“Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it”. – Warren Buffet
Whenever I come across pessimists bemoaning the current investment climate, I repeat this mantra to infuse positivity in my world view, especially where it applies to finding investment opportunities.
To be honest I don’t even see what they are complaining about, the Dow is touching new heights, the real estate sector hasn’t seen such a drop in foreclosures since the early part of this century, and the dollar amounts being invested in industrial innovation is at an all-time high.
Yes, there is a downturn in the Global economy, numerous factors are combining together in what seems like a perfect storm of negativity to depress the global economy and quell even the hardiest of investors from any attempts at risk taking. Nothing could, or may I say should, be farther from the truth.
The Situation So Far:
The Trade wars may have been a gut punch to the Chinese economy, but it also had a domino effect that resonated across the globe; Asia, Europe and even the U.S. were affected causing a world-wide economic contraction. Post President Trump’s call to equalize export/import imbalances between China/U.S., more and more of the world’s populist leaders followed suit by calling for the same simplistic yard stick to rally their own core supporters.
Multilateral trade deals between countries are becoming even more complex and unwieldy by the day as every country wants to export but none are interested in importation of goods. The JCPOA is on its last legs with Europe unable or unwilling to find a work-around; in short protectionism seems to be the order of the day.
Industrial output and the global economy is so badly hit that the ECB has tried to boost spending by undertaking a Negative Interest Rate Policy (NIRP) by pushing its benchmark interest rate below zero. The ECB was swiftly, if reluctantly, followed by the Central Banks of Japan, Sweden, Switzerland and Denmark once fears of mass withdrawals proved to be unfounded. By mid-2019 over $17trillion worth of negative investment vehicles had been issued – investments that will yield a return less than the original amount invested – Britain, still a part of the E.U. is set to follow suit, and if and when the Fed reduces interest rates, the malaise is set to cross the Atlantic.
However as a counterpoint the age of climate change innovation is upon us. The numbers of companies that are looking to offer products that minimize carbon emissions are at an all-time high. A necessary part of this is replacing existing equipment, which means eco-conscious consumers are buying in.
Some of the world’s richest and most industrious men, like Musk, Bloomberg, Soros, Eldridge etc. heeded this call to action and have thrown their weight and considerable resources to force through innovations in the sphere.
This industrial activity along with new investments in tech has gone a long way in negating the effects of the economic downturn in the USA (world capital of innovation and tech).
In short Oil may not be well, but ‘Tech’nically we are not as bad off as is being portrayed.
Investment Opportunities in an Economic Downturn
Back in August, 2019 Tom Essaye, editor of the Sevens Report newsletter, said “Real estate remains a perfect candidate for this environment given falling yields, a strong labor market and rising wages.” He pointed to the Real Estate Select Sector SPDR ETF (XLRE) as one option. In U.S. News’s real estate ETF rankings, the Fidelity MSCI Real Estate ETF (FREL) is No. 1. It has an expense ratio of 0.084% and is up 22% year-to-date.
Real estate is an excellent investment during an economic downturn, competition for properties is significantly lower. Banks are willing to give loans at exceptionally low interest rates. Deals are going a begging. In short it is a buyer’s market.
But this article is not just about any real estate investments, it is about special situation debt investments.
Special Situation Real Estate Debt Investments:
…Also known as distressed properties or foreclosure sales – properties whose current owners can’t service the loans for any number of reasons and are looking for a way out.
Foreclosure or distressed property sale differ from a regular sale in two major ways, one – the sale is made in cash – no mortgage. Two – when you buy distressed property it means the current owner is behind in payments or in no position to make future payments, and that the property is mortgaged (multiple players could be involved) and because of this, the term ‘Caveat Emptor’ or ‘Let the Buyer Beware’ applies.
The premise of investing in Distressed Real Estate Investments is simple – locate a real estate asset owned by a company or individual that is in the process of getting foreclosed, assess the asset for Unpaid Principal Balance (UPB) vs Loan to Value (LTV), and if the After Repair Value (ARV) is worth it then purchase said property. Add value by investing in cosmetic or capital changes, stabilize and then monetize the asset by the rental or resale of the same.
At this moment in time the real estate market in the U.S. is particularly robust. The totalities of foreclosures are at their lowest in over 13 years. If you look at the latest figures from ATTOM, the foreclosure rate for Q3, 2019 is the lowest since Q2, 2005. It is also down 19% from Q2, 2019.
However, having said that, there were over 143,105 properties (commercial and residential) that had foreclosure filings as of Q3, 2019 across the United States.
As the last vestiges of the GFC died down and the economy started booming in late 2015-16, there were numerous companies who invested in real estate preparing for an expansion that never fructified. These residential and commercial developers are now looking to offload their non-profitable assets in order to get back in the green, sometimes this means having a willingness to take a small loss now.
Thus my renewed interest in investing with a fund that specializes in real Estate Debt Investments.
Should you consider Investing as an individual? No, No, no, no!
This is not something I would recommend to the uninitiated. In fact in the realms of investments in distressed real estate I would strongly recommend looking for a fund that specializes in real estate debt investments. My main reasons for finding a fund are listed below.
The Laws: Distressed Real Estate in the U.S. is a complex and many times confounding market. Every state has its own laws and guidelines. What works in California may not work in Ohio.
Competition: there is a small but very competitive buyer pool. There are over a million Realtors in the U.S. who specialize in foreclosure properties, who pore through Listings and use whatever means necessary to glean out any possible bargain deals to be had. Trying to compete with them is a no-win situation for an industry outsider.
The Calculation: Most assets need value-add makeovers that can only be estimated by property inspection experts, these repairs could vary from the cosmetic all the way to replacing the foundation/roof. The investor would then need a reliable contractor who will give a realistic quote. Keep in mind the following calculation: Sales Price – Commission – Purchase Price – Repair Estimate (RE) – Your Holding Costs – Maintenance and Repairs – Your Closing Costs = Your Potential Profit.
The Lenders: Lenders often times have incomplete property documentation, and borrowers have unrealized or underlying collateral starved of capital. In many cases while buying debt the purchaser cannot even access the borrower.
Cash-flow: Apart from being able to calculate the total amount required the investor also has to know the time it would take to resell the property.
A small mistake at any step in the above calculation could lead to a massive loss for the unwary.
So, the answer is – Real Estate Debt Investment Funds?
Yes, it is.
There are experts in the field who specialize in this industry, who are able to estimate the potential for profit in distressed real estate, and for investors who are not looking to get their hands dirty in the details, these experts operate funds that are the answer to this economy’s canny investor.
These Funds employ multiple experts who between them can locate distressed properties even before they are listed on the MLS, assess the property for any underlying unused values, assess the cost of repairing the asset, and most importantly estimate the turn-around time with a fair degree of accuracy.
So for all intents and purposes, in this case – Real Estate Debt Investment Fund is your Friend.
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Thank you for reading my post. I regularly write about private market opportunities and trends. If you would like to read my regular posts feel free to also connect on LinkedIn, Twitter or via Atlanta Capital Group Investment Management.
Greg Silberman is the Chief Investment Officer of ACG Investment Management LLC (“ACGIM”). ACGIM specializes in creating custom private market solutions for RIA/Family Office clients.
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The views and strategies described may not be suitable for all investors. It is not possible to directly invest in an index. An index fund is a type of mutual fund with a portfolio constructed to match or track the components of an index. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. Advisory Services offered through ACG Investment Management, LLC. ACG Investment Management is an affiliate of ACG Wealth Inc.
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Source: https://www.bloomberg.com/quicktake/negative-interest-rates