Inflation Gone Wild (What is Next for Real Estate Investors)

Inflation has gone wild! Today I'm going to share with you what I think this means for real estate investors, wholesalers, realtors, and everyone else that's involved in any and all things real estate. I currently own over 180 units of residential real estate plus a couple storage unit complexes. I'm constantly watching the market and inflation and a myriad of other things so I can determine the next best move for my real estate portfolio, my family and you. 

I’m here to help you invest in real estate properly. Today’s article is going to be very interesting, unique, terrifying, and exciting. It really can be summed up by just one word: inflation. This is the worst inflation since 1981. I'm not so foolish as to put all of the responsibility on Joe Biden. I don't know what responsibility should be put on Joe Biden.  I do know that inflation has gone absolutely mad and if I was the president i'd be a little bit stressed out about it. 

In the past I've talked about the benefits of inflation for a real estate investor. However I do want to be very clear about the fact that when inflation goes this crazy there aren't really any winners. 

You can find a way to have wins but overall crazy inflation causes lots of issues and problems for everyone. The last statistic that was just released said that they believe that inflation has increased by 9.1% since June last year. This is no surprise to the average person as they look at food costs, gas, building costs, literally anything in our world that can be purchased, the price has gone up a lot. 

I know a lot of you are here to see what you should do next. Whether you're a new real estate investor or currently have real estate, I’m going to give my guesstimates on what this is going to mean over the next one to five to ten years for real estate investors, wholesalers, and everyone else. 

I  don't want to get political but this extreme government spending is never going to help inflation. That's my opinion and I'm sticking to it. I would also argue that the extreme spending that has happened may be kind of the cause of it but we'll just have to leave that where it lies. What I do know is that inflation has gone absolutely crazy and there are many implications that come with that. 

First, you're seeing the majority of these just in what you have to spend on a daily basis for everything. If you're a real estate investor where you really feel this is interest rates. Interest rates have gone absolutely crazy. We've had a massive increase where this time last year you could jump into a home at 2.5% - 3% on your interest rates. At this point you're above 6%. I can almost guarantee that the fed is going to come back and interest rates are going to go up another .75% if not a whole percent in the very near future. I think that's just the beginning of the rate increases that we're going to see over the next year. For those people that are trying to get into a home after years of prices going up in value like crazy, a lot of sellers are not wanting to bend on their prices yet. 

Many buyers have lost buying power and they've been completely knocked off when it comes to being a potential buyer. They don't have the buying power like they used to, which also makes it extremely hard as a real estate investor. You have to make your numbers work. Today if you buy a fourplex with these interest rates, you could have bought six months ago with lower interest rates and they're wanting the same or a higher price for that property. It's almost impossible to find properties on the MLS that make sense because you've got these sellers that they still want to sell for a premium. They’re also watching these interest rates go crazy and smart investors won’t pay this premium. 

Here's what I think this means for investors: I believe that certain sellers will recognize how much interest rates have gone up and will begin to lower prices. I think we have to see prices decreasing and that's the point of increasing rates is to hedge the crazy inflation. I think you'll also see some sellers that will just hold and then end up chasing the market as it starts to correct. They’ll get nowhere near what they were hoping to get on their properties. 

I think there are also many investors that may have considered selling that now might just sit on those properties. Buyers are going to get cold feet because they just can't make the numbers work. This is going to cause them to either negotiate better deals where the seller bends or it's going to cause them to not really have deals. With the current interest rates it just is very hard to make it make sense. I also think that we're going to see inventory go up like crazy because a lot less buyers are going to be able to be buyers. They're not going to be purchasing real estate at the prices that we've seen. This is also going to leave a lot more people renting or being forced into renting which should in my opinion increase rents. 

When you look at California compared to Idaho, their rents are so much higher. We're talking double for a one to three bedroom apartment and yet people there that are working on minimum wage still find ways to get housing somehow by, for example, getting roommates. People are going to continue to find a way to pay rent. 

I also think that we have to see wages increase. Wages are usually a little slow when it comes to inflation impacting everything else and then wages start to creep up. There's no way we can't see wages increase with the insane inflation that we've seen. I also talked to tons of businesses at least in my local area and it's hard to find workers right now. When it's hard to find workers and everything is way more expensive I don't see any way for wages to stay where they are. I think we have to see those increase at a pretty drastic amount over the next one to two years. 

If you're a real estate investor looking to buy, it's probably going to be a little more difficult to find deals. That doesn't mean that you can't find them especially if you're doing seller financing offers or you're taking over the existing loan. There are still lots of opportunities there. When it comes to getting a bank loan, it's going to become a lot more difficult to structure a deal where the seller wants to be on price and will actually work for you. I think we're going to see a lot of flippers have some major issues over the next couple

years and especially the next year. As interest rates go up it's going to be more difficult to get hard money. Hard money should increase as well. We’ll have a lot of properties that are purchased where in the past people would make mistakes and they were bailed out by an aggressive market of properties going up in value. Bad flippers are not going to be built out anymore. I think a lot of flippers that don't know what they're doing will find themselves underwater. 

