Afford Anything - Invest Anywhere: There are THOUSANDS of Cities, Where Do I Invest?!

Episode Date: August 5, 2022

#395: Welcome to Invest Anywhere, our monthly series on long-distance real estate investing. Invest Anywhere airs on the First Friday of each month and is co-hosted by Paula Pant and Suni Rao. In this episode, we tackle the challenging decision of how to evaluate a city for rental property investment. We will cover three specific sets of analysis, talking through a macro business cycle view, a more specific economic analysis, and then encourage you to review your own personal network. Enjoy! 01:30: Topic introduction 2:30: Evaluation to be discussed: Business cycle, economics, and hierarchy of boots on the ground 5:48: High level look at the business cycle 08:40: The four phases of the business cycle 11:12: The peak phase of the business cycle 25:40: The recession phase of the business cycle 37:15: The recovery phase of the business cycle 39:40:: The expansion phase of the business cycle 47:10: Factors to consider when choosing a specific economy 57:48: Hierarchy of boots on the ground For more information, visit the show notes at https://affordanything.com/episode395 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every choice that you make is a trade-off against something else, and that doesn't just apply to your money. That applies to any limited resource that you need to manage, like your time, your focus, your energy, your attention, saying yes to something implicitly carries trade-offs, and that opens up two questions. Number one, what matters most?

Number two, how do you align your decision-making around that which matters most? How do you focus on the stuff that matters and ignore the stuff that doesn't? Answering those two questions is a lifetime practice. And that's what this podcast is here to explore and facilitate. My name is Paula Pant. I'm the host of the Afford Anything podcast. Normally we're a weekly show. We air every Wednesday.

But once a month, on the first Friday of the month, we air a first Friday bonus episode. So welcome to the August 2022 first Friday bonus episode. And these episodes are styled as Afford Anything Presents, invest anywhere. co-hosted with Sunny Rao. We want to make real estate investing approachable for everyone, not just the hedge funds on Wall Street. We want to make sure that no matter where you live, you have the opportunity to invest so that we can move wealth back into the hands of ordinary people. We're here to level the playing field by teaching you how to invest in real estate at a distance. I'm Sunny Rao, the co-host of the Afford Anything Invest Anywhere podcast series, and today, Paul and I are going to

talk you through one of the major decision points that confront investors when they decide to invest in real estate outside of their immediate location. Out of the tens of thousands of cities in the United States, in which singular location do you choose to pour your money into and allow to influence your financial future? Yeah, how do you pick? If you live in California or New York and you want to invest somewhere, how, how, how, where do you start? There are so many cities, and choosing where to invest is such a big decision. This is the point where a lot of investors get analysis paralysis, which is totally understandable. Exactly.

But it doesn't need to be the case because in this episode, we're going to walk you through a series of three assessments that will help you choose the city that you will invest in next. Sunny, what are the three assessments? We have three specific evaluations to talk through today. The first is evaluating the business cycle. The second, evaluating economic characteristics. And then third, evaluating your location-dependent resources. All of that sounded like jargon to me. And I'm sure that to many people listening,

that all just sounds like want-w-want-want-ch-Ralty-er. Thanks, Paul. I appreciate it. We are going to explain. We're going to unpack in this episode exactly what that means. the business cycle, economic characteristics, and location-dependent resources. All right, cool. What do those mean by the end of this episode?

You're going to learn that. That's not just learning jargon for the sake of learning jargon. This matters to your wallet. It's really important because what's happening around your business and your investments can impact what's happening inside your business and your investments. And even though we have seen so much strength around the real estate market over the last few years, due to economic growth, low supply, and low interest rates, the environment that we've seen will not always be the case, unfortunately.

I'm sure we'd love that to be the case, but we need to be aware of what different scenarios look like and how to prepare for those scenarios. We need to understand what's going on in order to be able to successfully invest over the long term because real estate investing is not get rich quick. It's get rich slow. And so we need to be able to understand to continually adapt. be prepared because all successful investors understand how to work with their environment. They don't need to be waiting for the perfect time to invest. They understand how to adapt a current and

potential circumstances, and they're able to keep making moves. They understand how to navigate risk and invest successfully in different parts of the business cycle. Right. And I think that's an important point because I hear from a lot of aspiring mom and pop investors, a lot of the people in this community who are essentially drawn to the real estate equivalent of market timing. Is this the right time? And the thing is, more advanced or sophisticated investors know how to make money in all markets. This is what, Sonny, and I know, I know your friend group in Indianapolis, you know, your friends, this is their life, right?

This is what they live and breathe. They don't just sit on the sidelines because they don't sit on the sidelines because interest rates are increasing and now it's a little bit harder and they think that maybe the property values are going to stagnate or drop. People who are really good at investing learn how to read the market and still recognize value. There's always value to be had. There's always ways to find an investment that works in any situation. Exactly. Great investors know how to make. the best of whatever situation is around them. And part of the way that they do that is by assessing this jargon that we're going to talk about today, by assessing the business cycle, by assessing the economic characteristics of a place, by assessing the location. So let's talk about how to do that. Let's start with the first of the three assessments. Number one, the business cycle. Yeah.

