EP. 100 | What Does the Future Hold and How Are We Preparing for It?

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Welcome to the Next Level Income show where it's our goal to raise your income, investments and life to the next level. With your host, Chris Larson. Get your free copy of his book at next level levelincome.com book. Also, if you're an accredited investor, check out the Invest link to learn how to gain access to institutional quality real estate opportunities.

All right, welcome to episode 100 of the Next Level Income Show. It's hard to believe that we launched this show over three years ago in January of 2019, and we've done so.

Much here in the past three years.

Caleb Welborn was my co host at the time. He has stepped a little bit more into the background as he continues to help with marketing and production. We had an ebook at the time. We published our ebook into a hard copy book where I share a little.

Bit about my story.

If you've not gotten a copy of that, please go to nextlevelincome.com, click on the book link and I will share a free copy. We have so much to talk about in today's episode, but it is going to be focused on what does the future hold?

How do we predict the future?

What are some tools that I've used over the last 20 years to help me in my career in predicting what.

Areas of the real estate market are.

Going to be successful? And hopefully these tools, this information can alleviate some anxiety that I know a lot of people have around the economy.

Real estate, the stock market.

And where does anxiety come from? Anxiety comes from ignorance, from lack of knowledge. It's like walking into a dark room. You don't know what's gonna be in there. If you have the lights on and you walk into a familiar room, you're very calm. You understand what is gonna be there. So let's try to shed some light.

Onto some of the topics here over.

The next five years. But first, I'm gonna share.

Some special.

Tools with you, tons of information. If you go to Next Level Income.

Can.

Coaching, I am going to give you tools that are typically reserved only for my coaching clients. So check out nextlevelincome.com coaching Craig Ballantyne was our first guest on the Next Level Income show. You can get a free copy of his book there, his new book, as well as other books that he's published. I want to go back a little bit in time. So at the end of 2019, going.

Into 2020, I was on some different podcasts and I'm going to have links.

To these in the show notes and I said that investors need to be cautious. I felt that a mid cycle slowdown was coming and some people asked me why did I think that was the case.

And real estate goes in 18 and.

A half year cycles. There's a lot of different resources you.

Can look to this people will say.

17 years, 18 years, 19 years, 20 years. Some people talk about kind of nine.

Year economic cycles and that's a pretty good gauge as well. One of my favorite resources, it's almost.

Like the bible in the bedside or nightstand in the hotel, is this book, the Secret Life of Real Estate and Banking. And this book is written by Phil Anderson. I heard Phil speak over a decade ago, about a decade ago and I was really impressed with some of the metrics that he used. And I read his book, I studied his work.

You can also check out his website.

Property sharemarketechonomics.com and he talks about the.

Real estate clock and where we are on the real estate clock.

So he has 24 hours in in a day on the clock. And if you looked going into 2020.

Where we were, we were coming up on 12 o' clock and that is the mid cycle slowdown. You can't. I'm not going to say I predicted Covid. You know, it's very hard to predict short term events. But if you look at real estate and the way it works, it doesn't go linearly, it goes cyclically and it also ties in to the stock market. We have talked about this on the podcast. So I urge you to check out episode 45 with Dr. Glenn Miller, which was published right at the end of 2020. Dr. Miller comes out every quarter with his real estate update and talks about where different parts of the real estate market are in the cycle. Also episode 88, which was just published this year in February, I talk about where are people moving in 2022? And really demographics are at the heart of real estate. At the heart of a Lot of economics in business as well. It's the main reason that I got into medical device sales, because I knew the baby boomers were getting older. And it was very important to follow the trends of the baby boomers because they spend a lot of money. Well, what is the biggest generation since the baby boomers? And arguably actually bigger than the baby boomers, if you look at the total generation, the millennials. So where are the millennials moving? That is a great question that if you have the answer to, you can figure out some of the next great real estate markets in the country and in your local area. And then finally, episode 97, blockbuster episode with DJ Van Curren. DJ works exclusively with family offices. Families worth $250 million or more, a quarter of a billion dollars or more, like the Marriotts. And we talk about again, where we are in the real estate cycle and what we can do. So I'm going to talk about the next five years and what I believe the next five years holds. Obviously, I don't have a crystal ball. If I do, it's always a little cloudy. I can't predict the future with perfect certainty. But I'm going to give my opinions today and you can go and do your own research and see what you think about these. So we're going to talk about where we are today, what the next five years holds, and where do we go from here. So let's recap. The last real estate Cycle bottomed in 2012. Okay, so we came out of 2008, 2009. The market was crashing. Typically, these downturns last for approximately four years. So that takes us right into 2012. This was the time that my wife and I started to look at buying land. So it's a great time as a real estate cycle bottoms to start picking up pieces of property. Builders and developers have not been building. Banks have not been lending. And if you go back in time and think about it, we were seeing all of those things. If you were not investing then in real estate, I urge you to go back and look at history. Look at the way the banks were behaving. I'll never forget the bank said, hey, no more lines of credit, Chris, we're calling your lines of credit due. You cannot lend on those. So we can take these lessons and take them into the next cycle. But coming out of that cycle, we started to buy land. Then we started to build on that land. Unfortunately, when we started to do this, banks did not want to lend. We actually found the one bank, the first bank in Asheville. After calling three dozen banks that would lend on building a spec home, it's.