This could be a potential issue for some wholesalers depending how they structure their deals. If they put down money on something there are a lot less worries. For realtors or flippers we might see it'd be a little more difficult to make the kind of money that they've made over the last little bit. Some realtors are saying now it's more of a buyer's market rather than a seller's market but it's flipping so drastically that I could see it being more on the famine side of things for realtors. 

I could see a lot of flippers really getting burned because they've been bailed out in the past. Now they buy a property hoping to get a profit and they own a property that they've put money into that it's not worth what it needs to be worth for them to sell. They'll have crappy interest rates to try and hold it. It's going to get scary for some flippers if they don't do things right. Same with people who are wanting to use the burst strategy. They'll hope that they can refinance later after increasing rents. 

When you're dealing with four units or less, the refinances are based on comparables not necessarily what you can get the rents up to. There are things we can do to get those rents up but I think it's going to be a little more difficult to get a loan that's going to make it make sense if you're using the burst strategy. That's another thing that I would be extremely careful about. 

The last piece of this that I want to talk about is vacation rentals. Anytime you head into a recession and have expenses going up you're going to see less travel. I think we're really going to see that over the next one to two years. We've been in a wild wild west situation with vacation rentals where people have been able to make a premium. I just hope those people have been smart and stacked cash and also purchase properties with long term rental potential in case there's no longer an opportunity to use them as a vacation rental as that dries up. Hopefully they'll still be able to at least break even and maybe cash flow a little bit. If not, I can see a lot of vacation rental setups being very dangerous.

I know a lot of people got vacation rentals in random places and for me it's hard to determine if that's going to be good or bad. If you've got vacation rentals in the coveted places like Haw California, Florida, I think those would struggle a lot as well. Maybe the random off places people are still going to go see family where the more exotic places it'll be less or maybe all of them will have a decline. I don't pretend to be a professional in vacation rentals. I personally have units that I'll switch over but they're not high-end vacation rentals. They're units that I can very easily flip back. They'll still be cash flow positive if I use them as just regular rentals rather than vacation rentals.

Some people have absolutely made it rain with crazy returns. Now there are a lot of vacation rentals out on the market so it is more competitive but I think we're going to see travel come down quite a bit. It is going to be a real slap in the face for a lot of people as expenses go up drastically and buying power goes down drastically. If you are a real estate investor, do everything that you can to get out of your short-term debt. I know rates are crazy but they're not going to come down anytime super soon. 

Make sure you're getting something locked in. I've always suggested a minimum of 10 years. I have some debt right now that's on a five year and then I've got a lot of debt that's on a thirty year. That's what I would suggest. If you're going to do it, make sure that your numbers work. 

Do not be one of those investors that's banking on a market like we've seen the last five years where every year you had massive appreciation. I think it's really going to level and I think a lot of markets we're going to see a correction. The Fed is being so aggressive with how much they've increased rates. I think we've just seen the beginning of that.

Here’s what I believe we’ll see in the real estate market as we go into this recession: crazy inflation and substantially higher interest rates. If you're in a place where you have a property to unload, I would try and do it quickly and maybe even take it at a discount if you need to to get rid of it very soon. I don't see prices continuing to go up. 

I also believe that if you can you should lock in rates now. I know they seem bad but they're going to get worse. Put yourself in a safe place, if you've got good debt for a minimum of ten years where you know those payments are locked in and you know you're going to be able to pay those payments then you're going to be in a good place. 

For all of you landlords out there that have never lived through this you're right there with me. I've tried to do as much research as I can. I'm confident the rents are going to hold or even increase. If they don't, hopefully you bought smart so that even if we do have a 20% - 25% decrease in rents, you're still able to be cash flow positive so that you're not in a dire situation because of the debt you've taken out. I don’t see a rent decrease happening but this is just to be safe. 

It's hilarious how much flack that I get for building my home and taking on the debt that I have, especially the massive debt and payments I have on my rental properties. You’ve got to remember, I've got a very large margin on those rental properties. I've also tried to put myself in a place with reserves and everything else where even if i wasn't cash flowing on all of my properties I would still survive for quite a long time. I'm not trying to be a fear monger, just trying to be realistic and give you the best advice that I can.

If you're trying to jump into your first flip or your first BRRRR, be very careful. If you do it at all as a first timer it's very easy to make mistakes. If you were a first timer last year or the year before and you crushed it because the market bailed you out, make sure you know what you're doing going into this next time period. 

If you're someone that wants to jump into real estate investing, now is the time to do it. You might not find immediate deals but over the next couple of years you're going to want to know what you're doing. You can take my real estate investing course where I'm going to share with you everything that I'm doing to work through these weird times. I'll probably even be redoing the course again to talk about how to handle these higher interest rates.