Jinks. Let's start off at the very top, high level. Business cycles are strongly influenced by inflation and interest rates. Inflation has been a topic that's been heavily discussed as a light, but it's still pretty convoluted and it can be difficult to fully understand. The good thing is that Afford Anything already has that covered for you. So if you want a deep dive or a refresher into the top, of inflation, check out episode 365 Inflation Explain at afford anything.com slash episode

365, and we will also have this linked in our show notes. There are many causes that contribute to inflation, but for the sake of simplicity, the situation that we're going to discuss today is when there's too much money chasing too few goods. This happens during economic prosperity. businesses are profitable, and some of those profits are passed along to employees and or more employees are hired to keep up with that demand. More people have jobs and they're getting paid more. Exactly. Then consumers have more money, and this leads to more spending, which makes businesses

even more profitable. The world is open for business. Exactly. And the other side of this equation are interest rates. interest rates are one method of keeping inflation in check and rates have been increasing lately, which is the government's way of encouraging consumers to save more. Because when interest rates increase, consumers receive higher rates on savings accounts, bonds, and those types of investment options.

So the government is hoping that consumers will funnel their savings into these vehicles and spend less on goods. And likewise, businesses will also spend less because borrowing, more expensive. So if borrowing's more expensive, businesses aren't going to borrow as much in order to grow, which means business growth slows. Businesses hire fewer people. They make fewer capital expenditures. Essentially, when money becomes more expensive to access, people access less of it and therefore spend less of it. Part of the thought process is that when people spend less, prices won't increase as fast. And that should bring inflation back into check. And the reason that we're talking about inflation is that business cycles are strongly influenced by

inflation and by interest rates. But what is, Sonny, what is a business cycle? Like, where's the cycle part? A business cycle is comprised of four different parts. If we were going to break it down and look at them. The four parts of a business cycle involve the peak phase. the recession phase, the recovery phase, and then the expansion phase. So those are the four phases of the business cycle. What happens in each one? We are going to jump into that. But first, the important thing to remember is that all business cycles have their variances.

And the business cycle of the last few years has definitely been different from what has been seen in the past. According to the National Bureau of Economic Research, average business cycle, are usually only six to nine months. But the business cycle that we had that ended in February of 2020 right before the COVID shutdown lasted 146 months. So we are going to be talking about broad characteristics that define business cycles, but it is really important to look at the environment holistically because real estate markets are hyperlocal and the indicators that we discuss, like housing supply, like interest rates, can be influenced and fluctuate based on other dynamics. Right. So what we're going to be talking about are the fundamentals or the principles that are

generally broadly seen in business cycles across the span of history, but may not apply in any one given moment in time or in any one given location. We're talking broad characteristics. We are going to review the different phases of the business cycle and spend more time talking through the riskier phases of the business cycle, which would be the peak phase and the recession phase because those times are more difficult to navigate. And honestly, many have found being successful in the recovery and expansion phases to be much easier, not unlike sometimes hitting water falling out of a boat. Right. You know, there's that expression in a bull market. Everyone thinks they're a genius. Yeah. The recovery and expansion phases, I guess,

is where you can have a monkey throw a dart at a dartboard and make money at it, like hitting a winning stock. As Warren Buffett says, when the tide goes out, you see who's swimming naked. I love that quote. That's all about how to survive the more difficult phases, the peak phase and the recession phase. Okay, so let's dive into what these four phases are. As we've already established, there are four phases. The peak phase, the recession phase, the recovery phase, the expansion phase, let's go through these four phases. What's the first that we're going to talk about? The first phase that we are going to talk about is the peak phase.

Because that's been the topic of conversation for some time now, and it's definitely the phase with the highest risk for investors. And it is the highest risk because it is during the peak phase where prices begin to level out and demand begins to soften. Oh, that sounds like right now. Prices start leveling out. Demand starts softening, you know, and that's created intentionally right now because of the need to keep inflation in check by raising interest rates.

We want prices to soften because we can't have real estate growing at a 20% clip year over year like it did in the past year. Yeah. That still boggles my mind. Yeah. And that's not a sustainable growth rate, so that growth rate needs to be tamped down. So, yeah, we're clearly in a peak phase right now. And the Fed is doing their best to try to get prices to level out and to get demand to soften.

So what else happens in that peak phase, broadly speaking? Yeah, so while we are currently seeing pricing and demand follow the typical characteristics of a peak cycle, supply is not following that same trend. Typically, supply and demand at this point start to even out. And inventory starts to build up to a point where there can be excess inventory on market. However, at this point in 2022, there has been. been low supply for so many years due to decrease building that the inventory on market is not catching up to where it would typically be at this point. Right. And one of the effects

of the Fed raising interest rates in 2022 is that builders are now building less than they were. So the problem of not enough housing inventory is continuing. We've had this problem for the last decade where there's been a deficit of housing inventory. And builders started building at the end of 2021, early 2022, when real estate was growing at a 20% clip. Now that demand is softening, builders are building less. you can tell through the issuance of new construction permits. And builders are also building less because interest rates are increasing. Right.

