February 3, 2022

JF2711: How to Invest in the Everything Bubble of 2022 | Actively Passive Investing Show with Travis Watts


How will the events of 2021 affect your investments in 2022? In this episode, Travis reviews the variables that may make you rethink how you invest this coming year, including the pandemic, government actions, supply and demand, inflation, and more.

Want more? We think you’ll like this episode: JF2637: Sued for $68M: Cautions of Inflation and Risk Appetite with Ted Greene #SkillsetSunday

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Travis Watts: Hey, everybody. Welcome back to The Actively Passive Investing Show. I’m your host, Travis watts. In today’s episode, we’re talking about investing in the everything bubble. The headline you may have seen or may have heard here recently, a lot of folks are calling today’s investing environment an everything bubble. Debatable if we are in a bubble, but we’re going to talk about it. We’re going to talk more specifically about the stock market and real estate, dissect what’s happening. Hopefully, this is informative to help you make a decision on what you want to do this year in terms of your own investments.

Prices are up, I think that’s pretty evident. Inflation is here, used cars are up, real estate is up. So where do you place money? Generally speaking, there are two ways of thought here, two schools of thought. There’s “I’m going to wait this one out until we get a massive correction pullback or a dip, and then I’m going to buy in at that point.” Or there’s the dollar cost average philosophy, which is you’re buying in on a regular frequency all the time, and sometimes you’re buying in a dip, sometimes you’re buying at a high price, but over time, you’re averaging out and getting kind of the middle of the road, general pricing.

I’ve shared the story before, but it’s worth sharing again in this episode… When I started investing in multifamily syndications around 2015, one of the first things I did is I started reaching out to the experts in the field, people who had 10, 20, 30, 40-year track records doing what it is I was thinking about doing. There was a syndicator, a general partner with about 25 years of experience at that time. I was talking to him about multifamily. I said, “Please put me on your deal list. I really want to do a deal with you. I’m into this. I’ve read this, that, and the other.” He goes, “Listen, Travis. Unfortunately, it’s 2015. I predict that in 2016, we’re going to see one of the biggest market meltdowns that we’ve seen in history. Quite frankly, we’re not doing any new deals right now, so I’ll put you on our list, but don’t expect to see anything, because we’re really liquidating assets right now and we’re not bringing anything new in. We’re going to sit, wait, and see.”

That was one philosophy, and I’m certainly not insinuating in this example that I’m any smarter than this individual. I mean, this guy’s got at that point and 100% more experience and track record than I had. But what was different was my philosophy. I was of the mindset that there’s always a deal to be had. This was stemming from my single-family flipping, buy and hold, vacation rental days, where I thought that even if there were a downturn or the market went flat for a while, if I was collecting conservative, consistent, steady cash flow streams, it really didn’t matter that much to me about the asset price. If I wasn’t going to sell it, what does it really matter? So I went ahead and moved forward with doing syndication investments. Fast-forward five years later, which would bring us to 2020 in the midst of COVID, my investment portfolio had just about doubled at that point from 2015. Meanwhile, the GP and syndicator had really been sitting on the sidelines. I think they did maybe one or two deals in that timeframe.

Again, not saying that I’m smarter or well-versed, but the point in that story is to decide for yourself what your philosophy is. There’s nothing wrong with sitting and waiting on the sidelines if that’s your thing and you’re very risk-averse, or if you’re into the dollar-cost averaging, just moving forward and riding the wave, then you go with that. Of course, I try to be more conservative than I’m making that sound, but something to think about.

Let’s talk about how do we get here? How do we get to the so-called everything bubble? First of all, there’s still a lot of pent-up demand since COVID, with people being locked down, inside, not really spending, and maybe not even investing, maybe sitting on the sidelines to see what happens… So that is starting to come out and unfold; that’s how we’re seeing inflation is rising simultaneously. There’s been an awful lot of government printing new money, these PPP loans, these unemployment checks… There’s been a lot of money pumped into the economy, that money has to go somewhere. A lot of people have chosen to put that either in the stock market or into real estate, which is why we’ve seen such a massive uptick. Well, I should say that’s one reason why.

We also have all-time low interest rates, the lowest interest rates that we’ve seen in US history. That is a stimulus to encourage people to invest and perhaps take a little more risk, go put your money somewhere if you can borrow at very low-interest rates.

