Month: November 2022

Categories
Real Estate

Have the Economic Changes Affected The Built-For-Rent Business?

Real estate has been a great investment option over the years, as it promises commensurate returns. That explains the over 19 million rental properties in the US, with about 70% owned by individual investors.

Consequently, the built-for-rent (BFR) business has been a buzzword in real estate circles, with everyone clamoring for a piece of that pie. However, there’s been a seismic shift in the economy, which could impact that market segment.  

There’s been a general economic decline. There are fears of a possible recession, playing to the soundtrack of doubled mortgage rates and home sales crashing while wages have stagnated. 

To some real estate observers, the built-for-rent business model is about to take a significant hit, but will this come to pass? This article investigates the truths and misconceptions about the impact of the changing economic climate on BFR. 

Economic Factors Affecting the Built-For-Rent Business

Economic changes affect rental prices and housing demand and can lead to extensive periods of vacancies. Some of these factors include:

Interest Rates 

Change in interest rates dramatically affects the cost of mortgage. For instance, in a period of high interest rates, the mortgage payment cost will rise, leading to a drop in the demand for home purchases. The knock-on effect is that since fewer people can afford homes, the only alternative is leasing, which increases the demand for rental housing. 

Economic Growth

A country’s income growth determines the demand for housing. People will spend more on houses as the economy grows and incomes rise, increasing demand and pushing up prices. 

Indeed, housing demand is income elastic (luxury goods), with rising incomes leading to a more significant percentage of income spent on houses.

Similarly, people can’t afford to buy in a downturn, and those who lose their jobs may fall behind on their mortgage payments and have their homes repossessed.

Affordability

Another economic factor that affects the rental market is the ratio of the house to price-earnings. From 2015 to 2022, house prices are higher than income growth by 36%, which means the number of people who can afford homes has reduced since 2015. 

Effects of Rent Control on BFR

With the various changes experienced in the economy leading to the steady rise in house rent, many states have come up with multiple strategies, such as enacting rent control. This program limits the amount you can demand from the house you lease.

While rent control benefits tenants, these programs directly affect the house markets, which would impact you as a real estate investor.

The research at Brookings University shows that although the effects of rent control will decrease rent prices for tenants in the short run, its long-term effects include:

  • Reduced affordability
  • Fuels gentrification
  • Creates negative consequences in the neighborhood  

Further research shows that 8% of owners of rent-controlled buildings are likely to convert their facilities to condos to avoid the effects of decreased market prices. That led to a 25% drop in the number of renters in rent-controlled rental units as the property owners replaced the existing units.

Rebound in Rental Market  

The pandemic period greatly affected real estate, but its market reignited in 2021, and the housing demand rose. According to the Census Bureau of Housing Vacancies and Homeownership, the number of rental households increased to 44 million during the post-pandemic period, leading to a decrease in rental vacancies by 5.8%. 

The strong demand for rental units also fueled the rise in the price of properties. In 2022 alone, the price of rental properties rose by 13.4% from 2021. Therefore, although mortgage rates rose, rental property acquisition has remained the same since property owners have access to rental income and can increase the rental price to match the mortgage repayments. 

Effects of Economic Changes on Rent Growth of Built-for-Rent Businesses

Over the past couple of years, rent prices have been escalating continuously at a rate of 15-20%. That means that the rent is unlikely to go any higher in the next subsequent years, likely dropping by a fraction of the rent rates experienced now. 

Since the income for most renters has risen over the last couple of years (and will probably continue to rise in the subsequent years), there’s a likelihood that most will experience rent growth at a steady pace in the middle of 2023 after going through a brief slowdown in the rent growth. 

Still, the increase in the rental income also means there is room for you, as the property owner, to raise the rent. Some of the indicators that show this is possible is the recent research by Real page, which showed that renters spent about 23% of their income on rent which is well below the affordability rate. 

How Economic Changes Affect the Rate of BFR Construction

Built-for-rent construction always follows demand. Although the US is experiencing an economic slowdown, this hasn’t affected the development of housing units. Although housing prices seem to have stagnated at such a high price, that isn’t because a lack of housing drives up demand and prices, as they would typically do. On the contrary, considering there’s a 2-5 million rental unit shortage, BFR constructors still have plenty of catching up.

However, this only applies to built-for-rent houses. Built-for-sale housing is likely to plunge for most of the year. 

Effects of the Economy on Renter Household Growth

The growth of rental apartments mostly stayed the same, even during the pandemic. Several factors explain why the rental estate is experiencing growth during these tough economic times. 

For one, young adults leaving their parents’ homes and looking to form new households usually make their first stop at rental properties as they settle down.

