Even In A Crisis, Real Estate Is A Solid Investment (If You Know What You’re Doing)
I recently wrote an article on mortgages and in it, I talked about how foolish I thought it was for people to shorten their mortgages at a time like this because it’s just going to increase their fixed expenses, lock the money away in equity and if they actually need the money due to a cash crunch, the banks aren’t like to give it to them.
Housing is on everyone’s mind, which is why I recently spoke to Glenn and Amber Schworm—a husband and wife team that’s flipped over 650 houses and are experts on sizing up a market and buying, flipping, holding and selling houses—about their thoughts on the real estate market going into and coming out of this pandemic.
They are the experts when it comes to real estate now because they flipped their first house in 2007, right before the housing crisis, and lived through it. It was a new business they were finding and figuring out and while it knocked most people out, they pushed forward out of pure determination. They continue to flip single-family homes as well as teach their methods to thousands of students.
The first thing Glenn and Amber remark on is their prediction for the housing market.
“As far as the country goes, I think it’s going to be area-specific as to what gets hit the most,” says Glenn. “There’ll be a decline in values, but I don’t think it’s going to be as bad as 2008 with the values where they went down.”
Amber also predicted there might be fluctuations city to city: “A lot of people that are from big cities might start wanting to get out too.”
Regardless of what happens, they still believe real estate is a solid investment.
“I’ve said for 13 years now is that real estate is a really tried and true investment in most parts of the country because it’s something that people need,” says Glenn. “No matter what happens, people have to have a place to live.”
They think the luxury market will get hit hard, but for first time and second time home buyers and the downsizing market, it’ll be a solid market. Another thing that will get hit hard is commercial real estate or some of the more popular urban apartment buildings with apartments on top and commercial storefronts on the bottom.
“We like the single-family market,” says Glenn. “To me, those are always going to be there.”
They teach their students that they create wealth in pretty much any market, whether there’s a recession or not because they’ve done it. And with the pandemic, there will be a flood of distressed home buyers having to downsize or relocate.
“I think during a time like this, in the next few months or maybe even the next couple of years, people will be able to create wealth a lot more quickly than they would even in a good market through real estate,” says Amber.
The way the Schworms make money in real estate is by doing three things:
1. Wholesale (buying and selling to other investors)
2. Buy and flip
3. Buy and hold. The way they help people decide which to do is by helping them determine each person’s exit strategy and their cash position, cash flow and risk management.
If you’re going to flip a house now, you’re going to have less of a buying pool going forward and who knows for how long as the future and the future of our economy right now is unpredictable. There are ways to be smart about it.
“If you’re an experienced flipper, I would definitely start buying cheaper,” says Glenn. “Make your offers 20 or 30% lower because you’re going to have to make up for it on the back end when you sell. It’s probably going to sell for less or take longer to sell and those holding costs will add up and eat away at your profits, so you’re going to want to pad for that when you buy.”
The percentage might change depending on the market, but flippers are typically trying to make upwards of 20% or more on a flip, while some markets are as low as 10%.
Another reason that padding is important is that people will make more mistakes now than before.
“You’ll pay for mistakes now where you didn’t have to really pay for mistakes before,” says Glenn.
You’d better treat this in a professional manner because the risk isn’t in the investment but in the investor. If you’re going to get into real estate, you better become a real real estate professional. If you’re willing to do that, you can get real returns because the stock market is very artificial.
Here is one of the reasons it’s artificial: Let’s say you have a mutual fund or an S&P 500 index fund. There are going to be big companies that go out of business during this time. The numbers won’t be shown the full loss as that company will be replaced with a new company. You lost, but the new S&P 500 now has a new company that drives the average return, without accounting for your permanent loss from the bankrupt company.
In real estate, you experience and know if you gain or lose. There are no average rate calculations reported by the NYSE or NASDAQ, just your bank account. Something substantial that may not be calculated in the return on investment is the tax advantages real estate provides: cost segregation, real estate professional (for those that spend the 750 hours a year in real estate), or the ability to roll over gains or use charitable trusts to eliminate tax on the sell of a capital gain asset like real estate.
“If you are a new investor, the best thing you can do to not pay for your mistakes is to get educated,” says Amber. “Don’t go in totally green and just wing it. Learn from somebody else’s mistakes.”
“I think one thing we wish we had had was a mentor when we first got started,” says Glenn.
In terms of financing, the Schworms have used private investors to fund all of their flips and to buy their rentals before they refinance them and get them all fixed up. It might be an investment opportunity new people might want to get into that haven’t considered it before.
“We have a large private lender base and we’re always looking for more,” says Glenn. “The opportunity is for people to get out of the stock market, out of the rocky up and down roller coaster ride and be with someone consistent that pays them 8-10% consistent, year in and year out. I always say our returns aren’t sexy, but they’re steady.”
Whether you like it or not, it’s time to get into the cashflow game because that’s what’s going to matter moving forward because you know whether it’s working or not. Unfortunately, too many people want to be passive with their investing and that just means money is passing them by. They’re going to have to take a different approach. And if there’s ever been a better time to learn personal responsibility, I can’t think of a better time than right now. So learn from these experts.
“A typical formula that we use is that we take the ARV, or the After Repair Value, of a house where we determine what it’s going to sell for, and we multiply that times 70% and then subtract the estimated repair costs. That gives us what’s called our MAO, or a Maximum Allowable Offer,” says Glenn. “That’s kind of a good general rule of thumb. That’s not an exact science, but it’s a ballpark to get you in the range that you should be. Now the biggest sticking point right now is, what is the ARV? We don’t exactly know because when you buy it now you won’t finish that house for three, four, five, six months before it hits the market. What will that be in your market? And that’s going to be the real game. So, you have to buy it cheap enough so that you have room to make money. You may not make as much money as you thought you would, but you could still make money and not lose money.”
Glenn and Amber shared some of the mistakes they see too.
“When people buy with emotion, that’s a common mistake,” says Glenn. “Also when they let the contractor walk all over them.”
“Or when they hold it too long,” says Amber. “I think another big one is people trying to do all the work themselves because they don’t calculate how much time that’s going to take, whereas if they just hired a contractor that could have it done in four or six weeks instead of it taking four or six months.”
Speaking of contractors, the Schworms emphasize to think about what’s really important to you when picking one.
“When you’re looking for a contractor, you’re looking for three things: good quality, good timeline, and a good budget,” says Amber. “They’re all important, but pick two because you’ll never get all three.”
Their big takeaways for me were:
1. Don’t let one success determine all future deals;
2. Stay humble. As soon as you think you know a lot, you’ll get humbled. Hire someone so that you can always have an outside perspective if you find yourself letting your confidence turn into arrogance;
3. You’ve got to be resourceful and creative because things are going to change. And those that are will have a lot of opportunity for wealth.