So that makes their ability to borrow funding to support the development much more costly. And this is a characteristic that is typical of the peak business cycle phase. Increased interest rates don't just impact. They also impact retailers. They also impact retail buyers, which impacts some investors, because when interest rates increase, retail buyers are able to afford less home within their budgets, which makes some strategies like flipping more difficult. And so all of this impacts demand, right? Builders are building less. Flippers are flipping less. Retail home buyers, owner occupants, are confined by their budgets.

And so when we hit this peak phase in a business cycle, what metrics do we see? How do we know that we're in this phase? One of the metrics that can be pretty telling is the days on market metric for listings. And so does that increase during the peak phase of a business cycle? It increases when demand begins to soften. when you get to the point where you see houses sitting on the market for a little bit longer than they have been, that's when you know that demand is starting to soften.

So if someone who's listening to this podcast wants to invest in real estate but is at a point in time and in a location, because all real estate is local, right, every economy is local, if you are at a time and place in which you believe that the market that you're interested in, is in this peak phase of the business cycle, what can they do? What are the best practices at this point in time and space? There are four practices that can help investors navigate this time. Number one. Projects with shorter timelines into the money are safer. We really want to mitigate risk during this time period. Whatever projects you are working on, expedite those projects to the point where you can start seeing your returns. What does that mean? If you're a buy and hold investor, get those places leased. Get your homes under contract with a tenant. So this is not the time to like buy a fixer-upper, for example, and do a big fixer-upper project. Yes. You want to get

your homes renovated and leased out as fast as possible. Correct. And why? Like why is, Is it that you want, because there's certainly a case for other points in time where you would buy a complete piece of garbage fixer-upper and you'd spend a year doing a front-door tear-down and remake an entire place. And sure, there might be a gap of a year between when you buy the place and when it starts producing income. why is it that if you're at the peak phase of a business cycle, arguably the environment that we're in right now, why is it that this would not be an ideal time for that? It's really important to have shorter timelines during this period because there are so many pieces of real estate investing, regardless of your strategy or your niche, that can be impacted. If you're a buy and hold investor and want to refinance through a burr, if you're a buy and hold investor, if you're a buy and hold investor, if you're, wait a year after getting that fixer up or ready, the ARV could be completely different, the after repair value, the interest rate could be very different, which is particularly

dangerous because when the interest rate increases, then your arbitrage opportunity between your mortgage payment and the rent that you'll get shrinks. If you're a wholesaler or you're a flipper, that comes back to what you can sell the property for. And if the demand has softened and prices are stagnated or even declining a little bit, your profit margins are also impacted at that point. So you don't want to hold on to your inventory and be impacted by broader forces outside of your control. You don't want to be impacted by the market, if at all possible. And so prioritizing cash flow over longer projects puts you in to a position where all of the noise that's happening in the outside world, all of the rising interest rates are not really your concern at the moment. Exactly. Okay. So tip number one, if you think that you're in the peak phase of a business cycle, is prioritize speed of cash flow

above and beyond something that might be a more long-term project, like trying to get a bunch of forced appreciation through a big fixer upper. So that's the first tip. What's the second? The second tip, which applies really to all investing, but especially in the peak phase of the cycle, is to have multiple exit strategies, regardless of how you decide to invest. One popular example of having multiple exit strategies is if you're rehabbing a flip and the market turns, if you have run your numbers so that you can also turn it into a rental or even sell with a lease option to ride out the downturn, even if the market terms, you can still make a return. turn on your investment until you can return to your original strategy.

All right. So with multiple exit strategies, plan A, if you're flipping a house, for example, plan A is flip the house, but plan B, hold and rent, or plan C, sell it to a renter with a lease option, right? So boom, boom, boom, multiple strategies. Yes. You want to be prepared no matter what happens. All right.

What's number three? avoiding large amounts of leverage during this phase is a smart move. You don't want to get stuck holding the bag with large debt payments if the unexpected occurs. Yeah. Number two and number three, frankly, are good practices, I think, in any market. Don't be over leveraged and have multiple exit strategies. Agreed. All right. So what's number four if you think that you're in the peak phase of a business cycle? What's the four out of four best practice?

The last best practice would be to focus on property. that will be in demand to the largest fiscally stable audience, like homes in good school districts within a price point that makes sense because focusing on these types of properties will optimize your chances for a safe exit, whether that's a sale, whether that's the residual income of a rental property being rented out. People usually will always want to live in good school districts. And with inventory being so low for so long, there will likely continue. to be demand in these areas. So focus on more stable neighborhoods rather than hip, trendy, up and coming neighborhoods.

Yes. Because if something is hip, trendy, up, and coming, you don't really know if it's going to actually up and come. Well, like we saw during COVID, why are neighborhoods up and coming? Sometimes it's because they have an influx of a cool coffee shop, the cool bar, the cool restaurant. In a downturn, those businesses, supporting the growth of that neighborhood may not make it.

But good school districts tend to stay in that area for longer periods of time. They're more resistant to economic cycles. And the population who tend to want to live in these areas for their children typically tend to be more stable fiscally and forward thinking, which extends to their finances. Right. So they do tend to make more reliable buyers and tenants. And generally, people don't want to pull their kids out of school or make them switch schools, at least not too often. So there's likely going to be less tenant turnover.

