5 Factors Making Investing Today Completely Different Than It's Ever Been in Our Lifetime (And How To Adapt)

The real estate industry has experienced unprecedented growth over the last few years, but now we’re facing a correction and all signs indicate it’s going to be brutal. 

This boom has been great for investors, but now the tides are turning. That doesn’t mean the opportunities are gone or even going away. It just means that we have to understand the changes in our economy, how they impact the industry, and adapt accordingly. 

I know this is a scary time for a lot of investors. Especially newer investors who haven’t faced this kind of economy before. 

If you’re one of the people who is worried right now, I want you to understand that things are going to be OK. Yes, there will be some ups and downs in the market and things may get really tough. But if you go into this knowing that, surrounding yourself in the right community and properly assessing reward over risk, you’ll come out the other side in a stronger financial position. 

So let’s unpack the factors that make today's economy different from anything we’ve experienced in our lifetime, and how you, as an investor, should adapt. 

Growing Inflation

Inflation is a hot topic because it’s running rampant and affecting every part of the economy these days. You can see its impact in the rising cost of goods and services you buy, but it also drives the interest rate as well. (More on that in a moment.)

Essentially, inflation erodes the value of your dollar, making everything cost more by increasing the supply of money. Think about it like this — if the government had one million dollars in circulation, and injected another one million dollars, the value of your dollar would be cut in half because its value is based on its scarcity. (Or lack thereof.) This is where a concept called Quantitative Easing, or QE, comes into play. 

Now you might think the government would never do something like Quantitative Easing because of the disastrous effect it has on the value of our dollar, but the truth is this has been going on since pretty close to the founding of America. To put this in perspective, an item purchased for $100 in 1913 would cost $3,081.91 today due to inflation.

This causes the costs of everything to go up, which if not kept in check, can lead to hyperinflation, and all signs indicate that we’re rapidly heading in that direction. 

In times like these, investors need to be more diligent in underwriting their deals to ensure they still work at today’s elevated inflation rates, and ideally, can survive the pressure of higher rates, which seem to be inevitable over the coming years. 

Skyrocketing Interest Rates

Everyone is talking about interest rates lately because, let’s be honest, they’ve skyrocketed compared to previous years. In fact, mortgage rates are currently riding a 22-year high with no break in sight. But interest rates and their impact on the economy are more complicated than it may seem at first.

As of today, or at least when I started writing this, the average 30-year fixed rate mortgage is 8.471%. If you were lucky enough to get in on the low rates that were handed out like Halloween candy over the last several years, your rate is likely four percent or lower. That makes current interest rates seem absurd — especially since these rates cut your purchasing power by about half.

This creates a problem in two different ways. The first is that these rates severely limit what buyers can afford. And when buyers compare what they can afford today versus properties they were considering just a few months ago, there’s little financial incentive to purchase now. The other part is that the vast majority of homeowners in sub-4% rates are unlikely to sell because they’ll be forced into a dramatically higher rate, resulting in less available inventory for buyers. 

Many investors have been conditioned to think the low rates we’ve enjoyed over the past few years are normal, when in fact, the opposite is true. Historically speaking, interest rates have hovered mostly between 7-8% — this is normal, so investors need to learn how to make their deals work at today’s rates. 

It’s also worth noting that, generally speaking, this will be easier for more experienced investors because we’ve already been through economic periods like we’re facing today, but it may be more difficult for newer investors because they’ve only experienced the unusually low rates of the last few years. Sometimes it's knowing how to structure a deal that makes it work when others don’t know how. That’s why I say, deals are created — not found.

This is why it’s critical to know your numbers on a deal inside and out. 

Supply Chain Issues

An issue that emerged at the height of the pandemic is a supply chain crisis that has impacted nearly every facet of our economy. 

This was driven by lockdowns that led to a massively reduced workforce. At first, the issue was masked by reduced demand since most people were cooped up in their homes, but as the world began to return to normal and demand picked back up, it grew rapidly. 

Today, three years later, we still haven’t caught back up. 

As a result, manufacturers were forced to ration products and raise prices to prevent large buyers from gobbling up all of their inventory. Unfortunately, this has driven prices up significantly, and despite that, buyers are still being forced to wait for the products they need. 

This is especially problematic for the construction industry because most of the materials we use in buildings are manufactured overseas, so we’re already starting at a disadvantage. Even during normal times, it can take 6-9 months for a container of building materials to make its way from China to the US. It’s even longer now due to the backlog. 

Investors can adapt to this challenge by anticipating higher costs and longer timelines than in the past. You need to look at not only the current costs, but also the direction they’re trending in. 

Lack Of Housing Supply

We’re also facing a serious lack of supply in the housing market that I think could be described as a perfect storm. 

I mentioned earlier that some homeowners are reluctant to sell because they have a mortgage with an interest rate below 4% while today's rates are approaching 8%. Add to this the fact that home prices have appreciated by 100% or more throughout most of the country, which means there are fewer homes available that are affordable to the average American. At the same time, the supply chain crisis is preventing the timely construction of new housing, and increasing its cost.

This creates a scenario that drives home prices even higher, causing further weakness on the supply side. 

The key to thriving in this environment is to build a strong network of connections to help uncover investing opportunities before they hit the market. These off market deals will often be the hidden gems that can create life-transforming opportunities for you. 

Tightening Credit Markets

While interest rates affect one side of the equation, credit underwriting guidelines affect the other. 

We’ve already talked about how climbing interest rates have priced many out of the market, but what few are talking about is how more stringent underwriting guidelines are taking even more potential buyers out of the market. I’m seeing experienced investors with pristine credit scores being denied mortgages that would have been quickly approved just a few months ago. 

Financial institutions are facing tremendous exposure right now and are taking aggressive measures to reduce their risk. One of the ways they’re doing that is raising the requirements for loans. This includes factors like debt to income, credit score, credit history, amount of total debt, etc., which can help a lender better evaluate risk.

While it may seem like that could kill a lot of opportunities for you as an investor, the truth is, it shouldn’t. 

Yes, it’s harder to get a loan today than it was last year, but we’ve actually been pretty spoiled the last few years by easy to get credit. 

As an investor, the smart play right now is to focus on two things in order to overcome this challenge. 

The first is to nurture stronger relationships with your existing lenders so that you’re more than just a number to them. The second is to develop new relationships with other lenders so you’ll have more options. And a third is to consider equity partners. Sometimes going into the deal with fellow investors who are looking for better than market rate returns will go in as a partner on the deal, sharing in both the risk and the reward.

Adapt To Survive…Or Else!

These factors will affect every investor over the next several years, and will likely get worse and stay that way for a while before things start to improve. 

But don’t let that scare you. Yes, things will be uncertain and challenging for a while, but these are the times when you come across the biggest opportunities — if you have the courage and discipline to follow through on your plans. Remember, this is when most people will be hiding on the sidelines waiting for things to get more stable. 

As long as you know these factors and how to adapt to them, you’ll be positioned to capitalize on these opportunities and change the direction of your financial future for generations to come.