Like waves on the beach or the rising and setting of the sun … the ebb and flow of the infamous “business cycle” is something every entrepreneur and investor must navigate.
The marketplace is fluid and dynamic. There are no lane lines or guard rails.
More importantly, there is no singular cycle because there is no singular market. As Jim Rickards says … it’s a complex system.
At our last Investor Summit at Sea™, Fannie Mae’s chief economist Doug Duncan warned the current economic expansion is one of the longest on record.
The odds, Duncan says, are high another recession is around the corner.
And as we’ve noted before, 10 of the last 13 times the Fed embarked on a rate raising program … the result was recession. So …
Should real estate investors wait for the next recession to add to their portfolio?
The answer is … it depends.
That’s because it’s probably not smart to apply a one-size-fits-all simple strategy to an investing question about a complex system.
And even trying to “narrow” the question down to “real estate” is still complex.
After all, “real estate” covers a lot of ground (sorry, couldn’t help it) … in terms of geographic markets, property types, teams, available financing, and specific deal terms.
Common sense says if you look at enough deals, you’ll probably find a good one … in any cycle … because every real estate deal is unique.
So macro conditions are interesting for deciding which markets to shop in, but less so for deciding whether or not you want to find a deal.
Because if you won’t even look because you’re waiting for a macro-sale, you might miss a micro-sale… and find yourself sitting out much longer than you planned.
Remember, you can’t profit on property you don’t own.
Markets get hot for a reason …
When a real estate market gets hot, it’s because buyers are bullish about the future. Sometimes they’re wrong, but often they’re right.
Local real estate markets are driven by local factors … the local economy, local tax and business policies; local infrastructure, weather, amenities and population trends.
When LOCAL factors are positive, LOCAL real estate prices and rents rise. Sometimes in sync.
But sometimes, prices get ahead of rents. Cap rates (rent ratios) fall. Investors are willing to pay more for the same income in that market … for a reason.
And in a recession, the problem can actually get worse. In other words, it’s not unusual in hard times for quality markets to become even MORE expensive.
That’s because when clouds form … or it starts raining … money seeks shelter in quality.
So strong markets and property types often attract MORE capital in uncertain times … thereby raising the price to acquire safe haven assets.
As we discussed last time, Americans and foreigners have already shown a strong preference for U.S. real estate … housing in particular … even as stock markets are raging to record highs.
Royal flushes are rare …
When a macro-event comes and slaps down the national or global economy, sometimes great markets get caught in the downdraft.
This happened in 2008 and it created some of the best buying opportunities since the real estate bust of 1989. For those who were in position when it happened and acted, it was awesome.
But think about that.
If you missed buying the bargains coming out of 1989 and sat out waiting for the next real estate recession, you’d have been on the sidelines for nearly two decades.
Meanwhile, lots of people made lots of money in real estate … without getting the bargain of the century on every deal.
Pigs get fed. Hogs get slaughtered … or starve.
This variation on an old investing adage still rings true in today’s investing climate.
The idea is there’s danger in getting greedy. It’s about being overexposed to a market top, and taking on a lot of downside risk trying to squeeze out a little more upside gain.
But it’s also true about waiting … and waiting … and waiting … for the BIG correction, so you can swoop in and gobble up distressed assets for pennies on the dollar.
Remember … you can also strike out by standing at the plate waiting for the perfect pitch. It’s usually better to swing.
What are YOU waiting for?
A PIG is a Passive Income Generator … like rental real estate. It’s the kind of asset which actually attracts capital in a recession.
That’s because when asset prices are uncertain, income is reassuring. And as prices of stocks, bonds, commodities, and currencies go up and down like a roller coaster …
… working-class people ride the merry-go-round of getting up and going to work every day to pay their rent.
And if they don’t, you can replace them with someone who will … IF you’re in a market and product type with solid supply and demand dynamics.
To be there, you may have to pay a premium for quality. The deal still needs to make sense, but it doesn’t have to be cheap to be a bargain.
“Bargain” is a relative term … and price is only ONE component. There’s more to value and desirability than just price. Few people want the cheapest brain surgeon.
So long as the market, team, property, and deal make sense … meaning you’ve got staying power to ride out a recession if it comes …
… then you can sail through the business cycle riding a PIG. It’s not sexy. But it’s better than starving or getting slaughtered. You can score a lot of points with base hits.
Until next time … good investing!
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