A common point of conversation amongst investors around the United States – both new and old – is “What is going to happen to the market?” The concern for the market stems from worries about the coming collapse of the market. Because, have no doubt, it’s an undisputed belief that a crash is coming – despite the fact that we don’t know exactly when it will come.
In this article, we will look at how you can prepare for the coming collapse.
We’re in the October of 2019 as we write this and the general consensus seems to be that the sky is falling. Again, no one seems to be sure exactly when it will come down on us, but for the last five years or so, there has always been a crash in the making.
After the 2008 financial crisis, there have been a lot of mutterings that the crash wasn’t big enough, that the economy didn’t fall far enough. Many people claim that the number of preventative measures taken – these band-aids that were put on our economy – didn’t allow things to balance out as they should have. This lack of natural balance is supposedly what is meant to be setting the stage for the upcoming crash.
Since then, every year it’s been the same thing. In 2015, we started hearing claims that the market will crash in 18 months. It has been over 40-something months since then and… nothing. That is not to say that a crash isn’t happening. The point instead is this: people can try to predict what is going to happen all they want, but we don’t think it can be done with any sort of reliable accuracy.
The truth is, we haven’t been in a position like the one we find ourselves in now. Which means that when people use historical data and what not to try and predict market cycles, it’s not going to give dependable results.
What’s worse is that the world economy is such that governments can manipulate it to their liking. They can print as much money as they want, whenever they want. They can write things off when they want, nudge the market in this direction or that, raise or lower tariffs – there is an abundance of ways in which governments can manipulate the market as they need.
We could go on explaining, but the crux of the matter is this:
We are in a unique position right now and now more than ever, predicting the market accurately is a near-impossible task.
Most speculations predict that the next crash will occur in 2020 because it’s an election year. But that’s not likely, at least, in our opinion. In election years we usually see the market slowing down, almost pausing, as we wait to see what’s going to happen, who’s going to take power and so on. There might be some volatility, but nothing that amounts to a crash.
Again, this is all speculation. We can’t rightly tell what is going to happen. Everything could come crumbling down in 18 months or 18 hours. There is simply no rhyme or reason for the way the market cycles. Even the biggest economists keep missing the mark and prefer giving us ranges.
So, is there a crash coming? When is it going to come?
You shouldn’t be basing your investing strategies on the possibility of someday, maybe, perhaps the market crashing. A market crash will only really hurt you if you’re doing speculative investing – where you buy hoping that the market is going up. Not that speculative investments are bad, but they should never be the entirety of your business portfolio. Instead, you should look at them as sort of extracurricular, experimental investments that you do alongside other investments.
We’ve heard a lot of people say something along these lines:
“I’m just gonna wait for the market to crash before we jump in.”
Our response is this:
Back in 2015, a good friend of mine pulled out all the money he had in the stock market – and he had a lot of it. He felt that 2016 was the year that the market would finally crash. Today, the Dow Jones Average is trading around $27,000 compared to the $17,000 it was at back in 2015. My friend is, to put it simply, very upset with himself because he has lost a tremendous amount of growth.
The point is this: you shouldn’t try to predict what’s going to happen in the market and try to make all your decisions based on that. Our advice, instead, is to make sure you are ready in case something does happen. If you’re prepared, you can act accordingly and minimize – or even completely negate – your losses.
Which finally leads us to how you can prepare, and now, we will share with you the three strategies we are going to use to stay in business.
Strategy number one is owner financing.
First: what is owner financing? Simply put, it is when you make a financing arrangement in which you agree to accept installment payments directly from the buyer rather than having them obtain a loan from a bank.
A lot of investors choose to do it, but only in certain areas of the market. Personally, I don’t like owner financing in today’s market, but it is a viable option to prepare for a coming collapse.
When you have a property that you know is no longer going to appreciate and are sure that it will just stay stagnant, you can owner finance it. So, at the onset of a bad economy, you can sell these properties you know will not appreciate at a fixed value and enjoy constant inflow of cash.
