096: Real Talk: The Real Estate Market Has Taken a $h*t
American finance author Robert Kiyosak stated that “real estate investing, even on a very small scale, remains a tried and true means of building an individual’s cash flow and wealth.”
Real estate has been here hundreds of years before you or us, and it sure will be here hundred more years after our departure.
Imagine what it would feel like and be like if you could create the kind of wealth for yourself and your family where you get to be in control of your own life.
Let’s get into it. 👇
There are always ways to make money everywhere at any time, you just need to know what to look for. Take whale poop, for example. At face value, this seems so gross, but you wouldn’t think that if you know how much it’s worth. Fun fact: did you know that sperm whale poop can cost as much as $1,000 per ounce? It’s a jaw-dropping fact that stunned us too.
Why is it so valuable? Because the main component of sperm whale poop called ambergris is used to produce high-end fragrances. One man’s trash is another man’s treasure, isn’t that how the saying goes?
So you see, when you know what to look for, even something as gross as sperm whale 🐳 poop can be valuable. It’s the same with real estate. Because cash-flowing real estate has intrinsic value, will always increase in value, and is a fundamental need, if you purchase it at the right price, and know how to successfully operate it then you’ll be successful in any economic cycle.
So, let’s talk about the giant whale in the room.
We know we know you are wondering: What will happen to the real estate market if interest rates stay at 7%+ or go up from here? 🤔🤔
Interest rates have skyrocketed significantly, essentially doubling someone’s mortgage payment in the last 12 months. And because the increases have come at such a staggering pace, the market hasn’t had time to adjust.
Why does the rise of interest rates matter in real estate investments? Well, we typically purchase our properties with debt, which in “normal” times is around 70 to 80% of the purchase price. The debt service aka mortgage payment is calculated by the interest rate.
The interest rate increase alongside the rising cost for just about everything is NOT a signal for real estate investors to run for the nearest bunker and assume the fetal position. Instead, we need to read and analyze the situation with a rational mind, double down intelligently, and get ready to make dynastic wealth. 👀
This is why it’s so important to pay attention to what’s happening. Many of us were too young to have experienced an economic downturn like what happened in the 80s or even the 2008/2009 great recession.
It’s like our experience as snowboarders. We’ve been very fortunate to have snowboarded 🏂 on the best of the best, Olympic-level ski resorts in the world, from Niseko in Japan to Matterhorn Ski Paradise in Switzerland or even Whistler/ Blackcomb in Canada.
Snow conditions, the topography of the slope, and overall mountain conditions on the same mountain all contribute to very different conditions from day to day.
But it didn’t stop us or millions of other ski and snowboard enthusiasts from hitting the slopes. Nope, we study the terrain, we talk to some local experts and plan our execution based on the given known conditions and, as a reserve, we also back that up with some experience that can be used when something unexpected arises. And then we go out thrashing and love every second of it.
This will be your experience with real estate investing as well, if you pay close attention to the market conditions and always lean in on the team who knows how to pivot when necessary. If you play your cards right, you will always end up creating wealth. ✨
Like we said earlier, all of us here have heard that interest rates have more than doubled and may go up even more by the end of 2022. What is less known or maybe less thought about are some of the ways this can be positioned to help us create our dynastic wealth.
Even before the interest rate hikes 😲, according to NHMC, the US is short 4.3 million apartments that it cannot remediate any time soon. This has only been exacerbated by the mortgage rate increases pushing potential home buyers out of the marketplace because it’s not affordable for them to purchase homes.
We will continue to see higher demands for rentals and with higher demands come higher prices. While interest rates have put a halt to home buying, this hasn’t stopped the rental rate, and pricing increases continue.
Interest rates hike only impact new loans 😉, so when we purchase a property with a loan assumption, we essentially take over the loan terms from the seller. This means that we can benefit from the fixed interest rate that they secured back in 2019, 2020, 2021, etc. Another way of putting it is that while others are paying 7% to 8% interest rates, we are paying 3.5%.
This insulates the property from the current volatile interest rate environment.
Keep in mind that not every general partnership team can take on a loan assumption. There is a higher barrier to entry, but thankfully, our team has loads of experience on this end and has proven time and again to sellers and brokers that we are up to the task.
What goes up must come down, and this logic also applies to interest rate hikes. As savvy real estate investors, you should celebrate seeing other investors running out and cowering in an intimidating time. You know now is the time to purchase properties at a discount, maybe a 10-20% discount from their all-time high from earlier this year.
It’s exciting because real estate is on a discount, and we love sales, especially when you are getting name brand stuff for less. Not only we’re seeing sellers giving $1-3M discounts, we’re even seeing even some sellers giving $10M+ discounts because they want out. ✨
This could be for any number of reasons, maybe they didn’t have the right capital stack, or maybe they mismanaged the properties and ran out of money for more capex, or maybe they purchased at such a low basis that they could afford to give buyers some discount.
There’s two sides to every grilled cheese sandwich. Just keep in mind that there’s so much going on with now – inflation, price of oil, friction in the market.
It’s really important to pay attention to the news 📰 and the current landscape of the market and economy. If you don’t pay attention, you may not understand and you could be setting sail into a storm without seeing it coming.
While you may not control the economy, you can get in position to grow your wealth, hedge against inflation, and handle your investment. And the key is you need to invest accordingly, which in our opinion, is done best through real estate investing.
Even though interest rates are spiking, it isn’t the end of the world 😌😌. On the other hand, because of inflation, your cash in the bank is now relatively worthless.
Again, we still believe in and love real estate. And if you could buy real estate with a fixed rate at a discount why wouldn’t you? When you properly take into account inflation and the interest rate hike in your investment assumptions, you will be able to ride the wave successfully.
What goes up must go down, and the same holds true with interest rates. In the 80s interest rates were at its all-time high of 14.6%, and it dropped to sub 3% interest rate in 2021.
As interest rates fall, which they will at some point, you will be celebrated as the genius who invested when these institutional-grade assets were purchased at a discount. History has proven over and over again that real estate value in the right markets will always defy gravity in the long term and rise. 🙌🙌
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