3 Survival Lessons Real Estate Investors Can Take From Jason Bourne
My father-in law and I recently sat and watched three of the Jason Bourne action-espionage movies in a row.
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Yeah, it was high on testosterone, low on reality, but very, very cool.
And in case you didn’t know it, the Bourne series also gives us great lessons about real estate investing! Yes, really.
Prepare For the Worst-Case Like Jason Bourne
Jason Bourne is the result of a US government project gone wrong. He is a renegade killing machine who can fight his way out of any trouble.
But as many karate kicks and judo throws as Bourne can use, he always looks for the quickest way out of any building as soon as he walks in. He always finds the quickest road out of town before jumping into a car.
Amazingly enough, he can also outrun fleets of police cars using any 30-year-old, European clunker-car he “borrows” during a chase!
Bourne prepares for the worst case scenarios so that he can escape. That’s why he always survives.
Don’t Get Real Estate Sucker-Punched
As investors in real estate, we’d be smart to learn from Jason Bourne’s preparation for worst case scenarios. Real estate investing can financially be like one of the bruising fist fights Bourne gets into.
You might get blindsided with a tenant who stops paying, moves out early, and leaves house destruction behind in his wake.
You might get cut and start bleeding when a house unexpectedly sits vacant for months without selling.
You might get your breath knocked out when a lender suddenly needs her money back in full within 60 days.
You don’t know what the challenges will be or when they will come. But the big, unexpected challenges will come. And they’ll test your financial strength.
Warren Buffett always says the future is uncertain. And as you can see from his net worth, Buffet is pretty much the Jason Bourne of investing.
He stays calm. He comes prepared. He confidently steps unscathed from all financial crises with cool German techno music playing in the background.
Related: 7 Timeless Lessons About Getting Rich From a Book Your Grandparents Read
Bourne and Buffett are both very cool dudes.
3 Real Estate Lessons to Survive Like Jason Bourne
In 2008-09 I knew investors who bought properties with one plan, but the economic climate and the down market quickly changed everything.
These investors backed themselves into financial corners. They weren’t prepared for the fight they got into. As a result, they got knocked out of the game.
Before we pass judgment, we should realize that the 2008-2009 crisis blindsided MANY entrepreneurs and investors. A lot of them weren’t brand newbies. They were experienced and well known developers, builders, investors with dozens of properties, and even established banks and insurance companies.
Pretty much everyone in the market at that time felt the pain. If you survived, you still received scars and lessons along the way.
Here are 3 specific lessons I learned from observing (and surviving) that same market downfall.
1. Avoid Short-Term Balloon Loans
Balloon loans mean that all of the principal must be paid off on a certain date in the future, typically after 3-7 years with commercial mortgages and within 6-12 months with hard money loans.
As long as prices keep going up, as long as buyers continue borrowing money and buying houses, and as long as banks continue loaning money, it is ok to have a short term balloon loans.
But all of these “as long as …” scenarios didn’t pan out in the past. You don’t want to be the borrower in that situation.
So should you avoid balloon loans all together? Or is seven years reasonable? Ten years? Twenty years?
The answer is different for each one of us and our particular financial situations.
Let's say you have a steady, well-paying job. You own seven properties, and six of them have long-term, fixed interest rate financing with payments covered completely by net income from rents. Your seventh property has a local bank loan for 75 percent of the value of the property, and it has a balloon in three years.
In this person's shoes I wouldn't be panicking. I would, however, have contingency plans (exit strategies) in the back of my head for how I'll either pay off the loan, refinance, or sell the house in the near future.
It’s also different for different properties and locations.
A short-term loan on a nice location, bread-and-butter single family home is different than a short-term loan on a 20-unit apartment complex. The single family house is more liquid, a.k.a. it's easier to sell and to refinance if needed. Liquidity is just another term for an exit strategy to get you out of a bind.
Balloon notes are not ideal, but if you must use them, be prepared with back-up plans, don’t over-commit yourself, and stay realistic about your exit strategies in different economic circumstances.
2. Maintain Sufficient Cash Reserves
During good times when high returns on your cash are easy to come by, leaving money in the bank can seem like a waste. As long as the good times continue, too much cash in the bank (excess liquidity) is indeed a waste.
