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Investing in a Recession

Episode 073

John Larson and the Real Estate Cowboys talk passive income real estate investing.

Hear new episodes every Sunday morning at 8 a.m. The Cowboys talk about investing in a recession.

Keep the #CowboyCoffee hot while listening to John, and the Cowboys talk about how to #BeACowboy and earn passive income in real estate.

Episode Transcript

Keith Weinhold: Hey, this is Keith Weinhold from the Get Rich Education podcast. You are listening to my friend John Larson and the Real Estate Cowboys. Don’t quit your daydream.

Robert Helms: Hey everybody, it’s Robert Helms, host of the Real Estate Guys radio show, and you are listening to the Real Estate Cowboys.

Announcer: Have you thought about becoming financially free through real estate investing, but don’t have the time or knowledge to get started? Welcome to the Real Estate Cowboys podcast. Each week we discuss passive income investment opportunities in the red hot Texas market. John Larson and the Real Estate Cowboys will show you how to leverage their team to build wealth in real estate through passive investment opportunities. And now here’s John.

John Larson: Hello and welcome to another episode of the Real Estate Cowboys. This is your host, John Larson. This week we are talking about a recession and how to invest in a recession or basically you know what type of an opportunities are available during a recession. Is it smart to invest during a recession? Should you kind of take a wait and see approach and let the recession carry through before you start to invest again? We’re going to discuss that this week.

If you’ve been listening to the show, I’ve talked a little bit about how I feel like a recession is possibly looming. We are starting to see interest rates go back down again, which is a sign of, once again, it’s a healthy economy and a healthy housing market. If you’ve been paying attention to the housing market, you can obviously see that prices have been going up exponentially year over year.

I’m starting to see a little bit of plateauing, even here in Dallas/Fort Worth. In some areas you’re starting to see prices plateau a bit, just because I think of the fact that you know, the type of demographic or the type of buyer that’s going to purchase homes and some of these areas around Dallas, which I would say are like middle-class, entry-level middle-class neighborhoods. It’s getting to the point where that type of person willing to rent a house or buy a house in those neighborhoods, they’re starting to get priced out, right? So, you’re seeing a little bit of plateauing when it comes to some rents.

Rent increases have become a little bit stagnant and property values in some areas have also become a little bit stagnant and you’re not seeing the type of year over year appreciation that we were from, you know, 2011 up until I would say about 2016, 2017.

I think in the past 18 months I’ve seen a little bit of a plateau in this market and other markets across America, but I still think prices are a little bit, you know, they’re high. They’re kind of back to where they were before the last recession in ’07 and ’08. You know, I see that as well with today’s housing market, but I haven’t really seen any slow down in terms of properties not moving. They just need to be priced right. If they’re priced right, they’re moving quickly. If they’re overpriced, if you have an overzealous seller that thinks that they can get a lot more than what the property is actually worth, you’re going to see the property sit on the market and that’s typically what’s going to happen.

But I still see multiple offer situations in a lot of smaller markets across America and not seeing as much in DFW as I have in the past. But I know, being from Detroit, in the metro Detroit area, you’re still seeing housing prices in those price ranges where you’re really at that net median level or just below that median home value, you’re still seeing multiple offers. You’re still seeing properties move very quickly within 30 days.

So I wouldn’t say right now I would be as worried as I was maybe a year ago. I thought, you know, with the rise in interest rates rise in oil and gas, things like that, there were a lot of determining factors that were kind of making me feel like a recession was looming. I still think one is potentially coming. An economy, an housing market can only run hot for so long and it’s a natural ebb and flows of the economy and just the industry itself, the housing industry.

So I believe that we will start to see a dip and maybe a slight decline here in the upcoming months, maybe by the end of this year or early next year, but for right now, I think we’re still okay. I just like property values, like I said, are back up where they were before the last recession. So, I feel like if you’re looking to invest right now, especially on the single-family side, you may be slightly overpaying for a property and you could see that property value dip during an 18 month to two year recession period where you’re going to have to wait for that property to bounce back up in value.

