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Invest Next PDX: How Fear Impacts the Economy

Invest Next PDX is a series of monthly webinars that help real estate investors navigate the unprecedented economic shifts and emerging opportunities in today’s market. Each month’s webinar will feature a guest expert who will join the conversation and speak to specific areas of the market. In this episode, we were joined by Jared Siegel from Delap LLP to discuss how fear impacts the economy and what you can do to overcome anxieties that may be keeping you from investing wisely in our current recession. We will look at recent market research to understand how the coronavirus crisis could affect behavior such as risk-taking in the long-term, and how these trends will impact US economic growth and investment in the coming months.

Transcript

Tyler Combs:

Well, welcome everyone. If you’re tuning in, on Facebook, live YouTube live or any other platforms we might be on, uh, my name is Tyler Combs and I work at the Investor Lab, a community of online–well right now, online because of COVID, but a community of local real estate investors who are really invested in, building up each other, sharing values, sharing tips, and tricks and information to make sure that we’re making the best, most productive decisions. And so this event today is right in line with our ethos and we have a couple people that really share those values as well. We’ve got Eric Larson and Jared Siegel on the line. And we’re going to have a fun, little, debate banter discussion about what is going on, in the world of economics and real estate today and what you should be terrified of and what you should do about it. So, I will just do a quick introduction for both of these gentlemen. So Eric Larson is with Northwest Private Lending and he has been in that world for quite some time. He’s worked with a lot of my clients, a lot of, the Investor Lab community members. I’ve worked with him as well. He is on top of all his activity in the lending world. He’s also an economics nerd, so he loves this stuff. We’re going to have a great discussion. Uh, and then, Jared is a partner at Delap. He leads the wealth advisory practice for Delap and they currently have 125 million under assets. So he is also an economic and history nerd and, and we’re going to have some, some good, good perspective shared, uh, from both of these gentlemen. So we’re gonna jump into it, and, and talk about what are we doing, as a, both on the global and national level for economy and what should we be doing as we kind of are looking at these challenges. So I’ll let Eric take it off.

Eric Larson:

Great, great. Thanks for having us Tyler. I am a private lender, which means I lend my money or investors money to people who want to make real estate investments who are buying investment real estate, who are, need to refinance homes. But we’re basically a private bank and it enables us to do and make loans that conventional banks, can’t or won’t do. I generally deal in shorter term real estate transactions. People have the loans with me for one month or a year or two years, generally short term duration. So a lot of people who are wholesaling properties or flipping homes, are clients of mine, people who have businesses and they need to get quick, quick access to capital. But one of the things that I just am feeling right now is just the tenuousness in the markets, the just erratic change that is going on.

Eric Larson:

And I get a ton of questions from my, both borrowers and investors. What should we do about that? What’s going on in the world? And I’m excited to kind of bounce ideas off of Jared. I probably go a little bit more tin hat approach. I look at, I’m concerned about the currency. I’m concerned about the real estate market. I’m concerned about the equities market and how that all plays in, and people’s jobs, unemployment. These are all things that are really scary. And so just talking about the fears that we have, and the fears that I have and other people have, it’s really nice to bounce our ideas and our thoughts off of people who have contrary or, other side perspectives. The truth is I don’t have all the truth, no matter how much I try to seek and learn knowledge, I find myself getting more and more polarized. Uh, and so it’s good for me to talk with other people at different perspectives. And one of the people I talk with the most is Jared Siegel, and I appreciate his perspective very much. And so our hope in this series and in the specific webinar is to give a well-rounded approach. We’re neither selling anything. We’re trying to get anybody to believe one specific idea. We really want people to walk away with wisdom and knowledge so that they can make their own good decisions.

Jared Siegel:

Awesome. Well, I’m Jared Siegel of Delap wealth advisory. And we work with business owners, real estate investors and entrepreneurs, and, we’re trying to help them make more predictable, profitable after tax financial decisions. And so, excited to have an opportunity to banter with my, my friend, Eric Larson, and, maybe kind of represent a different, different side of the coin as we’re kind of trying to navigate this, unusual kind of trying time, that certainly has provoked a fair amount of investor anxiety. So, our emotions certainly do influence our investing, investment decisions. And so just how do we navigate our emotions and the anxiety that we feel and how do we diagnose what’s real and versus what’s not, so that we can make decisions that are most supportive of long long-term financial goals. So Eric, where do you want to kick this thing off?

Eric Larson:

We had, we got a lot of questions from people who registered and so we can get into some of those questions. But if I had to sum up a bulk of them, I would say it is around is, is real estate or investments, whether it’s an equity stocks and equities or real estate, is there going to be a huge crash coming? Should I sell my real estate? Should I sell my stocks? Should I get into cash and then get ready for a buying opportunity? I think a lot of us have remember 2008 and of us wish we would have sold our real estate in 2008 and then bought, you know, bought up in 2010. And so I think a lot of people who are familiar with that cycle that happened 10 to 12 years ago, they want to try and take advantage of it now, and should they, should we sell our real estate? Should we sell our stocks, get into cash and get ready for a buying opportunity that you know is coming generally in recessions. And that’s, that’s a big question. So I’d love to banter about that for a second.

Jared Siegel:

All right. What do you think? Is there a, is there a pending pending correction and pending cliff to prices?