Exactly. And that's a wrap on the trickiest phase of the business cycle, the peak cycle. Okay. So the good news is if what we're in right now is the peak phase, then what we're in right now is the trickiest phase. So if you can navigate now, if you can do this well, then the other three phases will be. be a cakewalk. We'll come back to this episode after this word from our sponsors. The holidays are right around the corner and if you're hosting, you're going to need to get prepared. Maybe you need bedding, sheets, linens, maybe you need servware and cookware. And of course, holiday decor, all the

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very afraid and honestly, rightfully so, of the recession phase. And this is usually indicated by two successive quarters of negative GDP. Recessions are tough on a lot of folks, even those who aren't involved in the real estate market, due to many reasons, including the fact that there will be many without jobs and those with jobs will likely have to deal with stagnating or shrinking wages. For retail buyers, it's a tough time to purchase a home to build a life in because even though property values may have leveled out, lending practices are usually stricter. So getting approved for a loan can be much tougher with more conservative underwriting standards and more paperwork required. Not to mention, they might be approved for less home at this point in time. For investors,

navigating this time period can be especially challenging. Typically, property values drop stagnate, housing supply increases, and new construction slows. Everything that you've just said, these are characteristics typical of recessions or the recessionary phase of a business cycle. One thing that's notable about 2022 that's quite different than a lot of years is that we are, if we are entering a recession, or which we may or may not already be in one, we are going to going into this recession with very high employment, high employment, low unemployment, and that's going to make this recession feel different than previous recessions. And that's not to say, like, oh, there's nothing to worry about.

Like, that's not to dismiss it. It's simply to observe that there are fundamental economic characteristics about this potential 2022 recession that differ or diverge. from what we have experienced in the past. Now, all of us are scarred from the memory of 2008, and in 2008, during that recession, home prices plummeted. Home prices actually... But did they across the board?

Ooh, tell me more. This is where negativity bias comes in. People think of 2008, and they recall parts of Florida. and other parts of the country where, yeah, the property prices completely were decimated to a fraction of what they were a year or two prior. However, that is not the case across the board. Housing is impacted differently in each recession and by location. Even in 2008, when you had areas in Florida where home prices were 30% of what they were 24 months prior, but in other parts of the country where there were locations that were more economically stable and had more diverse employment, like Boston, property values remained relatively stable.

Those areas didn't see property values plummeting. to 25% of what they had been prior. Yeah, one notable thing about the 2008 recession was that the areas of the country that were hardest hit were also the areas of the country that had some of the greatest volume of new construction speculation during the expansion and peak phase of the business cycle, right? So the places where builders built the most were the places that then got oversupplied and got hit the hardest. And that wasn't, certainly was not the only criteria or characteristic. There were

also a bunch of garbage mortgages. There were, you know, communities with high levels of mortgage fraud. Those places also got hit quite hard. But, you know, cities like Phoenix, Atlanta, Orlando, there was a lot of builder speculation there pre-recession that led to an oversupply of inventory during the recession. Contrast that with a place like Cincinnati. Contrast that with a place like Cincinnati, where pre-2008, there wasn't an influx of building speculation or housing flippers piling into places like Cincinnati. And as a result, when the chickens came home to roost or whatever that expression is, right, home values in Cincinnati, relative to places like Atlanta, Phoenix, Orlando, were not hit nearly as hard. The other thing to note is that when housing prices decline

below where they are today, that is by definition deflationary. And what makes this particular, if 2022, I keep caveating if we're in a recession, because it's not confirmed yet, by definition, a recession is typically characterized by two consecutive quarters of negative GDP growth, which means that recessions by definition are only visible in hindsight. So we don't know if we're in a recession yet, but we might be in one right now. if we are in one, if there's a 2022 recession, it's notable that this recession is taking place simultaneously alongside the highest inflation in 40 years. And so when you have both recession and inflation happening concurrently, you have characteristics that would keep an asset class,

such as housing, from becoming deflationary. Deflation is when prices tomorrow are are lower than prices today. And that's what happened in 2008. Prices of homes in 2008 dropped lower than they were in 2007. Tomorrow was cheaper than today. So that deflation took place in the housing market in 2008. It was a recession that triggered asset class deflation. And that's what we are talking about when we say that the 2022 recession could be very different in that it's hard to imagine deflation happening given the high levels of inflation that we're battling? The recession phase is when a long-term mindset and appreciation for residual income can be beneficial. Buying whole strategies can really pay off in the long run if they're executed during the

recession phase. Paula, you just talked about property values being impacted in places like Atlanta and Phoenix. Those are two of the highest appreciation markets. And those have been two of the highest depreciation markets in the country. And as you're saying that, I'm kicking myself now wondering why I didn't think to invest in places like that when the prices were dropping. Oh, there will be plenty more opportunities. Like, it's so easy to look back at history and say, why didn't I buy Amazon stock in 1998 or whatever? But that misses the fact that there are so many opportunities today and tomorrow. There always have been and there always will be. The best time to buy real estate was yesterday, right?

