How to Invest For Boom and Still Protect Against Bust

[Don Konipol]

Boom and busts in real estate.  Some investors try to anticipate them, some ignore them.  
There have been numerous books written by people claiming to have the “magic” formula to sniff out future values.  Uh huh.  I’ve been at this a Long time, and almost all these people bragging on how they made money anticipating the last crash (or boom) get the next one COMPLETELY WRONG. Personally, I have predicted too many crashes, and hence missed out on the booms when I was wrong.  It all seems SO OBVIOUS - in hindsight. 

So, how do you invest to (1) take advantage of property price appreciation and/or protect against inflation (devaluation of “fiat” currency) and still protect against a crash?  Well, you can’t do it perfectly, you need to give up something to get something.  But you can still optimize portfolio performance while still reducing risk.  

Here’s how I do it

1-   I do not “cross collateralize” assets, i.e., if I default on one asset (god forbid) the lender can not come after any other assets

2 - I do NOT sign personal guarantees - I've got two banks that lend to me without a personal guarantee, but only up to 50% LTV. Likewise, I won't sign personally for owner financing loans, etc.

3 - As a result I'm at an average LTV of less than 40% on my properties. As a result I can suffer severe rent decreases, and still not have to "feed the alligator".

4- I keep a heavy amount of money invested in Vanguard Money Market Fund.  Prior,  it was in inflation adjusted bonds.  While it only returns 5.23% currently, it provides a great cushion allowing sufficient time to wait out a crash without having to resort to selling properties at inopportune times - at fire sale prices.

5- I keep a large part of my portfolio in high yielding notes secured by real property - and while I want every loan to make payments as agreed, my experience indicates that a certain percentage will default with me owning the property during periods of economic contraction. And some of these will end up as large profits in my portfolio.  Also, the cash flow of the paying notes will provide enough cushion to allow me to survive almost any crash.

6 - Finally, I have about 10% of my portfolio allocated for investment in high(er) risk property investments - and while there’s no telling how I’ll do on this, in the past I have been able to purchase some volatile assets at very low prices and end up doing pretty well.  Of course I had some tough losses, but that why it’s limited to 10% (at my age; for someone younger might want that percentage much higher). 

So, I’d be interested in learning how you limit you downside risk while still positioning for appreciation? 

[Jay Hinrichs]

For me.

Good amount of cash in my bank they give me 4.5% but its not restricted I can move money at anytime..

Some long term holds  NN  building and rentals that have zero debt..

For bigger transactional income we have our building projects which I have to PG however even though the risk is always there we have been blessed these last 4 years on these that equates to about 120 homes built and mostly all sold.. 

then the balance in Notes a few long term.. and JV partner on land deals and flip houses those have zero debt.

Like pert near anyone in our bizz you do have bummers each year myself I wholesale them off when i do have to take one over.. or i might sell them on my 0 interest short term owner finance program .. which creates some rock solid paper given the assets usually need a lot of attention at that point..

for the speculation I had 2 long term land plays one paid off after 22 years of owning it for a 100X multiple  yes 100X  :)  And the one i currently have that the new CHIPS act could create a huge win for myself and partners.. If it comes through it will also be a 20 plus year path of progress. And for me infinite returns since I sold off shares retained 25% which is debt free.

[Justin Buckner]

Do you have any advice for a new investor, who works a 9-5 and has no other income streams, on how to offset the risk of a bust? I am considering a househack on a duplex as my strategy. I'm looking for ideas on how to handle a potential bust cycle and prevent it from blocking my progress towards acquiring a second property. In the worst-case scenario, I might have to deal with negative cash flow and stay in the property longer than planned, delaying my second investment until I find a good solution. I would appreciate insights from experienced investors on potential exit plans or strategies you'd leverage if you found yourself in that situation.

[Jay Hinrichs]

Quote from @Justin Buckner:

Do you have any advice for a new investor, who works a 9-5 and has no other income streams, on how to offset the risk of a bust? I am considering a househack on a duplex as my strategy. I'm looking for ideas on how to handle a potential bust cycle and prevent it from blocking my progress towards acquiring a second property. In the worst-case scenario, I might have to deal with negative cash flow and stay in the property longer than planned, delaying my second investment until I find a good solution. I would appreciate insights from experienced investors on potential exit plans or strategies you'd leverage if you found yourself in that situation.

house hack with lowest down payment that makes sense.. refi and then go buy another house hack in two years do that 5 times over ten years and now you have 10 to 20 doors.. choose locations you would live in thereby mitigating risks of buying poor areas that are tough to manage