Eric Larson:

It’s interesting. Every recession has common traits to it, but they’re not all the same. You can’t look back on three or four recessions and say, it’s exactly like this one. And some of the, the knobs that I look at, I’ve been looking at those ’cause I’m trying to twist the knobs to make a good investment decision myself. But in this recession, we’ve added two or three other knobs that I’ve never seen turned before. So generally in a recession, if you have, you know, 20% unemployment, we’re 15% unemployment like we do right now that I would absolutely say unequivocally, if people have less jobs, they have less ability to pay their rent. They have less ability to make their mortgages, they’re going to have to sell. And if you have more supply coming up, more people selling their homes and the same amount of demand, then prices are going to drop. And that would be my normal expectation, but what’s happening right now, which is throwing me for a loop. But I think throwing a lot of peoples for a loop is all the government intervention. Yeah. you have government and invention. And the fact that that rent that landlords cannot evict tenants for non-payment. You have mortgage companies who cannot begin or start or even talk about foreclosing on a property, through the end of the year. And you have all this government stimulus. So people who are unemployed are getting, or some people are making more money now in this economy than they were making before, while they were working. Well, none of those things have ever happened before in a recession. And so we have the stock market taking a dip and then doing this huge shoot up in the air. And we had, when COVID hit kind of a stagnancy where people weren’t selling homes, cause no one was going out doing anything, but now it’s going to open back up and real estate prices is actually increasing. There’s actually not that much inventory. There’s more people buying than selling. And I think everybody’s wondering, did we miss it? Is there no, is there not going to be a drop? And I believe that there will be, I think that’s when the government stimulus stops. I think that there absolutely is going to be a buying opportunity. I just don’t think it’s going to be until, you know, February, March of next year, just beginning. And I think it’s going to be re would really provide opportunities. What happened? Uh, third, third and fourth of next year, 2021. So I, I don’t see a real estate buying opportunity, for low prices here in the next two to three months. I think it’s more six to nine months away.

Jared Siegel:

Oh, this is what we memorialized. So for all of our listeners, we ought to send this video clip to Eric Larson when he’s wrong. What do you think, man? Uh, you know, like, so I think that the best answers are preceded by the best questions. Right? Most people generally agree with that. And so certainly I think it’s a fair question to ask, will real estate values react, uh, as the rest of the economy shifts. That’s a, that’s a sensible question, but, it might, we might be better served by kind of peeling, peeling the onion on that and asking some other questions, in terms of like, what is your plan? Because the, the value matters most on the day that you go to sell, right? That’s, that’s probably when it matters the most. And just like if, if I were to go build a home, if I bought some land and I was going to go build my home, the very first thing that I would do is, is work to get some plans drawn up. Right. I, don’t just show up at the job site and say like, put the master over here. There’s a, there’s a plan. And so I think as we think about financial decisions, each of the decisions underlying, the plan, there should be a greater strategy, you know? So if you are trying to time the market, it, that’s kind of a fool’s errand, truthfully. I mean, if we were to look at the empirical evidence, it’s just doesn’t support that people predict the future. So we have a hundred years of great data, under kind of an economy that looks like our current economy, roughly, right. And over the last a hundred years, we’ve had 15 recessions. And so we can look at what, what are the common denominators and what did we learn? Well, we learned that no one saw them coming, right? You can’t predict them. No one predicted the recovery perfectly. Right? And that a patient investor that took a long-term view, one assets always recovered in prices. And so, yeah, uh, to the slides point, emotions is not a strategy. And moreover our emotions lag reality. You know, if you think about where, where your emotions are right before correction, we know that in theory, we’re supposed to buy low and sell high, but, but it’s difficult to sell your winner right. To, to, to go buy something that’s unfavorable. And by the time you feel good about it, so does everyone else in asset prices have already recovered? Um, so I guess, you know, not that the stock market is the end all and be all, but it is a wonderful wealth creating vehicle. Um, you know, the person that worked their plan and made an unemotional decision and rebalanced, meaning they sold their bonds high to buy stocks low. You know, the stock market is up 48, 49%, the S&P 500 since the bottom, uh, you know, in, in March to, to right now. So, I’m just saying it takes, you had to have a long-term view. And so PR market timing is one of those things. That’s been disproven time and time and time and time again, it’s like trying to catch a falling knife. You grab too soon and catch the blade or you swing too late and miss the handle. So, uh, I think it’s, you know, to a long-term view is, is your best bet, but there is a difference between speculation and investing, you know?

Eric Larson:

No, I think it’s a really good point. I mean, being a real estate investor, I mean, I, I have no equities. I don’t, the stock market to me is, is hard for me to understand. I like real things. I like things I can touch. I like being able to drive past a house. I know what it can rent for. I know what I need to do to fix it up. I have a general sense of what the market is. It doesn’t change too much. Rents might go up a little bit here or there, but they don’t fall off a cliff. And so the stock market equities market to me feels very scary. And what do you see the pros and cons as relates to, cause we’re talking about fear today, what are the things that are worth being afraid of in the stock market? What are the things that are worth being afraid of in the real estate market and what aren’t, what are things that we shouldn’t be afraid of and why?

Jared Siegel:

Well, I mean, uh, if we have a long-term view, you know, history, uh, doesn’t guarantee past performance, isn’t guaranteed, guaranteed future performance, but we have a long track record that asset prices continue to appreciate, right? In, in most markets, most economies, uh, a good asset will continue to not only retain its value, but grow in value. So, you know, whether it’s real estate or owning businesses, um, you know, here’s a chart of asset class performance for a 15 year period. And so, you know, you have an average rate of return of the S and P 500 of 9.1% and a real estate investment trusts, which is just one, one way to measure real estate, average 7.5%, uh, per year, or, a balanced portfolio of 65% stock, 35% bonds, average 6.1% per year. So I guess as we think about assets, um, it’s like a toolbox, right. You know, different tools for different purposes. And, you know, there’s some, some value we talk about cliffs often, you know, so if asset prices decline, not all assets move in unison together. There’s other assets that move in different time. You know, the stock market moves in one way. The real estate market sometimes moves. There’s some correlation, but it’s not perfect. There’s other assets that actually increase in value as, the stock market would decline or real estate, would decline.

