To say that there have been jitters on Wall Street this week would be an understatement.
Real Estate Investing can be extremely lucrative when done right. It can also be very a very stressful, time suck and miserable experience when mistakes are made. There are some questions to first ask yourself.
Are you Active or Passive? – Do you have 10-20 hours to manage active investments a week. Do you have the expertise and tolerance for stress and to solve problems. Active investing requires a lot of problem solving, it often never stops. Some of the problems are easy, some hard, many can really boost values and profits.
Do you have capital or need financing? – using OPM Other People’s Money is very powerful. In addition to banks, there are many private lenders and hard money lenders who would love to lend on a good project and earn 8-12% on their money secured.
Do you have contractors or time and knowledge to do repairs yourself? – find an experienced rehabber, ask them about the mistakes they have made with contractors. The list will be long and wide. Most will laugh or cringe when you ask them if they have their system to find contractors down.
Leverage your strengths, find experts who can help you in the areas you are lacking. Real Estate is a team game. If you try to do everything, you will hold yourself back. In most cases, people like what they are good at, and hate what they are not good at. Write down on a piece of paper what you like and dislike, get experts to do what you don’t like. You will thank yourself endlessly.
Find “The How”, even more powerful find “The Who” – who can you contact and learn from that is an expert in an area you are lacking? If you approach them in an appropriate manner with good intentions to add value to them, you will be surprised at how willing they will add value and help you. It is then up to you to execute, and please reciprocate to these kind people and others. Always add value to people, places and things.
Passive Investments include:
Private Lending – common is 8-12% secured with a Mortgage and Promissory Note, not to exceed 70% of After Repair Value. Some investors will offer more when they are trying to build their business. Make sure they are capable, have the track record and values to successfully complete the project and return your money and return. If not you will end up with the project back.
Real Estate Funds (PPMs) – Private Placement Memorandums, allow investors to pool money and provide an annual return, equity split or combination. Very Savvy investors such as David Swenson who manages the Yale Endowment Fund and is said to be the best institutional investor on record highly recommends diversifying with Fixed Income Real Estate Funds. I agree with him, of course I have a Fund, I love my market and model and the mutual benefit created with my investors.
REITs – Real Estate Investment Trusts. Large institutions that pool money for their model.
Active Investments Include:
Wholesaling – freelance acquisitions. You are connecting an end buyer to a discounted property and making a fee in the middle via an assignment contract or double close.
Rehab Flips – buy, fix, flip to homeowners or investors. Most people have seen HGTV, it is far different in reality but the general idea is understood. One key here is to be weary of Sexy deals. The boring deals are usually the ones that have the best profit and lowest risk.
Wholetailing/Prehabs – buy trashed properties, clean them up and fix the negatives that scare off buyers. Then sell for solid profits.
Rentals – Buy and hold with renters. This can be a great way to accumulate wealth. Just be realistic, this is not completely passive. You will have to manage and make decisions.
AirBNB/Short Term Rentals – Social Distancing is not going away. And people still want to travel, go to events and see sports. Instead of staying in a hotel with thousands, you can stay in a place with just the people you came with. I see this strategy becoming even bigger. Properties that are really nice, furnished nice with great amenities and service perform best.
Lease Options – Agree to a purchase price with a buyer, they pay a down payment and monthly amount on top of rent, then they can buy it at the agreed upon purchase price after usually a 3-5 year term.
Land Contracts – own the property and become the bank for the new buyer. You do not have to maintain the property, pay the taxes, insurance, utilities, etc. But you need to make sure the buyer is.
Whatever strategy you choose, market or how you are involved, Real Estate can be very lucrative when done right.
Historically the Market has always gone through cycles. While Real Estate has been more stable, it too has ups and down like the stock market. There are huge opportunities during changing markets. Savvy investors insulate themselves from the volatility and position them to capitalize in a big way.
Choose of market – Primary markets such as LA, Chicago, NY, Miami and many of the big markets and coastal markets usually see huge peaks and valleys in values. They follow the stock market. Tertiary markets like the MidWest do not see the huge peaks. Values stay more stable like a wave. I choose the Indianapolis market which is widely considered the most stable market.
