Between the war in Ukraine and America plunging into the worst economy in 40 years, it’s easy to get depressed about the future. However, it’s always important to remember that not all futures are created equal. In this Mobile Home Park Mastery podcast we’re going to talk about navigating cycles, the contrarian nature of some assets, and the necessity of maintaining a calm head when all around you is in crisis.
Episode 244: The Only World That Matters Is Your World Transcript
It's so easy to get depressed right now. There's literally nothing good going on in the world. You have the war in Ukraine, and here at home in America, you have the worst economic fundamentals in the past 40 years. So what do you do with all that information? It's so easy to get unbelievably gloomy. But there are some things you have to remember, because the only world that really matters, when the world is falling down, is your world. So here are some thoughts on that. I'm 61 years old, and I've been through most of the nation's greatest calamities. I was around during the Carter era of stagflation. I was there during the 1980s, 1987, '88, to be more specific, Texas savings and loan crash. I was there during dot-com. I was there for The Great Recession. Now let me tell you.
Well, although all those things were particularly awful, there were some people who profited from each and every one of them. That's because most everything in America's seams to revolve around very predictable cycles, this kind of boom-to-bust mentality. Why do we have these cycles? Well, it's simple. People just can't seem to live by moderation or a sense of history. Here we are right now in 2022, and our underlying economics for single-family homes are worse than they were in the 2007 crash. So did we forget about the 2007 crash? No, I think people in the back of their mind always make some kind of parallel, but the problem is they get too greedy. They can't help themselves, and then more people jump on the bandwagon like lemmings, and then pretty soon everyone's just diving over the cliff, following each other. And that's pretty much how cycles work. Now a neat cycle, for those who know there's a cycle coming, they can plan accordingly and profit.
There was a popular book back in the 1970s. It was the biography of the family Krupp in Germany, and Krupp made its initial fortune during the Black Plague. What they did was they figured they may already have the Plague. Everyone was dying around them. So they took what little assets they had and what little money they had, and they went to the people who were abandoning the villages on the run, thought they would die if they stayed in the village from the Plague, and they would buy their land or houses from them for next to nothing. They'd say, "Oh well, you're gonna lose your home and your land from the Plague, and I know you're roaming to try and find a happier place to live, so how about you trade me the title to everything you own for five bucks? Or for a sack on potatoes?" And lo and behold, through the Black Plague, the Krupp family created its fortune.
If you read the biography of J. Paul Getty, same story, Conrad Hilton, same story. Always the story of people buying into the down cycle. So not everyone does poorly, when things get bad. The only people who do poorly when things get bad are people who didn't plan accordingly, so they were caught off guard. So how do you plan for these cycles? How do you make money right now with what is going on? Well, clearly, the first thing you need to do is you need to be completely contrarian. Don't do what everyone else is doing. Do the opposite of what everybody else is doing. That's what's going to give you the edge, because as things go down, you want things that go up based on things going down. So if we're going to conjecture that America is going down the drain right now, which it certainly is, as America goes down the drain, what gets better? Well, think about that for a moment. What can you think of where the demand goes up as the economy goes down? I can give you a few ideas. Dollar stores, pay day lenders, even a lot of vices. People find that when things are terrible, people consume more liquor, more cigarettes, because it gives them a few moments of consolation. And then there's one industry that I like a lot, mobile home parks. They seem to do well when things get worse, when that demand for affordable housing increases, when the need for the nation for lower cost places to live grows.
But find that contrarian niche. That's the first thing you need to do to really navigate successfully these cycles, is always be ready and watching for the change in the cycle, and then invest accordingly. Now what happens, though, in the cycle? How can you really time what's going to happen? Well, it's pretty easy to see when the cycle is about to occur, but things are about to get worse, because you go from a period where the fundamentals seem strong to where they start getting very, very weak. So right now, what's causing a lot of the concern in the markets is inflation. We all know that inflation would be best at zero or a very low number, like one or 2%. That was the kind of number it was during the Trump administration. But now inflation is up to about 8-and-a-half and probably very well on its way to 10%, and we know that that fundamental is very, very bad. The same with single-family home prices. We knew, and we all know, when homes appear to be a bargain. A home is basically a function of what the lender tell you it's worth based on how much they will finance for the average buyer.