Eric Larson:

That’s another good point. I think that part of the reason people have fear and it’s one of the things I want to address today is that when the stock market took its tumble back in 2008, 9 and 10, that sort of real estate, and historically that hasn’t been the case historically real estate has generally held its value even in recessions. And, uh, you know, but even, even in the last recession, rents went up. So even though we had housing prices go down, we did not see a drop in rents. We saw an increase in rents. Yeah. So, as it relates, I think, I think a big fear my clients have is another 2008. That, and the reason I think a lot of people buy real estate is because they just can’t handle. It’s great to make the 7% return over time, the stock markets, but it’s hard for me to watch my stock portfolio go up a hundred, a hundred percent and then drop 50%. And this, these, these swings are just too volatile for my emotions to be able to handle. And I think the truth is, is I am an emotional person, like most of us are. And so the reason our, our emotions play into our investment decisions is not so hard to understand. Uh, so for those who have people who are dealing in real estate, I think what you said I really would come back to is, is this a short-term game, or is it a long-term game for you? You absolutely believe unequivocally that real estate is going to be worth more in the next five, 10 years than it is today. I mean, just inflation is happening. One thing with all the government intervention that we’ve done, for sure that I can just say a hundred percent we’ve printed trillions and trillions of dollars. I think we’d print trillions of dollars more, and that’s creating more currency in the system. And that’s going to force asset prices, both real estate and equities to go up. It’s not, I don’t think that the value will be more value being if I have a hundred thousand dollars a day in 10 years, if I ha if I have a hundred thousand dollars will buy me the same thing that does today, it will not, I don’t think the value will hold, but I think an asset, you know, the median house…

Jared Siegel:

What happens to interest rates if inflation shows up?

Eric Larson:

Well, I think inflation is showing up, but I think interest rates are tied not only to inflation, but to the government’s ability to raise interest rates. So I,

Jared Siegel:

The government, the government sets the fed funds rate, which is the short term, the near term money. And then the marketplace sets the long-term rates.

Eric Larson:

That’s true. And I can say that because I’m a private lender, I set my own rates, one of the, my money at, but the Fed’s fund rate is a big determination of for sure. And, and the government pays interest on our debt.

Jared Siegel:

For sure. So they’re incentivized to keep it low, right? Because we’re already kind of tight on, on revenue. I’m just saying, like, if we play that scenario out, if inflation does show up asset prices go up, but you would expect the central banks to increase interest rates. It’s a way to constrain inflation or address, address inflation. And like, again, you start playing that out. What happens to real estate demand? You know, if, if interest rates were at 10%,

Eric Larson:

Nope, that’s a great point. I let’s just talk about that for a second. And in part of this is just for our listeners, just to be aware of things that there probably were, but just to remind people of is basic truths. Any asset class, whether it’s real estate or investments is supply and demand. If I have more people wanting to buy something, the price is going to go up. If I have more demand for something prices go up. If I have less demand for something less, people want to buy something, the supply goes down. And that that supply and demand curve is absolutely something we can think of. So people, more people have more jobs, more people want to move to Oregon. More. The prices of homes will go up, but real estate is a highly leveraged commodity, the stock market. I can’t, I can’t leverage as much of the stock market by doing the real estate market. So if interest rates are very low and it’s more demand, it makes the value of prices go up.

Jared Siegel:

And also the fixed debt is awesome, right? I mean, the certainty of being able to lock in interest rates right now in the twos, you know, and to know that you have 30 years of borrowing money at two is, that that certainly creates some perceived stability to leverage, right? Cause that’s also what gives real estate a lot of its juices, the tax goodies, but also the leverage.

Eric Larson:

No, that, that that’s exactly right. I think if I’m looking at real estate, should I buy or sell? I think to come back to answer the question and move on another one. I think if I am the short-term market, my advice or my thought is I would sell. Now if I’m, if I’m, if I’m in it for the short run, if I’m, if I’m in for the long run, I’m a huge fan of owning real estate and not worrying so much with the prices, uh, six months from now a year from now, either bought or bought or sold at a higher, higher, good price. I think owning good real estate at low fixed interest debt is a amazing way to build wealth over time and to not worry so much,

Jared Siegel:

I’ve seen people re re-evaluate kind of debt levels, debt optimization, you know, they might’ve had an unencumbered paid off real estate. They’ve kind of prepared themselves. They got some level of, of liquidity, right through debt, refinance some properties and created some cash that way. Um, you know, Jim Collins, when he analyzed great companies and again, companies are different than individual real estate investors, but the 10 x-ers the companies that outperform their peer group by 10 times, one of the common denominators–positively paranoid. So that’s, that’s one thing is, so I think thinking about what if, what if something bad happens is, is certainly a good attribute because you always have a great contingency plan, but they also had 10 times more cash. Right. And so that’s one of those things that, uh, you know, there’s people that Rob Peter to pay Paul and have no liquidity and cash is king. And so, you know, making sure that you’re prudent in managing kind of your leverage levels right now, I think is one way to be prepared. If, if there is some volatility that’s unexpected that were to occur in the next couple of years,