But liquidity equals flexibility and staying power in the financial world whenever tough times come.
Most wise financial advisers recommend the equivalent of 3-6 months of your personal overhead as cash in the bank just in case you lose your ability to produce income. Wise businesses follow a similar strategy.
What were to happen if a third of your properties experienced vacancies at one time? Could you handle to pay the mortgage, tax, insurance, and the maintenance while you got the homes refilled?
I heard a story once from Robert Shemin, a real estate investor and author, about a series of tornadoes that touched down and caused extensive damage near Nashville, TN in an area where he owned 40 rental properties.
Many of Robert’s properties were damaged, and the tenants moved out and didn’t pay rent.
You might say, “If he had insurance, that should’ve covered it.”
Yes, he did have insurance. But a more important question was when would they cover it.
Because it was such a large disaster, there was a delay in getting funds from the insurance company. Robert almost went bankrupt, making his mortgage payments and fixing up properties while he waited on insurance money.
Many of the bank failures in past banking crises resulted because the banks did not have enough liquidity to satisfy bank regulators. Banks, unlike us, have the FDIC and other federal agencies watching their books constantly.
If a bank has a rash of foreclosures, they are required to set aside a certain amount of cash to cover this real estate on their books. If they can’t do it, the feds shut them down.
Unlike banks, you have to regulate your own liquidity, but it’s equally important to do it if you plan on being around for the long run.
3. Have Plans A, B, C, E & F
Selling properties and cashing out can be important to both fix-flip investors and landlords. It is a valuable tool in your arsenal because it allows you to capture profits, liquidate your equity, pay off loans, and move on to new deals.
That’s the upside.
On the downside, selling for cash is the most difficult part of our business. A lot of things have to happen correctly for it to work, and many of the variables are outside of your control.
Because that’s the case, you need to have backup plans when you go to sell.
So, let’s say that selling at full-price for cash is your ideal scenario or “Plan A.”
- Plan B may be cutting your price aggressively after a certain period of time and after you’ve tweaked the property staging and marketing.
- Plan C may be selling at a loss and using reserves (or borrowed money) to cover the difference.
- Plan D may be to find a qualified lease-option tenant who can reasonably cash you out in a year or two.
- Plan E may be to owner finance the balance after getting a 20 percent down payment (assuming you follow Dodd-Frank protocol and assuming your underlying lenders allow what’s called “wrap financing,” which mine have in the past).
- Plan F may be to refinance or bring in partners (if needed) and rent the house out until you can try selling another day.
I like having options. This is the opposite of being stuck in a corner.
But most importantly you must purchase and finance a property with these alternative plans in mind. If you have high payments, short-term balloons, or unfriendly lenders or mortgage terms that make the lender likely to call your loan due, these back-up options may not work well.
This is one reason, by the way, I love investing with private investors, seller financing, or creative terms like lease options instead of commercial or institutional mortgages.
The essence of my message in this article is to protect your downside and to watch your back.
You might be thinking that this is a pretty conservative and cynical approach. You’d be right.
Over time we can let go of some of the Jason Bourne paranoia so that we can enjoy our business and life a little more. But especially early on and especially while you’re highly leveraged, be conservative.
And be careful emulating the wild-eyed, carefree financial approaches many “investors” use as markets get hotter and more competitive.
Growth is great. Speed is super. Profits are awesome. I love them all.
But these goals must always be balanced with safety. If we never reach the peak of the mountain because we get knocked out of the game completely, what was the point of moving forward in the first place?
You must find your own personal balance point based upon your experience and risk tolerance.
If you invest too scared and take too many precautions, you’ll never meet your ultimate goals of financial freedom. This is called analysis paralysis.
But if you grow too quickly and ignore the risks you’re taking, growth can lead you to blindly run into financial trouble.
I hope you keep this Jason Bourne-like balance in mind as you move forward on your climb to financial freedom using real estate.
- What do you do to stay prepared for worst case scenarios in your real estate business?
- What other scenarios should investors watch out for?
- What secret Jason Bourne real estate moves have you used to survive in real estate?
I’d love to hear from you in the comments below.