Secondly, there is limited availability of new houses as they are currently beyond the reach of the average home buyer. Further, although the price of almost goods has risen across the board, incomes have largely stagnated, only growing 17.5% between 1979 and 2020. 

Final Word

Although the negative economic changes signal doom for the real estate industry, the built-for-rent segment seems poised to grow in strength. Mortgage and housing prices are still out of reach for many, and incomes have stagnated, which bodes well for BFR.

To the keen eye, the benefits of investing in BFR far outweigh the potential risks, which makes it a viable investment option.

Gurpreet Singh Padda, MD, MBA, MHP

Categories
Real Estate

Surviving Crisis in Real Estate Business: Innovation and Creativity

The current economic crisis forces real estate investors to innovate, be creative in their business models, and adapt to the changing market conditions. The economy contracted for two straight quarters, so to survive, you must find ways to cut costs, land clients, and increase efficiency. 

Businesses often overlook creativity in times of crisis. However, it is what makes businesses successful. Only real estate investors that think outside the box and look at things differently will thrive in these challenging times. Here’s how you can survive a crisis using innovation and creativity.

1. Understand the Crisis

The first step to being creative and innovative is understanding the economic downturn and how it will affect the real estate market. You need to understand what is happening at that moment and how things have changed over time. You won’t create something new if you don’t know where you stand.

2. Innovative Marketing

Here are some creative and innovative marketing ideas for real estate investors to survive and thrive during this time:

  • Lead Generation: This is the first step toward any successful marketing campaign. In the real estate industry, lead generation unearths potential buyers and sellers interested in buying or selling property. A good lead generation strategy ensures you contact the right people at the right time.
  • Social Media Marketing: It uses social networks to reach current and prospective clients. According to the National Association of Realtors (NAR), 74% of realtors use Facebook to market their businesses. Social media helps companies build relationships with their target audience.
  • Virtual Tours: These are a simulation of the property. They are excellent for showing prospective buyers what a property looks like inside and out. You can take photos of the interior and exterior of the house and then stitch them together to create a virtual tour. Alternatively, you could use videos. Listings with high-quality photos have a 44% higher chance of selling for the asking amount or more.

3. Devise Payment Plans

When there are economic downturns, most people face financial difficulties. Sure, the cost of housing is coming down in some cities, but the high mortgage rates mean a new home is beyond most people’s reach.

You could devise payment plans to attract property buyers and encourage new purchases. For example, you can allow clients to pay in installments, provide lease-to-own schemes, or lead them to lenders providing lower mortgage rates than prevailing industry rates.

4. Use Technology

One use of technology is leveraging data analysis for decision-making. You can use data to analyze past events and trends and use that information to help plan for the future.

Data collected from website visitors’ interaction is also great for gauging users’ experience. That should help you tailor the content and provide a better online experience for clients visiting your website.

Another way is to utilize technology to automate processes, making them more cost-effective. Software-as-a-service (SaaS) has enabled investors to optimize property management. You can use it to digitize tenant agreements, keep track of rental income, and send auto alerts for unpaid rent or lease expirations.

AI and augmented reality alter how potential clients engage with a physical environment. That enables you to provide virtual tours or virtual staging. 

On the other hand, an investor can use realtor websites and social media pages to find deals on properties. A recent boom in PropTech technologies has streamlined the home buying process. An investor can utilize the platform to optimally research, market, buy, and sell properties.

Additionally, there is real estate crowdfunding, an alternative to REITs. Here, investors can pool their resources with an even lower entry requirement.

5. Give Offers and Discounts

You could introduce discounts and offers to attract clients. A loyalty program can incentivize homebuyers to reserve a unit during a crisis by offering them a substantial rebate on the purchase price. Motivating homebuyers with referral bonuses is another fantastic option.

6. Repurpose Your Properties

In times of crisis, creativity often takes the shape of finding new uses for existing things. For instance, as the need for warehouse-style stores diminishes, you can convert the space into a self-storage facility.

With most people working at home, buildings that served as offices can house families as their occupants vacate. Alternatively, create innovative dining options by shifting the focus of a food establishment toward a take-out culture.

There has been a high demand for industrial space, so you can convert any of your feasible properties to suit this. The COVID-19 pandemic accelerated e-commerce, hence increasing the demand for industrial space.

Rentals are an excellent way to earn extra income. The constant need for stays in short-term rentals resulted in a 21% increase in demand in the second quarter of 2022. Their demand may likely increase as only a few people can afford new homes. 

If you have difficulty selling stock, you could list them on Airbnb or VRBO and charge guests a certain amount per night.

7. Innovative Building Materials

The push for carbon-neutral structures is inspiring innovative green construction methods and materials. New off-site construction management approaches give rise to novel models and ideas using cloud computing and remote collaboration tools. 