Eric Larson:

I think it would be good at the end of this call to kind of just to take, take a couple of key points. What are the absolute things that we would recommend today? Uh, two of them being, uh, what we just talked about. One, if you own real estate refinancing for long-term fixed rates, a 30 year fixed mortgage, I think is a no brainer. I think, uh, I’m not a huge fan of five-year notes or arm. Uh, there is the, the real interest rate has never been lower if you lock in at 30 years, right now, you’re basically at inflation or in some cases, even below I think what inflation actually is. And if you can borrow at that price, basically you’re borrowing for almost free. Yeah. If you can do that to buy an asset that goes up in value over time. I think that’s a great winner. Uh, so

Jared Siegel:

Just basic Sam Zell and his book, um, “Am I being too subtle?” Sam Zell is a billionaire made most of his money in real estate. I mean, he talked about the savings and loans crisis and basic, it was basic rate arbitrage. You know, the asset was growing at a rate greater than the interest rate that he was borrowing at. And it was just leverage and rate arbitrage. It was pretty easy arithmetic, you know, when you held it for a period of time. So I think that mortgage, like a 30 year mortgage is a spectacular wealth grading vehicle because it allows you to lock in long-term money. Uh, but, but it’s a one-way bet, right? Like as an investor, uh, you know, if you lend your money to, to a borrower for 30 years, if rates go down, they can refinance. But if rates go up, you can’t call the note, you know? And so it’s a phenomenal wealth, wealth creator for, uh, people as it pertains to just acquiring real estate and creating wealth.

Eric Larson:

So to reposition the question, should I buy or sell real estate, you would say, are you trying to be right in the next six months? Are you trying to be right in the next 10 years? And yeah,

Jared Siegel:

It, you know, last time we talked about the finish line, where’s the finish line, you know, the scoreboard matters when the, when, the times at zero w w when do you need to be, right? Because if you blow out your real estate and you’re sitting around waiting for the correction to happen, and it doesn’t, that’s silly, uh, you’re also kicking, you know, creating a lot of tax expense. So you end up with less cash. That’s another con consequence, but also reinvestment risk. Like where do you put the money right now? Because safe cash is earning you close to nothing. And so you’re, you’re losing purchasing power. So you’re, you’re you’re going to be kind of hoping against all hope that that you’re right. But the truth is like, capitalism is awesome because it’s a willing buyer and a willing seller markets are beautiful. And, and it’s because a willing buyer willing seller, hopefully well-informed, generally gets it more right than wrong, you know? And so that’s why comps work in real estate. And that’s, what’s occurring every single day in the stock market, right? There’s a, there’s a counterparty. Somebody thinks that that, that they’re maximizing or capturing as much value as they are thus a seller and somebody on the other side of that transaction. And so, markets do work. And so you have to know something that others don’t, in order to be, you know, to guess, right.

Eric Larson:

Let’s, let’s talk about that because it, our, our free capital market doesn’t feel as free to me. And this is another, I’m going to bring up another tin hats thing, but I think it’s becoming more, uh, what people are become more aware of it is the Federal Reserve. The Federal Reserve is now a buyer of assets. It used to be that they basically just printed money, but now they’re actually buying assets. They’re buying bonds. And they bought, you know, Fannie Mae and Freddie Mac. And so they’re buying mortgage backed securities. And so you have a buyer in the market with basically unlimited funds. Uh, some of the questions, you know, the other side of this coin is yes. Is there going to be market crash? Some people would say, no, there can’t be one, because you have the Fed, who’s basically unlimited funding, buying all the stuff, and they want to keep the stuff they want to keep asset prices up. What do you think about that?

Jared Siegel:

Um, yeah, I mean, again, um, I don’t, it’s not been done before, so it’s kind of, you’re in the make-believe land of economic theory. And so I don’t have really strong convictions around that. You know, how do I think about it? Uh, I love real estate. I own it personally. It’s a great asset class, and we can talk about why I love it, but I’m also invested in the global capital markets. And so I’ve got 30 different currencies in my portfolio. I’ve got 44 different countries because the United States, though, it’s though it’s represents a significant portion of the opportunity. There’s times that Indonesia is kicking butt or, new Zealand’s kicking butt and in the rest of the world isn’t. And so no matter where, money moves, it will move to where it’s going to be treated best. You know, uh, I feel like I’m well positioned to, to capture it and by owning so many different things, it just reduces the volatility that I’m going to experience, as an investor. So, you know, I, I like to have shocks on my car. It creates a smoother ride. And as an investor, you know, taking a long-term view, that’s another way to kind of smooth things out. But if you own asset classes that move, move up and down independent of one another, you always have an asset that’s up. You know, there’s always dry powder to go take advantage of the opportunity if you only have one asset class, uh, and you’re trying to create dry powder to go make purchases when things are down, um, you, it forces you to market time. If you own a variety of different asset classes, you have an asset that’s doing well while there’s a buying opportunity. So there’s always appreciated dry powder to go take advantage of the opportunity.

