Real estate markets are cyclical.
No one knows when the next downward market will begin,
but when it does... you'll wish you were a "safety first lender"
collecting predictable and secure cashflow
rather than a "property owner"
holding on to a property that is declining in value.
Are YOUpreparing to thrive during the upcoming downward market cycle?
You see... fortunes are made in "down" market cycles,
not "up" market cycles like we are currently in.
We're excited for the upcoming buyer's market,
but the transition from a seller's market to a buyer's market
requires a lot of patience and can be very painful for those caught unprepared.
Here's one
solution for thriving during the upcoming market shifts:
(1) Sell real estate equities while it is still a seller's market.No one knows how much longer today's seller's market will continue,but there are plenty of warning signs indicating it may not last much longer.
(2) Convert your "at risk" equity based investments,
into "safety first" investments as a private lender / mortgage investor.
(3) Collect a predictable stream of income from your mortgage investments
while waiting for the next buyer's real estate market.
(4) When the buyer's market cycle has arrived, sell your mortgage investments and use the cash to buy positively arbitraged investment real estate.
(5) There's a season for buying, a season for selling,
and a season for just holding what you have.
A huge part of being a safer investor is lowering your risk by
sitting out of the equity market during the worrisome transitional times.
While no one know for sure what lies ahead in our economy,however it's our belief that the current rewards of direct real estate investment do not outweigh the risks.
Don't get me wrong,
there are people who will make money buying real estate in today's economy.
I just think they are taking a bigger risk than they need to.
I love owning real estate and while there are
LOTS of benefits of real estate ownership there are also lots of risks.
When the investment risks outweigh the upside potential,
you need a different investment strategy. This is exactly why now may be the time to change your focus from acquiring real estate investments to
acquiring mortgage investments.
Here is the "risk versus reward" concept in simple terms:
If you could flip a coin and triple your money each time it came up heads and lose 50% of your money each time it came up tails, you'd be wise to make that bet as often as possible. If you could earn 10% profit each time the coin toss came up heads and lose 50% of your money each time it came up tails, you'd be foolish to ever make that bet. In both of these examples the risk is the same (lose 50%), but the rewards are drastically different (10% profit versus 300% profit).
In today's real estate and stock market, the risk of loss is not significantly more than it was a few years ago, however the potential for gain has dropped astronomically.This risk-reward analysis has pushed me out of acquiring direct ownership of real estate and into debt based investments. For those who are relatively new to my newsletter, you'll know that I'm not a fan of the stock market. While I still happily own a lot of investment real estate as a tax shelter and hedge against inflation, the majority of my personal investing has shifted to mortgage investments rather than real estate.
A debt based investment like mortgage investing is a guarantee of a specific outcome. You will either: (A) get the interest rate stated on the note or (B) you will get to foreclose on the real estate collateral for a fraction of what the market value of the property was as on the date you made the original investment.
If your investment horizon is long enough you'll probably do great as a property owner even if you buy at the top of our current market cycle. After all, while we are currently in a seller's market of real estate, we are in a buyer's market for long term debt. Real estate prices are at all time highs, while mortgage interest rates remain at all time lows. I would rather "over pay" for a property once and "under pay" for my interest rate every year for 30 years than vice versa. It's very possible that today's interest rates are a once in a generation phenomena, so if you are young enough it could very well make more sense to load up on as much positively arbitraged real estate as possible rather than investing in the security of mortgage investments. However, a lower risk / potentially higher reward formula (especially for older investors who have less time to benefit from the asset of extremely low long term fixed interest rates) is to acquire positively arbitraged mortgage paper and wait for the reward side of real estate investing to increase.
Don't you wish you could go back to the buyer's market of 2011-2013 and double down on direct ownership of real estate? If you've been investing long enough, don't you wish you would have sold everything in 2007 and just sat out of the market for a few years?
You might consider stripping the 'at risk' equity out of your current rental properties (through sale or refinance) and then place that equity into a safety-first senior mortgage investment until the next buyer's market comes around. Done correctly this will increase your cashflow and profitability while simultaneously reducing your macro investment risk. It will also keep you in a relatively liquid position for when the next buying opportunity arrives. Mortgage investments are much more liquid than real estate investments. Any time I can increase yield while simultaneously lowering risk,I definitely want to pay attention to that opportunity.
Here are links to a few blog articles that discuss these
risk reward concepts in more detail:
How to Predict Real Estate Prices
Borrowing To Invest Can Increase Cashflow and Lower Riskhttp://www.
Here are a few podcasts and webinars
that discuss the nuts and bolts of mortgage investing:
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If this email was helpful to you, please consider forwarding it to your friends.
Best regards,
David Campbell
Real Estate Investing Strategist
http://www.hasslefreecashflowinvesting.com/
Happy Investing!
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