Opportunities for innovation among builders, property managers, and tech firms have opened up with the proliferation of 3D printing and prefabricated components, lowering the cost of construction.

8. Collaborations

You’re not alone if you’ve noticed a decline in sales or inquiries. The entire real estate community is currently facing financial difficulties. If it is possible to partner with other industry players, then do it. 

Offer to promote each other’s projects if a potential buyer is interested in a property, you do not have in your portfolio. That should increase your market reach and provide valuable insight into running your business.

Final Word

Every indication points to tough times ahead, so you must develop innovative and creative ideas to stay afloat. Some ways you can achieve this are to collaborate with other investors or real estate agents, use innovative technologies, repurposing properties, and provide payment plans.

By Gurpreet Singh Padda, MD, MBA

Categories
Real Estate

9 Lessons Real Estate Investors can Learn from Digital Health Entrepreneurship

Healthcare entrepreneurship is one of the most dynamic fields to invest in. Digital health entrepreneurship has led to a raft of technological advances that improved health provision, such as telemedicine and telehealth.

Although digital health entrepreneurship seems far removed from real estate entrepreneurship, real estate business people might pick up a few tips from that industry. These are the top nine lessons a real estate investor can learn from digital health entrepreneurship:

1. Start with a Problem

It seems simple, but the first step to solving any problem is identifying what the problem is. When you identify a problem, you know exactly what type of customers you want to attract. For instance, digital health entrepreneurs realized pandemic lockdowns prevented patients from visiting healthcare facilities, so they came up with telemedicine.

The same goes for real estate. It’s not enough to identify what real estate niche you want to pursue; you must choose one that serves a need.

For example, lockdown measures prevented workers from going to the office during the pandemic. Meanwhile, online businesses flourished; hence the demand for storage facilities skyrocketed. It would have made little sense to invest in offices during that time because all the smart moves in real estate pointed toward warehouses.

2. Keep Client Data Safely

Most digital health entrepreneurship typically involves storing and transmitting sensitive patient information online, which increases the chances of hacking. Indeed, healthcare organizations have seen instances of ransomware attacks increase by 94% between 2021 and 2022.

In real estate, clients wholly depend on you to protect their data. You are also under a legal obligation to protect the data, and the law will hold you responsible if there is a breach. Therefore, secure your system by installing secure security software and encoding data.

3. Get Insurance

Considering mistakes happen in the medical industry, it pays to get insurance. It costs healthcare providers $1.9 billion yearly to cover the cost of medical practice insurance, but it costs $17-$29 billion to cover preventable medical errors. Insurance is vital as it covers the costs of liability claims that would otherwise come out of pocket.

Real estate investors will do well to get business insurance to cover costly legal claims. You might get sued for inadvertent mistakes such as failing to disclose a property defect, breach of duty, or giving tax or legal advice.

4. Be Patient

Building a successful digital health enterprise takes time. You can’t expect everything to work overnight. There are days when you will feel like giving up.

You may not be able to afford the best equipment or supplies when you first start. But if you stick with it, eventually, you’ll afford them. And once you’ve got the basics down, you’ll move on to more significant projects.

Similarly, it takes time to build a successful real estate brand. Keep working hard and stay focused on your goals.

5. Be Willing to Learn

Digital health entrepreneurship involves technology, and you probably know how fast that changes. Therefore, you need to keep abreast of the latest developments in the industry if you are to stay ahead of the pack.

The real estate industry is also highly dynamic, with housing prices often fluctuating during the past two years. Investors have had to keep a close eye on proceedings to avoid suffering losses.

6. Use Data to Improve the Business

It is vital to have essential healthcare data sources to be innovative. For example, the only way to determine the prevalence of a particular disease is to access its statistical information and use that for data analysis. Entrepreneurs will then estimate the potential reach and price of the solution.

Accurate data is vital to help you know what the housing market demands – the more data available, the less time and money it takes to bring solutions to the market.

Once you’ve identified the market needs and understood the user experience, you’ll have a clearer picture of what’s working and what isn’t. Armed with this information, you can make informed decisions about how to improve your product or service.

7. Set up an Accounting System

While digital health systems can incorporate accounting and tax capabilities into software, the responsibility to file accurate taxes lies with the entrepreneur. Therefore, a digital health user must set up a bookkeeping and accounting system that complies with the tax law.

Real estate entrepreneurs need to employ bookkeepers and accountants that know their way around the real estate industry to handle and file bookkeeping records professionally.

8. Prove the Importance of Your Product or Service

In the healthcare industry, it helps to find a course of action that fills a gap you have noticed. You will need to prove to healthcare institutions that you have innovated something they may need and help make their work more efficient.