Eric Larson:

No, it looks really good. It looks like we got a question come in here. When should I start getting serious about offloading properties I want to sell in the near future? I’ll take that one first. I think, at least I, every economy is different. California’s economy is changing a ton. They have a bunch of different new tax laws. There’s a lot of things going on in California that are different than Oregon that are different than Washington. Our businesses really predominantly in the Northwest Oregon Washington. So I’ll speak to that. Um, I can’t speak to Florida or Texas or New York or some other market that has radically different experiences, but for the Northwest, 70% of all real estate is sold in the summertime from April to September. That means 30% of real estate is sold the other six months of the year. I think that if you want to sell real estate selling summertime is your most optimal time. I tell people who are investing in real estate, always try to buy in the winter time, Thanksgiving, Christmas time, New Years. These are times when people don’t really want to sell. They don’t really want to move. These people have to move. And the house is it’s rainy and dark and crummy around here. And so the value of homes don’t look as nice as when it’s summertime and the trees are blooming and the grass is green. I think it’s better to buy when the real estate doesn’t look as good and it’s better to sell the summertime. I think selling right now, we’re in a market right now where there’s not that many sellers, a lot of people who can’t afford homes are staying put renters who can’t afford rent, aren’t leaving. And so it’s keeping a lot of inventory on the sidelines. So if some, if you want to sell something in the near future, I think right now is the time. I would do it now, going back to Jared’s question is what are you going to do with the money once you sell it? How many, how much taxes are you going to have to pay? Are you going to 1031 that sale into another purchase? Are you going to take it all as capital gains and pay a bunch of taxes on it? I think it’s as good a question to ask, what am I going to do with the money when I sell that real estate, as it is, should I sell in the first place? But if you’ve decided that you want to sell something, I would be selling now not later.

Jared Siegel:

Yeah. I probably don’t have a ton to add other than, you know, one of the things that’s nice about real estate is, is generally speaking, the cash that you have in on it is levered up. So it allows you to acquire more expensive asset that garners more income, right? So the cash on cash performance of your equity is, is much more attractive than any other asset class right now, right? So you might have a, an 8% cash on cash or 10% cash on cash, which is a again, though the asset value might go up or down between now and then at the end of the day, that’s irrelevant. It’s the cashflow, the preferred outcome of any investment is cash in real estate is providing it for you. And so it might make sense to just hang onto it. It’s a spectacular asset from an estate planning standpoint, because you get to depreciate it over a period of time. And then when you pass away and your heirs inherited, it gets stepped up and in basis. And so they have the opportunity to depreciate it again. And so intergenerationally from a planning standpoint, it’s a, it’s a powerful tool as well. So it gets back to like, what’s the, what, what tool on the financial plan does that property represent and kind of what what’s, how to position that equity, to serve the plan, but it might not make sense to, to capture it in addition to the gain, you also have the depreciation recapture.

Eric Larson:

I think it’s, it’s one thing that, uh, I have different clients and some clients, they, they own businesses or they have a job, uh, and they invest in real estate on the side. And then I have other clients whose entire job is to build homes or they flip homes, or they, that their job is to be in the market of buying, selling real estate. And so for those people who have jobs and who are investing real estate on the side, I think holding onto real estate is strong and trying to time the market as Jared as discussed is a really tough thing to do. But, for those who are in the business of real estate, should I be building, should I be buying a subdivision? Should I be building a subdivision? Should I be flipping homes should be buying so I can flip a home that is a tougher decision to make right now, because you do have to be right on the purchase. You have to buy that property well, and then you also have to sell it for more than he paid for it. And half the profit makes sense for all the time and effort, energy that you invest in your property. So, I think that’s one of the things that, that people just have to consider. So real quick, I’m going to go to a question here. What do I do if the market shifts and I’m stuck with a property? I think stability is king. And as a lender, I think a lot about carrying costs, holding, holding my asset and, and, and being able to, to cashflow it in 2008, our family’s falling back in our family’s been making loans for 30 years. We’ve been lending to people through lots of economic expansions and economic recessions. I find as we get towards the end of an economic expansion period, which we’ve done and we’re entering a recession period, the, the most, the people who’ve done the best are people who have staying power who have cash and who have the ability to service their debt. I don’t care if you’re a millionaire, a billionaire, or you you’ve got $1,000 in the bank. If you can not service the debt, then you’re going to lose it. And so the idea of servicing debt and being able to manage it, not getting over levered, and you’re not getting over our skis, uh, with our, with our leverage is a really important thing. If you feel overleveraged right now and you feel like I don’t know how I’m gonna make the next payment, don’t wait for someone to come take your property from you. Don’t wait for a foreclosure to happen. Take advantage of the fact that your real estate has never been worth more now than it is today. And like I said, I think it’d be worth more in the future, but don’t get greedy and hang on to something that you’re going to lose when you have the opportunity to sell it and get stable.

Jared Siegel:

Yeah, I agree. One of the things that’s pretty easy to do is, from a behavioral finance perspective, one of our predictable errors is mental accounting. So if I bought a property for a hundred thousand dollars, it was worth 300,000. And right now I might only be able to get 280,000 for it, rather than focusing on the huge, huge gain that I’ve had. I will tell you that I’ve lost money, right? Because there was a moment in time that that Zillow told me it was worth something, something more than it was. And so, as we think about, uh, the emotions and how it influences our ability to make decisions, uh, this chart shows something, I think that is worth noting, right? So, logic lives in our prefrontal cortex, but our emotions lives the amygdala. So we’ve all heard of the amygdala hijack. That’s kind of responsible for the fight or flight in the truth is that when the body sends a stimulus, right, an impulse, the amygdala, our emotions respond to 350% faster than our logic. And so, as it pertains to financial decisions, anytime we’re triggered a fight or flight, the amygdala is going to get the, the information and process it. And we’ll, we’ll start into an emotional response, in, so your body actually releases cortisol, right? And so cortisol is a coagulant. It changes your blood flow, which is great if a, of the lion’s attacking you. Right. But it’s not great when we’re trying to make a financial decision. And so just understanding that we have, uh, an impaired capacity to make great decisions when we’re scared. Uh, just that it’s the first thing is to just know that that’s, that’s our, our limitation, right? Cause we get up and we put this meat suit on every single day known as our flesh, and it’s going to interact with us in invisible ways that you’re not necessarily perceptive to.

