Hello again and welcome to another episode of Ask Marco where I answer your investing related questions.
Before I get to today’s question, remember to hit that subscribe button. If you haven’t subscribed to the show, please do so. Just take 30 seconds to do that right now. Today’s question comes from Charlie and he says, hi Marco. I’m a longtime listener and love the show. I’m looking to make my first few investments in the era of Coronavirus and would like some advice. The headlines today read that the banks are bracing for large scale mortgage defaults. What can investors do to turn this into an opportunity? What else can we do to use this downturn to help us come out ahead?
Okay Charlie. So let me begin by saying that I am still trying to figure out the size, scope, and scale of what this impact might be. Every time I read an article and try and figure this out, I get kind of opposing opinions as to how deep and how wide and how long it’s gonna take to unfold and to ultimately settle. My personal opinion is that we’re going to see a few months here of probably some tough times, not for everybody, but for a lot of people it’s really a matter of getting businesses back to business and once people are back to work and it’s business as usual and the economy’s working again and we have money circulating and essentially what is velocity of capital, then we’re going to see things get back to normal. An important thing is that we don’t want to see credit and the credit markets tighten up or dry up. They are tightening up a little bit right now, which is not good for people and businesses who need to borrow money.
But I believe that’s gonna start to loosen up again in the summer or the fall and it’s really hard to tell at this point in time. It’s my hope that it’s not going to be longterm, but what I think is probably going to be true is that the fourth quarter of this year is going to open up and be kind of a mini boom, if you will, maybe a rebound or a bounce back from the tightening up that we’re seeing right now. And I know that Vegas certainly is bracing for a very busy fourth quarter this year just because of pent up demand. That will be a fallout of what we’re seeing going on. But uh, will there be an impact? Most certainly how big, nobody really knows. A lot of people are anticipating a very deep pullback. I think what that really means is that people are anticipating a wave of delinquencies and defaults as it relates to mortgages and business loans.
And certainly as this induced shutdown of the economy unfolds, we’re going to see the impact of that come through. But one thing we know for sure is that the federal government has been very liberal in providing aid in the form of stimulus. And as it relates to banks and lending institutions, potentially bail outs of some kind. Now they’re not saying that right now, but they’re certainly not going to let major banks fail. One of the things that banks are doing in anticipation of increasing defaults and delinquencies is offering forbearance. And this is really coming from the top down top, meaning the government sponsored entities like Fannie Mae, Freddie Mac. This is what they’re talking about. And so what a forbearance is, or under a forbearance, your loan payments are essentially postponed or reduced, but the interest continues to accrue during that period of the forbearance. And it’s essentially tacked onto your loan, whether you’re paying for it upfront, during or after.
But if you don’t pay the interest during that period, that interest becomes capitalized, which means that it’s just simply added to the principal balance. So it’s tacked on and uh, either lengthens the loan or it’ll be a balloon payment that’s due towards the end of the loan. So what does this all mean in terms of opportunities? Well, I see a couple of opportunities here. First, if you haven’t done so already, now might be a great time to refinance. Interest rates are very, very low. In fact, they’re pretty much at historic lows. Banks are also starting to introduce stress testing, so if you may be qualified in the past, recent past, you may not be able to qualify in the near future. So they might be upping the qualification criteria. That could mean credit scores or your overall credit profile. So if you haven’t taken advantage of refinancing options and opportunities, maybe now’s the best time to do that because rates are very, very low.
And now’s a good time to lock in a low rate and or be able to pull out some of that debt equity dormant equity, idle equity that you might have in some of your properties, whether it’s a principal residence or some of your rental properties, and put that to better use. In other words, pull it out to save it, but pull it out for the sole intention of investing it into other property to build a stronger portfolio or larger portfolio. So I foresee lending standards getting tightened and they probably have already started. I know some lenders, I’ve actually pumped the brakes on funding. Non-qualified lenders have certainly done that, so they’re basically waiting two to four weeks before they fund anything that is based on assets, something outside of your own personal ability to qualify and service that loan based on your income and your own credit.
So financing, and that’s one area of opportunity. Second, are buying opportunities. So if a person has the capital or the lines of credit to pick up some great deals today from distressed owners or distressed sellers, you might be able to pick up or scoop up some really good deals. This is a hunt. This means that you’re going to have to go fishing or hunting to find these deals. They’re not just going to be sitting there, they’re not likely to be sitting on the MLS. And it’s really a matter of knowing people in the business wholesalers that are hunting for these or agents that have these pocket listings, if you will, that are not on the MLS, they just have them in their pocket and they know a ready, willing and motivated seller looking for someone to come in probably with an all-cash purchase and pick up these deals.
The third area I’m just going to mention here is as far as an opportunity’s concerned, is just to get out there and do what you’ve been thinking about doing and invest wisely while other investors take pause. You see inventory has been tight for a long, long time and that may be shifting this year, but inventory may be in a better position for you as an investor because other investors are taking pause, leaving that thin inventory that’s there now available to guys like you, people like you. So another thing that’s kind of tied into that point of investing wisely is that so many investors, and I had this conversation today with an attorney and his partner who is an eye doctor about the whole concept of unemployment increasing. And that being a concern and a problem for real estate investors, you have to stop and think about it this way.
