Get Rich Education 285: Your Pandemic Investing Strategy & Mindset
Unemployment is rising. Mortgage rates hit record lows two weeks ago. Stocks have fallen 32% from recent highs. Oil has fallen with a thud.
Your life has changed in order to control the spread of the novel coronavirus.
(**The entire episode transcript is below. You can read along as you listen.)
Fannie Mae, Freddie Mac, and HUD have suspended foreclosures and evictions for at least 60 days. This could soon be extended to a year.
The IRS tax filing deadline moved from April 15th to July 15th.
There are opportunities for you today that you’ve never considered before.
Recessions are normal. They occur every 7 years on average.
In three of the last five recessions, real estate values appreciated.
Consider drawing against your HELOC before it’s frozen.
Bill Gates’ epidemic prediction audio clip played.
Stocks: the bull market died of coronavirus.
I discuss my recent chats with national Mortgage Loan Officers.
Good news? Shelter-in-place means you might have the time with your family that you’ve always wanted.
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Complete episode transcript:
Welcome to Get Rich Education, I’m your host, Keith Weinhold. As the pandemic unfolds, how do you best position yourself as an investor to be profitable and mitigate loss?
We’re talking about the real estate market, the stock market, and specific, actionable things that you can do for your family and your real estate. Today, on Get Rich Education.
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Welcome to Get Rich Education, I’m your host, Keith Weinhold and no matter where you’re listening to us - any of the 188 nations - your life has changed … due to the pandemic.
Just when you learned to replace your handshake with an elbow bump, now you can't do either one.
Yes, your life looks different now. We are here in the social distancing era.
With major events all cancelled and the closure of businesses & schools, & entertainment venues; it is clear that the global efforts to slow the spread of the coronavirus is an unprecedented experience for you and I.
With people needing to stay home, it creates some new ways of socialization.
For my haircut this week, I don’t think I’m going to go out to get it. I’m hoping that my wife can cut my hair at home.
I can’t go to the gym. Thank goodness that I have a home gym - modest as it is. This is literally life-changing - altering the patterns and habits of you & I’s daily life.
You might see more of your spouse now. You might be homeschooling your kid now.
This is an emotional process for you and I - your relationships with people & things have changed.
You’re now more likely to be listening to me from home rather than out & about - not from work.
But wait. Now, for you, maybe work ... is ... home. Kinda.
If you’re working from home, you’re now ...
... about to find out which meetings really could have instead been ... an email.
Yes, it's simply a strange time to be a human being.
The pandemic has stirred up more uncertainty than just social faux pas and awkwardness.
It's created a breathtaking 32% stock market drop - more on that later. The slowing economy means that oil prices have fallen with a resounding thud. Mortgage rates hit record lows two weeks ago.
The combination of those things might make you, the REAL ESTATE investor, giddy with your predicament.
You might even have - what feels like - an extended adult Spring Break at home with your family.
But the larger economic slowdown can ensnare everyone - yes, the real estate investor too. Some help is on the way.
Just last week, Fannie Mae and Freddie Mac announced that they are suspending foreclosures and evictions for at least 60 days - so we’re talking about a lot of conventional loans there.
HUD is doing the same thing. HUD basically means FHA loans.
So I guess that property owners don’t have to pay their mortgages and tenants don’t have to pay their rent for a little while either.
That was followed by the state of New York declaring that certain borrowers in the state could forgo their mortgage payments for up to 90 days.
And there’s just so much NEWS about payment forgiveness and everything else related to the economy and the pandemic that it can be difficult to keep up.
I’ll tell you, I’ve had to scramble - more than normal this week - to pull together the more relevant stories that affect you - because so much is changing so fast.
Treasury Secretary Steve Mnuchin said just last Friday - three days ago - that the deadline for Americans to file their taxes would be pushed back from April 15 to July 15.
That’s got to be welcome news!
In fact, Mnuchin tweeted: "All taxpayers and businesses will have this additional time to file and make payments without interest or penalties.”
That’s what he said. That’s a 90-day extension. Some relief from the IRS for you.
Now, how long will this kind of alternate society that we’ve now reluctantly formed linger on?
How long will it last?
Self-isolation and playing the ol’ Risk board game or Battleship with your kids might be kinda cool at first - but it gets a little old after a while.
It really gets old once you find that your kid is improving at chess faster than you and he’s starting to beat you.
Well, no one really knows. No one in the world knows how long it’ll last.
So therefore, it’s hard to know whether people are overreacting or underreacting to the news. It’s really hard to know.
