How to make money with real estate during a recession

Let’s talk about what’s really going on with the recession. The stock market has crashed at numbers that I have not seen before. This is scary. As you may know, CPI data has been released, and we are seeing inflation at an all-time high at 8.3%. There was initial anticipation that this number would decrease, but unfortunately, that will no longer be the case.

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How does this affect real estate?

These numbers have a sizeable negative impact on real estate, especially on multifamily funds and portfolios. The numbers don’t make sense in this economy anymore. A close friend of mine who has a multifamily fund — one that’s hundreds of millions of dollars in assets under management — texted me to say that he can no longer deploy money in multifamily real estate, just because the numbers aren’t working. He wants to invest in flex space.

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Give me hard numbers

Jerome Powell, the chair of the Federal Reserve of the United States, is set to raise interest rates by at least one point, which unfortunately means a lot of guys in real estate are gonna start tumbling. It’s only a matter of time before we begin to see scores of bankruptcies and job losses. This means that a lot of people will be taking a beating on their real estate investments and portfolios, but I’ll be taking this opportunity to jump in and expand mine.

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It’s been a rough few years

Over the past few years, we’ve seen insurance costs skyrocket, already beating everyone down for income. Now we’re watching interest rates reach all-time highs with the potential (and even likelihood) for it to continue even further. These factors affect the bottom line and income potential.

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I feel bad for those who invested in multifamily last year, because those guys are gonna go belly-up — or are already and haven’t disclosed it. This is the funny thing about running a fund — you don’t really have to disclose that information at a public level, but I know that a lot of these people are taking a huge beating internally.

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The worst part is that the amount of effort, operations, and overhead that they need to make this money is extremely high. Multifamily means you have to deal with a lot of tenants. In most cases, a lot of these funds, including Grant Cardone’s, have over 20,000 apartments.

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That means that you’re dealing with 20,000 families, and the 20,000 issues that arise during their tenancy — all of which is happening throughout your apartment complexes.

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What about rental income?

Whether your portfolio is 500 or 20,000 apartments, the percentage of tenants who are either late on their rent payments or simply not paying is astounding. With Covid-related job losses compounded by the changes in the economy, you’re looking at a large percentage of tenants who will not be able to pay their rents. This means you’re spending money on maintaining and upgrading your apartments without the rental income to cover those costs.

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What now?

The buzz was that investors were going to buy these properties for cheap, repair them, and then sell them at higher prices. This simply isn’t the case anymore. I’ll explain what I anticipate will happen below, but first, let’s get into the specifics of four different asset classes: wholesalers, house flippers, multifamily operators, and flex space real estate.

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Wholesalers

Wholesalers in the U.S. make an average of $50,000 per year. Depending on where you are in your career, this might sound like a good deal. But this $50,000 comes with a ton of work — and likely sporadic deals that make it hard to plan financially. As time progresses, wholesalers begin to fatigue because the amount of effort they’re exerting to make that $50,000 is overwhelming. This is often the case with, I would say, 99% of wholesalers.

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Home flippers

You guys do all the grunt work. I actually feel sorry for home flippers — they get into deals they don’t know anything about. In most cases, home flippers buy properties sight-unseen — or if they’ve seen things, they haven’t really gone through a thorough inspection. The reason is, they need to buy the homes really quickly, as they’re often dealing with hard debt compounded with extremely high interest. Maybe they’re not putting any money down.

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So even though the barrier of entry is not very high, they’re walking away at the end with a minimal amount of money. This type of model is dependant on high volume and high operations.

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I’ve previously wasted six months of my life in home flipping. It took two months to find a deal, acquire the property, and repair it. It sold after two months, which is the norm. I ended up walking away with $20,000 on that one deal.

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Now, if you calculate $20,000 over six months, the end result is not much money — not for the amount of time and effort you’re putting in. To become a millionaire through this process, you’ll need volume.

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At the end of the day, you cannot build a legacy if you’re just in it for the flip.

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Multifamily and flex space real estate: head-to-head

In both of these scenarios, you can build a legacy. In fact, in some of the earliest parts of my career, I made the majority of my career in multifamily real estate. However, what I realized very quickly is that the time and effort I had to dedicate to the success of my portfolio meant that there was zero work–life balance. I simply wasn’t getting to spend enough time with my family, or doing the things I liked. I can count on one hand the times I took a vacation day because I was constantly putting out fires. Downtime was nonexistent.

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At some point, I had 54 employees managing 1400 units, which was just below $300 million. But a problem arose when I realized I wasn’t even working to control the assets.

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I was working on keeping people in check, motivating staff, and dealing with property management turnover. You have to spend a lot of time and exert a lot of energy onsite.

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My move into flex space real estate

The demand for flex spaces is extremely high, and the best part about it is that flex space real estate is institutional equity. This means that hedge funds, private equity individuals, and money managers are looking to move into this asset class. In the last two years, searches for flex space have increased tenfold online — the demand is there.

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Everybody wants to move into flex space real estate because entire businesses can be automated and the tenant profile is extremely professional. The effort you need to put into multifamily is extremely high; however, this is not the case with flex space.

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This is means I could develop more properties over time — owning an asset class that is relatively problem-free — and I could have one manager deal with $300 million in flex space, whereas I needed 50 managers dealing with multifamily.

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What does the future of this asset class look like?

I worked out of an office building for the past eight years. This meant fighting early morning traffic, finding a parking spot, getting into a crowded elevator, opening a series of doors, and finally arriving at my office. I spent 30 minutes between finding parking and physically getting into my office. What a waste of time.

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A flex space building serving as my workspace will remove the parking traffic, along with the other time-wasting steps it took to get to my office in the first place. I’ll have a lot of extra space for less money, and can customize the interior to suit my team’s needs. Being able to integrate flex spaces into my own business brings everything full circle.

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What are some hidden benefits of flex space?

I’m helping my tenants build instant credibility. Once customers walk into their spaces, my tenants feel pride in being presented in a credible manner. They have a proper office where they conduct business, and can also open a door to show you what’s under the hood.

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Once a client sees what’s under the hood, the chances of closing a deal increases. This all plays into the rising importance of transparency in business. Opening the doors to the inner workings of your business fosters trust with a client. You’re inviting them to see your business operations, your team, and your second home.

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What’s the bottom line?

I strongly believe flex space real estate is the future. This untapped asset class is only going to rise and new innovations will be seen. I’m not just talking about it, though — I’m doing it. I develop these things, I sell these things, I help people invest in them, and I even coach new developers. It’s a 360-degree show here.

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If your interest has piqued, I encourage you to subscribe to my newsletter, read past blog posts, follow me on social media, and watch my livestreams. I’m dedicated to sharing my knowledge and experiences with the world. If you’re ready to take things further, sign up for my annual coaching program Flex Space Untapped.

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