I think we can all agree that the economic outlook is uncertain. You can choose almost any economic indicator (inflation, labor market, real GDP, etc.) and find conflicting and confusing signals.
As an investor, this can be daunting. How do we make informed investment decisions when the economy is so uncertain? Here are four tips on how to continue investing successfully in an uncertain economy.
1. Begin with the end in mind
For most investors I talk to, I find that the confusion doesn’t actually come from market conditions. In fact, it comes from confusion about one’s own goals. If you don’t know where you want to go, making a decision can be very difficult.
It’s like asking for driving directions without a destination: How can you possibly ask someone (or Google Maps) for driving directions if you don’t know where you’re going to end up?
The same goes for real estate investing. There is no strategy without goals. In fact, the Oxford Dictionary defines strategy as “a plan of action designed to achieve long-term or overall goals.” There is no doubt that without clear goals, you cannot develop a strategy.
Once you know where you want to go, you can start deciding which strategies will help you get there given current market conditions. For example, if you know you want to retire within five years, you may want to choose high cash flow markets in the Midwest, even if they have a lower likelihood of appreciating in value in the next few years. Conversely, if you have a longer investment horizon, you can choose from many strategies to achieve long-term success.
2. Think long term
Speaking of long-term investing, a second tip comes to mind: Even in today’s market, there are many great ways to get short-term returns. Both flip investing and value-add investing have performed well in recent years. But if you’re looking for a lower-risk way to invest in an uncertain economy, I recommend long-term investing (lease, short-term rental, etc.).
When you think about the problems facing the housing market and the economy, I find that most of them are short-term in nature. Of course, some people believe that the economy is suffering irreparable damage, that the dollar is about to collapse, or that the United States will be crushed by the BRICs – but I don’t think so.
Is the economy facing challenges? Yes. Is the geopolitical climate very unstable? Yes. Is this an uncertain and sometimes scary time? I think so. But does this mean I’m bearish on the U.S. economy long-term? Absolutely not.
Sometimes when I’m nervous about the economy, I look at historical economic data. I know this is weird, but look at this chart. It shows real (inflation-adjusted) GDP growth and median home prices in the United States over the past 60 years.
What do you see? They all have undeniable growth trends. Yes, there are times of decline, but they are all short term. Fluctuations in house prices are almost always short-lived (with the exception of financial crises). Recessions will happen, but they will also end.
This is my version of a financial security blanket. This makes me feel comfortable investing even in times like these.
With this in mind, I’ve found that the best way to invest in an uncertain economy is to look beyond the uncertainty. I study the economy and the housing market for a living, and I admit I’m not sure what the next few years will hold. But if you ask me what I think property values will be in 10 years, I’m pretty confident they will be higher.
The farther you look, the more certain you are. Twenty years later? thirty? If you take a long-term view on investing, your decisions will become clearer.
3. You need an essay
Writing an investment thesis may sound like an activity for an institutional investor or hedge fund manager, but every real estate investor needs one. If you’re unfamiliar with the term, an investment thesis is “a set of standards and principles used by investors to guide the decision-making process when evaluating potential investment opportunities.” Basically, it’s a set of guidelines you use to make decisions.
Writing an investment thesis doesn’t have to be difficult. It can be as simple as writing down three to five ideas about the economy and how you will navigate it.
The few components of my thesis are:
- Focus on long-term residential properties with at least break-even cash flow.
- Avoid stable CRE assets and remain highly alert to all CREs.
- Learn how to originate and purchase a hard money loan.
- Underwriting assumptions are extremely conservative.
- Take an opportunistic (rather than aggressive) approach to acquisitions.
Please note that despite the economic uncertainty, I am making some decisions about how to respond to the near future. I believe in the long-term value of residential real estate and I will continue to invest in it.
On the other hand, I’m skeptical about the value of commercial real estate right now, and while there are some rare occasions where I’ll consider them (I’ve done a deal in CRE this year), I’d avoid all stable assets and treat them with caution All CRE.
You may disagree with my thesis. That’s natural. Not everyone will read the economy the same way, and it’s unlikely that two investors will agree on a path forward.
But the key here is to have a paper first. If you don’t set these guidelines, it’s easy to become indecisive, overwhelmed, or even accomplish nothing. I highly recommend you take the time to write an investment thesis.
4. Stay flexible
Given the nature of economic uncertainty, your thesis may be wrong. It may need to be updated from time to time.
While it’s important to clarify your intentions with an investment thesis, remember that your thesis is a set of guidelines—they’re not hard and fast rules. Your thesis can spur action, but as the economy changes, you’ll need to update it. Try to stay humble and recognize that your paper may be incomplete or incorrect and need to be changed.
In more specific economic times, I recommend revisiting your paper once or twice a year. You don’t want to constantly re-evaluate your paper because you need time to execute your plan. But you also want to make sure your paper and plan are as up-to-date as possible.
In uncertain times like these, I recommend revisiting your essay quarterly. This doesn’t need to be a long exercise. Just take 30 minutes, look at your paper, and see if the plan still makes sense to you, given the new information you’ve gathered since you last drafted it. If so, that’s great! If not, make the necessary changes.
Even if you update your paper regularly, you still can’t be sure of anything. But I’ve found that being flexible and regularly updating my investment thesis allows me to make the best decisions, even in times of economic uncertainty.
final thoughts
Uncertain economic times can be difficult and confusing for investors, but they can also be full of opportunities. A look back at history shows that many of the best times to buy are during times of fear and uncertainty. That doesn’t mean every deal will be great! It just means you should stay in business and look for deals that fit your investment philosophy.
If you need a quick start on your goals and investing thesis, check out my book Start with strategyand the new strategic planner. They’re packed with examples and exercises designed to help you develop a personalized strategy to navigate any market.
Find your vision and achieve your goals with this practical planner.
Use Dave Meyer’s customizable planning tool for real estate investors Start with strategy.
Notes on BiggerPockets: These are the opinions written by the author and do not necessarily represent the views of BiggerPockets.
