In this episode, Toby Mathis, Esq., and Clint Coons, Esq., attorneys at Anderson Business Advisors discuss the pros and cons of investing during a “recession.”
Right now there are some great deals in the market for investors. Home values are being forced down by rising interest rates, there is an extreme lack of supply and plenty of demand, and rents are very high due to inflation (creating that all-important cash flow from investment properties.) Toby and Clint tell you what to look for (raw land, manufactured housing, tax liens etc.) and what to avoid (flipping homes and adjustable rate mortgages) in the current real estate market.
Highlights/Topics:
- Recession effects on real estate- get those great deals!
- Increased interest rates – forcing down home values
- What are some of the risks of investing right now in this market? Avoid flipping, avoid Adjustable Rate Mortgages (ARMs)
- Opportunities: Raw land investing, manufactured housing, “subject to” deals, and tax liens and deeds
- Protecting yourself in case of recession, now rather than later – implement your LLCs, trusts, separate the personal from business, etc.
- Cash flow is more important than the home’s value
- Post-recession, the market will stagnate, then climb again
- Join us at one of our free events
Resources:
Infinity Investing Free One-Day Workshops
Free Asset Protection Workshops
Full Episode Transcript:
Toby: Hey, guys. Toby Mathis here. I am joined by Clint Coons, my partner at Anderson, and we’re talking about the recession. First of all, what is the impact of a recession going to be on real estate? What do you think?
Clint: If you want a recession, it’s going to drive prices down on real estate. Hopefully, that’s what’s going to happen and that’s going to create opportunities for individuals to go out there and start acquiring more properties. As a real estate investor, whenever a recession comes up, I see that as an opportunity to jump in and take the opportunity to acquire great price real estate.
Toby: We grabbed a few of the questions that have been posed to us from our clients, and we thought that we would attack some of them. The easiest one is what are the chances of going under a recession? I can just say at this point that it’s 100%. We’re probably already there depending on how you define a recession. Whether they change the definition, if two quarters of reduced GDP, I think we’ve already hit it. They say it could be three, whatever.
How about the Feds raising interest rates and they’re going to cause it, period, because they bat a thousand causing recession when they’ve raised interest rates. Unless they start lowering interest rates for some reason right away, I think it’s inevitable that we’re going to continue to experience financial pain, especially in real estate.
How has the increase of interest rates affected real estate?
Clint: When you have increased interest rates, it means less people can qualify to borrow for a home. That forces the property to go down in value as well. I think a lot of people get scared when they hear that. People can’t qualify to buy properties. We’re going into a recession, so that means there’s a lot of risk and I should back out from real estate investing.
Having been through this before, what we found is that as long as your properties are cash flowing, if you buy right, you’ll find that many times, your rents are going to go up. We charged more in 2009 in the Las Vegas market than we were collecting in 2015 because as you had more supply there, then it reduced the amount of what you can charge.
I think when you invest in a recession, what people need to keep in mind is that as long as you are buying property where you’re going to be able to cover all your expenses and still make your profit, you can’t go wrong.
Toby: That really goes down to the two worlds. How is the recession going to impact the real estate market? It’s going to affect the people that are buying on comps. Your realtor comes up to you and says, hey list for a home, this neighborhood, this is what this house is worth.
But an investor has a different valuation. They’re looking at the cap rate. They’re looking at the return on their investment. They don’t care what somebody else paid for the house down the road. They care what their rent is going to be and how that interacts with the house price that’s going to adjust the cap rate which is the return.
When there are recessionary pressures and you start seeing people who are no longer going to buy on the comp rate, and I’ll use Las Vegas as an example. A million dollar house here in 2007 was really a $300,000 house. In other words, the rents only justified spending about $300,000.
When you had these massive foreclosure and this devaluation of the market, where did the house sell? It sold all day long at $300,000 because that’s what investors would pay. They flooded the market just like they did in other places.
What’s going to happen now is if affordability goes down, if people start realizing they bought a property that is no longer worth what they paid for and it’s underwater, which is a very very tiny amount right now, the people that bought in the first half of 2022 are maybe having buyer’s remorse, that’s where the investors can come pick up some bargains.
Clint: Those properties that we saw last time when we went through this back in 2008 is that many of those people who are buying were buying on ARMs. When those loans were reset, the value of that property was less than what they owed on the property. They were forced into a situation where they had to bring cash to the table in order to maintain that property which they didn’t have, so those became REO deals.