Right. And the second best time is today. It's that old adage, the best time to planted tree was 30 years ago. Second best time is today. Okay. So getting back to buy and hold strategies. Bid and whole strategies can really pay off in a long term if they're executed during this time because of two specific reasons. One, since property values are depressed, buyers have the opportunity to purchase at a lower value like we were just talking about. and interest rates are usually lowered during recessions to stimulate spending. Right, which is why the 2022 recession will be different. You know, typically during a recession, the Fed does lower interest rates, but that's not going to happen in 2022. And again, that's why we're talking broadly about business cycles.

You know, we're discussing what people typically see during these cycles in general with a caveat that each year is unique. Each cycle is unique. Each location is unique. So if we were seeing depressed property values and lower interest rates as is typical, the combination of these two factors would mean that an investor's monthly mortgage payment would be lower, increasing that arbitrage opportunity, increasing the opportunity to have cash in your pocket between the monthly mortgage payment and the monthly rent collected, especially as the business cycle eventually recovers, people,

have more money and demand increases. Another strategy that can be really great right now is buying land, especially if you have the resources to buy it in cash and hold on to it until the business cycle trends upward again. And that's because prices are generally lower. And since new construction is slowed down, there can be less demand for that land, which creates the opportunity for you to be able to close on better deals. Right. As we talked about earlier, fewer building are building right now because interest rates are higher, right? As evidenced by new construction permits, there's very good data on this because you can look at the number of new construction permits that municipalities grant. So when fewer builders build, there's less demand for land.

When there's less demand for land, you take the contrarian approach, you buy it, you wait for that demand to pick up. What's interesting to me about this is that the strategy of buying land during the recession phase is the opposite of the strategy of prioritizing quick cash flow during the peak phase, right? When you buy land, you are necessarily committing to holding an asset that you cannot monetize for a long time. It's a speculative investment because land inherently is not income producing. By contrast, what we previously talked about in the peak phase of business cycle, you want to

prioritize shortening the gap between when you purchase the asset and when you start collecting income from the asset. So, for example, you don't want to buy a fixer-upper or you wouldn't want to buy land. So that, I think, is really interesting in terms of how what you buy, what types of assets you buy, differs during different phases of the business cycle. And that's a perfect example of how investors find opportunities in every phase of the business cycle. They find opportunities no matter what's happening in the market. but you have to shift. Sometimes it's better to buy a fixer-upper. Sometimes it's better to buy something that's rent-ready. Sometimes it's better to buy land. And not just sometimes, but different places,

again, because all real estate is local. And that also speaks to the importance of fully understanding the different strategies and niches available. One of the reasons land might be a little bit more attractive is because after the initial purchase, there shouldn't be more cash resources required. Whereas if you buy a fixer-upper, you're going to have to keep spending until it's done being fixed up. Right. Exactly. So you know with land how much you should be in for, which is easier to budget and manage. Right. And that's particularly important during a recession when money can be tighter. Access to money can be tighter. All right. So we've talked about two phases so far. We've talked about the peak phase and the recession phase. What comes after a recession? What's next on the horizon? If I'm on the recession

phase, things are just generally looking easier in terms of the economy. GDP is up. More people are employed. Wages are usually increasing. There's lower interest rates so people can borrow. All of this means that people can start spending more again. Typically, the real estate prices that have been declining or stagnating, that trend is starting to slow down or reverse totally as buyer demand slowly begins to increase again. And it's during this recovery phase that real estate investors start seeing more opportunity again in the market. Strategies driven by residual income like buy and hold are still a good option because prices are still pretty low relatively and interest rates are still relative. low. This is also when other strategies can become profitable again. Later on in the recovery

phase, when property values are closer to starting to increase again, strategies that are based on the sale of the property, getting income when the property is sold, start to become popular again, like wholesaling, like flipping, like development. It's something easier to be profitable on these strategies than it was in the last two cycles of the business phase. So in the recovery phase, basically everything's a good opportunity. Buy and hold is good, but wholesaling flipping, fixer uppers, we're on an upward trajectory. And so this is what we were talking about earlier. In a bull market, everyone thinks they're a genius. When the economy is doing well, inside the world of real estate, you can pick from a huge variety of strategies and niches

and likely have the conditions in place to do well at it. And you won't know who's swimming naked. Right, exactly. Yes, you might mistake luck for skill. You might mistake the results for good decision making. Yes, exactly. That's the danger. But you hone the practice of building skills and making better decisions by

being in the game. So takeaway is the recovery phase sounds like the easy life. Those are those are the good days. What comes after that? More good days? Wow. All right. After the recovery phase is the expansion phase, which is also usually the longest part of the business cycle. This growth period is typically four times longer than the contraction periods. The economy is strong again. Unoburned unemployment is low with job growth. Interest rates are low so people are still spending and buying and continuing to do so. And because this is the fun part, this is where everyone and their strange aunt is suddenly interested in real estate because it seems like everybody's making money.

Capital is getting cheaper to borrow. Appraisals are coming in higher as property values increase. And the housing supply is decreasing as it gets easier for people to buy again. Like the recovery phase, most investment strategies, are starting to go well again, although the arbitrage opportunities for buy and hold investors can be more difficult to land because suddenly there's so much cheap capital and that leads people to jump into the market and to compete over the same deals. Stiff competition.

