With the stock market being more volatile than ever, interest rates rising and inflation raging, where are we supposed to place our investment dollars in environments like this? Warren Buffett famously said to be “greedy when others are fearful and be fearful when others are greedy”. Personally, I’d rather not be greedy or fearful.
SO WHERE DO I INVEST RIGHT NOW?
Full disclosure…I invest in hard assets in inflationary times, deflationary times, and really…all times. One of my favorite hard assets is real estate. I’ve lived through enough cycles to where the only thing that changes with the economic times is the subclass of real estate I invest in.
REAL ESTATE IS STILL THE PLACE TO BE
Technical recessions do not last forever. The vast majority last less than 18 months. Recessions are the perfect time to start a project that will be delivering in 36-48 months which would be right in the middle of an economic recovery. This affords the opportunity to take advantage of lower construction prices while gaining the advantage of exiting in a recovered market. Real estate development deals can be a great place to invest capital right now.
What About Value-Add?
With increasing interest rates, Mezzanine and bridge debt that value-add multifamily operators use becomes more expensive or dries up completely. More equity is required for these operators to squeeze comparably lesser returns out of these endeavors. I’m sure there are good opportunities out there, but the number is fewer and harder to find. I usually don’t invest in heavy value-add in these environments.
I do look for development deals during these times.
We need to understand the average historical interest rate increase duration is 21 months with the longest being 36 months dating back 40 years. The average total interest rate hike by the federal government during this same time period is 3% with the highest being 4.25%. The Fed has already assaulted the economy over the past 6 months by raising interest rates over 3% as of this writing. With this trajectory, it seems reasonable to expect rates to plateau in 2023 and potentially even start to fall again by the end of 2023. Delivering a class A asset in 2024/2025 is sound planning as history tells us interest rates will be on the way down and the economy will be in recovery mode. Additionally, we are already seeing a 25% decline in multifamily construction. We are also going into this recession UNDER-built as I’ll discuss later. You can imagine the supply hole in 2.5 years as new housing starts have cooled and the lack of improved value-add will lead to supply/demand mismatch that could be profound. Lowering interest rates and high demand…sound familiar?
Manufactured Housing Communities/RV Parks
I think we’ve established in past writings that cash-flowing assets do well in inflationary times. Manufactured housing communities (MHCs) and RV parks are excellent cash-flowing assets to consider owning during these times. As inflation rises rapidly, consumers bear the increased costs in the form of higher prices for everything…including housing and vacations. However, those that own real estate have assets that can react to these prices and mitigate the effects of inflation. RV Park and MHC owners can respond very quickly to changing economic environments by adjusting prices for lots and sites accordingly.
Manufactured housing communities tend to stay very full during all cycles of the economy. The good parks have excellent operators who add value to the community by improving infrastructure, enforcing community rules, and encouraging tenant engagement.
RV parks are an excellent low-cost way for families to get away and still have a vacation in uncertain economic times. Parks with cabins and other forms of lodging for rent are especially enticing because the vacationer doesn’t need to have an RV at all in order to enjoy the experience of getting out into the great outdoors!
Housing is evergreen. People will continue to vacation. During inflationary times, MHCs and RV parks are two low-cost options for housing and vacationing, respectively, which makes them targets for savvy investors.
OK, MAYBE IT IS TIME TO BE A LITTLE GREEDY…
When the economy takes a pause, we tend to recall the most recent recession and assume we’re in for a similar experience. It’s important to be cautious and understand history, but just like with our investments, it’s also important we complete proper due diligence on the factors of this economic pause. The underlying factors of this recession are not nearly the same as the last. In the late 2000s, we were overbuilt by conservatively 3 million housing units, lenders were giving loans to people with no income, no job, and no assets (NINJA loans) and the resultant bubble-pop rocked our economy. Still, average rents increased every year with the exception of one year where rents only dropped less than 2% in the SFH market only, then continued their upward climb.
Obviously, there were a lot of governmental financial gymnastics that occurred during this time as well, but the point being if you owned hard assets (“owning” means just that by the way…if you had 105% leverage on a home with a 2 year ARM that came due when rates skyrocketed, I would contend you never owned that home in the first place) you still came out of that unscathed. If you then kept those assets, you participated in one of the greatest accelerations of real estate wealth the US has ever seen.
That was with an oversupply of housing. We are currently underbuilt by millions of homes, in SFH, affordable housing space, and apartments heading into this recession. I like that situation much better than in 2010. While there likely will be a correction in the real estate market, this is an opportunity, not a threat. I believe it will be transient and will rebound as interest rates stabilize and then fall again per what history tells us. In the midst of the pain, it’s sometimes difficult to look to the future. In these times, I lean on historical markets for real estate. Everyone thought it was the end of real estate in 2010/2011 but several who invested well came out of the last recession in a much better financial position. I took note and feel like this may be an opportunity for us to do the same. Maybe just a little greed isn’t so bad?
DISCLAIMER: If you believe that interest rates will continue to rise for the next 3 years, it really makes sense to buy absolutely nothing in real estate. Not single family, not multifamily, not commercial. Nothing would work. If you believe that, then stop reading, and put your pencils down…test is over.
Let’s Connect
No investment is bulletproof. I highly suggest doing avid due diligence on any opportunities you are considering. My intent here is to share what I’m investing in currently and why. Finding a coach, mentor, or investment group is always advisable and it propelled my investing acumen dramatically and quickly. If you’re interested in learning more about any of these investments or want more information on our development project, reach out to me HERE and we can discuss what the right path for you may be.
Here’s to winning your time back!
Danny