Will this last one month? Six months? Or even longer?
The best, most trusted source, I know of thinks that this will probably be with us … through June. Yeah, that’s three more months.
Now, it might peak before that time, but who knows? And a lot of forecasts change … because, again … there are a lot of unknowns here.
But there are a few things that I do know. So let’s think about what we do know.
There will always BE an economy - even if things got far worse.
There will always be an economy as long as there’s a civilization.
Sheesh, there’s an economy in Leavenworth - a maximum security prison.
When this thing ends, if you’ve got a friend or a tenant or yourself that’s been laid off - you’re probably going to return to your job.
But some people might never return to their job. You might see this - as an opportunity.
If you have - or have had - a job that you’re not in love with - this could give you time to find out what you’re good at & what you like doing rather than working for a paycheck.
Use this time to ultimately find out what you want. Then learn some new skills at the Khan Academy online - or somewhere else. See this as an opportunity.
There’s an old saying. If your neighbor loses his job, it’s a recession. If you lose your job, it’s a depression.
And more people are probably thinking about that today ...
But recessions are indeed - a frequent occurrence in the modern economy. This 11 year economic expansion, was an all-time American record.
In response to the pandemic, The Fed is effectively printing tens of billions of dollars - and more - to help keep banks liquid.
This is a process … that devalues the dollar. This is inflationary - which is good for borrowers long-term, and this dollar printing makes investors scurry for real assets that can hold their value.
Yes, real things that can’t be inflated away with profligate monetary policy. I’m talking about assets like water, and timber, and real estate - especially residential real estate.
Now, if for any reason, your income is disrupted, either because you’re out of work or your tenant is having trouble making rent payments ...
If you're losing income and must play defense, and you’re a homeowner, you might have something to work with.
Relief can come from your Home Equity Line Of Credit (HELOC). You can make withdrawals for emergencies.
Sure - I’ve been talking for years here about how if you’ve got excess equity in your home, you can originate a HELOC.
Since home equity is unsafe, and illiquid, and it’s rate of return is always zero, you can use that excess equity in your home. MAKE it liquid.
The HELOC can come in the form of a second mortgage. At last check, on a primary residence, you could get an 80% combined loan-to-value ratio HELOC.
How that works is if you have a $500K home, you could have $400K of debt against it. That’s the 80%.
So then if currently, your home has a $300K loan balance, you can potentially get a HELOC second mortgage for another $100K.
OK … your $300K first mortgage plus $100K HELOC has a sum of $400K - which is 80% of your home’s value.
So now, you’ve got $100K out of your home.
The way that this $100K HELOC works is that your interest rate generally follows the Federal Funds Rate - which the Fed has essentially dropped to 0%.
Now, you’ll pay a margin on top of the Fed Funds Rate - but HELOC rates are really low now.
Their interest is often tax deductible - and you can spend the HELOC funds on anything at all.
You also have the flexibility of making interest-only payments on the HELOC - or paying back extra toward the principal if you prefer. Nice option there.
And I’ve gone deep on how HELOCs work on prior shows, so I won’t do that here.
But here’s the message if you think that you need some - or want some - liquidity.
Originate your HELOC and consider drawing against it - which means pulling the money out - before the bank FREEZES withdrawals from your HELOC funds.
Look, here’s what happened during the 2007-2009 Great Recession. Homes were losing value then, and banks flash-froze HELOCs. It happened to me.
I still remember getting the letter - it was from a major bank that you’ve heard of.
I do remember getting that letter from the bank because I was frustrated that they froze my funds - which was equity in my home that I had previously had access to.
So, I’ve told you on past shows, that I can’t think of any reason not to have a HELOC second mortgage on your home, as long as you have adequate equity in it. That way you can choose to either use it by drawing against it - or not.
My point today is - consider making a withdrawal on that HELOC before its frozen.
Now, say you do that and you’re paying a 5% interest rate on that money.
Maybe wherever you put those borrowed funds, now you’re making more than 5% on them because you’re taking those funds and putting them on offense.
If so, that’s great. That positive arbitrage. Gotta love that.
But what if you take those HELOC funds that you’re paying 5% interest for and you’re playing DEFENSE, and you have them invested in a vehicle that’s MAKING less than 5% interest for you.
You know what I would say? What you’re doing is like … you’re paying an insurance premium.
You’ve got access to the funds, you’re keeping them liquid, you could be hemorrhaging a bit each month, but it’s like paying an insurance premium in order to have access to your funds.
