I think we can all agree that the economic outlook is uncertain. You can pick almost any economic indicator (inflation, labor market, real GDP, etc.), and find conflicting and confusing signals.
As investors, this can be daunting. How can we make wise investing decisions when the economic climate is so murky? Here are four tips on how you can continue to invest successfully in an uncertain economy.
1. Start With the End in Mind
For most investors I speak with, I find that confusion doesn’t actually come from market conditions. It actually comes from confusion about one’s own goals. And it can be very difficult to make decisions if you don’t know where you want to end up.
It’s like asking for driving directions without a destination in mind: How could you possibly ask someone (or Google Maps) which route to drive without knowing where you’re ultimately trying to end up?
It’s the same thing with real estate investing. You cannot develop a strategy without a goal. In fact, the Oxford Dictionary definition of strategy is “a plan of action designed to achieve a long-term or overall aim.” You quite literally cannot have a strategy without a clear objective.
Once you know where you’re trying to go, you can start to make decisions about what tactics will help you arrive at your destination in current market conditions. For example, if you know you want to retire in five years, you may want to select high cash flow markets in the Midwest, even if they have a lower chance of appreciation in the next few years. Conversely, if you’re investing on a longer time horizon, you can select from many tactics that set you up for long-term success.
2. Think Long Term
Speaking of long time horizons brings me to my second tip: There are plenty of good ways to invest for short-term returns, even in today’s market. Flipping and value-add investing have both worked well in recent years. But if you’re looking for lower-risk ways to invest in an uncertain economic climate, I recommend longer-term investments (rentals, short-term rentals, etc.).
When you think about the questions facing the housing market and economy, I find most are short-term in nature. Sure, some people think the economy is being irreparably damaged, the dollar is going to collapse, or that the U.S. will be crushed by BRICS countries—but I don’t.
Does the economy face challenges? Yes. Is there a very unstable geopolitical climate? Yes. Is it an uncertain and sometimes scary time? I think so. But does that mean I am going to bet against the U.S. economy in the long run? Absolutely not.
Sometimes when I get nervous about the economy, I look at historical economic data. I know that’s weird, but just look at this chart. It shows both real (inflation-adjusted) GDP growth and the median home price in the U.S. over the last 60 years.
What do you see? They both have an undeniable growth trend. Yes, there are times of declines, but they are all short term. Fluctuations in housing prices are almost always short-lived (except for the Great Financial Crisis). Recessions happen, but they end.
This is my version of an economic safety blanket. It makes me feel comfortable investing even in times like these.
Given this, I find the best way to invest in an uncertain economy is to look past the uncertainty. I study the economy and housing market for a living, and I admit I am uncertain about what will happen in the next few years. But if you ask me how I feel about property values 10 years from now, I feel very confident they will be much higher.
And the further out you look, the more certainty you should have. Twenty years from now? Thirty? If you take a long-term look at investing, your decision-making becomes a lot clearer.
3. You Need a Thesis
Having an investment thesis may sound like an activity for institutional investors or hedge fund managers, but every real estate investor needs one. If you’re not familiar with this term, an investment thesis is “a set of criteria and principles that investors use to guide their decision-making process when evaluating potential investment opportunities.” Basically, it’s a set of guidelines you use to make decisions.
Developing an investment thesis doesn’t need to be hard. It can be as simple as writing down three to five ideas about the economy and how you’ll navigate it.
A few components of my thesis are:
- Focus on long-term residential real estate with at least break-even cash flow.
- Avoid stabilized CRE assets, and be very wary of all CRE.
- Learn how to original and purchase hard money loans.
- Have extremely conservative underwriting assumptions.
- Be opportunistic (rather than aggressive) about acquisitions.
Notice that even though the economy is uncertain, I am making some decisions about how I will navigate the near future. I believe in the long-term value of residential real estate, and I will keep investing there.
On the other hand, I am skeptical about commercial real estate values right now, and although I will consider them in some rare cases (I did a deal in CRE already this year), I will avoid all stabilized assets and be careful with all CRE.
You may disagree with my thesis. That’s natural. Not everyone is going to read the economy the same way, nor are two investors likely to agree on a path forward.
But the key here is to have a thesis in the first place. If you don’t create these guidelines, it’s easy to be indecisive, become overwhelmed, and fail to do anything at all. I highly recommend you spend the time to write out an investment thesis.
4. Be Flexible
Given the nature of economic uncertainty, your thesis may be wrong. It may require updating from time to time.
Although it’s important to spell out your intentions with an investment thesis, remember your thesis is a set of guidelines—they are not hard-and-fast rules. Your thesis enables action, but as the economy changes, you need to update it. Strive to remain humble, and recognize that your thesis may be incomplete or incorrect and needs to change.
In more certain economic times, I recommend revisiting your thesis once or twice a year. You don’t want to constantly be reevaluating your thesis, because you need time to execute against your plan. But you also want to make sure your thesis and plan are as up to date as possible.
During uncertain times like these, I recommend revisiting your thesis quarterly. This doesn’t need to be a long exercise. Just take 30 minutes, look at your thesis, and see if the plan still makes sense to you, given the new information you’ve gathered since last drafting your thesis. If so, great! If not, make the necessary changes.
Even if you update your thesis regularly, you still won’t know anything for sure. But I find that being flexible and regularly updating my investing thesis allows me to make the best possible decisions—even in an uncertain economy.
Final Thoughts
Uncertain economic times can be difficult and confusing for investors, but they can also be ripe with opportunity. A look back at history shows that many of the best times to buy were during these periods of fear and uncertainty. That doesn’t mean every deal will be good! It just means that you should continue to operate, and look for deals that meet your investment thesis.
If you need a jump start on crafting your goals and an investment thesis, check out my book Start with Strategy, and the brand-new Strategy Planner. They’re filled with examples and exercises designed to help you craft a personalized strategy to navigate any market.
Find your vision and achieve your goals with this hands-on planner.
Create your own action plan, fill in the gaps, and design the perfect deal for YOUR vision of success with Dave Meyer’s customizable planner for real estate investors—the companion to Start with Strategy.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
