Certainty in uncertain times …

Sometimes when the world seems to be spinning out of control and not much makes sense, it’s helpful … even necessary … to cling to something stable.

Headlines are filled with wars, rumors of wars, natural disasters, senseless murders, endless divisive vitriolic political rhetoric, greed, corruption, hypocrisy …

And that was just last week.

No wonder so many Americans love to just veg out and get away from it all by watching some football … oh wait.

When it comes to investing, it’s easy to go “full turtle” … retreating into our shells, hunkering down until the storm passes.

History says that’s not a winning strategy.

After all, there have ALWAYS been wars, disasters, corruption, and a zillion reasons to pull the covers over our heads and wait for morning.

But is there ever a time when looking back 20 years, you wish you would NOT have bought more real estate?

We’re guessing folks in 2015 wish they bought more in 1995.  And those in 1995 probably wish they bought more in 1975 … and those in 1975 wish they bought more in 1955 …

You get the idea.  And if you know history, there was a LOT of crazy stuff that happened in the world during each of those 20-year periods.

But one thing’s been SURE … real estate’s been among the safest places to build and protect wealth from the storms.

Yes, the cynics out there can point to individual cases where a real estate investor took some lumps in a downturn.  We’re on that list for 2008.

But it wasn’t real estate’s fault … it was how the portfolio was structured.

Otherwise, how do you explain people like Ken McElroy and many others who THRIVED with real estate investing during the same period?

It’s easy to ride an upside wave on a sunny day when a rising tide is lifting all boats.  Everyone’s an expert sailor in good weather.

But when the storm comes, you find out who really knows how to sail and has prepped their ship for the INEVITABLE tough times.

However, there’s a BIG difference between being in just a rowboat versus a truly seaworthy vessel.  The rowboat is much more easily tossed about in rough water.

So with everything going on in the world … and real estate getting tossed into the conversation of bubbles about to burst in all “asset classes” … we thought it’s a good time for …

Making the Case for Real Estate

This could be a book, so we won’t expound each point.

We’ll leave it to you to think, research, debate, and discuss these items with your friends … even and especially those who are prone to disagree.

Real estate is eternal, essential, and easy to understand. 

It’s been around forever and will continue to be necessary to support human existence.

The business model is simple … people or businesses use your property and pay you rent.  No Ph.D. needed.

Real estate markets are inherently inefficient.

That might sound bad, but it’s good.  The less of a commodity something is, the easier it is for pricing to be more subjective than objective.

Real estate markets are really hard to manipulate.

Many paper asset markets are “influenced” by power players to create spreads through profitability.

Because traders can’t deal in large blocks of properties to push prices around … they don’t.

Real estate is supported by the power players.

To the extent real estate can be manipulated, all the incentive for anyone big enough to do it … government, central banks, industry … is to support it.

No one attacks real estate to drive it down.

Real estate is financeable with cheap long-term debt.

Even 20% down with an 80% loan, producing 5 to 1 leverage, is considered “conservative” … and qualifies for some of the cheapest long-term money in the market.

There’s no margin call if a property’s value drops.  As long as you keep making those payments … using the tenant’s money … you’re okay.

Real estate mitigates counter-party risk.

This is a REALLY important point because we’re guessing the VAST majority of paper asset investors are quite unaware of the counter-party risk pervading their portfolios.

Bank accounts, brokerage accounts, insurance contracts, bonds (and any mutual fund or investment containing bonds) are FULL of counter-party risk.

When you own real estate, you own it.  It’s a real asset, not a promise.  It’s not someone else’s liability, where if they default you have nothing but an IOU.

Real estate allows you to switch out debtors.

Some might argue if a tenant defaults on their lease, it’s the same as if a bond issuer defaults on their payments.

No.  Real estate is VERY different.

To our previous point, if a bond issuer defaults, your bond is worthless.  It’s only a promise whose value is dependent on the counter-party (the bond issuer).

When a real estate tenant stops paying, you still have the property.  You can evict the tenant and replace them with someone who will pay.

Good luck doing that with a bond.

Real estate provides a hedge against both inflation and deflation.

You might have to put your thinking cap on for this one.

Obviously, with inflation, real assets go up in dollar value.  Inflation is why a 3-bedroom home purchased in 1960 for $10,000 is worth $200,000 today.  The dollar got weaker.

Deflation is the opposite.  The dollar gets stronger (try not to laugh) and it takes LESS dollars to buy the same real asset.

So now, a $200,000 property might fall to $100,000 or less.

But if you only put 20% down … or $40,000 … and the tenants (whose paychecks goes farther as prices are falling) pay off your property …

… at some point, you have a property that’s paid for.  So you’re in for $40,000 and the property is “only” worth half what you paid for it, or $100,000.

Did you lose?

Real estate provides certainty in an uncertain world.

We could go on and on, but there’s the point …

There’s no guarantee with investing.  It’s about taking thoughtful, mitigated risks for an attractive risk-adjusted return.

And while you can’t just throw a dart at a map, pick any property and haphazardly structure the deal, financing, and management …

… history says properly structured properties in solid markets are proven long-term winners no matter what’s going on in the world.

Your mission, should you choose to accept it, is to …

… focus your education and networking on finding markets, teams, and properties which provide a high level of certainty in uncertain times.

Until next time … good investing!


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The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.

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