I was hoping the article title would get your attention.
First, am I 100% sure a crash is coming?
Yes! Am I 100% sure it’s going to happen in 2022?
No, but I really do feel in my gut it is going to happen in 2022.
Obviously, on Jan. 1, 2023, we will see if I am right.
Here’s why I think it is going to happen this year.
Our country and our economy have never been in this situation before. Our government is printing trillions and trillions of dollars. We have the highest inflation rate since the early 1980s. The supply chain is broken and, in my opinion, there are bubbles everywhere: the stock market, the bond market, and even some areas of the real estate market. Let’s take a closer look.
Back in 2008, when the government bailed out the banks, the total bailout package was $700 billion. Today, with the way the federal government is printing money, that would be a rounding error. Even before the coronavirus hit, the federal government’s printing of money was out of control; after the pandemic hit, they put it on steroids!
Unfortunately, there is no end in sight. Once again, in my opinion, government spending is totally out of control. I’m kind of a geek—I study monetary history and past governments that have printed money like the federal government is doing now. It never ends well.
In my lifetime, the supply chain has never been broken like it is today. When I go into a store of any kind, I make it a point to look at the shelves and see if the store is fully stocked. Without exception, every store is missing inventory—some a little less and others a lot.
I talk to every business owner I know and ask whether they are having problems getting parts and inventory. Without exception, everyone has said “yes.” On a personal level, in my business, we are feeling the supply chain shortage as well.
My company had plans to develop a build-to-rent community in the Huntsville, Alabama, area. We bought 264 acres and were designing 203 half-acre tracts with brand-new 1,500- to 2,000-square-foot manufactured homes. There is an incredible demand for affordable housing, and the projected profit we were going to make was extraordinary. But when we got the property under contract, the manufactured homes factories had a four-to-six-month backlog. Because we needed eight to nine months to develop the property and install all the utilities, that backlog would have been fine. By the time the 90-day due diligence ended, the factory backlog increased to more than a year, so we had to pull the plug on the project. Fortunately, we bought the property at a good price, and we were able to flip the land and make a nice profit.
My area of expertise is real estate, but I have a couple of close friends who have been in the financial planning arena for many years. They are real pros, and they tell me they have never seen the market like this before. Stock price-to-earnings ratios are at all-time highs, the bond market is a mess, and the whole system is being propped up by all the federal government money printing. If you look at the charts, the stock market is due for a large correction, and many believe it will be in 2022.
Real Estate Prices
Now to my area of expertise—the real estate market. What has created the boom and fantastic rise in the values of real estate throughout the country is the federal government keeping interest rates artificially low. Back in the 1980s, rates were 12% to 18%. Today, the rates are in the 2.5% to 4.5% range. I estimate the federal government can’t raise interest rates too much, because they can’t afford to pay it on our national debt.
During my almost four decades, I have never seen such a shortage of affordable housing throughout the country as there is today. I am in several mastermind groups with some of the top real estate investment companies from coast to coast. Everyone says the same thing: “There is little to no affordable housing in their market.”
Finally, let’s talk about what I believe is the biggest problem of them all: inflation. According to the government, the consumer price index (CPI) was approximately 7% last year. Does anyone believe that real estate, food, health care insurance, and gas at the pump went up only 7% last year? No way!
The government wants to keep the CPI index number low, so they don’t have to pay the higher rates to Social Security recipients. A man named John Williams founded a company called ShadowStats. He calculates inflation the way the government calculated the CPI index years ago. These days, every time something goes up too much, the government throws it out of the basket of goods used to calculate the CPI. John estimates the real inflation rate last year was 14%, and I agree with him. Think about that, if you had $100,000 sitting in the bank last year, the best you got was 2% on it. That means you lost 12% of purchasing power, or $12,000 of true wealth disappeared. Inflation is a stealth tax and, in my opinion, it’s the worst and cruelest one of all. I foresee inflation only getting worse, not better, in the coming years.
What Are the Options?
So, what should we do as investors? Where should we have our money if I am right and the crash occurs this year? Obviously, we all must decide that for ourselves; I’m certainly not going to tell you what to do with your money. But, I’ll tell you what I’m doing with my money.