I don’t like to tell people what to do. I like to tell people what I do, and I provide ideas and information here.
Now, if you don’t need funds or want funds, well, then there’s less reason to tap your HELOC.
Remember too, a high mortgage balance is a great asset protection tool against a bank foreclosure.
In an adverse circumstance, the bank doesn’t want to come after you if you still owe $400K on the loan.
But they’ll come after the family that only owes $40K on their loan - because the bank could get the property as collateral, and only lose out on the $40K that they would have had coming to them.
See, the bank doesn’t want to foreclose on your property where you, the homeowner, would have still owed them 4-HUNDRED K.
My point is - if you need to play defense, have a HELOC and consider using it before it gets frozen - IF it gets frozen.
It might not get frozen. See, a big reason that HELOC draws were frozen during the Great Recession 12 years ago is that housing was at the CENTER of the 2007-2009 Great Recession.
From the time that those HELOCs were originated, properties had lost value. As they lost value, that means loan-to-value ratios went up, often in excess of 100%.
So banks froze HELOCs so that they didn’t get exposed to that risk. If you’ve got zero equity in the home or skin in the game, you’re more likely to walk away - as a homeowner.
But see, if we have a pandemic-induced recession, it’s NOT housing-centered like the Great Recession was - with their irresponsible lending practices and overbuilding that occurred then.
Today, we’ve got RESPONSIBLE lending practices and an UNDERsupply of homes. We’re UNDERbuilt.
So, the Great Recession was different - and special.
Now, I don’t know whether we’re set up for a pandemic-induced recession or not. But I’d say that there’s a good chance that we’ll have one. I’d say, a more than 80% chance that we’re in one now.
We don’t actually know that we’re in one until in the future, we look back and see two consecutive quarters of year-over-year GDP contraction. That’s the definition.
But we’re definitely due for a slowdown. We’re in one now.
It’s worth remembering that recessions are actually a normal part of the economy. We have one every 7 years or so.
Our previous five recessions began in 1980, another one in 1981, then 1990, 2001, and finally the aforementioned Great Recession beginning in 2007.
In three of those five recessions - three of the last five, do you know what happened to home prices.
Home prices went up. They INcreased in 3 of the last 5 recessions.
Home prices increased in value anywhere from 1.9 percent to 4.8 percent. I’ll link that in the Show Notes for you.
So, a recession definitely doesn’t mean a drop in property value. Residential real estate is a recession-resilient asset class.
The thing that you need to keep your eye on is, is your tenant keeping their job during this crisis so that they can pay the rent.
By the way, do you know the difference between an epidemic and a pandemic?
As Oxford defines it:
An epidemic is a widespread occurrence of an infectious disease in a community at a particular time.
A pandemic is a disease prevalent over an entire nation or the world.
They mean about the same thing, but the pandemic is on a larger scale.
Now, MicroSoft co-founder Bill Gates has received attention recently in predicting that a pandemic was potentially humankind’s greatest understated threat.
In fact, let’s listen to this short clip - this is Bill Gates, more than three years ago in Davos, Switzerland:
Bill Gates clip: “An epidemic - either naturally-caused or intentionally-caused - is the most likely thing to cause, say, 10 million excess deaths. It’s pretty surprising how little preparedness there is for it.”
Yeah, Bill Gates said a lot more than that about it. But he’s appearing to be rather correct here.
Well, what has administration in the United States done for a response? Our political leaders?
Well, initially, Trump and company seemed to throw more money & fewer regulations at the problem.
That’s changing somewhat, as we’ve got more social controls and border closings now.
With the list of these administrative & … policy news stories longer than a Walgreen's receipt, the least you should know is that President Trump and Congress are aiding homeowners and renters alike.
Free testing, and an expansion of unemployment insurance.
A stimulus package of one trillion - with a “T” - one trillion dollars or more that looks to involve direct payments to American households … is really going to help provide relief to people.
There is lots of precedent for government bailouts in times of crisis.
The U.S. government provided $15 billion to airlines after 9/11, $700 billion to banks to army-crawl through the 2008 financial crisis, and $17 billion to automakers just after that.
Whether you see bailouts as the right way to do things or not, there is that precedent.
Fortunately - some of that help should include your tenant. We might see multiple injections of $1,000 each or more - directly into consumers’ hands.
That’s the plan that’s formulating - just write virtually everyone a check. And $1,000 means more to your tenant than it does to you.
This can really help Trump and Congress “fill the gaps” between cushions like paid leave and unemployment insurance.
