Why I’m Likely to Invest More of My Own Capital This Year Than Ever Before

Why I’m Likely to Invest More of My Own Capital This Year Than Ever Before

5 min read
Jeff Brown Read More

We’ve had a hellacious rollercoaster ride this century when it comes to our economy, real estate, and investing in general, haven’t we? Born under President Truman, I can attest to having lived through—or should I say, survived—many down cycles. Experience tells me this latest version was the third worst compared to the 1981 recession and the S&L Crisis in the 1990s. It’s not even a close call. But as I often tell clients, don’t let me get away with saying something like that without backing it up with empirical evidence.

For those born in the 1970s and after, here’s what happened in those two down cycles.

The 1981 Recession

We’d just experienced over four years of nearly runaway inflation. In fact, it topped out at around 14%! Think a second, and let that reality sink in. Real estate tends to “track” inflation, which it did with a vengeance. Homes worth $30,000 going into 1976 were worth $100,000 in 1981. But by then the economy had tired of high unemployment, higher taxes, much higher oil prices, and rising interest rates.

In the last quarter of 1979, the you-know-what hit the fan in spectacular fashion. When the White House changed tenants around this time in 1981, unemployment was around 10%, give or take. Inflation was roughly the aforementioned 14%. Prime rate was ready to touch 20%. The FHA home loan rate for their anchor 203B home loan program hit 16.5%! The rates for small (1-4 residential units) income property started at 18%. Here’s a personal family anecdote from those days.

Grandpa and I were talking one afternoon when he mentioned the 13.5% interest he was getting on a bank CD. I could tell how proud he was, but then he asked for my opinion. I told him that after tax he was losing around 5-8% due to inflation. The air went out of his balloon. He knew it was true as soon as the words left me.

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The S&L Crisis of the 1990s

Crooks took advantage of new legislation, poorly thought out, that in effect gave the key to the henhouse to the foxes. The predictable mass theft and corruption spun out of control. That crisis is why young folks don’t know what savings and loans are. They’re gone. In 1994, home loan interest rates were back to 9% or so. No real estate was moving due to the S&L Crisis. Back then and for years before that, a huge chunk of home buyer lending was done by savings and loan firms. The economy was a joke. How bad was it, you ask?

Related: 3 Strategies I Use to Succeed in a Cooling Multifamily (or Any) Market

You just read the short version of how bad the ’81 recession was. This one, in my opinion, was worse. Every few days, back in August of 1994, I gathered small groups of my investment clients in my office. I told ’em I wasn’t renewing my office lease that December. I’d let them know when I thought it was time to get back into the pool. But ’til then? I was out. That’s how bad it was. I remained out ’til November of 1996, just over two years.

Compare those two downturns to our most recent experience.

  • Home loan rates remaining steadily in the 3-4% range. Investment loans for residential income property camping in the window of 4-5.5%. Inflation staying in the 2% range if not lower—though I will agree the current formula for “real life” inflation has become a bad joke.
  • Rent/price ratios have reverted to better days, though lately we’ve seen them begin to show weakness due to supply/demand. Income property in very high quality locations can still be acquired at a rent/price ratio of give or take, 1%. High quality locations? Yeah, locations you’d put your mom or grandma to live alone. That high quality.

Let’s Give This Some Historical Perspective

I was in the business as a licensed real estate agent, then the broker/owner of a brokerage for 32 consecutive years before I ever saw a home loan 30-year fixed rate interest starting with a number less than seven! Ponder that a minute before saying how much we all suffered with home loan rates under 4% the last decade or so. 🙂 Think about the ability to abandon your local market, as I did almost 15 years ago, in order to invest in properties that made, you know, common sense.

Technology has allowed me and my clients to buy and sell properties and notes in over half the states. It’s allowed me to begin developing properties out of California. This has been true since at least 2000, and I’m being kind. I know many who invested outside their own states in the 1990s. The only thing I’ve done in my own state since leaving is to buy a house, and that was on the boss’s orders.

How About Now—What’s New?

As I write this, home loan interest rates remain under 4%, though they’re knocking on that door loudly. Our taxes have been reduced somewhat, more or less for some than others. The repatriation of maybe a trillion dollars or more from across the Atlantic will be like a shot of adrenaline IF it becomes reality in any real sense. Over 100 large American firms have already shelled out bonuses. Many, including Walmart, have given raises while simultaneously increasing employee benefits. I mention that only as evidence of how big business must be viewing the next few/several years. It shows confidence in an economy they think is about to experience long term growth in percentages much improved over the last decade or so.

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I Agree With this Assessment

Again, I’ve seen this movie before. I’ve seen its sequel and its remakes. Though unanticipated plot twists are always on our menu, it’ll be the first of my nearly 50 year career. Again, that’s not to say something untoward can’t happen, it can. But it hasn’t happened in my lifetime. That said, the iconic bubble bursting in late 2006 and 2007 was a new one to me, though not an unanticipated plot twist. I’d seen it coming by late 2002. So why’d it take me ’til May of 2003 to leave SoCal’s real estate investment market? It took me that long to man up is the simple answer.

Related: How the Dire Future of the Retail Market Could Solve the Housing Affordability Crisis

Walking My Talk

That’s a lotta talk about good times headed our way, isn’t it? Let me assure you I’ll be walking that talk, barring any plot twists, for at least the next couple years if not longer. Here’s what I’ve done already and what I plan for those years.

In the last few months, I’ve already spent over $1.5 million of my own and group investment money I control on flips around the country and land in a nearby state. Six figures of that is my capital. My team and I have already, or will in the next 30 days, break ground on three projects. This calendar year, 2018, plans are to spend another $5-10 million on more of the same. I’m all in with my own capital. Every time one of my other investments in notes or flips pays off, it goes into another out of state development run by my team and me. I view the upcoming few years as a window for real capital gain and profit.

A caveat: Interest rates in this scenario have always risen. I expect no less this time. For buy and hold investors, get sooner rather than later. The rates more likely than not will eventually hit the point where buy and hold will become much more difficult to pencil out.

I’m likely to invest more of my own capital this year than ever in my career.

I’d love to know what your thoughts are for this year and the next few.

This calendar year, 2018, plans are to spend another $5-10 million on more of the same. I'm all in with my own capital. Here's why.