Similarly, in the housing sector, your clients are people with problems they want to be solved. You need to understand their concerns to solve them effectively. If you don’t know how your customer feels about your real estate services and products, you’re missing out on a huge opportunity to sell more.

Consumers don’t care about your business; they care about themselves. To succeed, focus on helping people solve problems. That’s what will make your real estate brand stand out.

9. Involve Stakeholders

Stakeholders such as patients and medical professionals are crucial to creating digital health solutions. 

Stakeholders have a vested interest in the real estate industry. These are people involved in various aspects of the business, including buying, selling, leasing, financing, developing, managing, marketing, and advertising.

Involve them in research and data collection during the pilot stage to obtain valuable feedback to enhance the usability and utility of the solution you intend to provide.

Final Words

Digital health entrepreneurship is not just about technology. It is about people, processes, and culture. You must understand how these three components interact and influence each other to improve patients’ lives.

As a real estate agent, you must understand what clients want and consider how your offering will improve their lives. You can conquer the real estate industry by using lessons from digital health entrepreneurship, such as involving stakeholders, using data to improve the business, and keeping client data safe.

 

By Gurpreet Singh Padda, MD, MBA

Categories
doctor Real Estate

Making a move From Medicine to Real Estate Entrepreneurship

Practicing medicine is a noble profession, but a grueling career as you will spend years training and serving patients. You will barely have time for yourself as the practice dictates you have no definitive working hours.

Consequently, incidences of burnout are rampant in the industry, partly explaining why up to 47% of healthcare workers in the United States intend to quit their jobs by 2025. Presumably, to try their hand at less stressful ways of making money.

As a medical professional intending to venture into entrepreneurship, the real estate industry looks like a great prospect. The global professionally managed real estate market was worth $11.4 trillion in 2021. Keep reading to learn how to move from medicine to real estate. 

Why Medical Professionals Might Want to Shift to Entrepreneurship

Some of the reasons a nurse or a doctor might want to get into entrepreneurship are:

  1. Shift career: Exposure to diseases and viruses for long hours daily is not everyone’s cup of tea.
  2. Better work-life balance: Working in healthcare for most practitioners means giving up your social life, which isn’t ideal if you want to start a family.
  3. Filling a gap: There might be a medical issue you feel you can only solve by being an entrepreneur.
  4. Explore new challenges: Even if you have a rewarding career, it might have become too monotonous, so you want to try something new.

Reasons Why Caregivers Could Become Successful Real Estate Entrepreneurs

Here are some of the reasons medical professionals can become successful real estate entrepreneurs:

  • Desire to make a difference: Medics know all about changing people’s lives for the better, which isn’t far removed from the goals of most entrepreneurs.
  • Strong interpersonal skills: In the business world, having the skills to connect with people from various walks of life, develop relationships, and communicate effectively with them will put you ahead. As a medic, you already have these skills as you interact with patients and their families daily.
  • Pattern recognition: Medical schools teach medics to think critically. They can stand back and examine a situation by focusing on the essential aspects and patterns. This critical thinking ability will stand you in good stead to develop creative solutions to issues in the real estate industry.
  • Commitment to continuous learning and growth professionally: Doctors and nurses constantly look for ways to improve their skills and stay abreast of the latest medical advances. It would be best if you retained this curiosity and drive, as it will help you learn and grow your real estate business.

How to Move from Medicine and Venture in Real Estate

Real estate is still one of many millionaires’ most preferred investment options. The best way to go about it includes the following:

1. Know your market and pick a niche

The first step towards becoming a successful real estate entrepreneur is knowing what market you want to serve. How will you know you’ve arrived at your destination if you don’t know where you want to go?

The real estate industry is vast, so it helps narrow your scope and focus all your attention on that single niche. These are some of the real estate niches you could try out:

  • Residential real estate
  • Property management
  • Commercial real estate
  • Resort and vacation homes

2. Market research

It helps to know who you are selling to and what they need to provide the right services for your target audience. That entails extensive market research on demographics and current trends.

The research should provide some pointers on how you can position your business in the chosen niche. Try to find some real-world experience and self-assess your skills to work out if you have the skills needed to fill the gap in the market.

3. Create a plan

Once you know your target market and have researched their wants and needs, you should create a business plan to meet those needs. A business plan will formulate a roadmap of how you will start and run the business. An ideal business plan should contain a detailed outline of the industry overview, research and analysis, marketing strategy, management, and finances.

4. Start with what you have

One look at a real estate website may put you off real estate entrepreneurship if you don’t have vast sums of cash. That doesn’t mean you can’t start small. There are plenty of investment opportunities, even for those without deep pockets, such as REITs.

5. Network

Networking is another great way to gain experience and learn about the industry. Attend events, conferences, and seminars related to your field. Ask people for advice and feedback. Don’t be afraid to ask someone for a reference or recommendation.

