The economy is booming right now. Few would disagree with this fact.
But storm clouds can be seen on the horizon.
You can close your eyes and try to ignore the future, but that won’t change what’s to come.
I do not know. My crystal ball is broken. (Ha ha ha. But that overused quote is entirely true. Warren Buffett and Howard Marks confirm this.)
Here is what i know
The Fed prints cash like there’s no tomorrow. (Hope this is not literal.) See the St. Louis Fed chart below.
Inflation soared to just 2.5 times the Fed’s target interest rate in May 2020. And US debt as a percentage of GDP (gross domestic product) is two to four times higher than in the past. (See graph below. Levels from 1966 to the end of 2007 ranged from about 30% to about 65%. The level in the first quarter of 2021 is over 127%.)
Let’s just dwell on this last fact. We’re in big trouble, according to my astute friend and podcaster Jason Hartman. Hartman reminds us that in addition to the debt-to-GDP problem, the government also has a massive albatross of unsecured liabilities (such as Social Security, Medicare, Military Protection, and other programs) that are many times our current debt.
Hartman says there are only six ways for our government to get out of this hole.
- default. Break his promise. Very unpopular and very unlikely.
- increase taxes. Nope. You can’t raise enough taxes to get out of this mess.
- Yard sale. The US is selling its assets abroad to raise capital. (Who would like to get their hands on our international ports?)
- Steal. Start a war. Take over other countries or at least their assets. Napoleon did it, and maybe we should too. Or not.
- innovation. Technical innovations in the fields of energy, bio- and nanotechnology pull us out of the swamp.
- inflation. Devalue our dollar by printing more of it. This is almost certainly the “best” way out.
Take another look at the M1 money supply chart above. It is said that about 30% of all US money ever printed has been produced since the arrival of COVID-19. This is one of the greatest aspects of real estate investing so I hope you take a look at this.
But the economic and political turmoil in the United States cannot be inflated by monetary policy alone. The problems are far too complex at the moment.
More on Investing During a Recession from BiggerPockets
What is an investor to do?
Check out this infographic I found on Visual Capitalist. This article explains how investors can hedge against portfolio volatility.
While it is generally aimed at financial planners and those who use it, I love the way all three volatile categories describe real estate. At least the kind of property my team invests in. Look at that.
Real estate in general and certain commercial real estate in particular …
- Has a low correlation with the market
- Is defensive or not cyclical
- Generates cash flow
Let’s talk about each of these points in detail.
Low correlation to the market
Who would like a little quiz?
Question: What happens to the value of my investment portfolio if Elon Musk tweeted a sad emoji?
Answer: It could crash and burn when immersed in cryptocurrency.
But what will happen to my real estate portfolio?
Zero. Zipper. Nada.
My properties consist of real assets with real cash flow. It doesn’t care about celebrity tweets or other opinions.
And real estate is in an inefficient market. That alone scares off many investors. But that’s one of the reasons I love real estate investing!
Can you get a deal with Bitcoin? Can you find Apple stock on sale? How much can you improve the return on your bond portfolio? Three questions with three now known answers: Zero. Zipper. Nada.
But real estate is very different. You can find offers. You can track down inefficiencies that create huge upside potential. The illustrations are too numerous to list here and I’ve written a lot about them. Here are a few examples.
- I just got off the phone with my friend and BP member Alex Jarbo. Alex is a real estate agent and investor based in Asheville, North Carolina. He explained how he has achieved a cash-on-cash return of well over 50% per year by building cabins for rent on Airbnb and VRBO. By designing and building these cabins, he can make even more profits than buying an existing one. (Though that would work too.) The inefficiencies of the real estate market allow him and his investors such returns.
- My son can buy a piece of steep inland mountain land and find several ways to make a profit from it. This includes wood, billboards, cell phone masts, solar energy, CO2 credits, and leases to hunters and farmers. And he can divide up properties profitably for self-financing. Some of these packages have been on the market for years without a buyer.
- BP member AJ Osborne was on the BiggerPockets podcast in the summer of 2018. He explained how he bought an old Super Kmart, sold the apartment parking lot, cut the building in half and turned it into a beautiful self-storage facility. While he was in a coma. He had about $ 2.5 million in cash plus about $ 5 million in debt on the project. He turned down a $ 26 million offer for the property while it was still rented.
The inefficiency of real estate made all of these deals and many more possible.
And the value of real estate doesn’t depend on the mood on Wall Street, an alleged war in the Middle East, or a CEO scandal. Real estate has a low correlation to Wall Street casinos.
Prepare for a market shift
Change your investment tactics – not just to weather an economic downturn, but to thrive! Accept any recession and never be intimidated by a market shift again Recession-proof real estate investments.
Defensive or not cyclical
Well I guess it’s not all not cyclical. However, certain real estate investments are clearly defensive and countercyclical.
Think of long-term leases for Amazon sorting facilities or triple-net leases for CVS businesses. Or 20-year leases for cell towers.
Solar leases often have a term of 40 years and can contain an integrated escalation clause. Who would like to have a wind farm on their land?
My company invests in assets that tend to be anti-cyclical, such as RV parks and self-storage systems.
The income from self-storage products usually increases in troubled times. The four D’s (divorce, death, downsizing, and transfer) drive utilization and profit. Renters are pretty sticky and don’t usually go away for rent increases.
Mobile home parks have a similar stickiness. This is the only asset class I know of that has seen increasing demand and decreasing supply every year. And there is a real crisis in affordable housing. In difficult times, those who cannot pay the rent for their RV parking space (usually a fraction of the apartment rent) have little choice. They almost always pay their rent.
Generates cash flow
Real estate is usually not that liquid. But the tradeoff is more stable and predictable cash flow.
Think about the definition of real wealth. Real wealth is the possession of assets that generate cash flow. (Real estate does it so well.) I’d say a source of income, but income is a financial concept. Income leads to taxes, and real estate investors often avoid taxes for years. In some cases forever.
Have you studied Robert Kiyosaki’s cash flow quadrant? He teaches investors how to use money to make money (Quadrant I). He also explains the estimated tax brackets for each quadrant:
- E = employee: ~ 40%
- S = self-employed: ~ 60%
- B = business owner: ~ 20%
- I = investor: ~ 0%
It is a beautiful thing
I’ve been a serial entrepreneur for decades. Before that, I worked at Ford with an engineering degree and an MBA. I started or participated in a number of businesses before discovering real estate.
Now that I’m on this track, I can’t see myself doing anything else. I just wish I had started earlier for more reasons than I can list here.
The Howard Marks classic “Mastering the Market Cycle “convinced me that there will always be ups and downs as long as people are involved in the investment process. So we live with the constant expectation that the markets will develop against us at some point. Our company selects the asset classes accordingly.
Our preferred recession-resistant investments are self-storage, RV sites, RV sites, and senior and assisted living facilities. We also like a little piece of real estate known as a well-placed ATM. But many other real estate classes (apartment buildings, single-family houses and more) also fall into these recession-resistant classifications.