Here you see a lot of people that got into the fixed interest rates, so there are not many ARMs out there. Those properties I would anticipate in the recession. You’re going to see those come about when people lose jobs. They lose jobs so they can no longer pay. They are not going to be forced into a situation like we saw back in 2008, 2009, and 2010.
Toby: People were underwater in 2008. They’re not underwater right now. In fact, it’s very very few. When I say underwater, it means the loan is greater than the value of the house. That’s just not the case. There’s about average depending on where you look, around $200,000 of equity per home in the United States because there’s a huge run up.
Even if you see a decline, even if you see a massive decline, 20%, I think we’re going to be back to where we were in 2020. It’s not erasing decades of growth. You’re just seeing hey, we popped up. I personally think because it’s the money supply that increased and devalued dollars and increased assets, and that’s why inflation jumped up when you put the M2 money supply and you relate it to the CPI (Consumer Price Index), they’re almost identical.
I think that we jammed up the price of these houses. The problem with raising interest rates is that now nobody can afford to buy it at its current price. Investors would buy anything if there’s a return on it. When the house price starts to drop, there’s always that level.
Here in Las Vegas in 2008, it was a knife fight to get a property under $150,000 and $200,000. All throughout that stretch in the next four years, it was always a battle royale to get the properties that would cash flow.
Yeah, there were tons of great deals. But let me ask this because somebody actually posed this question to us. What are some of the risks of investing right now in this market? What would you tell people to avoid when you have a recession?
Clint: Run the numbers. Everything is about running the numbers. If you see there’s a property out there and you know that you’re in a strong rental market, look at the market to determine whether or not it has all the necessary components you are looking for, the metrics to know that you can support the value of that property that you want to rent it out at.
In fact, when I have done this before, let’s say you don’t yet have it. Throw a property out there or just look to see what people are willing to spend to rent the property, then invest. I don’t see problems unless people get stupid and make bad buying decisions.
Toby: Let’s talk about that because there are two or three areas where I would say to avoid during a recession. Number one is flip at your own risk because time is not your friend during a recession. Your house can absolutely go down in value. Number two is stay away from the ARMs just like what Clint said. Get away from those adjustable rates because we don’t know what the Feds are going to do.
They’ve promised that they are going to continue to increase interest rates throughout 2023. If they pivot and all of a sudden say you know what? We’re not and we’re going to start declining. Then you’re going to see a whole other kettle of fish.
Right now, what they are promising to do is to continue to increase. Stay away from the ARMs. If you have one, ay-yay-yay. You may be in hot water which in case you might want to start talking to your friendly wholesaler or some of them may help you get away from that situation. Those are the two big ones to me.
Then you hit the third which is I think you buy on a methodology. You don’t buy a house because you think you can sell it for more. You buy a house because it has cash flows and that’s the difference between assets and liabilities.
Assets put money in your pocket. Liabilities take it away. A piece of real estate can either be an asset or a liability. When you buy it as a personal home, it’s a liability, pure and simple. Unless you are house hacking. If you are buying it for an investment, you better make sure it sits in the asset column because during a recession, those liabilities are not your friend.
Clint: That’s why I see opportunities here. Where I would be looking if I was a real estate investor just starting out or maybe you’re investing for a while, I would start looking at subject-to deals because if people start to running into problems if they got laid off and they can’t afford that mortgage any longer, that’s going to be opportunity to help out a distressed homeowner.
Tax liens and deeds. States have been really aggressive at trying to bring in all of this money and they’ve been spending that money so they’ve raised property taxes. Do they drop property taxes real quick? No, they don’t. They’re going to be reluctant to do that because they’ve got this appetite for spending. That’s going to put pressure on people who quit paying their property taxes and now there are opportunities for investors to jump in there.
Raw land investing. This is something that I think is beneficial to people from a standpoint of it’s expensive to build, so rather than go through the normal process, look at using manufactured homes, bringing those in. You’re picking those up at $90 a square foot. If you look out there, each phase of the economy that this country goes through, real estate works. You just have to change.
As Toby mentioned, flipping real estate, this is not the time I would say to go out and flip real estate. I think it’s more of the time to be a private money lender to go out there. That’s another opportunity because interest rates are high so people are having a diff icult time to qualify.