And last but not least, we have severe supply chain issues. This is simply supply and demand; this would explain why rental cars, for example, are up 21% year over year right now. It’s simply because when COVID first hit and no one was needing the rental cars, a lot of these agencies offloaded their inventory. Then we had a massive kickback where people started traveling again – they didn’t have enough cars so it shot the prices up. It’s tough to get new cars right now, as you probably know, because of the microchip shortage that we have going on. So that’s supply and demand 101. The bottom line is there’s a lot of money in the system, and that money needs to find a home, and a lot of people are chasing yield, so that’s buying up asset prices, including real estate, including stocks.

Break: [00:06:32][00:08:11]

Travis Watts: With that, let’s talk a little bit about the stock market, then we’ll talk about real estate. I want to dive in and dissect a little bit about each of these asset classes, because they’re two of the most common that we have at least. This is a real estate show, and then a lot of people are talking about the stock market.

So you’ve got a lot of predictions always in the markets like JP Morgan Chase and Goldman Sachs. Every year they’re putting out their predictions based on their experience. Of course, you have to take any prediction, no matter who it’s coming from with a grain of salt because the truth is, no one really knows. But JP Morgan was pretty dang close on their estimates for 2021 about the stock market and what performance we might see. So their prediction now for 2022 is that things will continue to rise, the stock market will continue to go up, they’re predicting somewhere around 8% annualized.

On the other hand, there’s another school of thought that’s worth noting, which is that we have efficient markets. This means when these headlines come out and these news reports come out, that’s already priced into the market. But if it’s already built-in, and things don’t pan out as expected, there’s a chance the market could actually drop, and instead of seeing a plus eight, we see a minus four, a minus eight, or something like that.

Again, I’m not saying one’s right and one’s wrong. It’s just a question for you, do you believe that everything’s priced into the market currently as we see a lot of optimism at this point? Or do you believe that it will just keep rising and rising? Regardless of which side you’re on, there are certainly some things that we don’t know. We don’t know if there’s going to be any future government stimulus. Of course, there’s a lot of talk about this, and there’s a lot of proposals, but what actually passes, we don’t know, and when that actually happens, we don’t know. Also, future interest rate hikes. Again, there’s been a lot of talk from the Fed that this is going to happen, but when and how much, we don’t know. And as different things come in, different variables, and the situation changes, they could also change their forecast as well. It’s something that’s just out of our control.

Then there’s the virus uncertainty. Will there be new variants? What will those look like? Will they be mild? Will they be severe? Hospitalizations, business shutdowns? We just don’t know what the political environment looks like, and what the health environment looks like moving forward at this point.

Then we have unpredictable inflation and supply chain issues. When will all of this clear up? We don’t know. Will inflation stay the same or go higher? We really don’t know. Again, we have predictions and forecasts, but until the data comes out, we just don’t know. These all have a play in both the stock market and in real estate. Like I always say, when it comes to the stock market, it’s really anyone’s guess. It always seems to be, in my personal experience, it’s 50/50. If I think the Feds are going to speak tomorrow and it’s going to be positive, 50/50 chance it goes up or down.

I’ve been wrong just about as much as I’ve been right and that has caused me to not have very great returns overall when I’ve invested in the stock market. I’m clearly not the expert, I’m just giving you some things to think about for yourself. Take this with a grain of salt, what I’m about to say. This is not a prediction or a forecast, but just me personally, in my own mind, looking forward. I’m saying, I don’t believe that the markets in general, real estate stocks, no matter what we’re talking about, will be as robust as we just saw in 2021. We saw exceptional returns, I think the stock market, in general, did somewhere in the high 20s, like a 28% annualized return. My real estate portfolio did incredible as I had a lot of sales happen in 2021, as things ramped back. I don’t predict the same moving forward, as I look five years out, maybe even 10 years out.

I think a lot of things are priced in the market and I think we are really up there nearing all-time highs. Now does that mean a bubble and a bust? Not necessarily, in my opinion. But it certainly means that things have gone up. But see, here’s the thing about sustainability, this is something I think about as an investor all the time. Anything I do needs to be sustainable, any kind of strategy, any kind of philosophy. This is why I quit flipping homes at a certain point because I realized that this is not sustainable. I could do this while the markets are flat or increasing, but when markets come down, the strategy stops working, therefore, it’s not something I can do for 20, 30, 40, 50 years on end.

