Are you feeling hesitant investing in anything right now? How will interest rates, slower real estate sales, etc. affect the real estate market? Which investments are the best right now? Chris Miles shares the 5 principles to finding the best investment in today’s market and where he is currently looking. Tune in to discover what they are!
Listen to the podcast here
Five Principles To Finding The Best Recession Resistant Investments in Today’s Market
I want to talk about something that one of my team members brought up and I thought was a great topic. In fact, it aligns with many of the questions that our clients, our VIP clients that are at high risk for consulting. They’ve been asked the same thing as well, which is, what are the best recession-resistant investments now? The question you have to ask is that’s right now. That’s the keyword, the key phrase that goes with that.
The truth is, every recession is different. No one recession is the same. What would have been great last recession would probably not be good this recession. I want to teach you the principles of what to look for first and how to analyze an investment to know whether it’s a good investment right now. Second, I’ll give you my favorites. That doesn’t mean this is an investment recommendation by any means you perform. Consider this your disclaimer. This is not to be considered investment advice.
This is what I’m seeing right now based on current conditions, but I want to teach you the principle first because, even if it’s another recession. Maybe you’re listening to this ten years from now, and there’s another recession down the line. You can be ready to be able to make the right call for you. I’m going to give you five key points, five things.
There’s more than this, but I’m giving you at least a good start. If you go this far, in fact, with your due diligence and how you ask questions, guaranteed, you’re going to come out better than almost anybody that’s doing this. What I’ve learned is one of the best ways to learn how to invest is to learn from banks. I don’t mean the banks have been gambling and doing some high-risk stuff with their money. That’s going to happen.
I’m talking about the banks. Usually, they’re more like the regional banks. Sometimes, they’re larger banks, too, but if you learn from how banks invest, specifically how they invest in you when you try to borrow money from them, you can learn a lot about whether you should invest money in that. As a blanket statement, generally speaking, when you buy real investments, real assets, things like real estate. If I were to say, “Throughout all the recessions, what’s the one investment type that probably will hold true?” it’s going to be things like your real estate investment properties, the ones that you own and control.
I recommend doing more turnkey real estate where somebody else manages it for you, but even if you did that, the great thing is if something goes wrong, even with the management company. You could always fire them, and you can become the property manager. Save some money and make some more in case you need to. There’s a lot more flexibility there. As a general overall rule of thumb, that’s probably the more recession-resistant type of investment, even though they can have hard times, too.Do more turnkey real estate where somebody else manages it for you. The great thing is if something goes wrong, you can always fire them. Save some money and make some more in case you need to. Click To Tweet
I want to go back to this again with actual banks. What do they do? If you go and ask for money from them just like an investor might ask money from you, they’re going to be asking you a few questions if you’ve ever done any bank loan, like a mortgage. Auto loan is not so bad. Credit cards are not so bad. If you ever try to get a mortgage, those banks will, metaphorically speaking, have you drop your pants like you’re at the doctor’s office, and they want to do a full exam, don’t they? They want to financially check you out.
Track Record And History
We talk about credit scores. A credit score is not the most important, but it’s a factor. A credit score is a big one, especially when you’re looking to invest. What’s a credit score for looking at an investment? It’s looking at their track record and history, how well you made payments on your loans, how well these investors made payments to their investors, and how well these operators paid them to their investors, to those people that have given them money that they’re investing with. When things got hard, what did they do? Were they willing to dip into their own pocket and make things good?
We were doing a call with some of my clients. The ones that have been around for over six months. They kept us on retainer at that point, and we were talking about that. One of them said, “There’s one deal this guy did. He’s experienced, but even he ran into some obstacles.” He followed up with, “He still made it right. We still got our money back, but it was a little bit scary. He didn’t pay us for a few quarters.”
That can happen. Even to the best of investors, crap can happen. Things can go wrong, but what’s great is this operator, which I know, is one of the people that we’ve referred clients to before. He’s been doing this for over twenty years. He loves to make sure that people get what they paid in, even if it means it came out of his own pocket. Those are the investors that I love. That’s why we’ve curated a list of these investors over the years to make sure that it’s not just by getting a return on your money, but most importantly, a return on your money.
That’s what banks are looking at. When they look at your credit score, they want to see what’s the likelihood you’re going to pay them back. It’s the same thing when you’re investing. What’s the likelihood? What’s the track record of the people you’re investing with that are likely to pay you back? Does it mean it’s guaranteed? No, but does that ensure you and give you a little extra piece of mind? Yes, so that’s number one.