If you are a hard money lender, you have cash sitting on the sidelines and you believe in real estate, you want to possibly own that real estate by default, now start making some loans. You make money off points. You can do shared appreciation mortgages with people where if they do one thing, they’re going to build and flip the property. You can go in.
Toby: Be careful about the ratio of the fair market value, of what that loan-to-value is.
Clint: ARV, take out 20%.
Toby: At least right now. Let’s talk about this then. A good question was posed. How do you protect yourself in a real estate market collapse during a recession? Le’ts just say that they’re right. Everybody out there who’s freaking out, oh my God, I’m going to lose money during the recession. The market is going to collapse. What if it does? What if it drops 20%? How do you protect yourself?
Clint: It’s simple. What you have to be doing is put together the right types of entities, limited liability companies, land trust, statutory trust, personal residence trust. All of the things you and I talk about on our tax and asset protection live events are the things people should be implementing.
I remember in 2009 and 2010, people were calling us up and saying hey, I’m losing all of my properties because I got into some bad loans or this happened. I have my tenant now suing me because, of course, they manufactured the lawsuit because they don’t have any money. They can’t afford to pay rent. What’s one way to get out of paying rent? Sy you got hurt on the property. You get paid for it. You need to protect yourself now rather than later against all of these various threats that tend to come out of trying times like this.
Toby: I would agree with that. I will always say make sure that you are bifurcating off your personal assets from your business assets and your personal loans from your business loans. For example, if I have a loan that’s in an LLC whereas the asset is the only recourse—it’s non recourse for me, it’s not going to come over and affect me—that is much better. If there’s a crash and my properties were nothing and I can’t get a tenant for it, I give the property back and it doesn’t take out the rest of my properties. You get to pick and choose.
We saw this especially with businesses. Make sure your personal credit and business credit is separated because during 2008, 2009, and 2010 people would do this. I’m not going to pay my mortgage so that I can do a modification thing. The bank will say you got to be delinquent a month or two so that you can go to our loss mitigation department. Then we will amend your loan which for the most part, that was hooey.
What would happen is it would hurt their personal credit and their business credit. In one case, a gentleman had a line of credit in his plumbing business and you lost your line of credit in your plumbing business because you just went delinquent. You have to separate those things out so that your business credit is the business itself, not you.
If you end up in a pickle on your personal property and do have to do a short sale or do need to hand that deed in for foreclosure or work with somebody to get that property turned into, like in some cases you’d have an investor buy it and just rent it back to you. If you are in that situation, chances are you’re in a short sale or something that involves financial distress that it doesn’t hurt your business. It might be too late for some of you guys. I would be jumping on that and make sure you separate it to make sure that you’re not hurt.
The last way is the most simple, buy with cash. When you see interest rates going up it only affects one party—the party that’s borrowing. Don’t be a borrower. It’s easy to say but for Clint and I, there are properties out there that you can get for $90,000, $100,000, $110,000, or $20,000 of cash flow.
You see, people will still go out for $400,000 and put $100,000 down. Just buy the $100,000 property right now. Don’t mess around. Don’t chase those ones. Make sure that it cash flows, and the easiest way to do that is to continue to use cash because cash is king, in my opinion.
Clint: A lot of people like the fact that the property, like you talk about a $400,000 property is probably going to have greater appreciation than a $90,000 property. But at the end of the day, what is it that you are relying upon? It’s the income that comes in off of that property.
If you got four $90,000 make more than the one $400,000 property, even though it’s going to build more equity, you’re not eating your equity, so base it upon cashflow.
Tobt: I’ll say this. We have a sister company, Infinity Investing, wrote a book about Infinity Investing. You can go to Amazon anytime. The principle is really simple. We want to buy assets that are cash flow assets that we never get rid off. The reason I’m saying that is because there’s a question here of what should I do if I already own a property and it is worth less than what you paid for?
I want you to get this out of your head. When you buy something and you own it for an infinite period of time, you don’t care what it’s worth. If Clint and I buy a rental property, what we care about is how much it is producing, how much income. If you buy it for cash, it’s even simpler. You are just saying what is my inflow? Is it producing $6000 a year? Is it producing $60,000 a year?
