Many real estate markets in the U.S. are widely considered in 2017 to be in a similar bubble to 2008. USA Today reported last week that housing inventory was at a 20 year low. Even conservative, entry level 3-bedroom homes in the Midwest that are perennial favorites for income property investors have reached levels that make achieving positive net cash flow challenging.
The primary cause is not runaway inflation or a booming economy (think the ‘Roaring 20s’), but rather it is the expected shortfall of new construction inventory that follows a dramatic real estate cycle correction like we saw in 2009. Most builders cut back operations drastically, or went out of business entirely, and their workforce moved on to other industries – restoring this industry will take time as it has following every real estate downturn in the U.S.
Real estate experts have been tracking single family home production versus demand for decades and very accurately predicted the current shortfall of home inventory, and with most millennials that are still living at home eventually getting married and their own residence, these experts are predicting the shortfall will continue for several years.
For real estate investors, this inventory shortfall marks a transition from a buyer’s to a seller’s market. In 2012, we had our pick of properties in multiple markets at $40/square foot and today we find ourselves competing against other investors to bid up properties that start at $80/square foot. That’s not an intelligent or safe position from which to be purchasing investment properties. Yet, we are pulled to take action – if I don’t put my money to work in a property, where DO I put it to grow and still remain available for the next opportunity? The answer: A tax efficient, liquid opportunity fund earning 500-800% of your savings account.
What is an opportunity fund? Many typical financial advisors will describe it as an account where you are saving for one specific expense or event, like an around the world trip, or going back to school for your PhD. They define it this way because they assume that their customers are giving all investment dollars to them to manage; opportunities are not investments in their eyes.
Entrepreneurs and professional investors see an opportunity fund differently – opportunity funds ARE for investments, not just for purchasing ‘doodads’ as Robert Kiyosaki would say. An opportunity fund is a growth and tax efficient, liquid account where you hold your investment capital while evaluating potential deals, and when you bring this kind of account into your life incredible opportunities start to happen.
Opportunity ‘cycles’ are both short and long term. Professional real estate investors know that it is better to buy in the winter months when there is greater inventory and less competition from consumers who would rather move when the weather is better and school is out in the summer months. We then use our opportunity funds to earn 4-5% tax free while allowing the frenzy of summer buying to subside. Similarly, but measured in years not months, when we enter a seller’s market, professional investors store, protect and grow their investment capital in their opportunity fund waiting for the better deals to again present themselves.
Entrepreneur Jim Wang wrote in a 2013 US News and World Report article “Missing out on an opportunity is often as bad as being struck by an unexpected expense – though we don’t often see the two as being the same. It’s been proven that we feel loss more acutely than we appreciate gains, which is why you’ll see thousands of articles covering emergency funds and very few covering opportunity funds.” Who purchased all the businesses and income properties in 2009 and 2010 at a 75% discount? Professional investors with the experience, confidence and patience to have capital positioned in an opportunity fund.
Why does it take patience and confidence? Primarily because it is contrarian, the opposite of what you see everyone else being swept up in with the bidding wars, but also because you become frustrated with your money earning nothing while you wait; with inflation, holding your capital in a savings account is even causing you to lose money. That’s why many professional investors store their capital in a Wealth Maximization Account, an opportunity fund that grows at 4-5% tax free while remaining private, protected and completely liquid for that next opportunity. To learn more about your potential prosperity, contact your Wealth Strategist atparadigmlstg.wpengine.com.