Entry Level Homes – High end homes are beautiful. They are sexy and fun to show off. They also are very high risk. They don’t have multiple exit strategies and the buyer and tenant pool is small. Entry level homes have the largest buyer and tenant pool. They are much more affordable and provide many exit strategies. They are not as sexy, much less risk.
Buy at Huge Discounts – Industry standard is the 70% LTV rule. Purchase and Rehab should not exceed 70% of the After Repair Value. Most of our properties are 40-60% LTV.
Stick to Fundamentals – Buy at a discount, add value, higher and better use, pass inspection, increase the buyer and tenant pool, supply and demand in your favor, maximize exposure and profit.
Be Properly Capitalized – Being under capitalized makes it nearly impossible to capitalize on opportunities. Being over capitalized can make you a motivated buyer and do marginal deals. Find the happy medium where you are properly capitalized and have abundant funding sources for when opportunities arise.
Multiple Exit Strategies – Selling for retail is one exit strategy, what if that becomes a challenge. The supply of homes spikes while the demand shrinks. What to do then? It is highly advised to have a plan B, C, D, E, etc. Renting, AirBNB, Lease Option, Land Contract are some of the other exit strategies that protect investors from market changes.
For us at Fall Creek Asset Management, we watch the trends and plan ahead. These strategies put us in a position of strength. We are always able to capitalize in up and down markets as we are insulated from the volatility. The only thing that can hold us back is our attitudes and mindsets. Happy investing to All!
The Stock Market has long been the conventional investment vehicle for the masses. Fortunes have been made and lost. Many have strong opinions that the stock market is the best way to invest. There are positives, especially when done right. There are things that are not disclosed to investors however, that can greatly impact their portfolio over time. 67% of American owned stocks in 2007, that is down to 56% in 2020. Now I am not a financial advisor, this is a quick educational article to help people understand reality and some other options when comparing Real Estate as an alternative to the Stock Market.
Stocks average 7%, does your portfolio? When averaging the yearly stock market returns, they come out to around 7%. So a 1 million portfolio should grow to 3.869 million over 20 years of 7% returns. What they don’t tell you is how do fees and losses impact your portfolio value. There are management fees, transaction fees, etc. And what if year 1 is similar to the 38% loss in 2008? Then your portfolio only grows to 2.242 million during the same period and that is before fees. When investors look at their statement 20 years ago and compare it vs now, they will be surprised to see that it usually has not grown even close to 7%.
Stocks are liquid. Recently the market went down 29% in a very short period of time. Investors have the choice to liquidate their holdings. Many people who feared further loss did liquidate. What happened? It shot right back up. Will that always be the case? No, nobody knows. Many investors do like having the choice.
Everybody is doing it. We are taught to go to school, go to college, get a job, invest in the stock market, have a family, etc etc. Many can relate and they like being able to discuss it with their friends, families, colleagues and peers.
Real estate on the other hand has some amazing positives. I am the first to admit, it is not for everyone. Watching HGTV shows and buying expensive houses in your neighborhood and trying to do all the upgrades yourself just to make a small profit and not factor in agent commissions and soft costs can be a real bum deal. Doing it right however and you can double your money.
Buy Real Estate at a Discount. Industry standard is 70% LTV rule. The purchase and rehab does not exceed 70% of the After Repair Value. We buy our homes at 40-60% LTV.
Add Value to Real Estate – renovations can skyrocket values of homes. I bought a home for 15K recently, after 35K of rehab it is now worth 120K, over double what we have in it.
Reposition Real Estate for a Higher and Better Use – A property could be worth one amount to an investor who would hold it as a rental, to a homeowner some are worth around 50% more. Another example is a house could rent for $1000, but as an AirBNB it could bring in 2-3K per month which makes it much more valuable.
Multiple Exit Strategies. Flip to homeowner, hold as a rental or AirBNB, lease option, land contract, there are many exit strategies with real estate that insulate investors from volatility.
Real Estate is Stable, especially in tertiary markets – many remember 2008 when half the neighborhood in Vegas, Phoenix and primary markets were short sales. That was not the case in tertiary markets that do not see the spikes in values or the lows. Indianapolis for example dropped 7% while many markets dropped in half.
