Be Careful Where You Invest Your Money Today
Many Real Estate Investments Are Overleveraged
I have decades (43 years) of experience in the field of investing, particularly real estate investing.
I also have over a decade of experience in helping others navigate their own capital in alternative investments like real estate through my Freedom Founders community.
I participate in many other groups involved in real estate, business, and marketing – Those of high caliber and different levels of experience – because I want to have a clear picture of what’s going on.
There are many younger people today who are motivated and inspired to pursue success and wealth. But people who are just beginning to invest their capital don't understand that we are currently late in the cycle, meaning we’re about to hit a downturn.
We Are About to Hit a Downturn
Many people are passive and abdicate their financial responsibilities to financial advisors, 401ks and mutual funds. That's fine. If that's where you are in life, there is no judgment.
However, I have observed many people get into different kinds of investments (not just real estate) late in the cycle. A great example is tech bubbles. We're in a tech bubble right now. We had a tech bubble back in 2000, 2001. The problem with arriving late in a bubble (late cycle) is that when they burst, they leave you with less capital than you had to begin with, if any.
We've had different kinds of bubbles over the years, but bubbles are part of normal market cycles in every sector of the economy. Financial products and tangible products like real estate go through cycles.
Many begin to get interested in different kinds of investments late in their cycles because that is when the exuberance (popularity) comes in. When everybody's doing well. An example of this are cryptocurrencies.
I'm not a protagonist or antagonist for crypto but I will say that it is in the speculative category. Over the last decade-plus crypto was very nominal. Then two years ago it blew up. Not based on any fundamentals, but more on the emotional behavior of the markets.
This happened in the middle of COVID and the stimulus money that was going everywhere. That’s a large reason that crypto and Bitcoin took off.
Crypto took off but then dropped like a rock. And it's still down today. This is not to say it couldn't pop back up again, but these are what I call “fad investments.” A large majority of people get hooked on fad investments near the end of a market cycle (the wrong time to invest) because they don't know better.
If you have yet to actively experience a true market cycle and its shifts (up AND down) when orchestrating your capital then you have no bearing. You have no perspective. This means you are more easily lured into jumping in late in the cycle.
This happens to many people, even some of the higher caliber real estate investing groups. They become complacent, believing their success in this model will never end.
This Market Correction is Different – Beware
There are a lot of false flags when markets are getting ready to go through a serious correction. People interpret these false flags to mean that the markets will continue to go up, and may even justify why they believe that.
We are seeing it big time today in the financial markets, in alternative investments, and in all spaces. It's a very speculative time.
My caution to you is regarding real estate, particularly equities. Equity is ownership of the asset or investment. This could be a rental property like a short-term rental, which has been a big fad over the last several years.
It doesn’t have to be complete ownership. You can own it with somebody else or have a fractional interest in it such as a tenant common divided interest.
When you have owner rights, you can make decisions on it. There are many benefits that come with ownership: Tax deductions, appreciation, an inflation hedge, the potential to increase cash flow with good management or value add, and the potential for selling for a profit.
This is part and parcel of investing in real estate or tangible assets, especially during upmarket cycles. We have been through a long-standing upcycle for the last 14, almost 15 years now since the 2008 Great Financial Crisis. All asset prices have gone up.
Now we are seeing signs of weakness in the market, even though much of the weakness is being covered up. We’ve seen several bank failures earlier this year. More massive than the bank failures of 2008. People justify it by saying, “Those were isolated. That's been fixed. The problem was localized. Those are just a few banks.”
That is not the case. We've seen the fastest rate hike in interest rates by the Federal Reserve in our history from 0% a year ago, March 2022 to 5.5% today in September.
That is a massive increase. What people don't realize is that a massive increase (a higher cost of capital) has long-term effects. Why haven’t we seen an immediate change? Because there is a lag effect. The massive increase in interest rates doesn't cause the market to go through a massive downturn right away.
There are little bounces, especially near the end of an up market. In the financial markets, where there is more liquidity, it pops, drops then stops. Then it will pop again and repeat.
Real estate is a longer-term investment. It's not as liquid, so we don't see drastic changes most of the time. But they follow a longer-term trend.
A Word of Caution in Today’s Market
Today, we're seeing headwinds in commercial real estate (office spaces), multi-family, and other leverage syndicated sectors. If you're jumping into any kind of real estate, you are jumping in at a phase craze point. Someone might be telling you about the next “big syndication” that will give you a large return, but understand you're getting in late in the cycle.
I'm not saying any of these people promoting syndications or other real estate investments are bad people. There are frauds out there that are being revealed today, but many operators are people who unintentionally bought into the construct that this “ride up” in the market will never end.