Though that’s gonna cause more long-term taxpayer DEBT - yes, I think a lot of people need the relief in the meantime.
Think about it this way:
To save their economies over the long run, countries around the world are actively putting themselves into recessions.
Productive nations are actively plunging themselves into recession left and right.
Can you imagine that? But even though I’m a finance guy and a real estate investor, I think that it’s the right thing to do.
As odd as it sounds, the best way to heal the likely recession, is not to try to fix the recession. It’s to get into a recession by killing activity in order to control the virus.
The best way to heal the economy is to get people to stay home, stop the spread, and end this sooner.
Look, if you’re riding a bicycle and get a flat tire because there are nails on the road, well then, you don’t get to your destination … by patching the hole in the tire over & over again.
You get to where you’re going by cleaning up the nails on the road - which means that you & your bicycle go nowhere for a while - and then when the nails are picked up, you quickly roll along to wherever you’re going just like the economy should quickly roll along nicely - like it was - before the pandemic hit.
The fastest way to fix the economy is to stop the virus.
As we’ve now learned, even though you might feel like you’re in a digital age with TikTok videos, and an app that digitizes your dinner receipts, and everything else ...
Humans still generate trillions in economic activity by coming into close, physical contact with one another—sitting at restaurants, assembling auto parts, traveling on planes, getting haircuts.
But public health officials stress that to slow the spread of the coronavirus, we must all maintain a safe distance from each other, even if we’re healthy.
But that still doesn’t square with our economy’s structure.
Be mindful that recessions and surprises happen constantly. But this one feels a little more surprising for a few reasons - a virus is sort of intangible - you can’t see it - and there’s the fact that we just had a great loooooong run of 11 years.
That was the longest economic expansion in American history.
I think that this pandemic is the biggest news story since 9/11 - where you’re just kind of like, “I can’t believe this is happening.” But this WILL pass. It always does.
Look at what we’ve had in the last - not even 20 years: 9/11, Hurricane Katrina. The great recession. Superstorm Sandy. And now, you might call this the great shutdown.
With the economic slowdown, I’d expect sudden, deep, and brief.
I hope and expect that it will be sudden - it already has been sudden, that it will be deep - with massive layoffs, - and that it will be brief.
There are two prior Get Rich Education episodes that are getting a lot of attention right now.
One of them is named “A Recession Is Coming”. I released that in November of 2018.
One year later, I released an episode named “Planning For A Recession”. That was released in November of 2019, just four months ago.
“A Recession Is Coming” is Episode 215, and
“Planning For A Recession” is Episode 265 if that makes it easier for you to find them.
I’m coming back with more here - with “Your Pandemic Investing Strategy & Mindset”. This is “Get Rich Education”.
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Hey, you’re back inside Get Rich Education. And welcome, you’re squarely in the #WFH Era.
The “Work From Home” Era.
Yes, this alternate world where working from home is NOT frowned up - and going into the office IS frowned upon. I’m your host, Keith Weinhold.
I’d like to emphasize that no one really knows about the next turn that society and the economy will take during this pandemic. That’s because we are in uncharted territory.
Because I don’t think very many people were alive to remember the Spanish Flu of 1918.
As far as the most recent territory that HAS been charted ...
Last Friday, stocks, as measured by the S & P 500, fell more than 4%. So as of today, Monday, March 23rd, 2020, stocks have now fallen more than 32% from their recent high.
How many people with 401(k)s have lost 32% of their account’s value? Some of them, even more, oh … and that’s just in the last month or two.
And last week, stocks posted their worst week since the height of the financial crisis.
The bull market died of coronavirus.
That’s what happened.
Now, why am I talking about stocks more than usual both this week & last - since I’ve talked about the pandemic quite a bit on both of these shows?
It’s because stocks are often a LEADING indicator of what investors expect is coming.
(And note that I’m being kind by calling stock buyers true “investors”. A lot of them are just speculators.)
Now, a stock bear market is when stocks fall 20% or more from a recent high.
Do you have any idea how good of a predictor a bear market is of a recession? Well, I can tell you.
73% of stock bear markets have been accompanied by a recession.
As a forward-looking mechanism, the stock market usually sends warnings about the economy before shrinking growth shows up in the data.
So yes, in the 11 stock bear markets we’ve had since WWII, 8 of the 11 have resulted in a recession. That’s that 73%.
While it remains to be seen, real estate may be insulated to some extent - and that is because of tight residential inventory, high buyer demand, low mortgage rates, and lower prices for lumber and oil.