Use Leverage – Instead of doing 2 deals at a time, leveraging financing and you can do 10 at a time. By sticking to the fundamentals you can easily
Over 100% annual returns – my firm for the 3rd year in a row is more than doubling our money annually. Our average deal is around 60K for purchase and rehab and we profit almost 40K in 6 months. So we can do that type of deal twice a year. 60K turns into 100K then we can almost do 2 deals the 2nd time. Now the key is for us to average 4 months so we can turn it 3X a year. That is realistic, we are making great progress to achieve over 50% cash on cash return in 4 months so we can do it 3X and earn over 150%. Not all markets or models are like this. Our team combined has done thousands of deals. We made most of the mistakes you can make, and now we have it dialed in.
What is a good profit on a rehab flip? Opinions will vary, especially across different markets. Some will not do a deal unless there is a 100K+ profit. Often they have to put in upwards of 1 million dollars and far more rehab than profit. Here I will show you 5 Tactics that experts use to maximize their profits on flips.
Annualized vs Cash on Cash Return – What if you make 80K profit in a year on a deal that you buy for 120K and put in 120K. That is a 33.3% annualized and 33.3% Cash Return. What if you make 40K in 6 months and only did 20K of rehab on 60K all-in. That is a 66.7% Cash on Cash Return but a 133.3% annualized return. Which one is better? Most will go for the 80K profit in a year, that is were most of the competition is. My model is to target the less competitive, easy flip projects and do volume. And we are getting closer to averaging 4 months so our annualized return is creeping up closer to 200%. So now what would you prefer? Consider your return on time and return on rehab when evaluating and underwriting your deals. You may find that boring deals are way more profitable and much less risky in your market.
One chance to make a first impression – take them on a journey. Buying a house is an experience, it’s like going on a roller coaster. It starts when you are driving in the neighborhood. This is how they will come and go from their home. Consider cleaning up neighbors properties to avoid buyers not even getting out of the car. Staging is key, our properties sell far faster and for more when we stage them. Virtual tours are not common, but part of our standard marketing and they are phenomenal with social distancing likely sticking around long term. Make this the best roller coaster ride they have ever been on. Where buyers can’t wait to go inside upon arrival, then you are invoking emotions through out the walk through. They are imagining themselves living there, eating and enjoying family, holidays and get togethers. Spending quality time and getting ready to live their lives.
Kitchen Bathrooms, Curb Appeal – These 3 items are were you can add the most value, the best bang for your buck. People want open kitchen concepts. Make it awesome with high end materials and put in nice appliances. Bathrooms especially master baths are also key. Don’t skimp, put in nice tile surrounds, shower heads, new toilets and vanities. And make the curb appeal pop. The first thing seen is the front picture, if it pops you will be amazing how many showings you can get when the rest of the property and pictures are done right.
Make it pop for Pictures and Walk-Throughs – What you see in pictures vs with the naked eye during a walk through can be completely different. Imperfections may now show in pictures but immediately turn buyers off during walk throughs. And some times properties look amazing in walk throughs, but the pictures don’t pop. Color contrast is key with pictures. Consider both, buyers and agents almost always see pictures first, they have to appeal enough to get
Leave a Project Folder at the property – List all of the upgrades that have been done. Include scopes of work, invoices and contractors license info. It gives a perception that the work is high quality and that items can easily be addressed during inspection. We often inspect properties ahead of time and list what we have fixed, even offer them to call the same company back out to reinspect for free.
Recently a number of investors have communicated concern over the direction of the economy. The media has been a buzz about trade wars and the stock market has seen large drops. They also stated the belief that real estate is volatile. When I asked why, they all pointed to the sub prime mortgage boom and bust from the last recession. Makes sense being so recent, however my understanding has always been that real estate is typically very stable, even with the economy and stock market roller coaster rides. So I dug into some historical real estate values.
Summary of Findings:
Stable – US Real Estate as a whole is very stable, the exception was the subprime boom that peaked in 2005
More Volatile – Typically Coastal and big markets have more peaks and valleys
Most Stable – Indianapolis is the #1 most stable market, even during the subprime boom it peaked at 147K and dropped only 7% to 137K at the bottom 7 years later in 2012
If you look at the 3 graphs below, you can see in the 1st graph for US has a slow, steady climb. You can almost draw a straight line from start to finish without too much deviation above or below. The main exception is the huge boom around 2005 that came back down and resumed the climb almost right where it left off.
