Volatile Economy? Here’s Why You Should Still Consider Investing in Real Estate

Posted by Scott Jacobs, Broker on Tuesday, September 27, 2022 at 11:55 AM By Scott Jacobs, Broker / September 27, 2022 Comment

It's no secret that the economy is in a bit of a rough patch. Volatile markets and stock prices have many people wondering if it's still safe to invest their money in the stock market or other traditional investment vehicles. While it may be tempting to pull your money out and sit on the sidelines, there are still opportunities for growth and profit in today's economy - you just need to know where to look. One such opportunity lies in real estate investing.

While the stock market can be a roller coaster ride, real estate is a more stable investment. Over time, property values have tended to increase, even during periods of economic decline. That's not to say that there aren't risks involved in real estate investing - but if you do your homework and invest wisely, the rewards can be well worth the risks.

No, this is hardly the worst economy we've ever experienced. But it is undoubtedly the oddest and most volatile, with the exception of the first few months following the start of COVID-19.

The rate of inflation is at its highest level since the early 1980s and is likely to stay that way for some time. Prices for homes have risen faster than they did before the 2008 financial crisis. There is a severe housing crisis, numerous supply constraints, rising interest rates, an inverted yield curve, negative first-quarter 2022 GDP growth, and rising interest rates.

A recession may indeed be on the horizon. Some believe that another home market crash could be forthcoming.

Wherever we end up, one thing is certain: investors need to exercise prudence since the economy is extremely unstable. They should still go forward, though.

I expected the market will correct around 2018, but I'm not a fan of "waiting for the market to correct." I was mistaken. If I had stopped purchasing, I would have regretted it. I would feel considerably worse if I had sold our portfolio.

In fact, since 2015, I've known people who have been stating that. Without a doubt, they are still waiting.

20-Mile Marching

Jim Collins is best renowned for his timeless work Good to Great, but I think his book Great by Choice on how to invest in an uncertain economy is superior. Collins emphasizes the value of maintaining a consistent attitude in both good and terrible circumstances as one of his main ideas. He compares this to the legendary explorer Roald Amundsen and calls it "20-mile marching."

Robert Falcon Scott and his team competed against Amundsen's team in 1911 to determine who could reach the South Pole first. On good days, Scott's crew would push themselves to the limit, and on bad days, they would fortify themselves. Although it appears logical, this didn't work. Unfortunately, Scott and his crew did not only fail to reach the South Pole but also returned without having survived.

Amundsen, on the other hand, was adamant about planning ahead and being reliable. According to Collins in Great by Choice,

“Amundsen adhered to a regime of consistent progress, never going too far in good weather, careful to stay far away from the red line of exhaustion that could leave his team exposed, yet pressing ahead in nasty weather to stay on pace. Amundsen throttled back his well-tuned team to travel between 15 and 20 miles per day…When a member of Amundsen’s team suggested they could go faster, up to 25 miles a day, Amundsen said no.”

The relation to business is simple: "The 20 Mile March provides two sorts of self-imposed suffering: (1) the discomfort of unshakable devotion to great performance in challenging circumstances, and (2) the discomfort of holding back in favorable circumstances."

Collins discovered seven businesses that outperformed the Dow Jones and their sector during a 15-year period in a volatile environment by a factor of at least 10. All seven adhered to the 20-Mile March tenet, including Intel, Microsoft, and Southwest Airlines.

Getting stuck develops apathy, loses momentum, and maybe even paranoia about the future. Waiting around does not provide any excitement. If you have a workforce, the top workers will likely leave if they feel there won't be many prospects for progress.

On the other hand, developing rapidly might lead to additional issues, such as outgrowing your processes, overleveraging, and careless errors since the volume of your commitments exceeds the amount of time you have to thoroughly vet them.

Growth should continue through good and terrible times. This is essentially how dollar cost averaging works. Naturally, you shouldn't regard this as gospel. There are situations where you should either cease expanding (like when several staff leave or when your bank won't renew a large loan) or expand swiftly (a killer deal comes around). However, the strategy should focus on steady, high-quality growth.

Not the Time to Reach

However, 20-Mile Marching doesn't identify a specific approach. It doesn't state that you shouldn't sell a few properties right away if your cash flow is poor or your finances are tight. Furthermore, it makes no mention of reaching a competitive market like this if you can't locate a deal.

Indeed, it's a good idea to sharpen your pencil and only accept offers that are likely to make sense when the market seems a little irrational (in this case, too hot). You might acquire fewer properties as a result of this. One might not even be available for some time.

Cash is King

Collins also emphasizes the important point that businesses with significant capital reserves outperformed those without them. This is due to the fact that those businesses have enough cash on hand to cover unexpected expenses and seize lucrative business opportunities when they arise.

Having money to buy assets when they’re cheap can make a real estate investor antifragile.

Having money is obviously not the best advice. Strong cash reserves are notoriously difficult to keep, especially with real estate. I've jokingly said that unless you're cash strapped, you're not a real estate investor.

Having said that, now is not the time to ride the line due to the unstable economic climate. Consider refinancing or selling a property if doing so will provide you some breathing room that you don't know you have.

Dealing Inflation

We are, of course, in an atmosphere with high inflation, so you shouldn't store too much cash, at least not in the form of cash. It might be wise to look at investing options right now that at least provide a little return to counteract inflation. Maybe, now that they're again on the rise, 3-month Treasury bills.

Having said that, the benefit of owning real estate is that, while assets continue to (typically) appreciate in value, inflation erodes debt. Inflation shouldn't have a major negative impact on you as long as the majority of your money is in tangible assets like real estate.

However, inflation can make managing cash flow more challenging. It is crucial for landlords to maintain rent increases when costs for labor, materials, insurance, and taxes all rise (at least until the market cools).

Volatile and fragile economies can be unsettling, but they can also present opportunity. In the past two years, finding properties to buy has proven to be incredibly challenging. That ought to alter as soon as the market starts to cool.

In fact, recessions and unstable economies tend to favor the greatest investors. But they don't do it by watching from the sidelines. Instead, they maintain a high level of reserves, adapt to their surroundings, make adjustments to their plans, and carry on with their 20-mile march.

Volatile economy got you down? Don't despair - there are still opportunities to be had, especially in the realm of real estate investing. Real estate is a more stable investment than the stock market, and over time property values have tended to increase. If you're thinking about investing in real estate, now is a great time to start doing your research. With a little effort, you can find the perfect investment property that will provide you with years of growth and income.

If you're thinking about investing in real estate, now is a great time to start doing your research. The market may be volatile, but there are still plenty of opportunities out there for those who are willing to look for them. With a little effort, you can find the perfect investment property that will provide you with years of growth and income. So what are you waiting for? Start your search today!

Scan this code and find out how much your home is worth!