During a recession is typically when you’re going to find the best deals on single-family homes, multifamily properties, commercial, so on and so forth. I don’t expect a market like Dallas to see too much of a dip in commercial property rental rates and commercial property just because there’s so many people moving here and so many businesses moving here and that type of real estate is in such high demand.

Even on the single-family side, I’m seeing some plateauing. We saw the same thing back in ’08 to ’09. It was the same type of thing in the DFW market and the Texas market as a whole. You didn’t really see steep declines and property values like you saw coming out of the Midwest and in California and other areas of the country, Arizona.

Here because of the economy, the diversity of the economy. It really kind of held the real estate market together, so you didn’t see declines. You didn’t see inclines in pricing either until we started coming out of the recession and that’s where you saw some really great, if you bought properties coming out of the recession here in the Texas market, you’ve seen enormous returns. If you’ve refinanced those properties or if you sold those properties, there was a lot of equity growth appreciation within those properties, so that’s really when you want to buy is coming out of a recession or during a recession.

The tough part is that banks don’t really want to lend during those periods and it’s a little bit tougher to get loans during those periods, but if you have some cash on hand or if you’re still a qualified borrower, I mean, banks will still loan to extremely qualified borrowers, which is why we did an episode a few weeks back just talking about how much credit is important to you as a real estate investor and to have the highest credit score as possible and a low debt to income ratio is very important. Those are the two main things that banks are going to look at.

So getting into it, there’s been a lot of chatter on the street about an upcoming recession. I’ve been talking about it; the real estate guys have mentioned it. Anybody really in the real estate investment industry has been talking about this potential recession looming and we’ve honestly been talking about it now I feel like for the past 18 months, and I haven’t seen anything really lately that would make me feel like a recession is coming soon. But it’s definitely coming. And so this is a good episode to kind of discuss how to protect yourself during a recession and what type of investment opportunities are good to go after during a recession.

You can’t predict a recession with 100% accuracy, right? But it always pays to be prepared either way. You want to prepare yourself for any sort of doomsday type of scenario, right? Especially when managing a real estate portfolio and your investments. Like, I had a lot of family members that lost a lot of money during the last recession, not only in real estate but really in the stock market, is when I saw hundreds of thousands of dollars be evaporated from my relatives’ retirement savings, which was tough to stomach and tough to see, which is why such a proponent of alternative investments, real estate being the main one, private money lending opportunities where you hold first lien position.

That’s why I’m a big proponent of those because you know, real estate never goes to zero and if you hold first lien on something, even during a recession, you’re still protected. Your money’s still collateralized, right? Whereas with the stock market, that could just go away, just in a day.

I would say one of the best ways to protect your wealth is to invest wisely in the month proceeding a recession and during the time of the recession. But depending on your current portfolio, you may want to consider different strategies. Should you invest during a recession? A lot of people ask that question. If so, what type of investment types will help you safely navigate through a recession with as few losses as possible? We’ll discuss that today.

What is the difference between a recession and a depression? They’re two very different things. A recession is characterized as a slowdown in the economy, okay? Recessions are considered less severe than depressions, but for those who suffer from the consequences, the differences can seem like a moot point. But some of economists will differentiate between a recession and a depression by the length of time it lasts. The last recession we had lasted 18 months, basically. It started in December of 2007 and ended in June of 2009, or started to taper off in June of 2009 and one of the most recent depressions also lasted 18 months, so that happened between January 1920 and July, 1921.

Depending on whom you’re going to ask, the main difference between a recession and a depression is the level of contraction of the GDP, the gross domestic product. So in the recession of December 2007 there was a contraction of -5.1%. In the depression of 1920, there was a contraction of -38.1%, so that is probably a really good indicator on whether you’re dealing with a recession or depression, right there, not necessarily the length of time, right?

So you can compare and contrast more historical recessions and depressions to see that it’s actually the contraction of the GDP, if that really seems to make the difference between a recession and a depression. I would probably lean on towards that idea of thought.

