A Perfect Storm of Opportunity
Following on from my article last week, I have been absolutely blown away by the response.
Having received a ton of questions from all corners of the United States, I wanted to follow up and answer the question that has been asked the most, that being; what SPECIFICALLY should I be doing about it?
The good news is, there are absolutely some very profitable moves you can make in 2021. In fact, this year looks set to deliver the biggest transfer of wealth since 2008!
In this article, I will do my best to explain the opportunity that lies before us. I will lay out 4 ways you, as a smaller private investor, can participate – either actively or passively – and I will show you exactly what I will personally be doing in 2021 to add value for my investors, my own business, and to the communities in which we invest.
Investment Opportunity: Click here to learn about our private lending program
It All Started Here
About 14 years ago today, a unique set of economic circumstance were developing, ultimately resulting in the biggest transfer of wealth in recorded history (at the time).
The global financial crisis of 2007 marked the beginning of what was a terrible time for a great many households and businesses in the United States. Millions of homeowners and landlords were forced into default on their mortgage loans as teaser rates on sub-prime mortgages expired, and interest rate hikes kicked in. As a result, mortgage payments simply became unmanageable for many borrowers.
This created the most lucrative investing opportunity in modern history. Big banks, desperate to avoid costly and lengthy foreclosures, and stabilize their balance sheets, moved quickly to sell off their bad debt at pennies on the dollar. Private investors were able acquire these loans at a deep discount to face value.
This transfer of wealth was extremely profitable for investors who were able to be far more flexible than institutional lenders, offering forbearance and loan modifications to get payments moving again. In many cases, families were able to keep their homes, others were able to stay on as tenants.
The Household Income Crisis
Today, millions of households have once again fallen into a financial deficit. But it is not poor-quality mortgage loans or rising interest rates that are pushing these families underwater. Today, it is household income that is the problem.
In 2007 it was a plague of poor-quality debt and rising interest rates that rocked the US economy to its core. In 2020, we were hit with a plague of a more literal kind. As policymakers and politicians scrambled to contain the spread of Covid-19, hundreds of thousands of businesses were shut down, and 30 million jobs were stripped from the economy.
The impact was far reaching, and even now has not yet been fully felt. According to PEW Research Center, forty two percent (42%) of adults say someone in their household has been laid off, lost their job, or taken a pay cut. Forty six percent (46%) of low-income families say they have had trouble paying their rent or mortgage since the pandemic started.
Of those who lost a job, half are still unemployed, 15% are in a different job than before, and only a third have returned to their old job. According to Yelp, 60 percent (60%) of businesses will never reopen. It will take some considerable time for the workforce and economy reach full capacity once again.
A Spike in Delinquency
This tidal wave of unemployment and under employment has manifested in the biggest spike in mortgage delinquencies since 2009. According to the Mortgage Bankers Association, the delinquency rate for mortgage loans on residential properties has more than doubled year-over-year with around 4 million loans now in default. This is not far off the all-time peak of 2010.
Despite the number of new delinquencies now falling, those already underwater are getting further and further behind. Around 2.5 million borrowers are more than 90-days overdue, the highest long-term delinquency rate since 2010. Sadly, the evidence shows us that once a borrower falls 3 months behind, they rarely claw their way back. Most ultimately end up in pre-foreclosure at the very least.
A Second Bite of the Cherry?
Moving in to 2021, a wave of circumstance is emerging similar in nature to that of 2009 – 2010. Banks and credit unions are once again considering their options as bad debts mount up, and proactive investors are positioning themselves to take advantage of this enormous forthcoming transfer of wealth.
The best opportunities will undoubtedly lie in the affordable homes market. Lower income families are at the highest risk of falling behind on their rent and mortgage payments, and landlords are still unable to evict non-paying tenants while having to keep up with property taxes, management fees, insurance premiums, mortgage payments, and repairs.
For homeowners, landlords, and lenders alike, the most sensible option in many cases will be to walk away from the debt. Acquiring these assets at deep discounts to market value has now become a twice in a lifetime opportunity.
The affordable homes market is also where you find the most demand for housing. Rising asset prices and tough mortgage lending criteria are pushing the dream of home ownership further and further away from normal working families. Today, there is a shortage of at least 7 million affordable homes to rent and buy according to industry experts.
The combination of heavily discounted assets and high demand for good quality affordable housing has created a perfect storm of opportunity for well-positioned investors.
