CODE RED Market Crash: What Will You Do? | Episode 167 - a podcast by Bryan Ellis - SelfDirected.org
from 2015-12-09T16:53:35
What’s your CODE RED plan for when the market shifts from “full steam ahead” to full retreat mode? It will happen for sure… and nobody knows when. Whether you're using a self-directed IRA, a self-directed 401k, family funds or any other capital, here are some important things to consider for when the market invariably shifts against you. I’m Bryan Ellis. This is episode 167.
----
Hello, SDI Nation! Welcome to the podcast of record for savvy, self-directed investors like you!
The last 15 years or so have really been a financial roller coaster, haven’t they? Right now, it’s easy for everyone to focus on the last 5 years, during which the stock market and the real estate market in America have both been screaming upwards, notwithstanding a bit of a slowdown this year in stocks.
But that’s not all there is to the story, is it?
Let’s look slightly more broadly… say… 15 years. So, since December of 2000 to right now, December 2015, what’s REALLY happened?
I think you’re going to be surprised.
The S&P 500 has absolutely gone up… by a WHOPPING compounded annual growth rate of… drumroll please… 2.77%!
On a nationwide basis, real estate hasn’t fared much better, increasing in the same period by a compounded annual growth rate of 3.23%.
To be clear, neither of those numbers factor in the effect of cash flow – dividends for stocks or rents for real estate. Furthermore, it’s not particularly accurate to compare the performance of ALL real estate to the stock market, since 100% of the people buying stocks are doing so with the expectation of profit whereas the commanding majority of people buying real estate do so to use it for living. It would be far more accurate to compare all INVESTMENT real estate properties to the stock market rather than all real estate… but hey… I give you the data we have.
I suspect those aren’t the numbers you expected to hear. After all, in the last 5 YEARS, the S&P’s annual number is nearly 11% and the media is full of reports about the astounding real estate appreciation in places like Northern California, Denver, Dallas, Nashville and Detroit.
The difference is, of course, that the last 5 years represent only the up-cycle and not the rest of the story.
What happens when the market shifts course? Maybe it will be a deep plunge. Maybe it will be a simple leveling off. Whatever the case, do you have a plan?
I was asked a question yesterday that really illustrates this point well. One of your fellow listeners named Ted reached out to me. Ted has a bankroll of about $1.1M and is interested in buying some of the high-yielding turnkey rental properties we have available in Northern California. Ted’s side of the conversation went something like this:
Bryan, I get it that it’s a great opportunity because I’m buying into a rapidly appreciating market, and because my property will actually yield very attractive rents, and because I’m paying a below-retail price. All of that makes sense to me and I’m ready to sign on the dotted line. But what happens if the economy in Northern California dries up? What then?
This is a fair question. It’s absolutely possible that the economy could fall off… or a terrorist attack or anything else. Neither Ted nor I have a crystal ball. But what Ted has – what you have – is very powerful: The power of intention.
Here’s what I mean: If Ted is clear about his intention for the investment, then that intention will guide him through changing market situations.
In Ted’s case, he told me that he really likes the cash flow and tax benefits of rental property, and that’s why he’s bought a lot of other rental properties all over the country, mostly in lower-priced regions where his cash flow from rents is really strong. He also really likes that he’ll be able to easily pass on his rental property when that time comes. But what attracts him to THIS specific opportunity in Northern California versus buying more houses in other markets like Ohio or Indiana is the potential for real, near- AND long-term price appreciation. You see, in most markets, it’s not possible to get high ROI’s from rent AND strong property appreciation. Due to the fundamental nature of real estate markets, it’s nearly always an either-or. But in this case, Ted – and possibly you as well – can get very attractive cap rates of 6-10%... and do so in a market that Zillow predicts will appreciate by 19% in the coming 12 months.
So to Ted, that appreciation is the attraction factor, but it doesn’t change his core objective: To generate strong cash flows and tax benefits.
Will those things be affected if the economy in Northern California cools?
No, they won’t. Rents won’t likely drop because there’s a severe housing shortage in the area with basically no new construction happening to alleviate the problem. So even if Ted – and Zillow – and most experts – are totally wrong, and the tech and financial sectors that drive Silicon Valley really cool down economically, Ted will still be getting what he wants… strong rents, great tax advantages, and a property that he can pass on to his heirs… and he’ll still be in a market that has HUGE, HUGE, HUGE upside potential.
What about you? Do you have real clarity as to what you’re REALLY trying to accomplish with your investments. As an affluent investor, you’ve likely got your basic cash needs covered already. You’ve also likely got a collection of investments performing at various levels, and you probably have a bankroll of cash that you’re considering deploying… or maybe you’re thinking of cashing in stocks or annuities to be more liquid for the right kinds of opportunities.
If your focus is cash flow, then day-to-day or even year-to-year price fluctuations really shouldn’t occupy your focus much. Similarly, rental income potential isn’t particularly relevant to short-term flippers, but market fluctuations can be really important.
And one isn’t necessarily better than the other. It’s all about your specific objectives.
What REALLY matters to you, my friends? This issue of priorities – more specific, CLARITY of priorities – is just huge. It’s core. It’s fundamental. By making the decisions RIGHT NOW about what things really matter to you, you’ll be able to make actual GOOD decisions – wise decisions – decisions that respect your capital… later on when a market changes or fundamentals shift, and you’re forced to make a “should I stay or should I go” type of decision.
What did Ted decide? He’s going to diversify geographically and buy a few rental properties from us in Northern California. He’ll get the cash flow numbers he needs, the tax benefits he needs, and he’ll also get something he’s not getting from any of the other markets where he owns rentals: An extremely high probability… and almost historical certainty… that the properties he buys from us will experience substantial price appreciation over the long term. After all, look at San Francisco, the centerpiece of Northern California: There’s absolutely been price volatility over the years… but the long-term trend is positively, absolutely without a doubt… OVERWHELMINGLY POSITIVE.
So here’s your homework for today, my friends:
Assignment 1: Clarify your own priorities. Decide what really matters to you. What are the make-or-break requirements for your investments? Rental income, price appreciation, tax benefits, etc? Decide what matters to you as a basis for making your own wise investment decisions.
And Assignment #2 is: If you’d like to own rental properties at VERY affordable prices that are BOTH high-yielding in cash flow and located in the blazing hot markets of northern California, then you’ve got to reach out to us RIGHT NOW at SDIRadio.com/nccashflow. That’s SDIRadio.com/nccashflow as in Northern California Cash Flow. You’re going to love what you find there, just like Ted did.
My friends: Invest wisely today, and live well forever!
Hosted on Acast. See acast.com/privacy for more information.
Further episodes of Self Directed Investor Talk: Alternative Asset Investing through Self-Directed IRA's & Solo 401k's
Further podcasts by Bryan Ellis - SelfDirected.org
Website of Bryan Ellis - SelfDirected.org