The 2nd graph shows Los Angeles, a coastal market that has peaks and valleys. When drawing a straight line from the start to finish, it often goes quite a bit above and below the line. This is typical of many of the big markets and coastal markets.
The 3rd graph shows Indianapolis, ranked the #1 Most Stable Market you can see it did not have a huge peak or valley and is incredibly close to a straight line. Even during the sub prime boom and bust, Indianapolis went from around 147,000 in 2005 at the top to 137,000 in 2012 at the bottom. Indianapolis does not see these crazy peaks that should not be reached, then plummet. It only went down 7% over a 7 year period from 2005 to 2012 while many coastal markets dropped in half.
United States: Pretty consistent trend upwards with exception to the subprime boom then picked right back up on a similar upward trend.
Los Angeles: Coastal and big markets are typically more volatile
Indianapolis: Ranked Most Stable Market. Only 7% dip from 147K peak in 2005 to 137K 7 years later
Stability is one of the reasons I picked Indianapolis. I could go on and on about Why Indianapolis, such as the #1 Job Growth and Population Growth in Midwest. Next, I will be writing about how I have navigated and built my model in such a Stable market.
On Wednesday, the Dow dropped 800 points for the most significant one day drop of the year. Triggered by historically low bond yields, investors fearing recession, unloaded their Wall Street assets.
Check out some of the headlines from the past couple of days:
“Recession fears 2019: why everybody’s worried yet again.”
“Recession fears are back — should you be worried?”
“Wall Street tumbles on growing recession fears.”
While the general investing public reeled in the wake of recession chatter this week, there was a class of investors largely unaffected by the selloff – the ones invested in real assets, an alternative investment largely shielded from downturns.
Sure there are exceptions where real estate tanks with the rest of the economy like in the last Financial Crisis, but even that situation was unique in that real estate was tainted by Wall Street due to asset-backed securities that tanked from subprime loans. For the most part, real estate has been a resilient asset class shielded from broader economic downturns.
But what if there was a way for investors to be involved in commercial real estate without the high cost of entry and without the analytical headaches?
Tired of heightened volatility in the equity markets and low bond yields – on full display this week – the wealthy and institutions like university endowments have long turned to alternative investments like real estate for uncorrelated, above-market returns.
Alternative assets like real estate are not correlated to the stock market, offer diversification, and potentially higher returns when compared to Wall Street offerings. In fact, alternatives have historically provided higher returns at lower risk.
So while the rest of the investing public reeled this week from Wall Street losses, those invested in real assets were shielded from the mayhem. That’s because tangible assets are built to weather recessions, and here are some of the reasons why:
| Above-Market, Risk-Adjusted Returns |
Real estate has consistently beat the S&P 500 without the volatility. Because real estate is not correlated to the stock market, it offers diversification that allows for higher returns at lower risk when compared to mutual funds, stocks, and bonds.
| Cash Flow |
People don’t just stop needing housing in a recession. Lease agreements ensure continuing cash flow from both residential and commercial real estate in a downturn. While most investments like stocks, gold, bitcoin, etc. bank on appreciation, real assets generate consistent cash flow from leases that in most cases, are recession-resistant.
| Diversification |
With its breadth of real estate options across segments, price, and geographic location, just to name a few, real estate offers the type of diversification built to weather economic storms.
| Asset-Backed |
Because real estate is backed by a tangible asset, the chance of a real estate investment going to completely zero is nearly impossible.
| Appreciation |
Appreciation, along with cash flow, is ideal for building wealth. While prices fluctuate over time, in the long-run real estate values have always gone up and consistently outpaced inflation, and there is no reason to think that is going to change.
| Leverage |
Widespread access and availability of conventional and unconventional financing for acquiring real estate allow investors to leverage their investment capital to acquire multiple properties instead of just one, allowing for accelerated wealth creation and growth. For that reason, leverage acts as a wealth multiplier not available with public equities.
When a tornado hits, the ones that are least prepared are the ones that are most devastated. The ones that are prepared are able to weather the storm and sip tea in their personal shelters while their neighbors run for public shelter.
