How to Invest for Success with a Recession in Sight
One of the metrics we look for is the intrinsic value of the real estate, which is buying properties at or below replacement cost and investing in locations with high barriers to entry.
History suggests that the next recession is not far off.
The economy’s current growth has been steady since June 2009, making it the third-longest upward trajectory in history. Recently supercharged by the tax cut, the United States is on track to record 107 months without a recession, passing the growth of the 1960s in duration. That will leave only the decade-long, 120-month run in the 1990s as the only period where the US economy has outperformed the current trend, where the end of the Cold War collided with the rise of the Internet to create a Golden Age for the U.S. economy.
The bond market has accurately predicted nine out of ten recessions since the financial markets began. The bond market is considered “smart money” as most of the transactions are done by sophisticated professionals, and the bond market is beginning to predict a recession by inverting the yield curve.
The looming question is, “what defensive investment strategies should we be employing today that will continue to grow wealth?”
1) Make sure your debt ratio is not pushed to the limit. If there is a downturn in the financial markets, if interest rates begin to climb faster, or if there is a rise in unemployment – it is important to be comfortable your standard of living will not be affected.
2) Reallocate some of your investment portfolio away from growth investments and into investments with a strong current income component.
3) Invest in assets that are not correlated to the stock market. The last downturn showed us that even a portfolio that was diversified across the stock market’s asset classes moved downward in lockstep.
4) Build a strong emergency fund, to plan for the unexpected.
5) CASH IS KING.
At McKinney Capital & Advisory, we invest in real property because of the many benefits that come with owning it; such as consistent cash flow, principal protection, favorable tax treatment and generally greater stability.
We focus on sound investments with strong fundamentals and high current income. One of the metrics we look for is the intrinsic value of the real estate, which is buying properties at or below replacement cost and investing in locations with high barriers to entry. We strongly believe that if we invest in locations with stable or rising demand at a lower cost basis than the competition, over time our investments should experience strong performance.
Our investments in workforce housing are another example of this strategy. Workforce housing is generally defined as older properties that usually rent for 25%-50% less than newly built apartments. In an economic downturn, these apartments usually maintain or grow their occupancy rates as people move out of newer, more expensive apartments to more affordable, older apartments to lower their monthly rent payments. This continuing trend provides investors in workforce housing with strong cash flow assets that tend to see increased stability in a recession.
Not only does the affordable housing sector offer the ability to make your investment portfolio more defensive and secure, but it also allows institutions and private individuals to invest in positive social change.
Contact us today to find out how we can work together to not only make your family’s financial future more secure, but also how we can affect positive change together for the millions of Americans that live in multifamily housing.