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The Impact of the Lockdown Recession on Real Estate

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Here we are, right in the middle of this COVID-19 pandemic and everybody's fearful as you can imagine. The federal government's thrown all kinds of money at us and everybody thinks that we're going to snap right back to the way it was.

I don't believe that.

One of the great things about being around Rich Dad’s Robert and Kim Kiyosaki and all the other advisors is we study people, books, behavior, recessions, downturns, upticks and markets.

One of the greatest people that we studied was a systems theorist by the name of Buckminster Fuller. He wisely said: “Don't fight the forces. Use them.” Basically, he's saying things are going to happen on their own time, whether you have a say in it or not.

When are we going back to work? When am I going to get my job back? You must let it go.

Fuller often talked about the effects of procession and lag. With procession, you drop a pebble in a pond and the ripples come out in the water. The lag is the timeframe between them. There's a lag in everything that we do, including adopting new technology.

Right now, the processional effect we see is the shutdowns caused by this virus COVID-19.

We're north of 23 million people unemployed. To understand the magnitude of this, in the double-dip recession in 1982, we had 2.7 million. The early 1990 recessions --2 million; the dot-com bust -- 1.9 million; the great recession -- 2.6 million. This is 10 times higher than any other unemployment rate that the U S has ever seen. Everybody's saying the economy needs to jump right back up. That's not going to happen.

We had $2 trillion in circulation in the United States before all of this. We've just doubled it, maybe tripled it.

We received our Paycheck Protection Plan money last week. It was a lot of money, but since I kept all 250 employees working, that loan is forgiven. My tenants are not able to pay rent and therefore we're having to cover the properties. It's the same for everyone.

When the economy reopens and people go back to work, behaviors are going to be a lot different. People aren't going to show up just like nothing happened. They're going to be super cautious, even for NFL games and NBA games.

A lot of businesses that are not going to make it, despite the stimulus money. You're going to start seeing defaults – in real estate, car payments and office equipment.

Most commercial tenants won't have the income to pay rent. If they can't pay the landlord, the landlord can't pay the bank. You're going to start to see all this in the next four to eight months. Some of these businesses are going to be gone for good, unfortunately. It's horrible, but it's definitely going to happen. Recently, we saw JC Penney's miss its biggest payment. It has more than 700 stores. We saw Gold's Gym close 30 locations. That’s just the beginning.

We're already seeing drop in housing prices. We're even seeing cars selling at 0% interest over 84 months. When is the last time he saw that? We're in a consumption society. If nobody is consuming, then people aren't paying people. That's just the way it is.

We will be well into 2021 before you start to see this bank real-estate owned (REO) stuff get written down. Somebody is going to take that hit and it's probably going to be the bank. The bank's going to take back that property as collateral and maybe try to manage it.

This is exactly what happened in the last couple downturns when there were only fewer than two million people unemployed. We have more than 23 million people out of work.

This is almost time to buy.

Don't catch a falling knife while it is still falling. You want to be able to buy from the bank in 2021. What you want to do right now is you want to start getting your funds together and be positioned for next year. Basically, write off this year; it's done. You want to get down and into recovery mode. You want to ride through the expansion phase. You want to refinance and take advantage of these low prices.

My partner Ross and I sold $200 million in real estate in 2019 and now we look like geniuses. At the time, people thought we were crazy. We sold the 10 properties that we didn't want, in anticipation for this. It was part of the strategy. That’s one of the lessons I shared in The Advanced Guide to Real Estate Investing. We made a lot of money on it and we're heavy in cash.

You want to buy at the right place and we haven't fallen there yet. For all of you optimists, you need to be a realist. You need to understand the lag.

You don't want to buy too early. Go back to what Fuller said: Don't fight the forces. Use them.

Let things progress the way they're going to progress. Let the government pay out all the cash. See what businesses survive.

Let the real estate go back to the bank then be in a position to come in and buy. That is how you're going to get really wealthy from this horrible crisis.

Original publish date: June 10, 2020

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