Why We Are Entering The Best Real Estate Market Opportunity Since 2008

Toby: Depending on who you listen to, it’s either the market’s going to crash, oh my gosh, it’s going to be the worst thing ever, like worse than 2008. Oh my goodness. Or people are saying, hey, wait a second. It’s not the same thing. There are definitely things that differentiate us from 2008. I fall into that camp. But regardless, because there’s so much fear, it means there’s a lot of opportunity.

Clint: See, a lot of people (I think) tend to always look at new home buyers and what they’re buying. I have developer friends who’ve been building houses, and those houses are definitely sitting on the market. They’re 60, 70, 90 days on market and they’re putting out offers to buy down points in order to help attract homeowners. But the people that we typically work with, they’re real estate investors, so they’re not fitting into that category.

Toby: No, they’re looking for cash flow. And here’s the thing. I lived in Las Vegas. We’re in Las Vegas right now, but I lived in Las Vegas in 2007 where a house that would rent for $2500 a month was being sold for a million dollars. There’s no way an investor’s going to buy that. There’s no way it’s going to cash flow.

People that were buying those homes on speculation and hoping that they were going to go up, when the market shifted and they realized it we’re overbuilt—we have too much inventory, we had six months of inventory sitting there—no investor really wanted it, but there was a ton of activity.

I remember, you remember this because we were flipping houses down here. We would go to the auction, we would put in 20 offers a day trying to get properties, and you had the big BlackRock, Blackstones, all these flippers, all these other people competing for everything that was in the cash flow range, which was really (at that time) below $200,000, and they were bidding things up.

There were two worlds. There was the, hey, let’s comp this out. This is what your house is worth because somebody paid that much down the street. And then there was, ‘what’s the return on my investment?’ world. The return on investment world was going bonkers. Our rents, the rents on our rental properties went up during that time. People needed a place to live and there was a lot of competition for rentals.

Again, even when you think of a recession or even if you go back to the Great Depression, there were a lot of millionaires made during that period of time that recognized it as an opportunity. It was Warren Buffet that coined the phrase (I believe), “be greedy when others are fearful and fearful when others are greedy.” We have a whole bunch of fear. I think we need to be a little greedy.

Clint: What I tend to look at—going back and looking at the historical trends and what we’ve seen in the past—is that you’ve got high interest rates right now. What you have are homeowners that got into mortgages back in 2019, 2018. Those are going to reset.

So now, it’s going to jump their mortgage from 3½ up to 7–7½ percent. Maybe they can’t make that mortgage payment, so that property could potentially become the bank owner, an REO property. They’re going to go delinquent, they’re going to go into foreclosures.

We’ve already started to see those trends happening that started back in September. The rates have been going up. I think they’re going up about 3% a month from month over month with delinquencies in foreclosure.

Those are buying opportunities for people to get in there and do subject-to deals because it mirrors (in my opinion) what we saw back in 2010, 2011, and 2009. The the real estate investors who were doing really well, people who would buy subject-to, help people out of distress situations.

Because when you lose your job—you’ve seen a lot of lay-offs in the tech industry—what happens to those people? They lost their jobs, or in a mortgage they can no longer afford, or they can’t make the payment on because they bought too much house, they got property taxes, so you can go and you can solve their problems.

Private lending is going to be huge as well because as interest rates go up, it compresses the ability for people to borrow, because again, standards can change as well, especially for investors because banks get nervous, so be a private lender on that side.

Those two strategies is something in REO deals, is going to be not now, but I think you got to wait eight months or a year, and you’re going to see more of those come into play.

Toby: That might be the case because you see people, whenever they’re talking about interest rates increasing, immediately say, oh my gosh, the market’s going to crash. Keep in mind that the interest rates are only raised from that point on. You were talking about resetting a small amount of the loans that are not fixed. If you have an adjustable rate, all of a sudden your payment goes up and it could go up almost double, and you’re in a deep doo doo.

Now, you got to get rid of it and you’re in this market where the reality is there’s not a lot of inventory on the market. It’s about half of what normally is. It’s about three months. When you look at the default rate on mortgages, it’s about half its historical amount.

We’re seeing lots of default for the people that bought during this last run-up. In the first half of 2022, if you bought a house and you have a mortgage on it, you’re probably pretty upset right now because the house price probably dropped a little bit and you’re looking at it going, what’s my alternative? What should I be doing? Maybe I should be walking away from this thing. I think to your point, that’s where the short sales come in and that’s where foreclosures could come in.

But here’s the biggest factor for me. Yesterday, the Harvard Joint Center for Housing put out another report. It used to be that the baseline of how many houses we had to add to the inventory every year to keep up with demand was 1.2 million. In the last few years, it’s been closer to 1.5, 1.6, 1.7 million. We were targeting that 1.2, which just simply means we’re underbuilt. And because of interest rates increasing, it’s going to exacerbate that problem because new home builders are like, shoot, I’m not going to build. Nobody can afford my house.