The stock market has historically returned between eight to 10%, annualized, depending on if you’re looking at the Dow Jones, or the S&P, or the NASDAQ, or whatever index, but basically, it’s usually in that range as a historic average. When you have a year like we just have in 2021, where you have a 28% return on the stock market, there’s a very high probability that the following year will not be as high. It may be a flat year, it could be a slight decline in that year. In fact, we just recently saw this in 2017, the stock market returned somewhere around 21.5%, don’t quote me exactly, but it was something like that. The following year, which is 2018, was a negative 4% year so that makes sense. Because if you’re going to average eight to 10, you’re not always going to have these 20 and 30% returns year over year. It’s a roller coaster, so if you’re going to park all your capital there, be ready to ride.

Alright, moving on, let’s talk a little bit about real estate. Just like the stock market, there are a lot of predictions. Just like any prediction, you have to take it with a grain of salt. There’s a group called CoreLogic, for example, and they predict that housing will increase another 6% in 2022. 6% is still strong growth and this is, of course, nationwide. But it certainly dwindled down from what we just saw in 2021, which I think was closer to about 15% appreciation over the last year. Then you have other sources. Like realtor.com believes that the appreciation amount will be closer to 3%, not 6%. One thing to keep in mind when we talk about real estate in a general sense going up 3% or 6%, is the fact that most people investing in real estate are using leverage, they’re using debt.

The way to look at that in real terms as far as your return on investment is this… To use simple math because you guys know I’m not very good at math. If you invested in a $100,000 piece of real estate, we’ll call it a single-family home or a condo, and that went up 6% in one year, but you had only put $20,000 down as a down payment, that was your actual investment. You actually invested 20k and then what did you make? Well, if it appreciated 6%, that’s $6,000 that it went up. Again, I’m using loose numbers, we’re not talking about any taxes, realtor commission, or any of this kind of stuff. But $6,000 divided by $20,000, that’s how you find your return, it’s actually a 30% increase or ROI. That is actually quite substantial. That’s why I say, in real estate, if we really did see a 6% tick-up, that’s actually pretty huge.

Another thing to note is that mortgage rates remain historically low, I just mentioned that a few minutes ago. We are literally at the historic lows for the United States. That’s been a huge encouragement for people to get into real estate, both single-family, multifamily, mobile home park space, commercial space, self-storage, all the above. Another thing to keep in mind is that real estate is a local game. There are markets despite these forecasts of three to 6%, we’ll call it. There are markets like Modesto, California, Kalamazoo, Michigan, or Springfield, Massachusetts that are actually anticipated to see a decline in housing prices in 2022. It’s not all created equal, we’re just talking about a national scale on average.

To talk a little bit about rents, because a lot of us are investors or landlords here listening to the show. Rents went up about 10% in 2021 which is a huge increase for rents. A lot of the projections that are in these syndications I do are more like 3% and 4% annualized rent bumps, so to see 10 was quite amazing. The realtor chief economist is predicting a 7% rent increase for 2022. If that really occurs, it is just going to be another killer year in general, for real estate. Especially things like multifamily because you don’t just have one house, one tenant, one rent bump of 7%, you have maybe a 400-unit property, or maybe you’re invested in 20 different deals that are 200 to 600 units. That’s a lot of rent increase.

There’s usually a little bit of a lag in rent bumps compared to asset prices, which makes sense because prices go up. As investors have to pay more, they need to charge more rent to get an adequate cash flow out of the property. No one wants to be investing in real estate for a 1% or 2% return. I shouldn’t say nobody because people do it. But in general, you want to keep your ROI up and therefore rents go up. As I mentioned earlier, with the 15% rise in asset prices and real estate over 2021, rents are now following as these properties get rented out.

Break: [00:17:22][00:20:19]

Travis Watts: Jumping back to the Fed’s saying they’re going to raise interest rates, what effect will that have on real estate? It’s one thing to say that rents are going to grow, etc., but if interest rates rise, that’s generally a negative thing for real estate. But see, there are other factors at play simultaneously. There are the unknowns that we mentioned with the government, with stimulus, and what’s inflation going to look like. Then there’s also the supply and demand issue which is a huge factor right now to where asset prices are. Builders just can’t keep up, there’s just a severe lack of inventory that is pushing prices up.

