A Real Estate Investment Strategy for Crazy Times
Part2: Investing Quick and Slow
September 24, 2016 BY IAN IPPOLITO
(Usual disclaimer: I’m an investor, not a financial advisor. Consult your own financial advisor before making any investment decisions).
May 2018 update: here's a newer, step-by-step guide on how I pick deals today.
In part 1 of this article, I discussed the challenging environment we’re in, and investment types that I avoid. In part 2, I discuss investment types that I like.
Quick Bang for the Buck
I monitor recession signals on a weekly basis. Currently I feel the next recession is far enough away that it’s still safe to invest in high quality short-term debt, which typically lasts a few months or up to a year.
Commercial is one source and residential debt gives me an extra comfort factor because residential home prices don’t correlate to commercial prices (which is an extra layer of protection).
Here are some short-term debt investments that I like:
Peerstreet: short-term residential debt. I like the fact that they are one of the few platforms that posts the performance of every investment, and currently they haven’t had a single foreclosure or unremedied default. Also, unlike many other platforms, it has some loans at a safer loan-to-value ratios at 65% or less. So if the loan goes bad, you have the maximum chance of recovering your money from selling the property. Many other sites are 65%+ which worries me.
FundThatFlip: another newer provider of short-term residential debt. Some of these are also safer, low loan-to-value loans that 65% or less.
Broadmark Hard Money Loan Fund: Unlike the previous 2, Broadmark invests in both residential and commercial debt. The advantage of the fund over the platforms, is that you can instantly diversify into hundreds of notes with a single investment. Duplicating this kind of safety on a crowdfunding platform (or with a traditional hard money loan broker) with individual notes would take months or years. Another is Arixa Secured Income Fund.
I also am open to new long-term investments (5 to 7 years) that are riding long-term trends (such as medical facilities riding the aging population, or mobile home parks riding long-term income inequality).
And the best long-term investments are buy-and-hold investments (7 years +). There are opportunities in residential and commercial rentals that are located in good locations and good cities. Residential house prices held steady through each downturn between the Great Depression and the Great Recession. I personally feel another great recession is unlikely. If that’s right then at worse income will just go down temporarily.
Commercial requires more strategy, because it’s more volatile in a recession. But there are still some opportunities that I see.
Buy-and-hold residential rentals: I’ve bought 7 of these this year, and would like to buy 3 more by the end of the year. A challenge in my city of Tampa, is that prices are rising quickly due to lack of inventory. To win a property, I have to hop on it the day it’s listed or it’s too late!
Roof Stock: this is a company that lets you buy residential rentals in other cities. The cap rates for Tampa aren’t as good as buying them myself. But if you happen to be living far from a good market (or want to diversify to other cities), this might be a good option.
1031 Crowdfunding: this is a crowdfunding portal that specializes in buy-and-hold properties. If you are doing a 1031 exchange, it can be a very enticing option. For people just doing outright purchases, it can be less so due to the high fees. However, it may be worth it to some investors, since there aren’t many crowdfunding options for buy-and-hold.
Buy-and-hold class B/C apartments. These aren’t sexy, because they look dated, and aren’t something to brag about to your friends. However, growing income inequality means demand for affordable rentals is going to remain strong in the long term (even if it goes down in the short term during a recession). And unlike Class A, it’s impossible to build new ones because construction costs are too high. (Additionally, it’s trendy to convert these into class A properties which helps existing properties because it further reduces the supply). All of this props up future price appreciation.
Recession resistant investments. Mobile home parks seem to have mostly held up well in previous recessions.
The same is true of long-term triple net lease investments (NNN) in investment grade companies. These involve owning the property that a business rents from you, such as the land under a Walgreens or Starbucks. Many come with a guarantee from the parent company for a certain amount of income for a certain number of years. There is a small risk of default from an investment grade company, so it can be helpful to invest in a fund. Broadstone Net Lease is one such fund with low expenses.
March 2018 update: Here's everything that's inside my current real estate portfolio, including positions and returns. See Peek inside my 7 figure real estate portfolio (2018 Q1/Q2 Update).
Cash Is King
There’s one last strategy that I haven’t mentioned yet. If we experience a serious downturn, there are going to be huge opportunities for people with cash to take advantage of. So I’m currently keeping substantial “dry powder” in reserve for the next downturn.
Since I don’t know when that will happen I want to make some use of the funds now. So I split the cash into many, multiple, long-term CDs with small penalties for breaking them.
Sometimes, the best investment might be no investment at all.
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What's your opinion?
About Ian Ippolito
Ian Ippolito is an investor and serial entrepreneur. He has been interviewed by the Wall Street Journal, Business Week, Forbes, TIME, Fast Company, TechCrunch, CBS News, FOX News and more.
Ian was impressed by the potential of real estate crowdfunding, but frustrated by the lack of quality site reviews and investment analysis. He created The Real Estate Crowdfunding Review to fill that gap.