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How to Outwit a Bad Real Estate Market

by adminjay




Building Wealth with Less Risk in a Threatening Economy

Since the 2008 crisis, the economy has been on a drug fueled rager. Congress and the Fed were supposed to be the adults in the room. Instead, they supplied the kegs and the cocaine, in the form of artificially low rates, economic stimulus, cheap debt, and a subsidized economy.

The question we should all be asking… What happens when the party’s over?

Timing the Real Estate Markets Necessary, or a Fool’s Errand?

Markets are unforgiving to investors who get caught buying equities at the top of the boom/bust cycle.

If you bought an average middle class house in Phoenix, Arizona in 2007, the value of that house would have nosedived 56.4% in the 12 months that followed. It took almost a decade for housing to recover.

Amazingly, over 54,000 houses were bought and sold in Phoenix in 2007.

Those who were forced to move for jobs or personal reasons aside, the remainder of those buyers were convinced in their own mind that it was the right time to purchase. Had they waited twelve short months, they could have bought two houses for the price of one.

real estate, dental

Most investors believe that real estate should have a place in every investor’s portfolio. The richest people in the world invest their capital in real estate because it’s a tangible, or a hard asset that:

  1. Sustains value over a long horizon.
  2. Creates cash flow.
  3. Allows for creative use of leverage.
  4. Can provide many tax benefits.

Real estate can do all of those things. But is it always a good time to invest?

With the recent rise of interest rates, real estate has encountered headwinds. Some take this as a sign that real estate valuations have “corrected,” making now the time to get in. (Often this view is peddled by those with some financial interest in selling this outlook.) Others warn that we are in the early innings of a larger market reset and that this is just the beginning.

Who is right? And what is a practitioner to do?

Where Should You Put Your Money? (Developing Your Asset Allocation Philosophy)

The default for most is to hand money over to a financial advisor, the tradeoff is a loss of control and exposure to the volatility of Wall Street. Financial advisors will also recommend putting your funds into retirement accounts which will lock up your money until you are 59.5 years old.

What is the alternative to this conventional model?

Taking control of your own investments is not for everyone. Autonomy and sovereignty come at a price. Not every head can bear the weight of the crown. It is for those who cannot live any other way.

You do not need an MBA in finance to be extremely successful in investing. You do need a basic understanding of the major market cycles and the drivers that affect those cycles. You need a basic understanding of how the economy, Federal Reserve, inflation, financial markets, banking, recessions, and interest rates work.

You will need to develop the skill set and sophistication required to make your own assessment and decisions regarding how you will allocate your investments. This will be based on your interpretation of the broader market context and the opportunities that are available to you and to which you have access. You will need to develop those access points to the right opportunities in assets that fit your strategy, philosophy, and goals.

Becoming Your Own Financial Advocate

What factors drive change in the economic cycle? What are the key indicators that give clues about what comes next? What are the metrics on your investment dashboard that you watch closely and which inform how you shift and adapt to prepare for what is coming?

Whether you invest in real estate, the stock market, precious metals, crypto, GameStop memes, or something else, it’s essential to understand the fundamentals and the factors that cause that investment to increase or decrease in value.

There is no way to predict the future. But it is possible to understand the broader trends and position yourself accordingly. Ignore the reality of the larger market context at your peril.

I personally started this journey over 40 years ago as a college student planning a future in dentistry. I spent considerable time educating myself about financial markets, including stocks and mutual funds, and tangible assets like real estate. This knowledge wasn’t just academic; it was strategic preparation for my future as an investor.

I have done very well over the decades since then, but in the last three years, the markets have changed dramatically—more than I’ve witnessed in 40+ years of investing.

Real Estate is Not a Monolithic Asset Class

In my college days, conventional real estate investing was different. You could buy, rent, and own equity as the property’s value increased. However, today’s real estate market is at an all-time high. Interest rates, valuation, net operating income, property taxes, insurance, and the cost of materials have all gone up. The cash flow after all these expenses is much lower than it was 40 years ago.

The models that worked so well in the last decade or more are no longer viable.

Does this mean you shouldn’t invest in real estate?

Most investors only know one model (equity ownership of properties that are leased to tenants—whether residential or commercial). However, this is only one of many ways to invest in real estate.

There are other ways to invest in real estate. One example is debt lending, where you “act as the bank” and invest in debt backed by real estate. By acting like a bank, an investor can position themselves to be paid first, reducing exposure to the volatilities of the equity market. This method may not offer all the tax benefits or the inflation hedge that direct ownership does, but it provides a more risk-managed return on investment during uncertain times. It also provides a more resilient and predictable cash flow stream, which is attractive to professional practitioners looking for a pathway to reducing reliance on active income earned from their practice.

Now is a dangerous time to be investing in equities. A period of asset disinflation is coming. A heavy correction—not just in real estate but in the stock market and other assets—is imminent.

By shifting your portfolio away from equities and toward debt assets (private lending, note investing, etc.), you can avoid the risk of buying equities at the top of the market cycle. At the most basic level, investors can invest in today’s US treasuries, which are paying over 5% on a nearly risk-free basis. Alternatively, first lien notes can earn a return anywhere from 10% to 16%.

Of course, there will come a time when equities are once again on sale (as they were in the years that followed the great financial crisis of 2008). When the time is right, that opportunity will return, and those who are ready and positioned with access will be able to create significant wealth in a relatively short period of time.

In the meantime, patience and a steady hand are essential.

To be successful at anything, you need to know what you’re doing.

There is a level of sophistication required to be successful when shifting your portfolio from equity to debt holdings.

You didn’t start practicing dentistry without learning the appropriate skills. When it comes to your hard-earned money and financial future, the same intention is required. Start reading credible financial media and finding guides and mentors you trust to give you an understanding of various assets and the economy.

If you have no idea where to start, network with a group of like-minded doctors who want to take control of their hard-earned money, too, and learn together. Talk to experienced professionals to get their insights. This way, you can bounce ideas off each other and know what’s going on in the economy. You’ll increase your education, skills, and confidence levels quickly.

The time to start is now.

Things are changing, and I believe there will be a hard correction in the next one to three years, just as we’ve seen in history. For those caught buying equities at the height of 2006, it took years to recover and get back to even. It doesn’t have to be that way.

You can experience less risk and better returns. However, you need to understand various ways to invest and know what you’re doing as the market cycles change. The next set of opportunities is coming. Will you be ready to take advantage of them?

ABOUT THE AUTHOR

When his young daughter was hospitalized with leukemia, Dr. David Phelps, DDS, could turn to his alternative investments, step away from his dental practice, and be by her side. From this experience, he created Freedom Founders in 2012.

This community helps dentists and other professionals take control of their retirement investments to produce passive cash flow, ensure security, and live life on their terms.

To contact Dr. Phelps, visit www.freedomfounders.com.



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