by Dr David Phelps
How can you better navigate the current economy, the increased risk of the investment markets,
the uncertainty of different market behaviors, and more and more “trusted” sponsors seemingly running into troubled waters in the news?
When the stock market’s behavior is tenuous at best, and Wall Street suits are uncertain about the outcomes, people begin to look for alternative investments, at least for some diversification.
Real estate is one of those alternatives, and for those seeking to invest in it, I want to lay some groundwork on what you shouldn’t and should do when investing in real estate.
The Friends and Family Investing Model
We commonly receive calls from people seeking our opinion about real estate opportunities in their local area. Usually, it’s a kind of real estate fund. Perhaps it’s single-family rentals, a multi-family syndication, or XYZ.
It's what I call friends and family investing, and it's normal to do when just starting out and you don’t know where to go or how to do proper due diligence. Most don’t know how to read the current market or where to learn whether an investment opportunity is worth the risk.
We’ve seen the friends and family investing model burn many people because they only scratch the surface of the investment. They put their trust in friends and family who may mean well but don’t know much more than them.
Do Your Research or Join a Community Who Does it For You
Let’s say you want to buy a good used car, but you don’t understand the mechanics of cars. You go to a dealership and state you want a four-door sedan with around 100 to 125,000 miles in relatively good condition.
The dealership says they have about five cars of different makes and models that fit that category. When you check them out, all five vehicles meet your basic standards and look fine. They're not beat up or scratched up. They’re all in pretty close condition and price to one another.
So, which one do you buy? You could dig up the consumer reports that will give you the track record of those particular models from that year since its inception. That would be helpful.
You could hire a mechanic or take these cars to mechanics to look under their hoods and compare and contrast. But how much time and money would all this research and due diligence take? Your time is worth much more as a dentist and business owner.
But what if you were part of a group or community that did all this footwork for you? How much time, and in the long run, stress and money would that save you?
The same is true when investing in real estate. What if you were part of a community that integrated the best real estate vehicles with the best operators, providing track records, the status of financial operations, and other diagnostics? Wouldn't that be better than just trying to do it alone?
Beware of Operators Who Only Flip Properties
The headwinds in the economy are causing many issues with “non-operators.” These are real estate syndicators and fund sponsors that solely have used financial arbitrage to gain returns. They have used the cost of capital in the last few years to flip properties – single-family properties, short-term rentals, multi-family, self-storage, you name it.
They were operating on the “greater fool” theory. Someone would always buy it at a higher price as long as the cost of capital was low. That dynamic has completely changed, and that model no longer works.
So, those who can not operate their real estate investments to profitability will not survive in this environment. By my estimation, about 70% of the people who provide real estate investments are not good operators. They are flippers with no clue how to run and manage investment properties.
There’s only a small tranche of good operators – People worth investing with because they will make it through the headwinds of a volatile economy, a recession, or an environment of higher interest rates.
Assets That Grow and Maintain Value Through Recessions
I love real estate because it can and does make it through recessions if you choose the right model, the right asset, the right management, and the right financing. These are the key components you should look into when going under the hood of real estate investment opportunities.
Lastly, be cautious in this current environment. You can’t do what you’ve done in the past few years and expect the same success. Seek good advice and educate yourself about this new economic era and how real estate can weather through it.
Seek good advice and educate yourself about this new economic era and how real estate can weather through it.
To your freedom!
– David
P.S. Whenever you’re ready, here are some other ways I can help fast track you to your Freedom goal (you’re closer than you think) :
1. Schedule a Call with My Team:
If you’d like to replace your active practice income with passive investment income within 2-3 years, and you have at least $1M in available capital (can include residential/practice equity or practice sale), then schedule a call with my team. If it looks like there is a mutual fit, you’ll have the opportunity to attend one of our upcoming member events as a guest. www.freedomfounders.com/schedule
2. Become a Full-Cycle Investor:
There are many self-proclaimed genius investors today who think everything they touch turns to gold. But they’re about to learn the hard way what others have gained through “expensive” experience. I’m offering a free report on how to become a full-cycle investor, who knows how to preserve and grow capital in Up and Down markets. Will you be prepared when the inevitable recession hits? Get your free report here.
3. Get Your Free Retirement Scorecard:
Benchmark your retirement and wealth-building against hundreds of other practice professionals, and get personalized feedback on your biggest opportunities and leverage points. Click here to take the 3 minute assessment and get your scorecard.