You can also join a network marketing company. It is one of the best ways to become successful in real estate entrepreneurship if you come from another profession. Network marketing companies offer their members a low entry cost, high earning potential, and a strong sense of community.

6. Be patient

Successful entrepreneurs understand that patience is a virtue. You won’t become a millionaire overnight, so don’t expect to make money immediately. Take baby steps and keep at it diligently.

7. Stay organized

Keeping organized is vital. Keep track of everything you do, especially expenses and income. Use spreadsheets, calendars, and notes to organize your thoughts and ideas and manage the day-to-day running of the business.

7. Build Relationships

Relationships are the foundation of any successful business. You can develop trust and loyalty by establishing relationships with customers, vendors, and employees. A strong relationship network allows you to widen your market reach, potentially increasing your bottom line.

8. Set Goals

Finally, you need to set realistic goals for your business. Setting goals gives you something to strive for and motivates you to keep going even when times get rough.

Final Words

As a medical professional, you already possess qualities that can make you succeed in real estate, such as strong interpersonal skills and a willingness to help people. If you feel like making the jump to real estate, some things you could do to improve your chances of success include creating a business plan, conducting thorough market research, and networking with other real estate industry stakeholders.

By Gurpreet Singh Padda, MD, MB

Categories
Real Estate

Bureaucrats insist there’s No recession, but That Doesn’t Change Reality!

The National Bureau of Economic Research’s (NBER) Business Cycle Dating Committee is the singular body in charge of calling a recession. It defines a recession as a severe fall in economic activity that people would feel throughout the economy and lasts for more than a few months. Some variables it tracks include actual consumer spending, real income less government transfers, and industrial production. There are no fast rules or thresholds set in stone, so they determine whether the country is in a recession after studying statistics from the government.

So far, they have not declared a recession because they have not seen a significant decline in economic activity. You can’t really blame them as this is their current view according to the latest data they have received from the government:

So, according to the NBER, the economy is fine; there’s nothing to see here. They argue that there is a strong labor market and corporate earnings. Besides, recessions are not standard fair, with the US only experiencing a recession 8% of the time over the past 30 years.

But how is the economy really performing across the board? That’s what we seek to examine by studying the cold statistics below.

So, is the US in a Recession?

According to the general definition, a recession occurs when there are two-consecutive recorded negative quarters in the gross domestic product. Using that metric alone, the US was in a downturn earlier in the year.

But the NBER insists that you must take a holistic approach to get a clearer picture of the state of the economy because a recession indicates a significant decline in economic activities spread across the economy.

Therefore, here is an examination of 14 key economic indicators. If most show that the economy is ok, that will prove the NBER right. The opposite would be true.

1. Gross Domestic Product (GDP)

In the most recent quarter, economic growth was 2.6%. After the first half of the year’s GDP contraction, this is good news, but it is not exactly something to celebrate. Given the Federal Reserve’s aggressive stance, the economy’s ability to expand through 2023 is still in question.  Keep in mind that we have been depleting the Strategic Petroleum Reserve aggressively, approximately 180 million barrels in 2022.  We have been simultaneously exporting oil out of the US, generating a significant part of our increase in GDP.

2. Consumer Price Index (CPI)

According to data from the Labor Department’s Consumer Price Index, which tracks changes in prices across various products and services sold within the United States, the annual inflation rate has decreased to 8.2% from 8.3% in August.

During its November 2022 meeting, the Federal Reserve announced its fourth consecutive 75 basis points federal funds rate raise.

The less volatile core inflation rate increased to 6.6% in September from 6.3% in August, rising by 0.6% month-over-month. That annual core rise is the highest of its kind Since August 1982.

3. ISM Manufacturing Index

According to a survey by the Institute of Supply Management (ISM) manufacturing reading for October was 50.2. Manufacturing output increased at its slowest rate in nearly 2.5 years, with total readings at their lowest level since Spring 2020, so manufacturing is not doing well.

4. Industrial Production

Industrial production increased by 0.4% in September, and the index rose by 5.3% compared to the same period a year ago. Industrial production is doing well.

5. Retail Sales

In September, retail sales remained unchanged after increasing by 0.4% in August. Consumers are beginning to limit spending as their savings dwindle and prices rise.

The Fed hopes that higher interest rates will have several impacts, one of which is a consumer demand decrease. With further rate hikes in the pipeline, it’s easy to predict that retail sales are not doing well.

6. Conference Board Leading Indicators

In September, the leading index dropped by 0.4%, adding to its recent decline and suggesting that the economy is declining. This worrying trend is among the best indicators that a recession will hit the economy in the new year.