If you are an investor in their projects, you might find that a lot of these investments being promoted out there are going to be seriously affected by the downturn and correction in the next several quarters.
I know some operators, good friends of mine and good people, who are not purposely trying to deceive anybody. They are justifying models that worked successfully so far (but will not work going forward) because it is the only model they know.
Some have put out recent syndications but I'm not here to criticize them publicly. They are not intentionally trying to deceive people, but they have bought into a mindset that helps justify what they're doing.
They are trying to sell accredited investors into the next cycle. The next cycle, however, will be a down cycle.
My advice to you: Hold back. Be careful. Be prudent. Get help if you don't know how to underwrite deals and look at the operating agreements you’re being offered.
I've seen some horrific operating agreements that are part of the package you invest in and sign off on when you invest in a syndication.
I've seen some that are horrific. I wouldn't touch them with a 10-foot pole because they’re written in a way to only protect the syndicator, the operator, or the sponsor. They give no control, and no ability to mitigate damages if there are any against the operator.
The operators set it up to be a risk-free opportunity for themselves. That's why they keep doing it. They're hoping, fingers crossed, to get another deal through the gate.
But if they don't, they can roll it up, toss it out, and say, “Too bad. You signed off as accredited investors. You should have known better. Didn't you ask your CPA? We're out. You're stuck with the losses.”
That is happening right now. You can read it in the Wall Street Journal. And it will happen on a greater scale going forward.
Do You Know What to Look For?
I don't sell real estate. I have no skin in that game whatsoever. That is why I can tell you all this. I get to see behind the scenes, behind the curtains. I'm in a lot of groups. I have people who do vetting and due diligence for us.
At Freedom Founders we receive a plethora of people who would like to enter our arena and offer opportunities to our group. We take them through filters and many of them don't make the first hurdle.
Have you done a background check on the principles of the syndicators or sponsors? If you haven't, then you're just investing with them because they’re nice people, have treated you well so far, and have a semi-decent track record.
They might have been doing this for the last three or four years and have hit some home runs or at least doubles. They should keep being able to do that because they're nice people, right?
No one speaks ill of them because they haven't been doing it long enough to have a bad track record.
What's the premise or basis on which they are acquiring? What is the particular investment opportunity? What's their funding? What's their leverage? What are the terms of that leverage? And how long have they actually been operating? Not just flipping properties but operating them. Do they even have that capacity?
Most don't. Most have been flipping properties for the last half a dozen years. It's been a great model for this environment. You don't have to be a great operator to flip properties. You just have to get capital and hold properties for 18-24 months, and the greater fool theory is someone else will buy it.
But with the cost of capital going up massively in the last 18 months, things have now changed. The credit contraction and the decrease in liquidity are going to cause all kinds of problems.
I just don't want to see novices who have yet to learn how to be sophisticated investors jumping in late in the cycle.
Money Can Still Be Made in Real Estate
There are better ways for you to invest in real estate today, in my opinion, than just jumping into every equity offering that's put forth today.
The market will change. It will shift. There will be a time to go back into equities. I just don't believe that time is now.
When you look at equities, owning a rental property, a short-term rental, or investing in a syndication of multifamily or self-storage – that's only what I call “the first layer of the onion.”
That's what everybody looks at. That’s what everybody thinks real estate is all about. There are actually several more layers of the onion that no one ever shows you, where you can be more protected, hedge your position, and still make very good returns – but without the downside risk.
No one knows this unless they have been actively involved in real estate successfully throughout a downturn in the economy. But most haven’t. They haven't seen both sides of a cycle.
Real estate might be new to most of you and you're excited about the opportunity. But I want you to be cautious. The market is turning and I don't want you to get caught with losses that set you back for years.
You might even feel like never wanting to try investing in real estate again. That would be a huge shame because the only way to build real wealth and have true freedom is through tangible assets.
I don't like financial products. I don't like the stock market. I don't like 401ks. I want to have some level of control. But to have that control requires a responsibility on your part. Responsibility to get an education. To have a team that can help you see and build a game plan that works for you.
This means not just jumping into every fad that comes along. No, you need a game plan that's orchestrated to build the freedom you want when you want it.
That's what we do in Freedom Founders. We co-create a correlated and concentrated plan with each individual based on where they are in life and career, and what their specific goals are.
Who has ever asked you that question? What are your goals and how do you build them from there? You have to reverse engineer your goals, but nobody talks about that.
They just want you to jump into this, jump into that. It's all good until it isn't. That's my rant for today.
I'm not here to demean people who are doing the best they can by offering different types of investment platforms. I'm just saying there is a lot of naivety, and a lot of ignorance out there today.
To your freedom!
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