How does a recession affect real estate? Well, when there’s a deadlock, such as a shortage of resources or a failure of one of the key factors of the economic system, then a recession can occur. In today’s world, the economy is based on expansionist growth, because human ambition is predicted on growth. Our economy is based on it as well. This is evidence since the GDP contraction and recession go hand in hand.

There are several signs and symptoms that also go along with a recession. It can cause housing prices to drop, as there’s a lack of buyers and/or demand for real estate. So when the banks were doing all the crooked stuff with the loans and the housing market was being inflated basically on false pretenses and things like that, coming out of Wall Street. That is where we started to see that steep decline in pricing because buyers couldn’t get loans anymore. These adjustable-rate mortgages were putting people out of their properties. They couldn’t afford the loan any longer. So we were seeing this huge influx of inventory on the market and just really no qualified buyers or a very small amount of qualified borrowers.

And then the banks got really tight with their money and unless you had outstanding credit and great debt to income ratio, you weren’t getting loans. This can also occur in the event that the average citizen has less spending power. They lost their jobs, or when lending rates rise or all the above, it makes it very difficult to get alone. There’s a lot of job loss, especially coming out of the Midwest where I was at the time, I was in Detroit, I was in the metro Detroit area where I grew up and I saw a lot of people’s families, lose their jobs because they’re working for the big three or whatever it may be or some type of manufacturing that basically worked alongside or supported the big three and there’s just a lot of job loss.

And you saw, the whole pretty much eastern part of Detroit where you had a lot of people who worked in those factories and had blue-collar jobs just up and left and just up and left their property just sitting there, which is why you used to be able to buy, you hear the stories you could buy properties in Detroit for a dollar, right? You had to pay the back taxes on them, but they’d sell it to you for a dollar. They’d transfer the deed for a dollar and for the back taxes to be paid, which kind of opened up tremendous opportunities. Investors that knew how to navigate that type of property, that type of property class made a lot of money. If you didn’t, then you probably lost a lot of money because Detroit, certain parts of it pretty volatile, a lot of theft, a lot of break-ins. There was houses that were just being, you know … Arson, houses lit on fire and a lot of copper piping being stolen out of the houses.

And so, as an investor, if you didn’t know what you were doing, you didn’t have your keep your finger on the pulse of the investment, you could have really gotten yourself in some trouble.

But you know, in the great recession in 2007, millions of people actually lost their jobs, right? And it was the perfect storm of rising home prices along with the unbridled lending practices that we were speaking of. And that eventually led to a disaster that you probably are aware of. We all pretty much are. I think everybody knows somebody who was affected by that recession if they weren’t affected themselves.

And so now let’s move on to where to invest during a recession. Where you should invest your money? And you know, only take investment advice from a licensed professional. But there’s some ideas I want to give you some ideas for investing in a recession that are worth bringing to your attention or to your financial advisor or planner for consideration. And one would be turnkey rentals.

So, turnkey rentals make good investment options during recessions because housing prices may rise during a recession, which makes it more attractive for people to rent during a recession and makes it harder to get loans to buy a house yourself or maybe the rates aren’t as attractive, the terms aren’t as attractive, so it makes more sense to rent at that time. So you’ll see a like a larger influx of renters during a recession period, which is great if you’re a landlord that owns property. That along the increased stress on family budgets could lead to more families wanting or needing to rent instead of buy. You may have to downgrade for a period of time while you’re trying to battle through that recession and get through it, so you might just go for a more cost-effective rental for a couple of years. I think a lot of families did that.

Turnkey rentals may also be a good option for investing during a recession because a turnkey rental company bought the property when the housing prices were lower, at least when the prices were more reasonable. And instead of trying to buy a cash flowing rental property yourself in a bad economy, you could take advantage of a turnkey rental company’s existing inventory to maximize your ROI. Right? So, that’s something to think about as well.

