We might be facing the first value compression in real estate since the credit crash. And that includes COVID when the world quite literally shut down. As we navigate this unexplored territory, we need the right tools to help ensure our success. Here are 4 ideas to consider investing in a volatile real estate market.
Cash Is King
The safest way to be sure you come out on the other side is to have plenty of reserves. Cash in the bank keeps you safe and allows you to overcome just about anything. Some people will argue that availability on a line of credit is as good as cash for your rainy-day fund. I disagree. The last time we saw a market shift, banks started closing lines down and surprised clients lost access to their reserves overnight. Nothing is the same or better than cash in the bank.
How much should you keep in reserves is the question. Too little and you are not safe but too much and you will be eroding your wealth to inflation. We all know what is happening with inflation. The standard suggestion is to hold six months of living expenses, but you may want a tad more.
Finally, another reason to hold cash is so you can pounce on investment opportunities as they present themselves. The problem of course is if they never come. Although we want to be careful, most experts and economists that I have been reading agree that we will see a slow down in real estate, we already have, but they don’t see a crash or a bubble. Obviously, there is no crystal ball and not everyone agrees with this. If you are waiting for the crash to push your chips in, you may find that you are watching the game from the side.
Lines of credit are perfect for your pouncing money. If a line gets shut off because of fear from the bank, you are only hurt with a loss of opportunity. That alone won’t take you out of the game like it could if you depended on a line for living expenses. If you have a line and everything stays consistent, you will be ready for the opportunities without inflation tearing into your cash like you will experience with money in the bank.
Velocity of money is far better in most cases than the total profits or returns. If you can get in and out of a deal faster, you are both able to do more deals and you are keeping your money safer. This is one reason I love the short-term lending business. We have our funds and our investor funds out of deals quickly, limiting our risk to market movement.
Have A Plan B
“Everyone has a plan until they get punched in the face!”
I love that quote from Mike Tyson. How true is that? Plans don’t always go to plan, especially in real estate. Outside of reserves, this is the one idea that will keep you the safest. What happens if your plan does not work? If you are buying a house or doing a deal with only one plan, you are asking for trouble. A large custom home for example. In times of uncertainty you may want to limit your deal selection to deals that have multiple ways to make money.
Invest In low LTV note
Buying or originating notes is a great way to flatten the graph. If someone owes you money with a promised interest rate, the value of that asset should always be the amount they owe you. There are some exceptions to this of course, but for the most part this is true. Even if the loan is secured by a house and the house goes down in value, that does not change the amount of money you are owed or the rate of the note.
There are advantages of owning the real estate for sure but in volatile times it may be better to accept a fixed return and not go for the ride. Investors use the stability of note investing for both diversification and to create cash flow. Both are important in reducing risk.
One concern here of course is what if the value of the real estate goes down AND the borrower stops paying. Obviously, that can cause an issue which is why it is crucial to have sound underwriting and a low loan to value. The idea is that you can foreclose on the house and recoup your investment if it came to that.
Another option is to invest in a mortgage fund like what Pine Financial Group offers. A fund gives you the benefit of investing in a performing note without the risk of any one deal going bad. Because a fund has multiple loans on multiple different properties, the group is safer.
If you are considering performing notes to help steady your portfolio let’s connect. We have individual loan options and a public mortgage fund. Follow this link to the fund marketing brochure with more information.
Please give me a call or shoot me an email so we can start a dialog about the best way to help you de-risk as we enter an uncertain economy.