7. Markets Data

The stock market is perhaps the hardest hit of all the sectors, with the S&P 500 falling 19.1% this year, and the Fed’s decision to hike interest rates by yet another 75 basis points added to investors’ woes. Nasdaq is down 30%, The Dow 10%, and The Russell 2000 down 17.5%.

The treasury yield curve does not provide great news either, with the short-term interest rate yield performing better than the longer-term rates, traditionally a good indicator of an impending recession.

8. Unemployment Rate

The September unemployment rate of 3.5% shows the labor market is probably the only steady aspect of the economy. The Federal Reserve’s dual role is to ensure full employment and stable pricing and can now focus on reducing inflation because of the robust labor market.

9. Initial jobless claims

The Labor Department releases the initial jobless claims data weekly, showing how many people have started applying for unemployment benefits that week. The week of October 27 recorded initial job claims of 217,000, while November 5 saw a reported 225,000 initial claims.

A rise in initial unemployment claims may indicate a wider spread of layoffs, which would be consistent with the Fed’s push to lower inflation.

10. Job Openings and Labor Turnover Survey (JOLTS)

By September 30th, the number of job openings jumped to 10.7 million. Overall separations dropped to 5.7 million, while hires dropped to 6.1 million. This is good for the economy.

11. University of Michigan Consumer Confidence Survey

According to the University of Michigan’s Monthly Survey of Consumers, consumers’ sentiments improved in October. That represents a 2% month-over-month increase.

At 59.8%, consumer sentiment might seem rock solid, but it has dropped by 17% since this time last year. That’s due to increased gas prices in recent weeks, rising inflation, and unaffordable housing.

12. NFIB Small Business Optimism Index

The NFIB’s monthly Small Business Optimism Index increased by 0.3 points in September to 92.1. However, the index has been lower than its 48-year average for the past nine months in a row.

13. Housing Starts

As a result of higher borrowing rates and high prices, home construction declined by 8.1% from August. Developers are understandably cautious about taking on too much work in light of these factors.

14. NAHB Home Builders Index

The October reading fell to 38 on the Home Builders Index, showing that most builders consider the housing market weak. That has led to higher mortgage rates and a drop in the number of new single-family homes under construction.

Final word

Even though the economy isn’t technically in a recession, things aren’t looking great. Most of the key indicators above show a worrying trend in the economy. Still, not all the data points provided above give equal weight in determining if the US is experiencing a recession. Low unemployment and many available but unfilled positions have made the labor market the economic engine of the country. At the same time, consumers are handling rising inflation better now than they were earlier in 2022. The real estate and stock markets are both performing abysmally.

 

By Gurpreet Singh Padda, MD, MB

Categories
Real Estate

Why You Should Be Thinking About Alternative Investments

All you see in the news nowadays are rising gas prices, inflation, and high interest rates. The stock market isn’t faring any better: Nasdaq 100 has shed more than 33% so far, while the much-vaunted cryptocurrency, Bitcoin, has dropped more than 60% of its value.


In uncertain times, financial advisors often encourage investors to turn to low-risk, fixed-income investment options, such as CDs, money market funds, and high-yield savings accounts. They reason that these safe investments will preserve your assets as they provide positive returns. But do they?

Investing in the stock market and receiving a 60% loss is a no-no, so the financial advisors would rather you invest on a 10-year treasury yield, making 3.7%. While it may seem the investment is making you money, you have to consider that the annual inflation rate rose to 8.2% in September 2022. That means you are losing money (-4.5% annually).

While all investment options seem pointless at the moment, one criminally underutilized segment is viable during market downturns. Did you know you can make as much as 12% returns using alternative investing?

According to Prequin’s 2022 Global Alternatives Report, the alternatives AUM concluded at $13 trillion in 2021 and is projected to expand to 11.7% ($23 trillion) by 2026. This is a look at what alternative investing is all about.

What Are Alternative Investments?

Alternative investments have no basis on traditional financial products like stocks, bonds, or cash. Most alternative investments don’t receive as much regulation from the SEC and could be more illiquid.

Types of Alternative Investments

As more and more alternatives become available to retail or individual investors, it pays for investors to have a solid understanding of these options. The following are some examples of alternative investments:

1. Private Equity

Private equity is a term that describes investments in businesses not traded on a public market like the New York Stock Exchange or NASDAQ.

The goal of private equity firms is to generate returns for their investors by making strategic investments in private companies with the assumption that the value of those investments will increase by a certain time. You can further break private equity down into these categories:

  • Venture capital
  • Buyouts
  • Growth equity

These asset classes typically require long-term investments of substantial capital, so only institutions and wealthy individuals can participate.

2. Hedge Funds

A hedge fund is a type of pooled investment partnership that trades liquid assets using various investment strategies to generate a high rate of return for its investors. Entrepreneurs can invest in a wider variety of securities, as hedge funds are not subject to the same regulations as mutual funds.