Buying turnkey rentals during a recession is not a bad move. You’re leveraging someone else’s expertise and deal-finding abilities and rehab abilities to buy some good properties and get a discount at them during a recession. So that’s why, like I said, it’s important to keep your credit as healthy as possible, your debt to income ratio is healthy as possible.

So during a recession, you find one of these turnkey companies and leverage, like I said, their expertise and start building a rental portfolio and buying properties when prices are at an all-time low. And then that way, you can maximize your return on these turnkey rentals because you’re not just making money off the cash flow, you’re making money up to six different ways with rentals. Locking in fixed debt for 30 years, you’re hedging your bet against inflation. You’re receiving rental income from the cash flow from the rental, taking advantage of tax benefits that are available to you. Obviously, being able to capture some equity and some appreciation with these properties, because you’re buying them at a period when prices are low and you know with real estate, it’s cyclical and it will rebound once again. So you may have a lot of equity sitting in that property five years coming out of a recession. Something to think about.

You know, the people that were seeing double-digit returns by investing in single-family homes were doing it this way. They’re buying when the properties were low. They’re collecting, and putting together a rental portfolio and then five years, six years, seven years coming out of the recession, you now have properties, if you bought them in the right markets, they’re all worth much more than they were when you purchased them. They were cash flowing from a rental, a renter being in place. So they weren’t costing you anything. Then they’re seeing, they’re increasing in value over time. So that’s the best time to really buy rental property, in my opinion.

So another thing is private money lending, which we’re also big proponents of, and you know, when the economy turns sour, the stock market generally takes multiple hits, right?

And if you’re tired of being at the whim of Wall Street, you can consider private money lending where you’re investing in Main Street. And you know, we talk a lot about that. And some the real estate guys talk about, getting your money out of Wall Street and bringing it into Main Street. Right? I love that saying.

And I want more and more investors to be open to that. It’s not a bad move that keeps some money in the stock market. It’s all about diversity and diversifying your portfolio. But I think it’s a great move to pull some money out and possibly do some private lending opportunities where you’re holding first lien position, you’re collateralizing that loan, you’re protecting yourself. Real estate never goes to zero and you’re earning a fixed rate of return by taking the role of the bank, so you’re making these monthly dividends and you know what you’re going to make to the penny. So I think they’re very, very attractive.

That’s why I think private money lending is considered safe investing during a recession because you get fixed returns on a predetermined length of time. Many of the deals that we’re doing are a year, 18 months, maybe two years tops, so you’re getting that principal back to you in a relatively quick amount of time. We’ve even done some deals that are six-month terms, so your principal is only sitting out there for six months to two years and you’re collecting double-digit returns fixed each month. So I think that’s why this program has become so popular since we unveiled it back in basically start of second quarter of 2018 so we’ve been doing this for about 18 months at this point and just keeps gaining and gaining popularity.

Like I said, with a first lien position also protects you in the event of loan default, right? So you have legal recourse to take possession or take steps necessary to recoup your investment. And that can be for a business, that can be for equipment. Like, we’ve raised money for our CBD processing company where we have two extractors, these are million-dollar machines that spin-off cash flow 10 times that, right? So I think it’s a pretty safe investment opportunity because you still hold lien on that equipment in the form of a UCC-1.

So you know, in American real estate investments, we have a lot of private money lending opportunities. We’re not doing as many single-family rentals as we’ve done in the past. Just because I believe that the prices have just ran too high. Like I said, there’s not really a lot of room for our investors to capture appreciation and equity growth within the property and the cap rates on the cash flow just aren’t there like they used to be as well.

So I think that’s why most of our investors have been gearing more towards the private lending opportunities, although you don’t really get the tax benefits by assuming debt on a private lending opportunity or investing debt. You would on equity. But I even think with some of these equity opportunities today, the margin for error is just so slim and the projections that these sponsors are giving you on what you’re going to make and the returns that you’re going to make on your money with an equity syndication just or not … There’s some things I could maybe cause those returns not to come to fruition. Whereas with that play, you know exactly what you’re going to make each month on your investment, right?

