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Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
In this space each week I talk about something interesting related to the real estate market.
This week, I’m going to talk about something related to the overall economy that could very easily impact the real estate market. That means YOUR business.
If you’ve been paying attention to the headlines then you already know this. If you haven’t been, then you need to...
What’s the issue?
It was stated perfectly in an article I read this week:
"America's economy shrank at a drastic 2.9 percent annual rate in the first quarter, a far more alarming picture than ones painted in two previous government estimates -- including one that actually claimed modest growth.”
Sit up and Take Notice
If you’re a real estate investor that does rehabs and flips, then those words should get you to sit up and take notice.
The same if you own rental properties. I’ll tell you why in a minute…
The article also said that:
"The sluggish economy's woes have been widely attributed to an unusually cold winter, but the latest figure -- the biggest difference between second and third estimates since 1976 -- could indicate far greater problems.”
That’s econ speak for: At first we tried to blame it on the weather, but the decline is just too big to be weather related.
The bottom line is that this is the worst economic performance since 2009. The very bottom of the “Great Recession." Remember 2009? Ugh, me too. This performance was THAT bad.
The thing is, economic growth is based on people spending money. And when the economy shrinks, that means people aren’t spending money.
This same behavior was seen in corporate earnings too, as earnings per share fell 3.4% in Q1. That’s huge actually.
But you didn’t see that in the mainstream press, did you?
The article went on to say that:
"Businesses scaled back their investment, and that is a bit foreboding. They just don't believe the president's ballyhoo about this being a breakout year.”
And that:
"Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 1 percent rate. It was previously reported to have advanced at a 3.1 percent pace. Exports declined at an 8.9 percent rate, instead of 6 percent pace."
Is the Sky Falling?
So is it time to run up and down the street like a little girl with your dress up over your head screaming “the sky is falling, the sky is falling!”?
In my opinion - no.
But….
And this is a BIG but - you have to be blind and deaf not to have started hearing the whispers…
...about another housing bubble about to burst.
...and about how unemployment is really a lot higher than the government says it is.
...and about how inflation is really a lot higher than the government says it is.
So how does this impact you - the real estate investor?
Simple.
When consumer spending decreases, Hasbro doesn’t sell as many GI Joe’s with the Kung Fu Grip. When sales fall, Hasbro has to lower GI Joe production. When they lower GI Joe production, they don’t need as many people working at the company as they used to. When they don’t need as many people to work at the company, they lay people off. When they lay people off, then the guy that was going to buy your nicely rehabbed house now can’t afford it. And when people start not being able to afford to move, prices fall.
That’s exactly what happened in 2006 and 2007.
Listen - I’m nowhere near the point where I want to yell “FIRE” in a crowded theater. Because the good news is that one bad quarter doesn’t mean the sky is falling. But it IS an indicator to keep your eyes on it.
Pay Close Attention
All that I’m saying, and that I have been saying now for weeks, is that you need to keep your wits about you:
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You need to read the news.
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You need to understand how it impacts you.
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And you need to have a plan to adjust your strategy on a dime if things change.
Because things WILL change in the economy. They always do.
And you can either get on the train or get run over by it.
Holla at us
Have you seen other signs that the market is taking downturn? We wanna hear about it in the comments section below.
Dennis Fassett
earned a BS in Economics and followed that up with an MBA in finance. After working and corporate finance and banking for several years, he started buying single family houses, and quickly built a very nice portfolio of cash flowing rentals. When the credit markets started to dry up and he couldn’t get any additional single family mortgages he shifted his focus to apartment buildings. He now has over $3 million in rental real estate. He manages most of it his self and still has a day job. Dennis has even created his own Private Equity fund to buy apartment buildings.