The wealthy brush off recession news because their investments in real assets are built to withstand economic storms today as well as in the long run. So, while everybody else panicked this week and unloaded their Wall Street assets, the wealthy sat back and ignored the noise, knowing that their cash flowing real estate would protect them from downturns.
What’s the good news?
It’s never too late to get into real estate.
Unlike stocks, real estate is an inefficient market – meaning, there are still informational advantages available for savvy investors to profit from bargains. Public companies, which are covered by the 24-7 news cycle and subject to stringent informational and reporting requirements, offer no opportunities for exploiting informational advantages – at least none that are legal. With real estate, your neighbor next door is under no obligation to report to the public that he’s planning to retire and just wants a quick sale of his property so he can head to Florida sooner than later.
Not only is it never too late to get into real estate investing, but the opportunities to qualified investors are more ubiquitous than ever before. It used to be that to invest in a private real estate fund; you had to be wealthy or well-connected since advertising these offerings was prohibited. However, with recent regulatory changes to securities laws, the playing field has been leveled so that now investors at all levels can pursue the types of opportunities once the exclusive playground of the wealthy.
So take advantage of the opportunities now available to all accredited investors to protect yourself just like the “mega-wealthy”. Tangible assets offering cash flow, appreciation, and diversification are the investment vehicles the “mega-wealthy” use to protect their fortunes and are what you should be seeking out to safeguard against economic downturns.
How will your investments fare when the next recession hits?
Whether you’re a seasoned investor or just getting started, single-family rentals are not your only option for real estate investments.
For investors just starting out in real estate, the default option is usually single-family rentals because of affordability, ease of acquisition, and it’s what the people on TV are telling you. The down payment and lending criteria for single-family properties are less restrictive compared to commercial real estate, so it’s easier to get started in single-family for those eager to jump in.
Commercial real estate, on the flip side, seems out of reach for many investors, both from an economic and analytics standpoint. There’s so much data to process. Unlike commercial real estate, single-family investing is not rocket science. The analytics are much simpler because of the relatively small scale compared to commercial real estate. With a commercial asset, it’s easy to get lost in the data and overanalyze because there are so many factors that go into evaluating a good opportunity.
Factors to consider include:
Important financial projections include:
All of this is why single-family rentals are the fallback option for many investors who don’t have the money, the time, or the knowledge to dive into commercial real estate. Single-family investments are far easier to understand and afford simply because of scale. Although the financials of commercial real estate are more appealing, it just seems out of reach for many investors.
But what if there was a way for investors to be involved in commercial real estate without the high cost of entry and without the analytical headaches?
What if you could lean on the expertise and experience of others while pooling your funds with other like-minded investors to make a win-win for everyone?
There is a way to accomplish this through passive investing. Passive commercial real estate investing allows an investor who doesn’t have the capital, time, or expertise to reap the benefits of commercial real estate investing not available with single-family rentals.
The economic benefits of single-family rentals pale in comparison to commercial real estate investing.
| Returns Limited to Appreciation |
Because most single-family rentals are leveraged with mortgages, they produce little to no cash flow in most markets. As a result, investors are almost entirely dependent on appreciation for a return on their investment. With average growth in home prices at 3.4% in the past 20 years, according to JP Morgan Asset Management, and inflation averaging around 2% during that time, returns on single-family homes were minimal. Even when without factoring in inflation, appreciation in home prices only beat the best CD rates by a single point.
| Limited Diversification |
Owning one or two rentals limits diversification and prevents the spreading of risk across tenants, business lines, and properties, as you’re able to do with commercial real estate. A leaky roof, a cracked driveway, a broken furnace can sink cash flow and profitability when there aren’t multiple tenants to spread the costs across.
Owning a single asset doesn’t make hiring third-party property management feasible, so the only option is to manage the asset yourself. This is time-consuming stealing time and resources away from your more productive activities.
| Occupancy Risk |
With multifamily and commercial real estate occupancy hovering above 95% since 1990, tenant movement has minimal impact on cash flow. With a single-family residence, vacancy for just a month means a month of covering the mortgage yourself, which has a significant detrimental effect on long-term profitability.
The inherent risks, along with limited financial gain, make single-family rentals hard to justify as part of a long-term investment strategy, especially for building wealth. Passive commercial real estate investing, on the other hand, can satisfy an investor’s financial goals without the time and financial barriers inherent in direct commercial real estate investing.