And this is finally the phase where sales-driven strategies, like wholesaling and flipping, are really paying off. So if you're interested in flipping or wholesaling, the approach would be get your ducks in a row right now. Right now we're in either the peak phase or the recession phase. Get your ducks in a row right now so that you can be ready for the recovery phase and the expansion phase. That's if you're interested in flipping or wholesaling. If you're interested in buy and hold, now the recession phase and following that, the recovery phase, are good times to pick up those deals. And we've talked about different strategies in niches being riskier or easier to execute in the different cycles.

But there is one strategy that can work pretty efficiently in all cycles. And that strategy is lending, especially private or hard money lending when you can closely vet the deals to independently determine the risk of the deal yourself. So you're talking about becoming a lender, becoming a private lender or becoming a hard money lender. Yes. And if you decide to do that, it's good to know that. the environment will change based on the phase, even though it's still a feasible option in all phases. There'll be more competition from fellow lenders during growth periods during the expansion and recovery periods because that's when making money and real estate starts to look more attractive.

And having less competition during the slowdown can be an opportunity to increase your profit margins because there's less competition. And before we wrap on this discussion of business cycles and strategies, we want to reiterate that we are not advocating for timing the market or choosing a different strategy that's outside your area of expertise or taking a different path necessarily. It is important to invest based on solid fundamentals and due diligence. we are pointing out the factors of the business cycle that should be considered in due diligence, and that can't impact your outcomes. But that's not a reason not to invest, not to take action. Right.

Understanding where you are within the business cycle is a factor, but it is not the sole determining factor. Absolutely. All right. So what we have just covered are the four phases of a business cycle, the peak phase, They're a session phase, the recovery phase, and the expansion phase. And we've talked about different real estate strategies that could work well in different phases. Next, we're going to take one final break for a word from our sponsors. And when we come back, we're going to talk about the local assessments that you should do,

how to assess the local economy of an area. We kicked off this episode by asking the question, how do you pick a city? There are thousands of cities across the U.S. How do you decide if you want to invest in Wichita, Kansas versus Ann Arbor, Michigan versus Dayton, Ohio? After this final break for a word from our sponsors, we're going to address that question by talking about the economic data that you should look at in and across the different cities that you're considering. So that's coming up next. Stick around. Get you and your crew to the big shows with Go Transit.

Go connects to all the main concert venues like TD Coliseum in Hamilton and Scotia Bank Arena in Toronto, and Go makes it affordable with special e-ticket fairs. A one-day weekend pass offers unlimited travel across the network on any weekend day or holiday for just $10. And a weekday group pass offers the same weekday travel flexibility from $30 for two people and up to $60 for five. Buy yours at go-transit.com slash tickets. Welcome back. Now we're going to talk about how to look at the local. economy of an area. The fun part, most of the data that you need is free. Most of the data that we

will talk through is published by the U.S. Bureau of Labor Statistics and other data sets can be found in reports published by groups like PricewaterhouseCoopers or CBRE and other groups who invest in real estate holdings. And while there are so many factors that you can look at, we understand that this can get daunting. The one thing that you want to keep in mind while you are figuring out what you would like to analyze is the end goal, which is very simple. You want to make sure that the location that you choose has people who can afford housing. To do that, we are going to cover five statistics that you definitely need to include in your analysis. Those five are population growth, projected population growth, unemployment, projected change,

in employment and major industries and major employers. All right, let's talk about population growth. The importance of this is pretty straightforward. You want to know that the area that you're investing in currently has an influx of potential renters or homeowners. And not only do you want growth, you want an area that is growing faster than the average for the U.S. This is done by finding the population growth statistic as a percentage. And comparing that, to the U.S. national average. You want the average to be higher in your local environment because you want an environment that is performing better, that is growing, that has more people coming into that area than in other areas. Yeah, that makes sense. You want a city or town

where the population is growing faster than the national average. There are times when these statistics based upon where you find the information can be called by different names. And an example of that is population growth. If you're, depending on where you're looking for this information, population growth can also be expressed as household growth in certain reports. Yeah, household growth or new household formation. I've seen it called that too. And regardless of how the metric is calculated or phrased, you want a positive percentage. And again, you want that percentage to be larger than the average for the U.S. Other than population growth, what else should we be looking at. Population growth looks at the current view of people coming in and out. Because real estate

investing is get rich slow in a long-term strategy. You want to know more than what is happening with the population today. You also want to know what's going to be happening with the population for the next few years. And that's where projected population growth comes in. Projected population growth is the forward-looking version of population growth, and it's also expressed as a percentage, and you also want to compare that to the national average for context. You're looking at this to confirm that there will be continued demand for housing in your area, not just confirming that there is demand in your area for housing right now today this year.