Compared to other alternative investments, hedge funds are notable for their high liquidity ratio. Because they have a higher concentration of liquid securities, you can liquidate the funds in minutes. Due to the high costs and risks involved, only wealthy individuals and institutional investors, like pension funds, typically invest in hedge funds.

3. Structured Products

Structured products are a type of investment that involves pairing a debt instrument (such as a bond or CDs) with one or more derivative instruments tied to an underlying asset class or a collection of assets such as stocks, market indices, currencies, or interest rates.

Despite their complexity and potential for loss, structured products allow investors to create a uniquely tailored portfolio to their needs. Typically, investment banks produce them and offer them to institutional, corporate, and individual clients.

4. Private Debt

Private debt consists of loans from sources other than traditional banks. Businesses often use private debt for expansion, working capital increases, or real estate construction and development. 

Given the historically low returns on government bonds, direct lending to businesses can provide a sizable premium over the cash flows accessible from liquid fixed-income products. Private debt funds, the firms that provide the funding, make money through two main channels: interest payments and the eventual repayment of the loan.

A private debt fund may also focus on senior, junior, or mezzanine debt, among other strategies, such as direct lending, venture debt, and exceptional situations.

5. Real Estate

Many Americans already have a stake in this asset class because they are homeowners, making real estate the most viable alternative investment. Real estate investments can take the form of direct property ownership or indirect investments.

Properties like apartment buildings and shopping centers provide regular rental income to their owners, and they hope for price increases over time.

Investors who want a more hands-off approach might buy shares of private real estate investment trusts (REITs) through a broker. REITs that trade publicly do so through the stock market.

In addition to its diversification benefits, real estate offers investors a hedge against inflation and favorable tax advantages.

6. Commodities

Commodities are tradable items that have both direct and indirect economic uses. Examples of commonly traded commodities include gold, farm animals, precious metals, wool, oil, gas, wood, and uranium.

Given their relative immunity to fluctuations in the public equity market, investors often use commodities as a hedge against inflation. Commodity prices fluctuate based on supply and demand market forces; increased demand will lead to higher prices and greater returns for investors. You can invest in commodities in several ways, including:

  • Futures Contract
  • Stock
  • Physical commodities

7. Collectibles

When you invest in collectibles, you aim to generate a return on your money through long-term appreciation of the items you own. Some of the common types of collectibles include:

  • Books
  • Rare wine
  • Stamps
  • Antiques
  • Trading coins
  • Art
  • Coins
  • Baseball cards
  • Toys

To succeed in this alternative investment strategy, you need an extensive understanding of the sector and the patience to hold on to your investment for a long time. It is not easy to predict how much a work of art, or a collection will increase in value because both can decline in worth or get destroyed. 

Some collectors treat their collections as investments on par with their homes or cars, and their collections make up a significant portion of their net worth. Adding collectibles to a portfolio is a great way to diversify your investment base and spread your risk.

Final Word

Many investors are increasingly looking to alternative investments to diversify their portfolios, maximize their returns, and accomplish other financial objectives. That is why it is so important for investors to have a firm grasp of the options they have to adopt alternative investments into their portfolios successfully.

 

By Gurpreet Singh Padda, MD, MB

Categories
Real Estate

Why You Should Consider Buying Real Estate During A Recession

The inflation rate as of November 2022 is 8.202%, well above the long-term average of 3.26%. Mortgage rates are still rising, exceeding 7.44%, and there’s a good chance the Fed will increase lending rates by 50 to75 basis points in the December 14-15 FOMC meeting, and an additional 25 to 50 basis points in the January 31-Feb 2 2023 FOMC meeting.  This could result in Mortgage rates close to 9% by February 2023.

All of these point to a intentional recession. If anything, TD securities think there’s a more than 50% chance the US will enter a recession within the next 18 months.

While a recession means people don’t have the money to purchase a home, it presents mouthwatering opportunities for a real estate buyer, as long as the buyer can maintain financial solvency through the 18 to 24 months of a recession. Keep reading to learn why buying real estate assets during a recession might be a good idea.

Advantages of Buying a Real Estate During a Recession

Purchasing Real Estate during a recession has some benefits, such as:

a) Lower Prices

House prices usually fall dramatically during economic downturns. Such an economic environment means people can barely afford the bare essentials, so splashing hundreds of thousands of dollars on a home is out of the question.  This has a trickle-down effect on the Multifamily real estate market and even other real estate asset classes.

A lack of interested purchasers can lead to prolonged selling times, so sellers may feel compelled to cut their asking prices to move the assets. Foreclosures also force homeowners to sell, increasing the supply of homes and further driving down prices.