Banks Will Look At For You Is Cash Reserves
Number two, the banks will look at for you is cash reserves. How much cash reserves do you have on hand? Do you have extra savings? In case you can’t make payments because of cash running out, maybe you got laid off from a job or something like that, do you still have the ability to keep paying your payments for a certain amount of time? That’s critical, especially when you’re investing with investors. Do they have cash reserves involved? Do they have money there? Do they have liquid cash assets that they can keep things running in case things don’t go their way?
Most good operators, even if they take investment money from you, will take some of that money. Put it in cash on the side just as operating capital in case they need a little extra money and things don’t always go the exact right way. They want to make sure it’s good. Do they have extra reserves? There’s one group that our clients have talked to, and when we’re on a call, we grill them with questions.
When they were talking about them, they said, “How much cash do you have? How much do you have on the sidelines?” They said, “We’ve got about $15 million of our own money,” but then they brought up another thing. I might throw in an extra bonus. I said five things. This will be like a little sixth, even though it ties in with one of them as well.
He also said, “Here’s a great thing, too. When we buy our properties, we buy them with a lot of equity in them.” If you ever get a mortgage on a property, notice that banks will give you a lower interest rate if you put more money down on the property. Meaning that there’s more equity there. If you ever can’t make the payment with that bank, let’s say it’s a $500,000 home, but you only ask for a $250,000 loan, only half of that, you cover the other $250,000. You put it down.
Now, if something goes wrong, you can’t make those payments. Even if the market goes down, let’s say it goes down 10, the house is still worth $450,000. You only lost $50,000, but you only owed the bank $250,000. The bank knows they can still turn around and sell the property, get their money back, and then some by foreclosing on you. That’s safer. As a result, they’re more likely to give you the loan, and they’re likely to give you a better interest rate.
The key thing with the banks is they’ll pay you a lower interest rate or request a lower interest rate from you if you put less risk on them. The riskier it is, the more they charge you. That’s why credit cards are the highest charge because there’s nothing there. Be aware. When this guy said that, he said, “Not only do we have $15 million cash, but also when we buy these properties, we’ve bought the land ahead of time. We’re essentially asking you to give us money to be able to help build on that land. We own that land outright. We have over 50 % equity in these properties.”
Even if things go wrong, they could only build half and still sell them off and be fine. Not to mention, they have extra cash reserves. There’s that extra liquidity and extra savings that they have. Not to mention extra equity in the property that allows it to be a safer investment for you. Look for that as well. Look for that thing.
I’m going to go along with that equity. I would also say this. If you’re ever lending money to an investor and they say, “I need money for a property that we’re looking to renovate and maybe flip,” great. If you’re going to renovate that property, how much will it be worth after you finish it? It’ll be worth, let’s say again, $300,000 after you finish it. They’re asking to borrow from you $200,000. That means that there’s $100,000 of equity or should be at that point. That’s good. That’s not a bad thing.
I would put that borderline though, especially when you’re dealing with projections and things can become more expensive. They don’t always go the right way. That’s better than someone saying, “I need to borrow $300,000. What’s it going to be worth after it’s done?” $300,000. Most investors never do that, but I have had somebody say, “I need $280,000. It’ll be worth $300,000 afterward.” That’s less than 10% equity. There’s a lot that can go wrong there.
A lot of times, you may not be able to get your money back because they won’t be able to sell it for as much. Be careful for that very reason. Anyway, as I said, number one is credit. What’s their credit history? What’s their track record? Number two, do they have liquid cash reserves? Another two and a half, the bonus that I gave you is their equity.
Number three comes down to this, profit. When a bank looks at your situation, they’ll look at what they call the “debt-to-income ratio,” or DTI. The debt-to-income ratio is simply this. What’s the amount of income you have coming in compared to the amount of minimum monthly payments going out? Let’s say that you make $10,000 a month. If between your mortgage payment and the other loans that you have, you’re going to be paying $5,000 a month, banks will likely say, “No. That’s too much. We won’t want to give you a mortgage because your debt-to-income ratio is too high compared to the income that you have. We need those payments to be lower.”
They usually don’t want it to be more than 45%. They would say, “If you make $10,000 a month, you better not have your total payments, including your mortgage more, much less than $4,500 a month.” That’s a hard thing for a lot of people, especially if someone’s making $5,000 a month. Imagine that. That means you will only be lent about $2,200 a month. If you already have $1,000 a month going to car loans and credit cards or whatnot, now you only have about $1,200 a month.