I am going to be 100% in hard assets, outside of the cash I need to run my business and personal life. My asset allocation will be 10% gold and silver (which has been a great hedge fund against currencies and inflation since biblical times) and 90% real estate (only affordable housing that will cash flow no matter how bad things get). Here’s why I’m making these choices: No matter how bad things get, everyone will continue to need to eat and have a roof over their heads. Everything else is negotiable!
My company, Stromberg Investment Group, has a unique niche in the real estate space. I truly trust our company slogan that “It’s the best kept secret in real estate investing.” Our business model is to buy existing mobile/manufactured homes—doublewides that are typically 1,400 to 1,800 square feet on a half to 1 acre of land. These are real estate, not personal property. They have a deed of trust or a mortgage, depending on the state, similar to a single-family home. We get a title commitment on every property.
My company currently buys properties in four states: Texas, Georgia, North Carolina, and South Carolina. We purchase about 10 properties a month. After we purchase a home, we rehab it like new, put a tenant in the house, and property manage it. We keep about a third of the properties and bring in private lenders to finance them. We sell/turnkey the other two-thirds to our investors. We don’t use banks; we use all private investors. We structure lucrative real estate deals for private investors inside or outside of an IRA. We have created a win-win for us and for our investors. Our investors are totally passive, and they love that!
So, you’re probably thinking, “Why manufactured homes versus single-family homes?” Depending on the area, manufactured homes are a third to half the cost, and proportionately the rent and rate of return is much better. You’re probably also thinking, “Don’t the houses depreciate?” Absolutely not! As a matter of fact, in most cases, they appreciate the same as a single-family home. For example, for the properties we purchased in Dallas/Fort Worth in 2012 to 2014, our all-in price (acquisition cost plus rehab) was around $60,000. Today, these same properties sell between $150,000 to $200,000.
Now, you’re probably thinking, “Why don’t we sell them all right now?” Because the rent rates have increased so much. In 2012-2014, rents were $800 to $900 a month; today they are $1,300 to $1,500 a month. After all expenses, these properties cash flow from $600 to $800 per month. Plus, we get to write off the depreciation and the appreciation. Using my example, the $140,000 of true appreciation is growing tax deferred. I expect with inflation this will continue to go up in the future. My attorney says to never use the phrase “recession-proof,” so I don’t, but he did say I could use “recession resistant,” and that’s what I call it.
Here is my 2008 crash story. Back in 2006 and 2007, I was buying the same type of properties I’m buying today, but I was flipping them. When the crash hit, the capital markets froze and I wasn’t able to sell anything. I had 18 properties with investor notes, and I have always said, “I would rather take a bullet to the head than not pay my investors.” So, what did I do? I never intended to become a landlord, but I was driven to it. I went out and talked to property management companies and took ideas from each one of them I liked and created a great property management system, which is truly the key to buy-and-hold real estate!
What I learned is that our model works great in good times, but even better in bad times. When a crash hits, people downsize and rent instead of buy. The demand for our properties, which is always great in a good market, goes up three times in a crash. This happened in 2008 and when the pandemic hit. Our collection rate was 97% and better throughout the pandemic, even with the forbearances on foreclosures and evictions. Therefore, I feel I’m perfectly positioned no matter what happens in 2022, and it’s why I believe affordable housing real estate is the safest and best place to have your money, in good times and in bad!
If you would like more information or have any questions, please feel free to reach out to me through our website: Stromberginvestmentgroup.com
Glenn Stromberg began his career in real estate in 1982, quickly rising to the top of the real estate game. He owned and managed a Clayton Home franchise and owned and operated 13 independently owned manufactured home dealerships. He also ran a successful fix-and-flip business.
During his 39 years in the mobile home industry, he developed mobile home subdivisions; owned a mobile home park; owned and operated mobile home sales centers; and bought, sold, and leased single-family homes.
In 2006, he formed Stromberg Investment Group with the mission to be one of the best real estate investment companies in the country. The 2008 crisis that took over the American economy led Stromberg to redefine his business model and create the current model SIG uses, allowing investors a safer option to investing and receiving higher returns without the high risk that Wall Street or the “flipping game” yields. With over 500 homes under management in more than four states, SIG deploys over $1 million dollars in investment capital each month and closes an average of 12 properties each month. Stromberg Investments offers investors lucrative passive turnkey options and long-term lending opportunities.