If you caught the real estate investing bug after 2008, you’ve been riding a fun wave of rising rents and growing equity.
Was 2008 a one-and-done anomaly? Or are vicious ups and downs a part of the new normal? And if so…is another crash coming?
No one knows. But it’s probably a good idea to be prepared.
In this episode, we’ll take a look at some of the strategies you can use to prepare your portfolio to weather stormy economic seas. Just in case.
Battening down the hatches and rigging the storm jib for this one-hour tour of The Real Estate Guys™ radio show:
- Your brave and sure skipper, host Robert Helms
- His mighty unsure first mate, co-host Russell Gray
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Is another financial crisis coming?
Maybe it’s just us. But when we look around, we see the financial winds blowing in a way that’s eerily similar to 2007.
Of course, back then we didn’t really know what the signs meant. But we soon found out. And so did a lot of other unsuspecting investors…real estate and otherwise.
After the 2008 financial crisis, we became pals with Peter Schiff, who insists 2008 was just a warm-up act and the real crash that’s coming will be far worse.
But before you look for a nearby tower to jump off of, remember that the flip side of every problem is an opportunity. And typically the people who fare best, see the bad times coming and prepare.
Then, when the storm hits, they wait for the sun to break and head out into the sunshine of bargain shopping. Remember, lots of people made a TON of money in the wake of 2008. So a financial crisis isn’t something to fear as much as it is something to prepare for.
What can you do to prepare for the next financial crisis?
With the caveat that no one knows when, where or how severe a downturn will be, there are some basic precautions which are helpful in almost all situations.
First, as Donald Trump reminded us when we asked him what he learned in the crash before the last one…it’s always good to be liquid. That is, have a chunk of cash and cash equivalents on hand. And just consider whatever your lost opportunity cost as storm insurance premium.
Also, if Peter Schiff is right (again) and the dollar’s at the center of the storm, it might be good to keep a chunk of your liquidity in something other than dollars. Maybe that explains the huge popularity of precious metals lately.
With some liquid reserves in metals and some in dollars, your hedged whether the dollar rises or falls. And if real estate values collapse again…you’re in position in pick up new properties.
If the next crash is anything like the last one, they’ll be lots of properties in solid markets…available for below replacement cost again. Nice.
Of course, if you’re the proud owner of big portfolio of properties you might be wondering…
How can you protect your equity in a downturn?
Mr. Market giveth equity. And Mr. Market taketh equity away.
Unless of course, you beat him to the punch.
Right now loans are cheap and becoming more plentiful. You can even get cash out refinances and equity credit lines to convert equity to cash.
But then you have to pay interest.
True. But rates remain stupid cheap…and, at least for now, tax deductible. At least in the USA.
This make the net interest expense on real estate equity is REALLY cheap.
So perhaps before mean Mr. Market takes your equity and leaves you illiquid, you could grab a chunk of it and arbitrage the debt.
What?
The concept is simple.
If you borrow $200,000 out of a property at 4% interest and then invest $100,000 of the proceeds at 8% interest, you’ve created a break even cash flow. You’re long the dollar (as the lender) and short the dollar (as the borrower) at the same time. So you’ve effectively arbitraged the debt. At at least half of it.
And while you didn’t make a “profit” on it in terms of positive cash flow (you’re only break even), but now you’re sitting on $100,000 liquid cash…perhaps some in the bank and some in gold bullion buried in your backyard…but don’t lose your treasure map. 😉
Preparing for a financial crisis is more than just money…
One of the most important investments you make…right up there with your financial education…is building your tribe.
Let’s face it. When the poo poo hits the fan (that’s a technical term)…it’s easy to panic. Our friend Blair Singer says, “When emotions run high, intelligence runs low.”
So being a part of network of serious investors who can share ideas and resources…and maybe do some deals together…can be a very important part of navigating challenging storms.
After all, it does no good to call, “All hands on deck!”…if there’s no one else on the ship.
So while the sun is shining, get out and build quality relationships with quality people. It’s why we produce, promote and attend so many events…especially our annual Investor Summit at Sea™.
High level events are a great way to meet high level investors. Of course, the opposite it true, so pick your events carefully.
Better to be prepared
A lot of really smart people are sounding the alarm, which at the very least, demands our attention. And probably some form of action. Because knowing isn’t the same as doing. And it’s what you DO…or don’t do…which determines your results.
And, using a variation on a quote from the great Les Brown, “Better to be prepared and not have a financial crisis, than have a financial crisis and not be prepared.”
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