You should be looking at investments the same way. What’s their profit? What if things don’t go the right way? It’s one of the scariest things that I see, especially right now, with interest rates rising. Before, when interest rates were low, it was dirt cheap money. You can be sloppy with the way you pick properties. Even if you weren’t sloppy, if you could say, ” I’ll get a variable rate loan. It’s dirt cheap right now. It’s the cheapest thing on the market. I’ll get that.”
When you want to try to fix that financing and their interest rates skyrocket as they did in 2022 and 2023, you’re going to say, “This is a lot more. This is taking out of our cash. Now we don’t have enough money to even pay out in profits because of all the profits that we had built into this model.” What’s happening? It’s taking all of our profits out because now we’re paying more than we expected. That’s a big assumption. When you’re looking for somebody to have you invest money, this is what you expect.
Can you give me a worst-case scenario? Can you even give me a much worse-case scenario? What if interest rates go up, say, 4 % in the next year? What would that do to you? If they say, “We do all-fixed interest rate loans. It doesn’t matter.” That’s awesome. Are you still profitable? Yes, we still have profits built in. If it’s an apartment building, for example, what if all of a sudden you have a 10% or 20% vacancy rate where 10% or 20% of your units aren’t being rented? Maybe people are going late, and they’re not paying you? What then? What would that do to your numbers?
Have them run those projections and say, “Here’s what happened with that 20% vacancy rate.” Self-storage is the one that people are saying, “This is recession resistant,” and it can be. Again, when you buy it for a higher price, then probably what you’re going to get in profits like some people when they try to buy rentals, and they realize there’s not much profit there. They’re going to say, “Is that worth it?”
Give you an example, I saw a rental. This is going away from self-storage but looking at a rental property, a single-family home. I saw one that they said they expect a profit of $63 a month. I know they’re taking out expenses and costs that they’re projecting as well. That’s not a lot of wiggle room in case something does go wrong. What if you don’t get paid rent for more months than you expected, or there’s more maintenance than you expected and what you budgeted for?
That could mean you could lose money. You might see appreciation still. That’s been a game-saver for some people when there’s appreciation, but you don’t want to rely on that. You never want to rely on that. You want to rely on, “Is it profitable right here?” If things don’t go your way, is it still profitable? Do you still have extra money to pay out? Again, if they’re profitable, they can keep that deal going and going. It might pay you less, but at least you’re getting something. That’s better than nothing, isn’t it? That’s the third one. That’s like the debt-to-income ratio when you’re trying to get a loan. The same thing, are they profitable?
Leverage And Having Equity
1) Track record. 2) Reserves. 3) Are they profitable? How much profit is there, especially if things get stress-tested? Number four goes along with the bonus I gave you. The bonus about leverage and having equity. 4) Is it secured? Is it backed by real assets? The one thing I’ll say is when it comes to investing, you want it backed by real assets. You don’t want to be giving money to things that maybe have no real value behind it. For example, giving a business loan. It can have some good profits, but do you have any assets to put it on?
This is why a bank will say, “Can we put a lien against your house? In case things don’t go well, we can still get money from somewhere. Can we put a lien against the building that you’re buying?” They want real assets to back it up. Do you notice that banks do not lend to the stock market? 1) It’s illegal, but they do not lend money to the stock market because that’s a gamble. They don’t trust it. You shouldn’t either. 2) They do give money to businesses, but they’re very strict on that because they know it’s unsecured. 3) They’ll give you money for real estate. In some cases, businesses will give you money for certain assets, even a car, because a car does have some asset backing up, even though it does depreciate over time.
That’s why real estate is one of our favorite things. It is secured. It doesn’t mean that that value can hold all the time, but it’s much more likely to hold compared to crypto or compared to a stock where those can go up or down based on rumors. It doesn’t have to be real. It would just be emotions, and people can cause your price to tank, causing you to potentially lose money.
What Position Are You In With Them?
You don’t want that. You want to be backed and secured by real assets. That’s why not just being backed and secured by real assets but also have equity in them so that even if the values do go down a little bit, you are still protected. Your money is still safe. That leads to my fifth and final point. 5) What position are you in with them? First position or second position. Hopefully, it’s not the third position. The second is bad enough.
What do I mean by that? Think about getting a mortgage. When you go to the bank, you’re going to put money down, and they want to be your only lender, preferably. That’ll be your first mortgage. First mortgages mean that if you don’t happen to make the payment, they get paid back first, even before you. What if you get a second mortgage? Maybe you did a special loan where you put 10% down. They came with an 80% loan plus a 10% second mortgage.
