Learning to Adapt as an Investor

It was the summer of 2011 and I had just moved to Las Vegas to head directly into the storm in real estate, which was a field I had no experience in. What I saw was an opportunity; at the time, you could close your eyes, buy, and return 20% on your investment.

All. Day. Long.

People were giving away properties on the MLS and an atmosphere of fear permeated the air. In this kind of distressed environment, I believe anyone with the temperament to pull the trigger can succeed. The math was obvious- it was just a matter of controlling your emotions and making the correct logical decision.

In the long run, however, you need more than the ability of buying when there is blood on the streets, since these situations are rare. You need to learn the skill of adapting to the invariable changes to your market, created both by local and global trends. 

From Bust to Boom

In the blink of an eye, Vegas went from a distressed market to a very hot market, so it didn’t make sense for me to buy and hold anymore. I did some research and decided to try out wholesaling because it satisfied: a) my need as a buyer to purchase attractive cash-flowing properties, and b) my desire to generate cash and adapt to the market environment, which was a bit frothy in my opinion.

Now here’s the important thing to understand: I changed with the market and acted. Right away. I didn’t spend 12 months researching and setting up the “perfect” system for myself. In this business, you have to learn often times by trial and error.

Here’s an example. Everything I read was about this mythical 70% ARV rule in wholesaling. Well I quickly realized that due to the lack of inventory, prices were being bid up quickly and the 70% rule just didn't work. Furthermore, on a cash-flow basis, prices were still reasonable, so it wasn't a classic bubble environment.

With this information as a backdrop, I went to more of a 90% ARV rule because the market rewarded velocity. I allowed the general trend in the market to take care of the rest. It was a strategic move based on inventory levels, capital flows from Europe due to the developing crisis there, and the reasonability of prices on a cash-flow basis. At the end of the day, you need to use your judgment and adapt. Know when to break the "rules."

What Does the Future Hold?

We all need to adapt, especially if another shockwave hits similar to what we experienced in 2008. For now, I'm preparing for a deflationary environment, which by definition means dollars get more valuable. The basic premise is that the dollar became the de facto global carry trade currency (borrowing cheap dollars to invest in higher-yielding currencies) through the Fed’s low interest rate policies. This creates a situation where every uptick in the dollar forces people to unwind their carry trade (buy back dollars), which creates the next uptick in the dollar. This is a positive feedback loop that I believe any serious real estate investor in the U.S. must understand.

In this environment, I believe it is reasonable to lend short-term via first trust deeds to build reserves of increasingly valuable dollars for the next crisis environment, which appears to be a year or two away. But that's a topic for another post. 

My point is that the market is always shifting, and sometimes macroeconomic trends do matter, especially in a crisis environment. That's the type of environment we're in today. I believe savvy investors who can adapt quickly incorporating global trends will do very well in this environment, while those who miss the forest for the trees will be in for another rude awakening.