You have to flip that around and put it on its head. You shouldn’t be focused on the people who were unemployed because they’re not your customer. Those are not the people that you’re going to be servicing. You are servicing the people who do qualify. Those are the other 90 95% of the population, so let’s just theoretically say that unemployment rises to a whopping 10% that’s a big number. Yes, that’s going to hurt a lot of people, but at the same time, that implies that if 10% are unemployed, 90% are employed, so the implication is that you still have the majority, 90% of the population that can still qualify because they still are working. They still have income, they’re still paying their bills, and that’s your customer. That’s who you’re servicing. That’s who you’re going to target, that’s who you’re going to market to and that’s who you’re going to place in your tenants or in your properties.
Your property manager will be looking for those people, qualifying and screening those people and placing those people in your properties. So just because unemployment goes up and down doesn’t mean that it’s going to be a problem or that real estate investing is out of favor. It never was and never will be. People always need a place to live. So think about the employed, not the unemployed. And that segues to kind of the third point about this point and that is the United States suffers from a severe housing shortage. I’ve been talking about this for many, many years and interestingly enough in a recent study that just came out last month, I actually was late February if I’m not mistaken. This study was called the major challenge of inadequate us housing supply and I have to look up who actually published that cause I don’t remember. But in that research report it was estimated that 2.5 million, million additional housing units are going to be needed to make up the current shortage that we have here going into 2020 they also estimated that there are currently 29 States out of the 50 that have a housing deficit and when you actually consider that only those 29 States, you just take those 29 out of the 50 that housing shortage grows from 2.5 million units to 3.3 million units.
Now this is all listed in great detail in this report and I can put a link to it on the website and in the show notes, but the point is is that we have had for a long time and continue to have a growing housing shortage. It’s a growing problem. What that means is there are fewer homes for people who want to buy homes, especially starter homes or affordable housing. But that also pushes people into the rental market. And so you as a real estate investor are needed to provide safe, clean, functional housing to those people who are in need of a place to live. And if they can’t find housing to purchase, they’re forced into the rental pool and now it’s up to us to provide that safe, clean, functional housing for these people. So there is definitely an ongoing opportunity. So don’t sit back and wait.
I think the opportunity is there now. It was there yesterday, it will be there tomorrow and that opportunity is probably growing. So invest wisely while other people take pause, take advantage of the opportunity while people are either scared or talking themselves out of real estate investing through fear, fear being induced to a large degree by the mainstream media and the talking heads and politicians. So that’s my feeling about all that. In closing, you basically ask what else can you do? That was your other question. You know with this downturn, we don’t know the depth of this downturn. I’m using your words here. Here’s what I suggest. Just real quick, have emergency reserves on hand. You know, you obviously want to protect you and your family, so put your family first. Have emergency reserves and that is food, water, liquid cash, just for emergency purposes, guns, gold, silver, whatever it may be.
So just have those emergency reserves on hand. Second is be cautious of the volatility in the equities markets and I’m referring to the stock market. Anything that is a paper asset, anything that’s paper-based, just be cautious because there is, I think a lot of downward pressure in the equities market. We haven’t seen a major market crash. We’ve seen a lot of whipsaw volatility. A lot of people think that we are now in a recession, although you can’t officially call it a recession, but that volatility in stock market, I think there’s still a lot of downward pressure and we’re going to see a bear market going forward. Not so much a bull market. And last but not least. Again, none of this is meant to be financial advice. This is not a financial advice show. This is just data and opinion and just some information to pass along, but I would also suggest in my own personal opinion to not be very heavy on liquid cash.
Cash as in currency is very susceptible to the effects of inflation. In fact, it just gets devalued and we are in an inflationary environment even though inflation is still low in terms of what is being reported as the CPI. The fact is is that we just pumped 2.2 or approved two point $2 trillion of made up money. Fiat currency just printed out of thin air and is being put into the system right now, so we’re going to see over $2 trillion pumped into the system this year. In addition to that, the federal government is talking about an additional 2 trillion, which will take it over $4 trillion. That liquidity put into the system with no productivity behind. It just leads to inflation and it may not surface right away, but it’s there and it’s going to happen and now they’re talking about potentially even more as much as $7 trillion. So think about that.
That is nothing but inflationary. So if you have to liquid cash in a savings account or a checking account, I would suggest that you look at inflation, hedges, things that are going to protect the purchasing power of your cash. One of the best, and in my opinion, the best is income producing residential real estate. And that’s exactly what my team and I have been doing for the past 16 years, is focused on income-producing turnkey residential real estate. That is one great option. It’s not the only option, but it’s certainly a great option because it’s got the inflation hedge built in, but you also have the immediate cash flows as well as the upside growth on the appreciation side of it, the equity growth through amortization and appreciation. Anyway, that’s another conversation, a whole other episode, but that’s what I would recommend. So Charlie, I hope that was helpful and if you need additional information, just let me know. If you have a question about real estate investing or finance that you’d like me to cover on the show, go to passiverealestateinvesting.com and click the Ask Marco button. You can also just go to a browser and type, AskMarco.com it’ll take you straight there. Remember to subscribe, share the show with other likeminded people, friends, family, your neighbors, whoever it may be. Leave us a rating and review. Thanks for listening. I will see you on our next episode.
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