What happens if you stop making payments? The first mortgage, the person that’s 80% and the bank that’s 80%, they get paid off first. If there’s anything left over, you might get something, but not likely. They’re going to sell it off. They’re going to take whatever money they can. That’s what’s going to happen there. For example, let’s just say this is a $500,000 property. If there’s one bank that lent you $400,000 and then gave you $50,000 while you put $50,000 down, what if that house only sold for $400,000? That first mortgage company gets paid off. The second mortgage company gets nothing. They lose out.
This is why your second mortgage interest is usually higher than your first mortgage because they don’t want to lose. If you’re an investor, you don’t want to be in that second position because that means you’re the second person to get paid if there’s anything left over. You get left over with the scraps. The first position, the first person who gets paid back, is essential. A good question to ask that investment operator is, “Is there another bank or some other lender that’s involved here that already has loans that they would be in the first position? If I put my money with you, am I now in second position so if all sudden things go wrong, you pay them back, but then I get nothing?”
I remember sitting at a meeting. This was about fifteen years ago. This was when I was working with Garrett Gunderson. He wanted us to talk to these clients about this investment opportunity with the guy who owned the building that we were in. The guy was saying, “It’s secured by the building.” He says, “You’ll be in third position.” That means there’s somebody in the first position who would get paid back first if things went wrong. There’s somebody in the second position, which is already risky. He says, “I’m going to put you in third position. I’m going to pay great interest on this, and the money I’m going to use is going to pay off the other investors.”
He’s going to pay them off. I remember I raised my hand and asked a question. I said, “What makes this different than a Ponzi scheme because you’re just taking that money to pay off other investors.” He’s like, “It’s not a Ponzi scheme. There’s a real asset here.” His veins are popping out of his head. He got so angry at me that he wouldn’t even let me rent an office for a whole year. I had to use a cubicle because he was so angry at me. That’s how bad it was.
Flash forward about two years later, barely even that, he defaulted. He lost $60 million of investors’ money in that same deal. Even when they were investigating it, I remember they brought me in for questioning. They wanted to depose me. As I started to answer the question, they said, “Here’s the email we saw you sent that’s saying you don’t recommend this. We also had multiple witnesses that said you called it a Ponzi scheme.” I said, “I did, and that’s why I wouldn’t even get an office for a year.” They said, “Good. You’re safe. You can go. We got some other people to investigate.”
That’s the thing. You have to remember that you don’t want to be all the way down the pecking order. You don’t want to be so far down the pecking order that you’re left with nothing. It doesn’t matter what interest rate they promise you. Here’s the thing we don’t care about. We don’t care about getting a return on our money as much as we care about getting a return on our money back. That’s why you ought to make sure you protect it. What position are you in?
To answer the question at the very beginning. “What are some of my favorite investments right now?” giving money to those who are looking to lend or borrow money from me to do certain deals, especially if there’s high equity in those deals. They’re secured by real assets. Those are the things I like to do. Short-term lending is a good one.
There are some lending funds. I don’t mean like typical lending club-type stuff. I’m lending to guys that are buying real properties with it, not doing some gambling like into businesses or car loans. I’m going into things that have real assets involved, and I get paid double-digit returns very easily. Could it go wrong? Could something happen where they can’t pay those returns? Yes, it’s possible that it could happen, but because interest rates are going so high with banks, they’re now looking more to borrow money from us and are still willing to pay us a good return on our money, too.
That’s one way you can make good money even in this high inflationary type of market. That’s my give for you. Remember those five things. Remember, 1) Do they have a good track record? 2) Do they have liquidity? Do they have extra cash reserves? 2.5) Is there some extra equity involved, too, that allows you to have more security there? 3) What’s their profit like? Can they be profitable, even if things go wrong, and still pay you back?
4) Is it secured by real assets? 5) Last but not least, are you able to give them money in first position? As a bonus to that last one right there, if you’re in an equity deal like syndication where you put equity partnership in together, you go in as partners, just so you know, you’re paid after those that are in those first lending positions. It’s another reason why I like lending because during recessions if there’s ever a risk that they may not pay me back, I would rather lend my money than become a partner where I’m paid back last.During recessions, if there's ever a risk that they may not pay me back, I would rather lend my money than become a partner where I'm paid back last. Click To Tweet
That’s my thing for you. Again, I like lending as well as debt and funds. Lots of opportunities within our group. Even though we have a lot of uncertainty in the markets, there are still plenty of opportunities to invest and be able to create freedom for you. It’s not about creating passive income. It’s about giving you that time back in your life that you so deserve that you can be with those that you love now. Spend time with them to be able to build those relationships because you can’t put a price tag on that, can you? Those are the things that we go for. Go and have a wonderful, prosperous week. We’ll see you later.