Everyone uses debt when they buy their home. Very few people pay cash. So the real value of a home is not what you think it's worth, it's what the bank thinks it's worth, and banks like to make loans. That's what's profitable for them. Now that interest rates are going up in the administration's attempt to battle inflation, once again, you're seeing the cycle play out. Mortgage rates have nearly doubled, and based on credit, as much as tripled for borrowers, making their payments extremely hard to make and putting a lot of pressure on single-family home prices to, in fact, go down. Now what happens when all these things occur? What happens when we have stagflation and the eradication of a lot of values, of a lot of different assets? What happens when the stock market plunges out of the sky, as it's been doing here recently? Who are the winners and who are the losers? Well, the people that hold the assets that decline in value clearly are the ones who get hurt, and those who have assets that go up in value, those are the winners.
So what assets do well during stagflation? Well, when I went to Stanford to get my Economics degree, I recall very well, because I was a victim of stagflation back in the 70s, so I was always curious what could you have been doing to do well during that period? And the answer was if you owned real estate, bar gold and silver. In my Stanford textbook, those were identified as the only two things you could own that would do well during stagflation, and here we are right back in the same movie again. Now the problem I have with gold and silver, although I do own some of it, is simply the fact that it doesn't produce any income. I am much happier with investments that produce income. I like the idea of something that can produce a residual net profit to the owner, and at the same time, gain in value, 'cause you get paid twice that way. With gold and silver, you only get paid once. You buy it, you sell it, hopefully there's a profit. But with income property, you buy it, and as long as you hold it, if you bought it well, you get the differential between the revenue and the expenses, and then yet you're also building equity. You're building equity as you pay down the mortgage, you're building equity as it rises in value, you're building equity when you raise the rent. Not only do you get that extra little bit of money in your pocket every month, but also the value goes up correspondingly.
Now how do you keep a calm head during all of this? It's almost painful to watch TV right now or go to MSN. It's just all terrible. So how do you find a way, a resolve, to be happy? To be calm? To feel safe? Well, I would conjecture probably one of the great attributes of people who feel calm in times of crisis are those who are well-diversified. In my small town in Missouri, it seems that everyone has at least two jobs, a day job and a night job, and then some have three jobs, a day job, a night job, and a hobby job. And what do jobs mean anyway? Well, it means just a stream of income. Our mayor in my town owns, or owned, our prior mayor, a window manufacturing company, a restaurant, and a day care center. That gives him three different sources of income. And when times get bad, even if one of those goes down, he still feels okay, because the other two helped to pay the bills. So when it comes to developing additional income streams, again, real estate and income properties are just that. They represent income. Income is key to you feeling safe and financially solvent.
Mobile home parks produce good income. That's like having a second job. So really going back to what I initially said, your day job would be your day job, what you do right now for your career. But then your night job might be a mobile home park, or a portfolio of mobile home parks. That helps to offset the risk and the challenges you have with the day job. Now when you have two sources of income, obviously, you've got a lot better chance of not having a complete shut-off of your cash flow, and that's the most terrifying attribute, typically, of these cycles, is if you're on the wrong side of the cycle at some moment in time, you have no money coming in the door. The result of that can be default, bankruptcy, just a feeling of great remorse that you put yourself in such a position. But when you have more than one income source, it can really make you much happier.
The bottom line to it is that although things are terrible right now, they don't have to be terrible for you. You can plan accordingly. You can rebuild a much broader range of income coming in the door. You can put yourself in position to be contrarian, to be not the object that goes down with the ship, but the one that floats. It's all in the way you approach these cycles, with the full knowledge with every boom, there must be a bust. But you don't have to go bust with it. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.