The Imminent Real Estate Bubble

Real estate is also a much easier model to understand than the paper financial markets. The conventional investment model is to own a property in which a tenant is paying rent. This rent becomes your cash flow and income as the investor. 

Real estate keeps up with inflation and can be financed to build your wealth more quickly with less of your money. There are tax benefits and many other reasons why real estate is a good investment. But is it always a good investment? 

No investment asset is always good. Whether you like precious metals, crypto, bitcoin, or financial market assets like tech stocks, every asset class has its time in the market, including a time when it's not favorable.

Education is the Key to Investing

You must learn how the market and the economy function. You don't have to get a PhD in economics to do this.

If you're willing to do some studying to understand the basic tenets of how the economy, financial markets, the Federal Reserve, interest rates, inflation, recessions, and banking work, you'll have an understanding of asset allocation. Asset allocation is what others would call “Where to put your money.”

You should always put most of your money into something you understand. This means you need to study the assets in which you invest. I'm not a fan of giving my money to the market, index funds, a money manager, or putting it into a 401(k). I don’t want anyone else to administer my money.

Every investor should learn the area they want to invest into, study, learn, and determine what assets they like. That’s how I started over forty-six years ago in college. I wanted to understand how money worked and how the investment world worked.

I started reading books about the financial markets, the stock market, and mutual funds. I also read books about tangible assets like real estate and other business books because I would eventually start a business as a dentist.

I was preparing for dental school, so I began studying a few years before I could invest. But I wanted to learn how to be an investor from the beginning.

This meant studying something outside of the core science classes and subjects that needed for my degree. I intentionally developed and learned the skill sets necessary to invest because I didn't want to be subject to just one mode of income.

One Stream of Income is Dangerous

Depending solely on one stream of income is dangerous. No matter how much money you make, trading time for dollars, things can happen to take jeopardize that income source.

Markets can change, your situation can change. All kinds of things can happen, and you don’t want just one source of income when things change for you. That’s why I studied real estate. What I’ve learned and experienced has made me a fan of real estate throughout all market cycles, even today. 

How I am Investing in Real Estate Today

Today, however, I would not suggest investing in real estate in the conventional models that most have used over the last 40 years.

Most think of owning equity when it comes to real estate investing. It’s the same principle as owning stocks. You want to own shares just like you want to own equity or title to real estate (a tangible asset). Owning equity is where you get many of the benefits mentioned at the beginning of this article.

But is that still the best play right now? 

The only way to win with equity investments is if the price of those assets continues to go up and up. Real estate has been reaching all time highs. 

The COVID stimulus has created an all-time high in the real estate market. Cheap money has created all-time highs in almost any asset since. But now, with interest rates increasing at the highest rate in history, the valuation, net operating income, and the cost of everything else (property taxes, insurance, labor, materials, supplies, etc.) have gone up. This has squeezed the cash flow spreads from real estate investments, which is what drives the values of real estate.

So, if owning real estate is not the best option today, where else can I go?

There are other ways to invest in real estate without being an equity owner and subjecting yourself to the risks of direct ownership.

I am currently invested in the debt-lending side of real estate. Think about a bank. When you borrow money from the bank to finance anything (a home, office or dental practice building, etc.), who gets paid first every month? The bank.

The bank always gets paid first. You, the equity owner who financed the real estate, get paid second. Today, I am investing in debt that’s backed by real estate.

Seek Control Over Your Investments – Debt vs Equity

As an equity owner you get paid on the profits you can make off of owning that equity asset. When you're in business, with your hands on the throttle, so to speak, you can drive decisions that can get you through recessions, corrections, and downturns. That is the primary benefit of owning assets. You have your hands on the wheel. You are the active operator.

But on the passive side, investing in assets where you are not the driver, which is where I like to be today, I may not have that same control. So, how do I assert control when investing in debt?

I don't want to own equities today because, unless you find a steal of a deal (rare today), I want to get paid first. I want to be the bank and lend my money. That's a safer place to be.

Now, when lending your money, you won’t receive all the tax benefits as you would when investing in real estate. You won’t have an inflation hedge, either. But I believe we're in an asset disinflation period anyway. 

The stock market, real estate, and many other assets will undergo disinflation. There will be a heavy correction. Why would I want to be in a position to buy at the top of the market in equities when I could play down on the debt side, which in the financial market is like bonds.

Bonds are, typically, a safer place to be. In the bond market, I can put my money in the U.S.

Treasuries today at over 5%. I can also invest my money in the real estate “bond market” also known as first mortgages, and earn anywhere from a very conservative 10% all the way up to 16% return.

But I have to know what I'm doing. I also need to have a network and access points, which you can develop over time. I've developed my network over 40+ years. 

This means I don't have to invest at the same place at the height of the equities market, which wouldn't make sense right now.

The Coming Recession and Correction

I believe we are turning the corner, and we will experience a correction in the next 12-36 months. Historically, this has precedence.

In 2008, the market started breaking in late 2007, and we didn't start getting out of that recession until about 2012. During that recession, as equities were going down, that was the time to go back in and buy equities.

When assets are at a discount, that's the time to be a conventional real estate investor. That is the time to buy ownership, buy shares of syndications, funds that invest in real estate, or even invest in REITs.

The Real Estate Bubble

Equity real estate is in a bubble, but you can still invest if you know where to go and what to do. You can also get much better returns than investing in the financial markets, with much less risk.

There will likely come a time in the market cycles where equity investments will make sense once again. When that time comes, it pays to be ready. 

Real estate has different dimensions. When you understand the different ways to invest in real estate and have experience in the markets, you will always have a place to invest your money safely.