A great time to build coming out.

Of a real estate cycle, the bottom of real estate cycle, because land is cheap, building is cheap, because you don't have the demand that you see on those. And then the other thing that you start to see coming out of the bottom is that net rents rise. And as rents rise, it's a great time to look at acquiring cash flow real estate value add deals, because again, you can buy these value add deals at a discount. In 2013 and 2014, we started selling off our residential portfolio of rental properties. So as rents rose, as prices came back, we started to sell off those properties and we started to roll those profits into commercial assets, largely multifamily real estate. As you know, if you're a listener of this show, we've been focused on multifamily real estate for almost a full decade now. Started in value add deals, buying properties built in the 70s and 80s and it has been a very profitable space to be involved in since then. We've also invested and expanded into self storage, mobile home parks. All these cash flowing real estate assets are terrific when rents are rising, cap rates are falling. And then if you look at as we continued to move forward in the real estate cycle, we actually stopped building spec homes in 2018, I believe was the last home that we sold. We actually built our personal residence. And one of the areas that we began to focus on, and this isn't specific to the real estate cycle, but it is a trend that we've seen is short term rentals. So my wife and I own and operate two Airbnbs in Asheville, North Carolina and it's been a very profitable endeavor. I'm going to talk about some of the areas that I think are going to be real winners in the future and certainly short term rentals, Airbnbs, VRBOs. But short term rentals is kind of the all encompassing term that is going to cover that space there. Okay, so coming into 2019, 2020, I warned investors to be cautious. What did we do? We stopped buying these heavier value ideals and we started to focus on higher quality. We're talking B plus and class A multifamily real estate. And why did we do that? Well, first off, when you're coming into a slowdown, typically the higher the quality of resident you have in a property, and whether that's a commercial property with a very high quality commercial resident or a multifamily property with higher income residents, they're going to be More stable. Again, I did not predict Covid, but our collections in those higher quality class a properties were 98% during 2020. Whereas looking at those older assets, those C, C, B minus value add assets, it was more like 90%. So almost it was 8 to 10% difference in those classes. So obviously it was a lot more comforting to have rent coming in each month during that period and distributions were able to continue during that time. So being conscious of that mid cycle slowdown, we said, all right, let's see when there is light at the end of the tunnel. I followed Covid very closely. I started documenting Covid and the studies in early 2020 on a daily basis and tracking and seeing where we were as soon as we started to come out of the crisis, that Covid crisis in 2020. We started buying again as soon as possible. And 2021 turned out to be the best year on record for multifamily real estate. Best in terms of rent growth, in terms of sales, in terms of cap rate compression, however you want to measure it, it was just a phenomenal year. So that brings us up to today and I'm going to pause here. So today where do we stand? We stand at a point where residential real estate especially is at some of the highest rates it's ever, the highest dollar cost it's ever been in average cost for homes, in average cost per square foot cost to build. And if we look at the Shiller case, Shiller Real Estate index, we're going to see this. I think it's not a, a good time to be buying residential real estate for cash flow. It's just really, really hard to make the numbers work when it comes to that. If you look at the stock market and I'm going to again have links in the show notes, three metrics that I watch. I'm going to walk through these. One, the Buffett indicator. The Buffett indicator shows that the stock market is significantly overvalued. Now what does that mean? It's at 179.5% and based on historical averages, the market is likely to return a negative number over the next 10 years. If we look at the cap rate over GDP plus total assets, federal Reserve banks, again, it's significantly overvalued. It's currently approximately 131% as I record this. And we're likely to see returns of very low single digits, approximately 1% going forward. The second big indicator that I look at is the Shiller Cape, which is that's going to look at the market and it's going to compare it to the ten year treasury, basically the risk free Treasury. And again, this is significantly overvalued and we're looking at either, either negative or very low returns going forward according to that. Now that does not mean that the market can't continue to go up. And I'm gonna talk a little bit more about that here in a minute. But it is a time to be cautious and potentially look at taking some profits. I've been telling my coaching clients since the beginning of the year, you know, start to look for opportunities to take profits and stack cash. And we're gonna talk about our strategy to do that. And then the final indicator I look at is an interesting one. And if you've never heard of this before, I want you to take a look at it, I want you to think about it in terms of a logical perspective. The American association of Individual Investors does a survey each month, each quarter, I kind of track it quarterly and it looks at the percentage owned by investors in stocks, in cash, in bonds, in different sectors. As the percentage of a portfolio goes up, future returns go down. So if you look at modern portfolio theory that I want, modern portfolio theory that I studied when I was doing my MBA in portfolio management, Modern portfolio theory essentially has, has you weighting your portfolio. And as robo advisors and funds that have end date or a time centered fund, they automatically do this. So if you have very high proportions of investors, portfolios invested in the stock market, over time it's going to have to come back towards the average, which means you're going to be selling stocks going forward. And if you're selling, that's going to put downward pressure, pricing pressure on the market. So again, if you look at all three of those indicators, we're either at historical highs or we're very close to historical highs in every single one of those metrics. So if we look at the next five years, what does that hold? So if we take the bottom of the market in 2012 and we move forward another 18, 18 and a half years, we're looking at the year 2030, 2031. If we walk back, we're talking about 2027. So I think that the current real estate market, real estate specifically, so now we're transitioning from the stock market to real estate, has about another three to five years of room to run here. And again, we need to be conscious of what we're going to see. So if we look at what the next several years hold, we're looking at extraordinary building right now. If you go into any major city. You're seeing cranes all over the place. Some things that you want to look out for in the news are like the biggest buildings being built in these cities around the world. You also want to look for government spending. So tax revenues are up, government spending is up. It's interesting that we have a Democratic administration in the White House and you know, we're seeing a lot of spending on public works, especially like Covid coming