Eric Larson:

Yeah. So I think, if I get stuck with a property in the market shifts, and you’re stuck with it, I think sometimes selling and taking a small loss is better than having a loser in the future. We’ve all heard about the, the, the monkey with his hand in the cookie jar. And I have a hand in the cookie jar and I’ve seen too many investors not want to lose any money on one transaction. And so they get there, they die with their hands stuck in the cookie jar. It is sometimes better to take a small loss, move on to something else than to lose everything, uh, in a decision just because they don’t want to take a small loss. Now, uh, that’s one thought as I’m thinking about, if I get stuck with a property, the other thing, if I get stuck with a property, I obviously would want to try to refinance it and get cheap money on it. If I can’t, if I’m stuck in a hard money loan and I’m paying 12% interest and the properties, you know, heavy to me, the question I would ask myself is, can I bear the weight? Can I rent that property out? And can I bear the weight of that loan for six, nine months while I wait for the market to come back if I can. Great, I should do. So if I can’t, it is just way it’s always better for you to work with a lender, to sell a property for as much as you can, than it is to hang on to it, drag yourself in foreclosure, run your credit through the muck. You, you won’t be able to refinance or buy a house for another seven years. It takes you completely out of the market. If you work with your lender and say, Hey, listen, I’m over my skis. I’ve over leveraged. It’s exceedingly better. To work with that lender, get the property sold, get cleared of debt so that I can take advantage of an opportunity, an opportunity I can, I can only take advantage of that. I have the cash and I’m ready to do it. And so, uh, try not to get stuck in properties, but if you do release them quickly.

Eric Larson:

Yeah. All right. How do I handle non payment of borrowers or tenants? Uh, you want some rentals, Jared? I went first, last, so what, what are your thoughts if as, as you have tenants that are unable to pay or dealing with stuff, how, what are your thoughts on that?

Jared Siegel:

Yeah. Um, well, so personally, uh, I’ve gotten to the point where, you know, my day job, isn’t, uh, isn’t real estate. So, uh, I’ve hired a property manager to, to do that. And in light of all the changes right now, it’s fraught with landmines, right? Because Oregon’s got its own rules. The city of Portland has its own rules. Uh, so you kind of, uh, for me, I’ve, I’ve engaged an attorney and worked for the property manager to make sure that we stay current, uh, uh, navigating all of that. Um, prior to, um, prior to that, you know, there was just essentially a desire to, to get some, some dollars down, right. Uh, to get some, some payment towards it and put together a plan with the, with the tenant to, to get made whole, um, kind of maybe a payment plan of a portion of the missed rent, but, uh, on each, each subsequent a month, but not, not really a deep area of expertise, for me. So I’m pretty reliant upon, an attorney and a property manager, you know, try to circle of competence. Warren buffet talks about circle of competence and property management. Probably isn’t a isn’t mine.

Eric Larson:

I think it’s a really good point. I think a lot of us are very few of us. We say a different way. Very few of us are great at a lot of things. I think I am great relationally. I think I’m great at doing my job. That doesn’t make me a great landlord. I might think that I am, but if I don’t do something full time, I’m probably not as great as somebody else who does do something. Full-time. And I think that the idea of a property manager, if you own even one or two, even a small amount of rentals, that seems manageable to you. The idea that I can do that as well as somebody else who does this for a living is a little bit foolish. In my opinion, I’ve tried to do it myself. My own pride has caused me to try to be my own landlord for a long time. And the truth is I’m not that good at it. And after I’ve done the same thing I’ve released my properties to property management companies and just been blown away at how much better they are at managing the property than I am. I think that’s a really good, uh, first thing is that you not dealing with a borrower is not paying is, is one of the best ways to do it. Let someone who’s professionally able to do it. Having dealt with some people who struggle to make payments or aren’t aren’t paying, I see really a couple different mindsets in the market. And some, to me are really negative and some are positive. I, as a private lender, there’s a lot of private lenders who I would call very foreclosure friendly. They are actively looking to foreclose on people. Uh, the term in the market is loan to own. They’re making a loan to you, hoping that you default that they can take that property back in foreclosure. And it’s a greedy mindset.

Jared Siegel:

Foreclosure friendly sounds positive. I appreciate that. Yeah.

Eric Larson:

It’s but there’s mindset around that. I want to foreclose. I want to take advantage of somebody else’s loss. The truth is, is I’ve seen people who have made that mindset decision, do that in all their lives and their lives are terrible. They have bad relationships. If they have bad experience with people, they see the world in a negative light versus other people who say, you know what, there’s a human being, living in the home that I have. There’s a human being that has a loan that I have. And I’m going to treat that person. I’m going to care for them. I’m a steward to them. And when I work with people who are struggling to make payments, whether it’s in rent or mortgage, the idea that how do we carry this burden together? I’m not here to become contentious with you. I’m here to help you. And how do we figure this situation out together? I think, uh, has, has proven for our family over the last 30 years to be the very best way to handle something. So I think when someone’s not paying or struggling to pay, not going litigious, talking to somebody as a human being, getting face to face, asking questions, what’s going on? How do we solve this problem together is an exceedingly better way to handle a challenging situation than, Hey, I’m going to take you to court. I’m going to sue you. I’m going to evict you. I’m going to foreclose on you. A lot of people go that direction and it seems it now has made that person who could have been a partner in solving the problem, It makes them an adversary. Now you’re fighting over something instead of dealing with the solution.