Be Part of the Solution
Real estate and real estate debt solves two key problems for investors today. First, these assets deliver reliable, consistent income. This is extremely important for investors. Perhaps more so now than ever. Not only is regular income crucial to leveraging the most powerful force in investing – compound interest – but record low interest rates have all but eliminated traditional yields to cash. Income-producing assets like real estate offer a reliable solution.
The second problem we face as investors today is rising wealth inequality. Fueled, as I wrote in my previous article, by trillions of new dollars flowing into the economy from the Fed. As asset prices continue to rise, the value of cash is crumbling fast. Over the next ten years it will be more important than ever to stay fully invested in assets as the value of the dollar continues to fall.
Those of us who control real estate and real estate debt will be among the biggest beneficiaries of these now-permanent economic trends, and those who do not will find themselves on the wrong side of a growing delta between rich and poor.
This is also where I see an opportunity to improve lives and communities, by helping to make home ownership affordable and accessible for working families. Home ownership is the pillar of the American dream, providing normal working families with access to asset wealth, better credit, tax deductions, improved household cashflow, and long-term housing security.
By utilizing creative financing solutions to help homeowners stay in their homes, and reintegrate landlord-owned properties back into the owner-occupier market, private investors can absolutely be part of the solution, to the most dangerous threat to American society since communism.
4 Ways to Participate
With the opportunity ahead abundantly clear, just how you choose to participate in 2021 will depend entirely on your personal investing goals, tolerance for risk, and just how much time, effort, and energy you are prepared to commit.
If you have the connections, resources, time, and expertise, buying non-performing notes from banks and credit unions will place you at the top of the food chain in 2021. Buying bad debt for as little as 10 cents on the dollar leaves ample margin to rearrange loans with existing borrowers, or work out a solution via the real estate.
If you do not have the industry connections, time, or resources to buy notes direct from banks, there are plenty of hedge funds and note brokers that do the buying in bulk and resell individual notes to smaller investors – at a profit of course. Be very cautious when buying non-performing loans from brokers and hedge funds. Often, they will keep the best paper for themselves while selling off the trash.
Pre-Foreclosure Real Estate
If you do not want to learn the note investing game, but you are still prepared to roll up your sleeves and be hands-on in 2021, identifying pre-foreclosure homeowners and landlords offer a fantastic access point. This is something I am actively doing right now with great success. I have found it is often easier to strike a deal with a homeowner than with a lender, and there are lots of creative ways to work out a solution that works for every stakeholder.
For more passive Investors, private lending is a great way to access the income and capital security of real estate without the time, cost and hassle of property ownership. I partner with private lenders for most of the acquisitions, many of whom use their self-directed IRA, 401(k) or retirement account to invest.
As a private lender, you take the position of the bank, enjoying all of the benefits that entails. You are always in first position, both in terms of monthly income and the proceeds of a sale, and your investment is very low-maintenance. This makes private lending a great option for armchair investors that want in on the action, but do not necessarily have the time, resources or motivation to go out and buy properties themselves.
The JOBS Act in 2012 relaxed securities regulations allowing for smaller investors to take part in crowdfunding and syndicated investments. There will be plenty of these opportunities in 2021 as real estate investors seek out new funding sources to capitalize on buying opportunities.
Much like private lending, these types of joint ventures allow you to partner with experienced real estate investors as a passive investor – usually called a limited partner, or LP. Often your funds will also be pooled with other investors to acquire much larger real estate assets that would normally be out of reach for the individual.
What I Will be Doing in 2021?
As you may or may not know, my real estate investment strategy is directed by an underlying purpose that defines our buying criteria, value-add approach, and exit strategy. That is; to eliminate wealth inequality and housing poverty by making home ownership affordable and accessible for low-to-middle income working families.
In 2020, throughout the depths of the Covid crisis, we added 48 houses to our portfolio, and we are working with all of our tenants to purchase their homes through our Pathway to Home Ownership Program (P2H). I see even bigger opportunities in 2021, both for us and for the communities we invest in. We plan to create at least 100 affordable homes for rent and purchase through the P2H Program.
We will continue to partner with passive investors to fund our acquisitions, and we have positioned our investment offering to allow our private lenders to share in the equity gains as well as a generous monthly interest income. We will continue to do the hard work, so our investors do not have to!
For more information about our private lending program, click here.