out. The next phase as we move into 2024, 2025, is we are going to start to see the peak of the real estate market. And what's interesting, and these are some things to look out for, is typically the stock market is going to peak before the real estate market. The stock market looks at future earnings and prices that in to the stock market. The other thing that we should look out for is an inverted yield curve. And we are seeing portions of the yield curve today that are inverted. And if you don't know what that is, go ahead and search for yield curve or inverted yield curve. And you can go back and look historically how this has correlated to recessions. But we also have to be careful because portions of the yield curve are inverted depending if you look at 2 years and 10 years. But then there's other portions of the yield curve, Tom, that aren't inverted. So this is something to follow. It's also another indicator that we can look at. But if we see the stock market start to decline, you know, over the next, say two to three years, you know, that is a warning sign in my opinion of the peak of the real estate market coming. So you say, well, Chris, if the real estate market is going to peak, should I just sell everything? Should I stop investing today? Well, that also is a slightly risky endeavor because if you sit on the sidelines during the last phase of the real estate market, you miss the biggest boom phase after the mid cycle slowdown. So you know, those first three out of the next five years are typically the best in the entire real estate market. So what do you do? You're going to look for opportunities to sell opportunities, profitable properties. You're also going to look for opportunities to buy high quality properties. I'm going to talk about what I think are going to be winners here over the next five years. And then you're also going to look for opportunities to start to build cash. Okay, so let's talk in order about those. So if you have properties that you are holding a large profit and a lot of equity in, remember, and I've talked about this on the show before equity earns you zero. It's just sitting there. It's lazy equity. You need to keep your money moving, which means you need to pull equity out of profitable properties and get that money reinvested. Number two, you want to look for high quality cash flow properties as we go into this phase that is going to hedge against inflationary forces. It's also going to help against if and when there is a downturn. If you have nice high cash flowing properties, you don't have to sell those to realize a profit. That means you can service the debt and you have income coming in during those times. And look, cash is king, but cash flow really is king during these times. And so you want cash and you want cash flow as you come into this. One of the other rules that we follow are we stick to low ltv. So loan to value. We like to have loan to value well below 80%, really below 75% in our personal properties. Our loan to values are lower than 70%, more like 60, 60% on our properties. So we have a real balance when it comes to our loans outstanding as well as our cash flow. And then what areas of real estate are going to fit the bill? So I mentioned earlier that residential real estate, like just buying a single family home and holding that isn't a great endeavor right now because the costs don't really make a lot of sense when it comes to the rents that you can get. So we love high quality multifamily real estate. This is B plus class A light value add real estate that we can go in and have a predictable strategy going forward. Self storage, which is still a pretty fragmented market which we can go in and purchase and aggregate properties. Also mobile home parks, which again in my opinion are a version of multifamily as well as affordable housing and they're very resilient in economic downturns. Also what I would classify as operational real estate. So this is real estate that also has an operational component or a business component. Some of our favorites are car washes. Car washes have terrific cash flow. They also have a great real estate component when it comes to it. Short term rentals, as I mentioned earlier. So if you are a new investor and you're like Chris, I can't afford to buy a house or I can't afford to buy a rental property or I don't have 50 or $100,000 to invest in a passive investment. But I have more time than money at this point in my life. Perhaps what are some great opportunities? Short term rentals are fantastic. They have really high cash flow, especially if you're a operating them yourself. I have coaching clients that have been very, very successful doing this. They've created six figure cash flow and income streams in a year or less for themselves. Also. My wife and I have done the same with our properties here in Asheville, North Carolina. Senior housing is another opportunity. You have to be careful the different sectors that are out there. But there's some residential assisted living facilities as Low Hornbuckle spoke about in 2019 on one of our podcasts. And I urge you to check that out if that's an area of interest to you. Again, it's highly operational. You have to be careful when it comes to your appetite for managing the personnel that are related to that. But that can be very profitable as well. And then the third component, as we go into the final phase here of this real estate market and personally, as we prepare for a downturn that will inevitably happen, we can't tell you exactly when that's going to happen, but what do you do as you approach it? I love to say stack cash. Stack cash. So look, we don't actually have a lot of cash. And the reason is, I mean look at the past year at the last check, not including housing CPI, increased inflation increased 8.5% year over year. 8.5%. So if your money's sitting in a bank account, it's being eaten away. It's rotting away at 8.5% loss. That's horrible. That's horrible. So how do you avoid this one? Put your money into inflation protected investments. We've been talking about real estate. All of these things are going to protect you against inflation. Number two, don't have a lot of cash sitting around. Don't have equity sitting around in properties. What do we do to avoid this? We have a lot of money in cash flow or cash value. Excuse me, life insurance. You want to check this out? Check out the strategy that we specifically use. It's called the investment optimizer. And you can check out nextlevelincome.com click on the banking link. There's a ton of resources on there. I talk about this in chapter three of my book called your opportunity fund. And this is a way to keep your money moving as quickly as possible without sitting around in the bank. Also, I'm a fan of bitcoin. I think bitcoin is digital gold. Some people are fans, some people aren't fans. But this is another liquid source of funds that also can protect you against inflation as you go forward. So Again, to recap, focus on high quality real estate. As we come into the last phase in the cycle, focus on taking profits on properties or investments that you have with large capital gains that you can then roll into really nice inflation hedged or inflation protected cash flowing assets. Obviously we're a huge fan of Real Estate, DJ Van Curren, and the episode that we referenced, episode 97, talks about how the families he works with worth a quarter billion dollars or more, $250 million or more, are putting 25 up to 30% of their investment capital into cash flowing income producing real estate. Also maintain reasonable loan to value so you can keep the cash flow high and in your properties so they can continue to cash flow during any downturns.