Jared Siegel:

Yeah. Um, one thing I think, uh, to maybe reframe this conversation about fear, um, is most people are fearful of some of the uncertainty, right? And uncertainty is one way to maybe define investment risk. You know, the more uncertain something is the maybe more risky it is, but, uh, some of the early, uh, kind of financial and economic, um, science that was presented, ultimately generated a Nobel prize from that capital asset pricing model. And so they were able to prove with empirical data that the more risky something was kind of the more volatile something was the greater, the expected return. And, and as we think back to the people that were buying, buying homes in the midst of the last correction or people that were buying stocks in the bottom of this last correction, uh, when things are the most, uh, uncertain, often the assets have the highest expected return. And so it’s challenging though, to try to time it, but people generally, whether you caught it at the bottom or not, when you became a buyer when others were fearful, uh, that it’s translated to some good things, you know, the Buffet, cliche “be greedy when others are fearful and fearful when others are greedy”, it’s easy to say and hard to do, and so I think it’s an easy, you know, to frame that conversation positively.

Eric Larson:

Are they afraid right now, or are they greedy? If I look at the stock market, it doesn’t look like it doesn’t seem like too many people are afraid that if I look at the real estate market, people are gobbling, there’s still multiple offers on homes. There’s people having a hard time actually buying houses right now. And we’re in the, a pandemic recession, everything. So which one are we?

Jared Siegel:

Yeah, Maybe a little bit of both, right. I mean, I think there’s, it’s like the, the economy is pretty bifurcated. There’s the haves and the have-nots right now. Right. And so it’s, there’s a portion of our population that’s pretty vulnerable. And then there’s a portion of our population that’s steady Eddie, right. And continues to do well. So, um, I think one of the dynamics is when interest rates are as low as they are, um, it, it, you know, I’m refinancing my home. Sure. A lot of other people are, so that, that creates a stimulus and companies are doing that to, you know, bond companies are calling bonds and refinancing their bonds at unbelievably low rates. You know, the 10 year treasuries unbelievably low 60 or 70 basis points. And so, you know, you’re able to recapitalize your business, reduce your interest expense and make some improvements for the long run. You know, Amazon doesn’t care what happens in the next 60 days. They’re thinking what’s, what’s the next 60 years look like and building their business accordingly. And they’re able to do it with almost free money.

Eric Larson:

Let’s talk about that because people who have a ton of money right now, if you’re sitting on tons of cash and you’re trying to make a good investment decision, that’s one challenge. If you have lost your job and you don’t have a lot of options, what are, how, how can, how can each, each person kind of make good decisions? Um, I talk a lot too. I talk to people who are in both new situations and I have thoughts, uh, the thoughts around, if I am struggling right now, what do I do? And I just want to point people back to Dave Ramsey, who I think is a really great, uh, financial guy in his mindset is to be low debt, to spend less than you make, and then, and figure out a way to stabilize if you want to begin investing well, the best way to not be afraid is to not worry about losing your stuff.

Eric Larson:

If you were in a place of excess, and you’re wondering, how am I going to make this money work for me? It’s a different place than if, how am I going to pay my rent? And I think that before we get to a place, I think a lot of people want to go from how do I pay my rent to how do I start investing in real estate? And I don’t know if that’s the best jump. I think a wealth is built over time and it starts from a place of stability. I have to have a stable job. I have to have some kind of stable income and I have to have some kind of stable expenses from which that there’s leftover money for me to go invest in. I don’t think there’s a lottery ticket approach to getting involved in real estate and going from zero to hero. I think it’s, it’s really hard to do. And I think most people who try to do that ended up making, um, really detrimental decisions because they have to, they have to buy at the right time and they have to sell the right time. I think real estate investment is one of those things. Uh, if you’re buying investment real estate for rentals or for investment purposes, that you want to have some stability, um, one of the biggest no-brainers I would say before I started thinking about investing or doing anything else is having a six month reserve, a six month reserve on my mortgage six month reserve. I’ll just kind of my, my monthly spending and if I own rentals before I take a penny of profit out of rental, I want to have six months of rental income of whatever my mortgage is on that rental stored away. It’s not touchable. So if someone doesn’t pay me rent, I’m not worried about how I’m going to make my mortgage payment. I’ve got that set aside for rainy day, which enables me to be a kind individual to work with my tenants in a way that’s going to help come out with the best solution. If I don’t get that rent check and I can’t make my mortgage, I would say to that person, you’re overleveraged, you haven’t saved enough, uh, to be even in that investment. And I would work really hard to start saving an investment. So you have some more structured stability there.

Jared Siegel:

Makes sense. So I guess, um, you know, as we kind of try to put a bow on the conversation, um, what are you doing? What would you encourage others to do? Like if there’s a action items for, for people in terms of processing their fear effectively, where would you start the conversation?

Eric Larson:

I think, I think I feel less afraid when I feel more stable. So I think before I look at investing or doing anything, I want to ask myself, how stable am I? How much cash do I have so that I can, that what makes me feel comfortable, cash in is something that I can use to invest in something you make it work, but it also can be a life insurance policy. It can be an insurance policy in the sense that I feel stable. If I lost my job, I feel stable. If my renter leaves, I feel stable. If my stock markets go up and down and I, and in my opinion, six months of reserves for whatever I’m spending on is it really makes me feel stable. It makes me feel safe. Some people would say three months, some people would say two years for me, a minimum of six months of stability before I start looking at any other type of investments, whether it be stocks or bonds or anything else. My first investment is in my family and my life’s stability.

