stagnant stock markets, they’ll look towards dividends and interest.  Cash flow.

The challenge with dividend stocks is … in a volatile market, investors face capital loss on share prices.  Worse, dividends can be cancelled.

Compare this to rental real estate, which produces far MORE reliable income than dividends with LESS price volatility.  And no one is cancelling the rent.

So dividend stock investors would LOVE income property … IF it just wasn’t so darned hard to find, buy, and manage.

What about bonds and bank accounts for income?  (Try not to laugh out loud)

Remember, a deposit is a LIABILITY to a bank.  When you deposit money in the bank, the bank needs to create an offsetting ASSET … a loan.

But the Fed has stuffed banks full of reserves … and there aren’t enough good borrowers to lend to.

Banks don’t need to offer higher interest to attract deposits.  So they don’t.

As for bonds …

Yes, it’s true bond yields are edging up, which means bond holders earn a little more income … but at a what price?

Rising bond yields also mean falling bond values.  So bond buyers are understandably very nervous about capital loss on their bonds.

WORSE …, bonds carry the added risk of default or “counter-party risk.”

A bond default is TOTAL loss. Yikes.

Real estate to the rescue …

The relative safety and performance of income property or income producing mortgages secured by real estate is extremely attractive right now.

The biggest problem for passive paper investors is real estate is hard to buy, messy to manage, and takes more financial education than just knowing how to click around an online trading app.

And THAT is the BIG opportunity for skilled real estate investors to go bigger faster with syndication.

Whether you decide to explore the opportunities in syndication or not … it’s important to stay curious, alert and proactive.

Most real estate investors we know are preparing for the next recession … because that’s when true financial genius pays the biggest rewards.

Until next time … good investing!


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