The third factor that you want to look at is unemployment. So typically, for context, having four to five percent, unemployment is considered healthy, and closer to 4% is considered full employment. As the unemployment rate drops, inflation becomes a topic of discussion, and that is when larger portions of the population have more money to spend on goods and services. Like population growth, you want to compare your location's unemployment rate to the national average, and you want unemployment in your location to be lower so that there are more folks with the income needed to create demand for your real estate product. And just like we took a look at population growth through the lens

of how it's performing currently and in the future, we want to do the same with employment. Projected change in employment will show us whether employment will increase or decrease in our area. And we can get that statistic at a nationwide level. And compare. And compared it to the local level? Yes, absolutely. That is critical. You want jobs growing faster in your area than the average for the country as a whole. All right. So the four stats that we've talked about so far, population growth, projected population growth, unemployment, and projected change in employment. All of that makes sense. Are there people coming in? Do we think they're going to keep coming in? Do they have jobs? Are they going to keep getting jobs? All of those metrics rely on numbers. We do

have one metric, one the area to look at, that doesn't involve numbers, but that doesn't make it any less important. Before investing in any location, you need to understand who is employing the population. It's great if they're getting jobs, and it's great if people are expected to continue getting jobs, but who is giving them the jobs? You need to look at the major industries and the major employers to understand that, and you really, really want there to be diversity in both industry and employers. Right. You don't want a city or town that's dominated by just one single large industry or worse, one employer. Because you don't want any one single fluke to take place that will impact that company or that industry. Because if it does, then the entire economics of

that location will spiral. And then it's going to be really hard for you to maintain. the value of your investment and your cash flow when people don't have jobs in that area. Right. And we've seen many examples across the country throughout history of cities or towns that were destroyed when a factory shut down or an entire industry collapsed. I mean, look at Detroit a few decades ago. And Detroit's done a great job of recovering now, but that was not the case a few decades ago. It looked pretty bleak for a while. And Detroit is notable because it's such a large city, a large population, but certainly smaller towns. We've seen the story play out again and again. An employer shuts down or an industry goes into decline. And then the entire town is

impacted. Right. People are moving out. People are having trouble paying bills. And as a real estate investor, that means the demand for your product decreases significantly. Exactly. And even then, And if you had multiple exit strategies lined up, does it really matter if people don't want to buy the home you're selling or don't want to rent from you because their company closed down and they have to move? So that is why looking at this metric is really, really important. Understanding this part of your environment is critical. Right. Make sure that there's an adequately diverse set of industries providing jobs. We just covered population growth, projected population growth, unemployment, projected employment, and major industries and employers. Those are five major metrics that you really should look at when investing, but there are other metrics that you can and should use to further vet your location.

All right. So what are they? These other metrics should be based on the strategy or niche that you decide. the economics alone are not enough to choose a specific location. You need to know that the economy is going to be strong, but you also need to know that the dynamics of that economy will support your strategy. Let's hear an example of that. So let's say you did all of your research. You looked at the business cycles.

You looked at the economic characteristics. And you decided that there's a specific location that would be awesome for you to invest in. And you decide, hey, I want to buy and hold rentals. and I want to utilize the short-term rental niche. But then it seems that a lot of other people have thought the same thing. And there are so many short-term rentals in your area that occupancy rates are low because the supply is so high. The way to navigate that risk is to look at occupancy rates beforehand. see how the bookings have gone for various short-term rentals in that area, use a bunch of

comparables, and look at that performance to make sure, hey, if I want to go into this area and open a short-term rental, I can survive. So what you're saying is you might do all of this assessment, right? You might look at the business cycles. You might look at the local economic indicators. You might decide Indianapolis, hypothetically, is a great place to invest. But just because it's a great place to invest doesn't necessarily mean it's a great place to have a short-term rental. Just because a place is strong economically does not mean that it is the best place to execute your strategy or your niche.

Right. Different places will be better for different strategies and for different niches. And the only way to find that out is to first choose the place and then see if the strategy that you're interested in or if the niche that you're looking for would work in that spot. Exactly. So first choose Indianapolis, then see if being an Airbnb host in Indianapolis or a short-term rental host. Or I mean, don't choose Indianapolis. That's okay too. Right. But hypothetically, right?

Or first choose Wichita or Salt Lake City or Las Vegas. Choose a place first and then see, would this be a good place to flip or wholesale? Or buy and hold short-term rentals? or buy and hold corporate rentals, that medium term. First you determine location, then you determine whether or not the strategy and niche that you're interested in would fit in that location. And you do that, I mean, with short-term rentals, you do that by looking at occupancy rates. With flipping, you do that by looking at average days on market, new construction permits. You do that with the metrics that are specific to the niche that you're interested in.

Absolutely. So at this point, we've reviewed two of the three assessments, the business cycle assessment and the economic assessment. There's a third assessment that is not quantitative and it is a framework that we will call hierarchy of boots on the ground. And this is actually a quick lesson that's covered in your first rental property, our rental property course. This framework examines your connections to help you determine a location that you can invest in based on your comfort level. And this can be used when the database analysis isn't enough to make you comfortable with the final location or if you need a tiebreaker of sorts between options. All right. So the hierarchy of boots on the ground, what is this?

It walks you through a series of steps starting with what is closest and most familiar to you. And the first of these steps involves trying to find a location that is within driving distance so that you can still hire out the work. and keep it mostly hands off and possibly get better returns, hopefully get better returns than your immediate location. But if you have a need to visit on short notice, you can still do that. Right. So for example, if you live in L.A., Las Vegas is driving distance. It's four hours.