And you know the amount of time that the investment is going to take, whereas an equity deal, a lot of times, they’re longer and it could maybe take a little bit longer to exit out of that investment. And so with that being said, I’m not opposed to an equity deal, especially if tax savings are very important to you. We’ve been structuring a majority of our deals debt due to the things that I just named previously, but I’m open to doing equity deals. It’s just, it’s got to be the right one. Okay?

You know, if you’re concerned about the rumors of an upcoming recession, you’re definitely not alone. And trust me, your fellow real estate investors are likely taking steps to protect their wealth as well. And that could also be why we have so much attention on private money lending right now. Because I think a lot of investors are kind of hedging their bet and getting their money working for them in a private lending model and everybody’s seeing the opportunity to make money in the CBD industry. And a lot of people are likening it to the next Gold Rush and I believe that that holds some weight and so you’ll see some investors that are really just real estate driven that are now looking at other alternative investments because they know the real estate market is … It’s hot you know, and the opportunities out there are just few and far between.

And like I said, the margin for error on getting these deals from point A to point B is very slim and I want to make sure that I’m going to be able to pay my investors their money back, which is why I like some of these other alternative opportunities. And if you’ve been listening to the show or following us, you know that we’ve also purchased a farm down in Belize where we’ve done investments for years. Southern Belize, the Placencia area, Stand Creek area, where we purchased an 1,800 acre farm and we’re in the process of now starting to plant our first 200 acres of hemp and we’re going to eventually get that farm to the point through help from our investors with our private lending model to where we are going to be able to grow probably up to 1,000 to 1,200 acres of hemp down there.

And with Belize being so close to the equator, very fertile soil, you know, we’re able to get three and a half harvests per year down thereby growing hemp there, instead of growing up in America where you only get one harvest. And so that’s a tremendous opportunity for us down there to sell hemp at a cheaper price per pound, but still make a solid amount of income to pay back our loans to our investors and also put some money in our pockets as well by basically being able to sell on a discount because hey, we can harvest three and a half times a year, where our competitors are only harvesting one.

So exciting, tremendous opportunity down there. I was just down there a couple of weeks ago, shot a video. If you follow us, like I said, you should have received some emails with that video talking about where we’re at in the process, what the use of funds are for and this is a deal that pays 15% on your money.

We understand there’s maybe a little bit more risk, although we’re very comfortable with Belize and the government that’s in place down and Belize so we know we’re going to succeed, but just the fact that you’re sending your money outside of the country, we’ve now offered a 15% fixed rate of return annualized on your money and that will be a one year term on this deal and we’re basically pretty much to the point we’re almost halfway funded on that deal. I think it’s a $2.55 million raise total and I think we’ve just hit over a million in commitments, so I believe that deal will probably be available for the next two to three weeks, maybe linger on until the end of the month.

But if you’re excited about that opportunity, if that opportunity sounds good to you, go to our websites. It’s, Put in your information. A member of our team will reach out. We’ll get you the marketing package on the current opportunity. If you’re an accredited investor, you can get your hands on the PPM and review that and if you decide that you’d like to move forward, we can definitely get you in on this program.

I think we’ll have about a month remaining to fund that deal. So like I said, if it sounds interesting, 15% fixed on your money, go to our websites, check out the opportunity and we will then discuss the next steps of how to get involved and be our partner down there on this great opportunity that we have in Belize.

Other than that, that’s all we have for this week. This is your host John Larson, signing off. I’ll be back next week with some more great content. Thank you all for listening and always remember, what’s your return on life? Have a great weekend, everybody.

Announcer: All opinions expressed by the host of the show are the opinions of American Real Estate Investments LLC and do not reflect the opinions of guests or sponsors. No personal or professional advice on this program should be considered an endorsement to follow a real estate financing or investment strategy. Before acting on any information, seek advice from your financial tax, mortgage or real estate advisor, as the information is not guaranteed and investment strategies have the potential for profit or loss.