While home prices have not dropped significantly as of August 2022, Moody’s Analytics forecasts that home prices in highly “overvalued” housing markets might fall by 15% to 20% should a recession hit, while nationwide home prices would decrease by roughly 5%.

b). Mortgage is Cheaper

During a typical recession, business stagnates, so the Fed’s go-to solution to spur the economy and get people to spend is lowering interest rates. That typically leads to more affordable mortgage rates, which is your cue to hit the market in search of a home.  This Fed pivot will not occur until we are firmly entrenched in a recession, and consumer confidence has severely been impacted, often seem as a reduction in the hyper liquid stock market open futures.

The National Bureau of Economic Research (NBER) still has not called this a recession despite two consecutive depressed financial quarters, which explains why the interest rates are still high.

If the economy does tip into a recession, expect mortgage rates to plummet, but only after the stock market capitulates and the average investor is running for the exits. That would be the perfect time to get a mortgage and grab a house.

c) Low Competition

In 2020 and 2021, homes were flying off the shelf, some site-unseen. Homes found buyers in as little as one week. A depressed economy, however, means people don’t have purchasing power, so expect little competition for home listings.

The high mortgage rates and exorbitant home prices also mean supply will increase, so you will have plenty of homes to pick from, if you can afford it.

Tips for Buying a Real Estate in a Recession

Here are some tips if you want to purchase a home during a recession:

1. Do Your Homework

Sure, property will generally be cheaper, but that doesn’t mean you can’t get a better deal. Scour the internet and visit local listings. You might net the bargain of the century and maximize profits if you decide to sell the home later.

2. Know When To Walk Away

Just because it’s your dream doesn’t mean you should compromise everything to get the deal over the line. If you find an asset that meets all your requirements but is too expensive, ask the seller to lower the price. If they can’t, walk away. There are plenty of gems like that waiting to be discovered. Take your time to negotiate.

3. Get Your Finances In Order

First, you need a budget, a limit of what you can afford to purchase any property. That will act as a guide whenever you’re conflicted about how much you should spend.

That also means ensuring you have a good credit score to secure a mortgage, pay all the taxes, and have enough savings to stump up the down payment.

4. Shop Around For A Mortgage Deal

Yes, mortgage rates are lower than usual, but you can still get a better deal than most people. Considering mortgages involve vast sums of money, you’d be surprised how much money a few changes in decimal numbers will save you.

Go around looking at the deals mortgage providers offer to find one that suits you best. That would also be a good time to enlist a mortgage broker as they know the best places you can land a mortgage deal after considering your financial circumstances.

5. Hire A Real Estate Agent

Hiring a real estate agent is a great way to expand your reach in the real estate market. Agents have access to more properties than you could find by yourself and know where to strike a deal. They can also provide valuable advice, offer guidance, and negotiate on your behalf.

6. Obtain Concessions

Due to the market downturn, you should take advantage of all the rebates and real estate deals that come your way. Owners are under pressure to sell their properties as quickly as possible due to the drop in prices. Consult with your real estate agent to request concessions from the seller, but keep in mind the agents goal is to generate a commission, their incentive is to generate a sale.

7. Avoid A Bidding War

One benefit of purchasing in a down market is obtaining a reasonable price. Don’t let your emotions get you into a bidding war, as that will mean spending more than you had anticipated. An excellent way to go about this is to set a budget and adhere to it.

8. Realign Your Investment Strategy

As you’ve probably noticed, it is a down market, so properties aren’t moving fast. Therefore, you should approach a purchase knowing that you may not offload for a long time. It would be best if you reassessed your investment strategy.

If your strategy is flipping property, that may not work in a down market, its akin to catching a falling knife. It would help if you thought of long-term strategies, such as renting the property. That entails gauging the viability of the property as a rental unit before deciding to purchase.

Therefore, don’t spend your last dollar on a property hoping to get instant returns. Since you’ll be holding onto the property for some time, you should also ensure you have the finances to take care of maintenance and taxes.

Final Words

For the right investor, purchasing real estate during a recession makes sense. While mortgage rates are forced up to control inflation and create unemployment, they typically fall during the recession; once unemployment skyrockets up and the stock market tanks. Further, there are a lot of listings to choose from as there’s little competition.

I recommend you use the stock market as an early indicator of economic duress, the housing market as a less volatile marker, and the multifamily market as a lagging indicator; unless of course, a black swan happens to swim by and we have major demographic changes.

If you have the financial liquidity, you can grab a once-in-a-lifetime deal, especially if you enlist the services of experienced guides who have navigated a few economic cycles. However, you may have to keep the asset for some time since it may be a prolonged down market.

 

By Gurpreet Singh Padda, MD, MBA