Strategy number two is short selling.
In a crashing market, there will be an immense amount of layoffs and when people are laid off, they won’t be able to make their mortgage payments. There will be people who have bought houses priced over the medium price point for that market and in a down market, these properties will be worth much less, but because they bought it with cash they didn’t have, they will still owe the original amount.
That’s when you implement short selling.
For those of you who don’t know what a short sale is, here’s a quick breakdown.
A homeowner owes $250,000 on their mortgage but in the downturned market, their property is worth much less. It may be $240,000 or $220,000 or $200,000 – whatever the amount, the point is that it’s worth much less.
So the banks have to sell this property short, meaning they have to sell it at a loss. This has to be something the bank has to approve first, having verified that the seller simply cannot afford to keep making the payments, but once that is approved, the bank has to sell the property. Banks are generally not in the place to keep holding on to real estate, which allows us to come in and help.
One thing we personally do is refer all our short sales to another company that we work with, who will then process the short sale. Once the short sale process has been approved, we submit the first offer with a detailed scope of work which gives us first dibs at the property. As long as nobody else submits any higher bids, we'll get that property for much cheaper than its original value.
Short sales can also be utilized in another way if you’re an agent yourself. If you are an agent and you recommend a short sale property to an agent who specializes in such deals, you can get a nice referral fee. Some agents will even pay up to 25% of their commission.
Short sales can produce revenues in multiple ways and if you understand how it’s done, you can take advantage of it to get through recessions or crashes in relative safety.
The third strategy is to utilize rentals.
The owner of a property management company we work with told us that in a downmarket, rents do not typically fall if you can manage to keep your rent within a sweet spot. Which means that as long as you’re not renting your property either too much or too little, you can use rentals as a viable strategy to get through the collapse relatively unscathed.
When you’re staying in that sweet spot – which is not the same in every case because it can vary depending on the city – you’ll find that your properties become incredibly attractive options for a lot of people.
Thing is, most tenants can’t afford to buy a house in an economy that is in recession. The crashing banks are simply not going to be lending money to people who need it to buy houses, so these people need to find a place to rent at an affordable price. And when they find such a house – which in this case, we’ll assume is a property owned by you – they’re going to want to stay there.
In these situations, they don’t want to move and more importantly, they can’t afford to move. As our friend says, you can even increase the rent $50 or $100 and they’ll still stay. Because where else can they go?
This makes rentals a really good option in a downmarket situation. Even if you have equity tied up in the property, as long as you don't sell it in the downmarket you're not going to lose any money. So, if you can hold onto a property that can keep providing stable cash flow, you will be able to outlast the downturn in the economy.
But do remember, this is not us proposing that you buy rental properties that currently have negative cash flow simply because you hope they will appreciate. As we mentioned earlier, this will be speculative investing and that’s just not recommended.
We recommend having at least a $250 to $300 cash flow a month, including property management. What this will do is ensure that you have a safe amount of cash flow for you to play with and adjust as you need to get through the tough times. If needed, you’ll still be able to drop $50 or $100 from your rent and still be safe.
So, let’s recap.
Should you get into the real estate market?
Don’t try to time the market because it doesn’t matter when you get in. What matters is how you get in and how you stay in the market. As we like to put it, “It’s not TIMING the market that matters, it’s TIME IN the market.”
If you want to jump in now, jump in, make smart decisions and buy good investment properties. If you keep timing the market, you’ll never get in for fear of losing your investments or you’ll get in and start speculating more, which will just lead to further losses.
Honestly, who cares if we’re going to crash or not. Further, it is near impossible to accurately predict if we are going to crash and if so, when we are going to crash. And truth be told, knowing that has no bearing on your success or failure. What does matter is that you’re prepared for the crash.
How to be prepared for the crash?
Remember our three strategies.
1) Owner financing.
2) Short sales.
Focus on these strategies and prepare yourself for a potential collapse. And as long as you keep an eye on the market and keep making smart decisions, you’ll not need to worry.