And then as you take some profits.

Start to build your cash stores, start to stack cash. So over the next three to five years, as the economy starts to slow down and opportunities present themselves, you can seize upon those opportunities. When people ask me, hey Chris, what was the number one mistake you made during the last downturn? Number one, I didn't sell my property soon enough. I started to put my properties on the market, right like a quarter before the downturn happened. Fortunately, I maintained the rules that I just mentioned. We had low loan to values, we were able to cash flow all of our properties in a positive fashion through the downturn, but I didn't have as much cash to seize on the opportunities that I wanted to. And look, whether you are later on in your investing career, whether you're square in the middle of it, or whether you're just getting started, when you know the real estate cycle and you understand that there are seasons, that the real estate cycle is cyclical, you can prepare for it. So if it's fall and you know winter is coming, get your coat out of the closet, get some firewood, you know, get some nice hot chocolate that you can have and sit in front of the fire with and enjoy the winter when it comes. But if you're sitting outside, if you don't have a coat, if you have not prepared for the elements, when winter comes, it's not a pleasant time of year, obviously. So take advantage of the opportunities that are upcoming, look forward and make sure you're planning and taking advantage of the market that we have today. And finally, don't miss the opportunities that are in front of us today. I think the current market that we have in real estate is buoyant. It's very positive. There's a ton of opportunities out there today. If you are, if you're, if you're careful if you're doing your due diligence. If you're investing with a group, make sure you're working with solid operators that are experienced and have a strategy that understands the real estate cycle as well. And finally, check out all the resources that I've mentioned today. They're going to be in the show notes and you can also check out even more resources on our website, nextlevelincome.com coaching and you can get a ton of resources that are normally reserved only for my exclusive coaching clients. Hey Chris, here again.

I hope you found this episode valuable. Now I have one more thing to gift you. We have a page for my coaching clients where you can get a free copy of my book as well as much more from previous guests on the show. Just check out nextlevelincome.com coaching to get a free copy of my book, audiobook and much more. I'll send you a copy of my book and cover all the ships costs as a thank you for listening to the podcast. Also please like share and take just 90 seconds to give us a rating on Apple Podcasts.