As Americans continue to be ravaged by runaway inflation tearing through our economy like a wildfire. At the same time, we’re simultaneously being slapped in the face by government officials and journalists disingenuously telling us the economy is great and we’re just imagining the inflation we see when we go to the store.

Things are bad—in fact, far worse than most realize, because while we can all see the direct financial impact, few have the financial literacy to see the deeper and much larger underlying economic rifts poised to swallow a significant number of businesses and investing opportunities as our economy further weakens.

When this occurs, as we’ve seen leading up to the pandemic recession of 2020, the housing recession of 2008, the Dot Com recession of 2000, or countless others over the years, a few very predictable things tend to happen pretty consistently, according to economic expert, Dr. David Phelps.

Phelps says, “the people who are really in tune with the economy start to see the writing on the wall long before anyone else does. They look at data like inflation, personal, corporate, and national debt, fiscal deficit spending, unemployment, new business start ups, bankruptcies, and other economic metrics to get a more accurate picture of our economic health—and these are the people who have been sounding the alarm.”

As for sounding the alarm, Phelps has been leading the charge warning Americans about how bad things really are in our economy for several years now, frequently sharing his insight in the media.  The bigger problem, he says, is that it “often falls on deaf ears because we have a real financial literacy crisis in this country today.”

Back in 2021, he was asked to help the Florida Department of Education develop its new financial literacy curriculum that would later be implemented in all schools throughout the state.

“Financial literacy is so critical in our world, but so few people have it—and those are the people hurt most during a downturn because they typically can’t see the risks in a potential investment opportunity. The efforts Governor DeSantis took to change that will have a profound impact on future generations, and I especially admire that in today's political climate where so many are afraid to do the hard work to make real change.”

But Phelps warns that people without financial literacy should also be extra cautious right now.

“Investors at all levels need more rigorous due diligence on making prudent investment allocations in a very volatile and uncertain environment today.  Past models are likely to fail. This means investing in what you know, sitting down to really crunch the numbers, not chasing late market returns, and thoroughly vetting all the partners in the deal. You simply can’t rely on your gut with all of the underlying weaknesses and uncertainty in our economy today,” he said.

Business funding expert, Amanda Webster, says that when mistakes are made under the kind of economic conditions we’re currently facing—especially when borrowed capital is at play, our financial stability can pile up and get out of control pretty quickly. That, she explains, is why we should be more careful when using borrowed capital during periods of economic uncertainty.

“Business credit provides leverage but it comes at a cost, so it’s critical to not only make sure that the numbers and details behind the asset you’re investing in are accurate, but also that you’ve accounted for the added costs of borrowing. And that means having a backup plan in the event that your primary funding source falls through for some reason, and that your asset still makes sense at that increased cost of your backup funding source as well,” Webster explains.

She said that her staff at Fund&Grow advise their clients to be more conservative when the economy starts to shake up.

“You need to be far more selective of the terms you agree to, and you need to be more focused on what you use the capital for. Generally speaking, we recommend only using your business funding for activities and assets that produce immediate revenue,” she warns.

Phelps says it’s important to remember that real estate, like any other asset class, always comes with risk—even in the best of times, but when our economy declines, that risk increases across all asset classes.

He shared a story of a real estate investment that went bad because of choices made by one of the other partners in the deal. Despite everyone involved having decades of experience, things still fell apart because of one variable they hadn’t controlled for. Could that have been prevented with additional due diligence? Phelps thinks so, saying a deeper dive into the personal finances of each partner may have uncovered some useful information.

“We certainly could have gone deeper, but considering that our due diligence today is much more comprehensive than the industry standard, I took this as a clear sign that it’s time to get even more granular,” he explained.

The saving grace, he said, was transparency throughout the process.

“Where many people err in situations like this is they fail to communicate. Once we were aware of the problem, we immediately jumped into identifying what had happened, the current status of the investment, and collaborating to develop a workout solution. Secondly, we utilized our network to bring additional resources to the workout plan. That’s the right thing to do because your investors deserve to know what’s going on with their money, but it also helps you in the long run because it fosters trust. This is critical because we’re all going to see a lot more investments underperforming and even losing money over the coming years, so we need to be prepared to have the tough conversations when the need arises—and it will,” he explained.

Phelps says the outcome of a few recent real estate investments, which were still fairly profitable, made it clear that his predictions were coming true very quickly. That was when he decided it was time to expand on the underwriting process to reduce risk in the deals his community was investing in.

“We’ve continued to stress due diligence and vetting, but now we’re doubling down to reduce the chances of us and our co-investors getting blindsided. We start by running  background checks on the principal operators, then review of the legal documents by a securities attorney, and finally, an analysis of the financials by an outside chief operating officer.

Additionally, we evaluate the numbers on the deal, but we adjust our variable to account for several factors. For example, we’ve always calculated the impact of increases in inflation and interest rates, as well as trends in construction to see how our improvement costs might change before the completion of a project. But now we’re also digging deeper into suppliers and contractors, looking for signs of instability or growth that could change our relationship to an extent that impacts our business.

We start by running background checks on the principal operators, then reviewing regularly. We even research local community leaders to get a sense of the direction things are going in an area. For example, do they encourage growth and development or fight to stifle it?

Are they in favor of burdensome regulations and costly fees or do they support a free market? The more information you can uncover here, the better you can gauge the viability of investing in that area. The idea here is to dig deeper and wider than usual because you’re trying to find the red flags buried far below the surface. Adopting this mindset, you’re looking for reasons not to make a particular investment rather than reasons to make it,” he explained.

The market has steadily weakened since the pandemic, but much of that has gone unnoticed because prices have remained relatively stable and many in the media have downplayed the severity of the situation.

What most people don’t realize is that despite prices staying generally stable, transaction volume for both commercial and residential real estate has plummeted. For context, while existing home sales in July 2024 increased a paltry 1.3% compared to the previous month, following four straight months of significant declines as inventory continued to pile up, according to the National Association of Realtors.

Meanwhile, the commercial real estate market has been decimated, driven by the weak economy and a remote workforce, and is facing a surge of foreclosures as a result.

The natural outcome of this set of circumstances is that real estate investments which would have been profitable a few years ago no longer are today. But since most people aren’t aware of the underlying economic conditions, they’re operating on the “business as usual” mindset and unknowingly investing in opportunities that mathematically cannot be profitable.

Phelps says that investors who fail to expand their underwriting process to account for today’s increased risk will inadvertently get caught up in bad deals. Each failed deal creates further economic damage that ripples out, affecting the entire market, and as more opportunities go south, this ripple effect will increase exponentially.

He warns that this can quickly become a proverbial perfect storm where the market and even the broader economy take a nosedive. As someone who grew up in a military family, often hearing, “The more you sweat in training, the less you’ll bleed in war,” I felt that something Phelps said to me perfectly encapsulates the situation while incorporating the mindset behind that powerful military saying.

He said, “Investors are going to pay a premium in today's market, either beforehand in additional due diligence efforts or afterward in lost profits and opportunities,” and I think that’s the perfect way to close this article.

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Lori Greymont is a seasoned real estate investor, creator of the hit TV show, Funding Faceoff, and founder of a private mastermind community with the mission to help 5,000 real estate entrepreneurs get their real estate deals done and create true financial freedom.