Recessions are not officially declared until the economy is already deep into them, or until after they’ve passed. We could look back later and say the recession started this month.
That’s because so much of our economy has to do with consumer spending - you buying a frappucino, you filling up your car with gas, you buying a boat.
Consumer spending accounts for about 70% of GDP.
Now, here on the show, we’ve spent the last few years focused on rental SFHs and properties up to four-plexes in size.
Though it’s still a developing story, there’s been some evidence that the ventilation system in larger apartment buildings - can transmit the virus. I … sure hope that’s not true.
I talked to two prominent national MLOs last week.
- One of them is Caeli Ridge, where they are just doing a TON of mortgage origination business for both income property purchases and refinances.
- The other mortgage loan officer is prioritizing new property purchases ahead of refinances there in THEIR office.
Low rates will outlast coronavirus.
Markets are anticipatory - so once the virus is past it’s peak, prices of real estate should be rather buoyant.
Be mindful too, that because we focus on investing in the United States Midwest & South - what i call the stable markets - instead of the volatile, coastal markets.
Just generally here, coastal properties and stocks here near the start of the decade - are very much alike.
They’re both overpriced, they’re both low yielding, and they're both susceptible to fall in value.
In these times, RE could be like the cleanest dirty shirt in the investment world - where you get the best risk-adjusted return.
Better than bond yields, and better than 2% dividends from the S & P 500.
With factories closed, supply chain kinks can LIMIT housing supply - and housing was already in short supply.
I think that some people either won’t have the confidence or capacity to buy a home.
Well, good. Then what they’ll do, is rent. You want them renting from you. More people in the renter pool … is to your advantage.
But they’ve got to have an income.
It’s important to remember that a pandemic is different from a financial crisis—bargain-basement interest rates can help keep businesses afloat, but the “social distancing” measures recommended by health officials mean canceling events and avoiding crowded places, which will curb spending.
Interest rates can’t fix that, though low interest rates are great for borrowers.
Think about how this has affected society - maybe in some other ways you haven’t thought about.
I know friends that spent months training for marathons that were cancelled.
MLB, the NHL, NBA seasons suspended.
Think about college & HS seniors that might have played their last game - without even knowing it. The pandemic ended their career - did you ever think about that?
Of course, this is minor. Some people have lost their lives, others have lung damage.
How’s your grandma doing - hopefully you get some time to video chat with her.
Maybe, just maybe, there is a huge silver lining to all of this with people staying home.
Maybe more time as a family is what we need. Maybe we’ve gotten so caught up in following the madness of busy-ness, and that this is a reset - and you can have some health benefits - and exercise more.
Maybe, after the short term economic losses have faded, some might place a much higher value on what is most important in their lives. Maybe.
We should salute and express our gratitude to the millions of frontline workers who are making tremendous efforts to help us all.
That includes our world class medical staff and others that you’re not thinking about too many others too - the calm grocery store & pharmacy workers and the tireless drivers bringing important supplies to hospitals & warehouses & stores & our own doorsteps.
Think about the spouses of some of those people too. My wife is a medical worker and I’m a little fearful that she’ll bring the virus home.
Realize that fear of the Coronavirus may keep people away from restaurants and small businesses who usually operate on small margins.
So here’s something you can do!!
From your favorite local business or restaurant, you can buy a gift card.
Buy it directly from that favorite place so they get the use of your money for the next few weeks or months.
Then ....when things have settled down, treat your sweetie to an evening out or buy something for someone and use your gift card‼ That’s something simple and actionable you can do to help the economy and your community.
Thank you delivery workers.
Thank you doctors, nurses & medical staff.
Thank you grocery workers.
Thank you truck drivers.
If you like to see the headshots of the guests we have here on the show and see the show notes, it’s easy.
For this episode, #285, simply go to GetRichEducation.com/285
Now, we might only have the complete lyrics for the episode transcribed for maybe ten percent of episodes.
But for both today’s show and last week’s show, you can see the entire transcription there.
That way, you can read along as you listen, or share that transcription with someone else who, perhaps, wants this content but isn’t able to hear. So you can check out:
GetRichEducation.com/284 for last week’s show notes with complete transcription or
GetRichEducation.com/285 - for this week’s.
I’ll be back with you next week. If you want to help the economy, then, you might be best off, just staying home!
It’s part of doing the right thing before you do things right.
I’m Keith Weinhold. Don’t Quit Your Daydream!