Clint: Yeah, but a lot of those you think, here’s what’s happened with the builders. You were building when materials were at an all time high. So now, you’ve got all this money invested in the property and you were expecting to sell it for X because real estate’s been going up. You are willing to pay $75 a sheet for OSB.

But now, the prices aren’t there. You can’t have people that can qualify for these mortgages. So now, these home builders are sitting on inventory and what are they going to do? They’re going to have to slash prices, take losses.

Toby: And I agree with you 100%, it’s going to bring that price down. The numbers I tend to look at is how do home prices for the new single stories relate to rents?

If the home prices take off faster than rents are rising, then you have that big gap. That’s your loss because there’s an investor that will buy any house just about out there. They’ll always be like, hey, as long as it’s in a decent area. Most of your major cities where you don’t have massive unemployment, you don’t have massive amounts of crime. Those are going to be your bread-and-butters for investors. They buy those all day long and they’re continuing to buy those all day long.

They’re looking at it saying, where is my cap rate? You might have a big fund who’s looking at it saying, hey, I’m good at a four cap rate, which is really your return on the investment. Then the regular investor might say seven. They may be a little bit pickier and choosier, but they will go in and buy those things as long as there’s a return.

The problem is like you said. It’s so expensive to build, it’s almost impossible to build a single family house and get a return by renting it. There are those folks that do the build-to-rent. They’re building more economically. They’re compartmentalizing. Some of these are using prefabbed homes, manufactured homes. We’re seeing that to drive the cost per square foot down.

But if you’re a home builder, you’re looking at it saying, I want to sell on comps, which again, I look at the neighborhood and here’s my price per square foot, and maybe it’s $250 or $300 a foot. That’s what they’re selling on. They’re not selling on return on the investment of what you could rent it for.

Those are the people that are getting the bloody nose right now, is the people that were basing it on comps because affordability is at (I think) its worst point in history. When you look at the mortgage rates in the affordability of homes, you just washed out about half the home buyers, which means less demand for those homes, which means the prices are going to fall.

Clint: Yeah, and they become tenants. That’s why another thing I’d be looking at is raw land investing, because buying those manufactured homes, you can put them on there. You’re into those at much less, maybe $90 a square foot for a house like that to get that all set up. That was going to get your cap rates back up to what you’re looking for.

If you’re going out there and you’re trying to buy a home (as you just stated) that are at extremely high prices, it’s hard to get that return on the investment you need. Not only do you have interest rates that are screwing that up, but you also have property taxes that have gone up. They’re always so slow to go back down and adjust. You’re going to get that double whammy. As more people tend to get laid off, especially in the tech sectors, that’s going to be a ripple effect.

Also, what you’re seeing is with the material men, they go out to the sites, the contractors, the subs and stuff like that. People that I’ve been talking to now, the generals, haven’t been paying them. They’re getting further and further pushed back on their payments with the work that they did back in October, right when the interest rates really started to spike. You’ve seen now drop off in those payments. In fact, my brother’s one as well. He just had to write off about $70,000 because he wasn’t paid.

Toby: I could see that. And I think we’re going to still in the next, depending on what the Fed does, because technically you’re looking at the 10-year treasury for mortgages. But let’s not kid ourselves. It’s the Fed and they’re raising up interest rates. We could have this topic/debate all day long.

I personally believe it was the printing of money that caused inflation. In fact, when you take the M2 money supply and you overlay the CPI (consumer price index), they’re almost identical. It’s like, okay, what caused inflation? How about we print an extra $4 trillion and devalue all the money out there?

You still are looking at that factor. We are seeing quantitative heightening, which is good because that should lower the interest. It maybe stop the Fed from its aggressive increases. We’re already seeing the pivot where the Fed is not raising interest rates as fast. Only time will tell to see what ends up happening.

It would be really interesting if during 2023 the Fed ended up lowering interest rates because that would be a strong indication that they went too far too fast, and that they’re really worried about hammering the economy.

As we sit here right now, we still have really historic low unemployment rate. You just have a lack of affordability on homes, and I think that punches the luxury builders right in the face. Maybe not the high-high-end because they’re buying on cash, but for the typical home buyer, it’s not possible now. They’re just going to keep renting and there are not enough properties out there.

I think we’re five million units, depending on who you look at. Freddie and Fannie (I think) said it was about about five million units shy. What it means is we’re underbuilt, which means that there’s more demand for properties than there are properties, which really hurts the lower class, folks that are below the median income. It’s really hurting those folks because all of a sudden, their costs of their home, whether it be rents or buying, is a huge percentage of their income. It’s just not sustainable.

Clint: Yeah, but I see things like that, and they talk about there’s a lack of supply out there for the demand, but is that demand really there? Is it based upon historical trends they’re thinking? Because a lot of people can’t afford to buy that any longer.

Rate locks have dropped over 20% just in January of this year. People are pulling out of deals. They’re not moving forward. It’s going to be a ripple effect just because—

Toby: They can’t afford it.

Clint: Correct. They drop rates three months from now. Let’s say they do a rate cut. That doesn’t hit the economy. That’s going to take at least three quarters to start to see minimal impact from that.