Jared Siegel:

Yeah. Cash cash is like oxygen to your kind of financial health, right? You need to have it. And, uh, if your investments aren’t liquid or owned in accounts that you can’ access, that’s not, that’s not helpful. Um, I do think there’s, there’s something helpful about kind of creating your recession plan prior to the recession, right? When, when in the absence of fear, you plan a lot better. Um, you know, in the military they talk about, I think it was Winston Churchill said, planning, uh, plans are worthless, but planning is everything. And it’s the idea that things are uncertain. There’s no way that you can know everything today that you’ll know tomorrow, but the process of planning, I think, creates some clarity and allows you some, uh, mental nimbleness, right? Like when you encounter it. And so to the extent you can kind of make some of the hard decisions today in terms of how you’d approach things financially. Um, then you’re not necessarily trying to process a decision in the midst of the emotion. And so, you know, there’s a reason why people have an investment policy statement, why pensions and endowments and large multi-family, uh, generational families that have family offices. They all have an investment policy statement. They talk about here’s our allocations, and here’s when we buy. And here’s when we sell. And the decisions are made ahead of time so that when things get crazy, like they did earlier this year, you’re not making the decision in the midst of the chaos, the noise and the emotions.

Eric Larson:

Right. I think that’s really good. Um, I think beyond stability and beyond just having a plan, I think, as it relates to real estate, I truly believe real estate in the Northwest. I’m really bullish on it, long-term. I think, uh, in five or 10 years, I would just, I can almost guarantee you real estate going, be worth more than it is today. Um, I do have some fears. I, you know, if someone says, what if interest rates go up to six or seven or 8%, uh, is real estate could be worth more? Um, I, this is a valid concern and something to, uh, to manage cause our, our, our value real estate is very tied to interest rates. I personally believe that it’s going to be really hard for the government to raise interest rates. Um, I think if we have a currency change, if the dollar actually, if the dollar moves from its really strong world reserve status, and we move to more of a global currency and we have less power in the world currency, I think that will affect all asset classes. Uh, and that scared me a bunch. But you said something the other day, Jared, if let’s say the dollar loses worlds of currency size and we moved to a world currency, how is that going to screw up my real estate portfolio? How’s it going to screw up my investment portfolio?

Jared Siegel:

Yeah. Uh, I mean, again, it’s, it’s one of those unknowable things. Um, but again, in theory, you know, your house is worth what it is right now. We quantify it in dollars, but if we wanted to quantify it in Bitcoin, we could, if we wanted to qualify, quantify it in pesos, we could like the assets worth what it is worth. So if the dollar becomes worth less, your house is worth more because it takes more dollars to capture the value there. So, uh, you know, unless you’re sitting on just piles and piles and piles of cash, as long as you own assets, businesses, um, real estate, I mean, if you own assets, those are I think currency agnostic. Right. Um, and then to the extent you can kind of own things and non-dollar denominated things. I think that’s, uh, that’s prudent as well. Cause there’s times where the dollar does well in times when it doesn’t. So again, if concentration creates wealth, but diversification preserves it. So we can talk about that more on, on, in some other webinars, you know, that’s all right.

Tyler Combs:

Well, thank you guys for, uh, for kind of getting into these discussions. It’s um, I think all the people that, that, uh, that I work with are definitely asking these questions about how, how do I navigate what I have, what I’m trying to do to still reach my goals, even though we don’t know exactly what’s going on. So, and we are going to be doing more of these, um, on a regular basis. So, um, so stay tuned for more discussion specifically about kind of, uh, like a macro level, like what’s going on with the political environment and what’s going on with currency. That kind of thing is kind of going to be in our, in our next discussion is how do we navigate some of the upcoming changes that we know are going to happen? We just don’t know what is going to happen with them. Any final, last words from you guys.

Eric Larson:

First of all, thank you, Tyler, for, uh, for hosting and, uh, doing all this and it’s, it’s great to talk with you, Jared. Uh, I absolutely would love to get into a political discussion. That’s I’m not personally political, but how, how is politics going to affect our investments I think is going to be really interesting. And I’d love to hear your perspective on taxes, uh, politics and taxes, I think would be something really important to talk about. There’s nothing that costs me more than taxes. Uh, so understanding how to navigate that is, would be super valuable, but just the opportunity just to share and talk, uh, about these things and to just bring in a group to, to have this be a team effort, no one person has all the answers. Uh, but when we talk about something, when we’re honest, uh, we’re not trying to sell a specific idea. I think truth can be found in truth is hard to find these days.

Tyler Combs:

That is true. It’s true. The truth is hard to find. All right, well, I think that’s a wrap. We’re going to, we’re going to in the webinar, thanks to everyone out there on the internet that, uh, that tuned in live. And, uh, and we’ll have this video up, uh, on the various platforms, shortly for people that want to watch the recording.

Eric Larson:

Thank you guys.

 

Northwest Private Lending Inc NMLS # 1522364 // ML # 5496 is based in Portland, Oregon. NW Private Lending is an Equal Opportunity Hard Money Lender. We provide quick acess to capital for borrowers, real estate agents and mortgage brokers in Oregon and Washington. NW Private Lending is a collateral based lender focusing on bridge loans, fix and flip or rehab loans, commercial loans and non-owner occupied real estate investment properties.

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