It's not a drive that you would want to make frequently, but it would be reasonable to do that three or four times a year. If there isn't a location that fits your criteria within driving distance, then you can look to locations where you have relatives, you have friends, you have trusted confidants, so that you can have some eyes on your investments from a trusted resource. Or at a minimum, you've got someone to crash with when you fly there. You've got somebody's couch to sleep on that you're actually excited about visiting. And if investing within a drivable distance doesn't work for you,

and investing in a place where you have people you like and trust also doesn't work for you, maybe review the places that you've lived. it could be a location where you went to college. It could be somewhere you spent some time as a child. It could be where you held a job for a short period of time. In these spots, you have some insider knowledge of the area so it can be easier to build out a network. And that might help you navigate the location with more ease and comfort. The fourth option will be to list out places that you'd like to retire or you'd like to visit often and evaluate those locations for investment fit. And since you enjoy or you think you'll enjoy the location, this option could be a really nice blend of meeting personal and financial goals.

And if none of these previous four options were viable for you, then you just might have to build out your boots on the ground team. And while that option definitely sounds daunting, we have you covered on that very topic in a feature Invest Anywhere episode. Yeah, how to build a team from scratch in a place where you don't know anybody. Yeah. I did in Indianapolis. Same. Right? Yeah. I was a long-distance investor from Boston. Yeah, exactly. So all of those are factors, you know, that the hierarchy of boots on the ground, those are factors related to your personal life and your personal experience. And then local economic data, those are factors related to the local economy in wherever you're

considering investing in. And then that discussion about business cycles, that's a discussion about broad macroeconomic timing, which applies nationwide, but also all real estate is local. So a specific city or town might be experiencing something that is different from what the majority of the nation is experiencing. Of course, every city or town is going to be influenced by the Fed, by national trends, but there are also many cities and towns that have their own local economic cycles and timing that's different, right? There's variance. And so these factors, the business cycles, local economic data, and your personal connections, these come together to create a mosaic of how to evaluate where to invest and how to evaluate what strategy or what niche might

be a good fit for this moment in history? And which would be a good fit for you in this moment in your personal life and with the resources that you have, your network of connections? Now, Sunny, we've talked about gathering data in our show notes, which people can subscribe to by going to afford anything.com slash show notes. It's free. In our show notes, we will list resources where you can find some of the data that we've talked about, the U.S. Bureau of Labor Statistics, the press Waterhouse Cooper's report. Inflation explained. Right.

Yes. Our deep dive into inflation, if you really want a tree trunk level understanding of inflation. We're going to link to all of that in the show notes. You can subscribe to the show notes for free at afford anything.com slash show notes. You can also visit the show notes for this episode on the web at Affordainthing.com slash episode 395. Well, Sonny, thanks for another great first Friday episode. It's been a lot of fun for usual.

Paula. Absolutely. What's going on in your life in terms of real estate? Give us your personal real estate updates. You segue into this as if you don't already know. Yeah. So I am super hyped right now. I just got my next house hack under contract. Since moving to Indy three years ago, I have also been investing as a local investor and utilizing the house hack strategy, owner-occupant finance. Dancing's pretty awesome. I've been moving from one place the next every year, fixing it up and renting it out. And my next place, hopefully all goes well with due diligence. If it does, I will be moving to within a mile of my favorite brunch spot and my favorite distillery because priorities. That's awesome. Congratulations. Congratulations. So this is going to be your third house hack? Yes, my third property. Wow. Yes. And I am currently working on converting my basement and my current house hack into an ADU turning my duplex into a triplex that I will be able to rent out short term and medium term. So if all goes well in the next few months, I should be up to 10 doors. That's awesome.

Very exciting. Congratulations. Thank you. Well, thank you to everyone who's tuning in. If you enjoyed today's episode, please do three things. Number one, share this episode with a friend or a family member. That's the single most important thing that you can do to help people invest in real estate in a knowledgeable, well-thought-out, man.

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And Koka Fai says, quote, I've been listening to her podcast for three or four years now and feel so much more prepared. for early retirement as a result. It is entertaining and insightful whether you are new to FI or not. My favorite episodes are Ask Paula or the ones interviewing prominent names in the FI retirement community. Give it a try. Your retirement account will thank you. Thank you, Koka Fai.

If you have not left a review yet for everyone else who's listening, please leave us a review. These are incredibly helpful in allowing us to attract insightful, knowledgeable guests who just drop these incredible wisdom bombs on this community. Please leave us a review. Make sure you're following, you're subscribed to the podcast in your favorite podcast playing app. And if you want to hang out with other members of the Afford Anything community, head to Afford Anything.com slash community where you can discuss any topic ranging from real estate to retirement, from inflation and budgeting to investing. We even have groups that talk about travel, lifestyle design, anything you want to discuss is there. Affordainthing.com

slash community to be in the company of like-minded people. All of it is totally free. Thank you again for being part of this community. I'm so grateful that you're here. My name is Paula Pant. I'm Sunny Rao. This is the Afford Anything podcast, our special First Friday series, Afford Anything presents Invest anywhere. We will catch you in the next episode. Following the recession phase, is the recovery phase. At this time, GDP is increasing. The end of recession is declared. This sounds so fucking boring.