By deferring to the expertise and experience of others through investment in a private fund specializing in commercial real estate, you can avoid the prospecting, analyzing, financing and acquiring headaches associated with investing in a commercial property directly. It’s much simpler to choose the right fund instead of going through all the metrics that go into evaluating a good commercial investment deal.
Instead of analyzing a hundred different factors, you can focus on just the half dozen or so factors most relevant to your decision including 1) the experience and expertise of the people managing the private fund, 2) the rate of return, and 3) the exit strategy. And by pooling your resources with other like-minded investors, everyone can participate in commercial real estate investing without the high costs of doing it by yourself.
Don’t fall into the same trap as millions of novice real estate investors and believe the myth that single-family rentals are your only option when starting out in real estate investing. Building wealth requires being proactive, but not in the traditional real estate investing sense. It doesn’t require a lot of blood, sweat, and tears like with single-family rentals, but it does require being proactive in seeking out the funds and fund managers that align with your investment and wealth goals.
It’s just a matter of attaching yourself to seasoned and experienced professionals who have already been successfully investing in real estate. Finding promising deals suddenly becomes much simpler, which, in the long term, will serve to grow the wealth you’re seeking to build.
Join other like-minded savvy investors today enjoying the more appealing economic returns of commercial real estate investing.
Real estate frequently takes the fall for the errors of men.
Take, for example, the Financial Crisis of a little over ten years ago. The real estate market crashed like never before along with it the rest of the economy, resulting in one of the most devastating financial crises of recent memory.
It was easy to point the finger at real estate for being the root cause of the Financial Crisis, but it had nothing to do with the inherent attributes of real estate and more with the irresponsible, greedy actions of bad actors in the banking and financial industries.
The real estate boom and bust that preceded the Financial Crisis was a direct result of subprime lending fueled by the insatiable appetite of foreign investors for asset-backed securities. The unprecedented rise and fall in real estate prices had nothing inherently to do with real estate and everything to do with unnatural demand fueled by sketchy home loans and financial products.
The real estate bubble was man-made, just like the dotcom bubble of the early ’00s.
The boom in dotcom IPO’s was also artificially generated by bad actors in the financial sector pumping stock prices for their financial gain. However, that’s where the comparison ends between the dotcom crash and the real estate crash.
Whereas most of the companies underlying the dotcom crash were worthless to begin with – with no inherent value, real estate in and of itself has value.
That’s why following the dotcom bust, most of those companies disappeared. Real estate, on the other hand, despite the giant fall, picked itself up and moved onward and upward just like it has every other time because real estate has inherent value.
Real estate’s inherent value is why it builds wealth more consistently than other asset classes.
It’s resilient, and except for the one time in its history where Wall Street got its dirty tentacles all over it causing the great crash, it is generally uncorrelated to Wall Street’s volatility and the volatility of broader markets.
There are several reasons why real estate is superior to other asset classes for building wealth:
| Cash Flow |
No other asset class can offer the type of cash flow for consistently building wealth like cash flowing real estate such as commercial real estate and investment properties. Most investments (stocks, art, jewelry, bitcoin, etc.) offer the promise of profit from appreciation. Unlike these asset classes, commercial real estate and cash flowing investment properties generate consistent cash flow from leases that in most cases (depending on the subsegment) are recession resistant. For investors seeking regular income essential for building wealth, cash flowing real estate can provide an attractive alternative to bonds, which also provides cash flow, but at much lower rates.
| Appreciation |
In addition to cash flow, appreciation (i.e., the increase in property value over time) is another way real estate builds wealth. While prices fluctuate over time, in the long run, real estate values have always gone up, and there is no reason to think that is going to change. Also, cash flowing real estate has historically demonstrated capital appreciation exceeding inflation over the longer term, resulting in strong actual returns (after adjusting for inflation) to investors, making it an ideal hedge against inflation.
| Tax Benefits |
Tax benefits such as depreciation enhance the real rates of return on real estate investments. Depreciation allows you to write off part of the value of the asset itself every year. This significantly reduces the tax burden on the money you do make, giving you one more reason real estate protects your wealth while growing it.
| Better Risk-Adjusted Returns |
Because real estate is not correlated to the stock market, it offers diversification and potentially higher returns when compared to mutual funds, stocks, and bonds. In fact, real estate has historically provided higher returns at a lower risk.
| Leverage |
Widespread access and availability of conventional and unconventional financing for acquiring real estate allow investors to leverage their investment capital to acquire multiple properties instead of just one, allowing for accelerated wealth creation and growth.
| Diversification |
With its breadth of real estate options across segments, price, and geographic location just to name a few, real estate offers the type of asset-backed diversification unparalleled by any other asset class.