If we had a whole bunch of supply come on the market, that would soften the prices. But if that doesn’t clear up over the next year or two, prices will remain high, and it will remain a very competitive environment. Real estate is a very slow-moving asset class with the exception of what we saw in 2008 and 2009. It was really the great real estate recession with the exception of that. If you took that off the radar, real estate’s really slow-moving when it trickles up and trickles down, it is not the stock market that real estate’s down 30% overnight, that just doesn’t happen. I think as we progress through this data and through the years, we’re going to see more and more signs and potentially red flags to talk about to help us make better decisions.

Just remember, if you are investing in actual real estate, not publicly-traded REITs, and things like that, they are generally an illiquid investment. So you’ve got to do your due diligence, you’ve got to know what you’re buying, how it performs, whether or not you can actually execute the business plan. Hopefully, you will remain profitable even if you bought a property today, did nothing to it, and just decided to hold it for five or 10 years, you would be cashflow positive.

Alright, swinging back to inflation real quick. We’re somewhere in the ballpark depending on when this episode airs, the last data that I just looked at was somewhere around 6.8% annualized inflation year over year. Now, a couple of things about that. One, that’s the highest inflation we’ve seen in the US since 1982. So in a lot of people’s lifetimes, this is the highest inflation that they’ve seen. The Fed has also said that they’re going to be reducing their stimulus, this is known as the Fed taper. They’re reducing basically their stimulus from injecting about $30 billion per month through the end of March until they’re no longer having to supplement what they’ve been doing since COVID.

We mentioned that the Fed said they will have multiple rate hikes, this is to help tackle inflation as inflation starts. That’s just one of the tools that the Fed has when inflation starts kicking up is to raise interest rates to help fight that. That’s definitely on their agenda, but every Fed meeting, it seems like there’s a little bit of a change so we just don’t know. There have been years that the Feds come out and said we’re raising rates and then they didn’t, or where they did raise rates and then they decided right after that to lower rates again. We just don’t know is the bottom line.

The last bullet point I’ll point out is that at the last Fed meeting that I tuned into, Jerome Powell had said that he anticipates a natural decrease in inflation from the 6.8 that we’re seeing now to the mid twos. To that, I say “We’ll see.” Here are the takeaways I want you guys to have from this episode, 20 to 30% annualized returns are exceptional but usually not sustainable year after year. Since we’ve already seen those in 2021, you may want to lessen your forecast here looking forward. I could be dead wrong, I’m just saying I like to be a little more conservative than that and predict that we will kind of see a softening or stabilization, if you will, of returns.

The number two takeaway is that the gurus and the talking heads are projecting increases still happening. We have the chief relative economist, JP Morgan, Goldman Sachs, a lot of folks are saying that the stock market and real estate are still going to be on the rise, just at a much lower and more conservative level than last year. Hopefully that means another great year for investing, at least that’s my interpretation of that data. If anyone is curious or anyone cares what I’m doing personally, I’m still investing heavily in private equity. I believe you should invest in what you know and understand the most and then try to diversify a little bit outside of that.

I use the 80/20 rule, 80% of my portfolio is what I know and understand. I invest in value-add B class multifamily properties primarily because they’re stabilized, they cash flow, they pay me on a monthly basis, they’re tax-advantaged. And from the data that we just uncovered with rents still on the rise and lagging a bit behind, the primary driver of the value of a multifamily property is the net operating income. When rents go up, that’s it more collections, that’s more income, therefore the price goes up. But I’m never a speculator on what the price will be in the future. I’m simply investing for cash flow and for yield. I like the value-add business model where we’re buying at a slight discount, we are improving a property, making it better, making a better community. For what it’s worth, that’s my take on it, I’m still investing here in 2022. The question is, what are you going to do?

Hopefully, you guys found some value in this episode. I truly appreciate you tuning in. Reach out anytime with questions, comments, concerns. I’m on Bigger Pockets, I’m on LinkedIn, I’m on Instagram, I’m on Facebook, joefairless.com, travis@ashcroftcapital.com. I look forward to connecting with you. Have a Best Ever week and we’ll see you on another episode of The Actively Passive Investing Show.

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