I think over the next year there’s going to be a lot more opportunities coming up for real estate investors in different areas of the market that normally they wouldn’t have considered when you’re in that hot market that we did in the past.

I talked about taxes going up, so there are going to be opportunities for tax liens and tax deeds for people to figure out those strategies to get in there and pick up properties here in the next three quarters.

Toby: Inflation affects governments, too, and they’re raising the property taxes. You have the raised rates, which is affecting the affordability. All that stuff is going to put pressure on people to either downsize, get rid of a home, maybe they’re going to go back to being a renter. But where’s that opportunity then for investors? Where do you think that the biggest opportunities lie?

Clint: For investors? I think I named it. You’re looking for distressed properties. That’s where it’s going to be. And as you stated, house prices will still continue to come down because as long as we have a strong dollar and it’s only being exacerbated by what we’re doing with the economy, you’re locking out a lot of that foreign investment that probably made up 10%–12% of the market. You’re going to see that it has already started to dry up because the dollar exchange rate is making the properties here in the US (which they used to want to invest in) that much more expensive for them.

Toby: They’ll see if the dollar can soften. I’m just going to add one little flavor to you. I think that for investors, there’s going to be continued people being very aggressive in those areas. If you’re looking at homes under $200,000, I think you’re not going to see this fall off. I think you’re going to see the fall off really in the $500,000–$600,000 range, maybe beyond that. But your bread-and-butter homes are becoming unaffordable for typical people. They’re going to go rent.

The part that really was confusing is everybody figured millennials were checked out. The young people aren’t looking for home ownership. Then we just saw a surge in young people’s home ownership and household creations in the last three years that nobody really anticipated. That’s going to throw a monkey wrench in this whole thing because they’re still looking for homes.

The dream of home ownership is not gone. It’s just (I think) we outkicked our coverage in this particular case, and the prices went up too fast. The interest rates have now made those unaffordable, so you’re going to see some adjustment.

What is it going to do to the overall market? I guess you could see something of maybe on the worst end, 10%, best case scenario, probably flat. But I don’t think it’s going to be as dire as everybody’s saying. Again, when there’s fear, then just get your reading glasses out, start really looking at the data, and figure out where the opportunities lie.

I think manufactured housing, buying land, and putting inexpensive rentable structures. You see in California, you see the auxiliary dwelling units being used. They can start running them out because there’s a strong need for housing, and we need to fill that need because if we don’t, all it’s going to do is exacerbate the issues for the folks that are below the median income.

Clint: Yeah, and we talked about the jobs. There was an article in Wall Street that I read this past week. It was really interesting. The guy went to work at Facebook Meta two years ago, and they offered him triple his salary what he was earning his prior job. Well, he just got cut (of course) because he was too expensive.

Then you take a lot of the people that have moved and bought homes. Those people are remote workers. Well now, companies are requiring people to come back into the office because they realize to some extent that remote work isn’t that great for the corporate culture.

So what about those people that move to Texas or Alabama or Florida, and their job is located in California or somewhere else? Either they’re going to have to give up their job, which is then going to impact their ability to cover their mortgage, or they’re going to have to move and sell. And as you sell more, there are more opportunities there.

For those of you that listen in and you find this to be interesting, you want to know more about the strategies he and I were talking about, where we see the market going, I would highly encourage you to take a look at Infinity Investing.

It’s one of our sister companies that we run, that we put on, to help individuals just like yourselves. Look at the angles of the real estate market, get out there, and start investing. We teach many principles. Why don’t you tell them a little bit about it, because you run more of that than I do.

Toby: The easy philosophy of Infinity Investing is that there are five income sources and we’re talking about one of them. We’ll talk about rents. There are rents, royalties, dividends, interest, and short-term capital gains on selling covered calls on your stock portfolio. Those are the five income sources. Once you have enough of those income sources to replace and cover your expenses, then you could live an infinite number of days without selling any of your assets and without depleting your asset base.

We don’t believe that when you retire, you reduce your accounts. We believe that when you retire, your actual value’s going to continue to increase, but we live off of the cash flow of these things. So we’re cash flow hounds.

There are opportunities in this market just like there are in any for cash flow properties. It’s just you have to use the right metrics. We teach very concise principles about what we’re looking for, and it leaves you to bread-and-butter homes that cash flow.

There are obviously other ways to make money in the market, whether you be wholesaling, flipping, buying distressed properties, to buy, rehab, put a renter in it, refinance it, repeat the same process, and just keep doing that.

There are those things as well, but at its core, the holy grail is buying assets that pay you enough to where you never have to work again. That’s the principle. Once you get there, you can live an infinite number of days without ever having to work.

Clint: We teach a one day event. It’s called Infinity Investing. If you’d like to join us during that one day event as we talk about these principles in more detail, you can click on the link below and it’ll take you to a registration page. I can guarantee you if you go to that and you join us, you’re going to learn about (as Toby stated) many different facets of the real estate market and different ways in which you can take advantage of it in 2023, and other ways to ensure that you’re going to take care of your financial future.

Toby: There is no lack of opportunities in 2023 in real estate.