Yes, real estate has stumbled from time to time, but it has consistently gotten up, dusted off its shoulders, and continued onward and upward.
No other asset class can build wealth consistently like real estate by offering unmatched cash flow, appreciation, tax benefits, risk-adjusted returns, leverage, and diversification.
The beautiful thing about real estate investing is that it lends itself to investment in a variety of manners – whether directly acquiring properties or by relying on the expertise of others.
Discover current opportunities available to partner with Fall Creek Asset Management and enjoy the benefits of the wealth building attributes of real estate.
There are two certainties in life – death and taxes. Might as well add one more to that short list – RECESSION.
Since 1929, there have been 14 recessions. On average, they come every four years and last around nine months in duration. It’s been ten years since the last recession so it seems we may be due for another one here soon.
How close is the next recession?
Depends on whom you talk to, but any discussion around a recession usually starts with the state of the economy.
So, how is the economy doing?
Once again, it depends on whom you ask.
There are bright spots.
Consumer confidence and spending, a popular bellwether for judging overall economic health, seems to be holding up. “The consumer continues to be the driver in the U.S. economy,” said Jack Kleinhenz, chief economist for the National Retail Federation. “Real personal consumption expenditures for 2019 is 2.4% year-over-year growth. It was 2.6% in 2018.”
Job growth, another bellwether, continues to be strong, with the average monthly growth expected to be 184,000 in 2019 and 139,000 in 2020. In April of this year, the unemployment rate fell to 3.6%, the lowest rate since 1969.
While consumer spending and job growth are bright spots in the economy, there are also warning signs and factors that could throw the economy into decline.
The big concerns among analysts are tariffs and trade policy. “The greatest downside risk is trade policy and increased protectionism,” Kleinhenz said. A trade war could stall growth and fuel a recession by as early as the end of this year.
Another warning sign of an impending recession has been the Fed’s recent rate hikes. Ten of the last 13 rate-hiking cycles (more than 75%) since the 1950s have ended in a recession. Don’t be fooled by recent Wall Street gains many analysts warn. Recent attempts by the Fed to engineer a soft landing by pausing its rate-hiking cycle may have stalled fears of an imminent recession, which explains recent stock gains, but many analysts think the wheels are already in motion for a recession. Johnston, Matthew (Apr 18, 2019), “Why There’s a 75% Chance of a Recession,” https://www.investopedia.com.
In matters of priorities, secured creditors reign supreme.
High-net-worth individuals (“HNWIs”) and institutional investors like university endowments and private foundations are always prepared for recessions. How?
By investing in alternative investments exhibiting the following attributes:
The Yale Endowment, one of the nation’s largest and most successful university endowments, allocates more than 80% of its assets to alternative investments. How did the Yale Endowment do in 2018 when the S&P was down 6.2%? It gained 12.3%.
Yale’s model is a prime example of recession-busting investing. Among Yale’s favorite class of alternative investments is real estate where it consistently allocates 12-20% of its investable assets.
Not all real estate investments are created equal, however.
Some are more correlated to the broader economy than others. In general, retail and office properties tend to get hit the worst during economic downturns. Other commercial properties such as multi-family assets are less correlated, offering a recession hedge while providing a consistent income stream during a time of uncertainty.
Besides offering a recession-hedge, well-occupied commercial properties with staggered leases and financially sound tenants provide predictable cash flows with fixed income stability that consistently stays ahead of inflation.
Since the National Council of Real Estate Investment Fiduciaries (NCREIF) began tracking private commercial real estate returns in 1978, the NCREIF Property Index (NPI)* has exceeded inflation in 32 of 38 years. The only two periods where inflation exceeded NPI were during the recession of the early 90s and the Great Recession beginning in 2007.