Do you care what the house value is under those circumstances? I would say no, you are accumulating the value of your assets. I’ll put it into the Monopoly language. If you are playing Monopoly, you go around the board and buy houses and trade them up into hotels. I don’t really care what the price of the hotel is that I own. I care about you’re going to land on it and pay me rent. That’s what I care about.
The rent is the key. Are there good deals out there? Absolutely, but that’s the binding decision. Once you’re holding it, I really don’t care. Maybe if I want to trade it for more real estate. But how often do we run values on our properties?
Clint: I think that is a great example. Everybody who played Monopoly wants to own the boardwalk. I found when I typically win in Monopoly is when I’m owning the Light Blue, the St. James, the Purple, and the Oranges because you’re making money every time someone comes along. You don’t have to wait for that one hit.
Toby: It’s a greater likelihood that you’re going to get a hit. Here’s the thing, if you are playing Monopoly, this is your strategy. I’m just going to go around the board and I’m going to collect $200 every time and I try to stay out of jail. If that’s your strategy, you’re screwed. You have to be an investor.
People still get scared out of investing. There’s recession, there’s this, blah-blah-blah. They’re just scaring you so that you’ll go around the board and not take advantage of any opportunities that show up and you’re collecting your $200. It’s guaranteed that you’re going to lose that game if you don’t invest. You got to be an investor.
Let me ask you this because there are a bunch of questions here. What precautions can an investor take to protect themselves during a recession?
Clint: We hit on that a little bit. You want to make sure that you’re going out there and you’re protecting your assets, so that if you do find yourself in a distressed situation, and people aren’t going to take your savings account from you because you put that in a limited liability company, and you put all of your real estate in a separate LLCs, and you’re using personal residence trust to protect your personal residence from judgment. I think the most important thing about this for someone is that they need to get educated.
I firmly believe that what we are doing now in our sister company, Infinity Investing, is taking and teaching core principles to people on how to invest in this market right now. We’re talking about the strategies of how to get out there, find distressed real estate, how to close on that distressed real estate, and how to do manufactured housing, subject-to investing. The things that we see that are coming up that we’ve seen in the past that take off or when people accumulate real estate.
By coming into our Infinity Investing class—there’s a link below, you can click on that link and you can join us on that event, it’s a one day event—you’re going to learn how to take control over your financial future.
Toby: Absolutely. Last couple of questions. How long does it usually take to recover from a recession and what happens to the housing market after a recession? What would you say?
Clint: After a recession, the housing market is going to go stagnant and then it’s going to climb again. You’re going to start to see more people coming back in because once that fear evaporates from the market, then people start to want to jump back in. The problem though at the same time, as we experienced too, is that as more people buy again and become less renters and become homeowners, your rents tend to go down. That’s why you got to buy right.
Toby: You got to buy. I’ve even seen rents go down. I don’t see rents going down in most of the neighborhoods. In fact, the rents have been continuously climbing with inflation. I suppose there’s always that risk. I see it more that it stalls. It’s not increasing as it does every year, which I guess is the same thing.
Let’s just say that we are going through a recession, a period of downturn, which is really bizarre because we have low unemployment, and you have the Fed aggressively raising interest rates and trying to stabilize inflation, I don’t know. I think we’re going to have a new world. We’re going to have a different set of rules.
Right now they are saying 2% inflation. I think that goes to 4%. Why do we care about 2% inflation? We are just trying to keep it from going too crazy. They printed a lot of money. They are doing quantitative tightening trying to lower that money supply which will have its desired effect in some cases, but are they going to suck $4 trillion out? I don’t just see it.
I think we’re going to have to say this is a little bit different. We didn’t have COVID in the past. We don’t have much guidance here. What I see here is there’s fear, and once that fear subsides, like you said, I think we’re going to see that market continue to march forward and prices to go up because there’s so much demand and so little inventory until we figure out how to build houses that cash flow right out the gate.
Maybe apartments work right now. Maybe manufactured homes work right now, but it’s going to have to be a mass scale. Until we figure that out, we’re going to continue to have this disconnect between supply and demand where we just have this massive demand and lack of affordable housing. What that means for us as investors is that there’s plenty of opportunity if you use the right metrics and if you keep yourself from making big mistakes.
Clint: Like I said, if you want to join us for our Infinity Investing event, click on that link below. We’ll be talking about where we are investing as well and the opportunities in more detail where we see them and how you can take advantage of that as well with your own investing.