Nobody really knows when the next recession will hit, but we can learn a lot from HNWIs and university endowments who don’t wait around for the warning signs to prepare for a downturn.
They’re always prepared. By removing Wall Street from their investment equation, these successful investors hedge against recessions by investing in alternative assets like commercial real estate that offer inflation-busting income streams that continue even through difficult times.
For individual investors, private investment funds offer the opportunity to invest in commercial real estate assets with consistent income distributions and without the high entry barrier of acquiring properties on their own.
No matter how you get into the commercial real estate segment, what’s important is that you get into it for its recession-hedging, income-producing, and inflation-busting qualities. It’s what successful investors have been doing for decades.
Partner with Fall Creek to start preparing for the next recession today.
What is an investor’s greatest enemy to achieving true wealth? Themselves.
Human nature prefers simplicity, is impulsive, and prone to the herd mentality. That’s why investors are drawn to Wall Street. The Wall Street players understand this and prey upon simplicity and impulsiveness. So-called financial advisors who profit from fee churning also benefit from the volatility brought about by investor impulsiveness. They have no incentive to change the status quo.
Despite Wall Street’s grip on a large segment of investors, there is a growing movement to break away from the norm and there’s one simple reason for this seachange – RETURNS.
In a previous message, we discussed Wall Street’s outdated 60/40 allocation strategy, which allocates assets between 60% stocks and 40% bonds. In response to the ineffectiveness of the 60/40 rule, there’s been tremendous interest in a new allocation strategy where 40% of a portfolio is dedicated to private investments. Why? Because members of this 40% club have been beating Wall Street returns by a wide margin.
Anticipating the obsolescence of the tired Wall Street model, major university endowments and institutions turned to private investments for above-market returns sheltered from Wall Street volatility and inflation. Private investments including non-venture private equity, venture capital, private real estate, private oil & gas/natural resources, and precious metals have provided the types of returns Wall Street is no longer able to offer and without the volatility.
The private investment firm Cambridge Associates (“CA”) recently published a study finding that private investments have provided the strongest relative returns for decades. Top-performing endowments like the Yale Endowment and other institutions have been long-time allocators to private investment strategies, reaping the benefits of the outperformance. Private Investing for Private Investors: Life Can Be Better After 40(%). (2019, February) www.cambridgeassociates.com.
In recent years high net worth individuals (“HNWIs”) and family offices have taken notice of these successful endowments and institutions and are now pivoting towards adding private investments to their portfolios for good reason.
CA’s past analysis indicates that endowments and foundations in the top quartile of performance had one thing in common: a minimum allocation of 15% to private investments. CA data also showed that the top 10% steadily increased their allocations to private investments over the past two decades, exceeding 15% of allocations, in many cases, exceeding 40%.
CA data shows a clear positive correlation between returns and allocation percentages to private investments.
Figure 1 highlights the meaningful returns that institutions with higher allocations to private investments have achieved over the last 20 years. The median annualized return for a greater than 15% average allocation was 8.1%, 160 basis points higher than the group with a less than 5% allocation. This chart also shows the higher the allocation, the better. As seen in Figure 2, the top 10% of performers have steadily increased their allocations over the years to a mean of 40%.
So, what differentiates these successful institutions from the typical Wall Street investors? Private investors are comfortable with a long time horizon, illiquidity, and complexity inherent in higher private investment allocations. They understand it takes time and skill to build a private investment program, but they are compelled by the potential rewards for this extra effort.
Additionally, what has appealed to many of the decision makers at these institutions is the fact that where they lack the necessary experience or knowledge in a particular field, they have no reservations about deferring to the expertise of the principals at these private firms if the trust is there. This level of trust is achievable because private investment firms are typically more transparent and their directors more accessible than their public counterparts, allowing investors to place money in markets in which they’re not completely familiar but where they’re comfortable trusting the decision makers.
Joining this growing 40% club will require a change in investment approach. Investors interested in building multigenerational wealth through private investments with the necessary long view, patience, and ability to act quickly, will stand to benefit not only from the potential for higher returns but also from the tax-advantaged nature of private investments like real estate.
Discover how you can join the 40% club and take your investing to the next level by Partnering with Fall Creek.