July 17, 2020

By Charles Sells

When you hear the term “recession-proof investing,” it can sound pretty attractive in today’s market conditions. After all, the National Bureau of Economic Research declared about one week into June 2020 that economic activity in the U.S. had peaked four months earlier, meaning that this summer will mark six months into the downturn. Who wouldn’t want to recession-proof their investment portfolio more than a full quarter after the recession had begun?

Well, it turns out that most Americans are very interested in recession-proofing their portfolio, which is probably why interest in self-directed retirement accounts is rising. Since “conventional” retirement accounts tend to focus heavily on stocks, bonds, and mutual funds, it is extremely common to hear investors worry out loud about the state of their retirement capital when an economic downturn begins. You will hear people saying things like, “I lost 30 percent in one month!” or, “My financial advisor tells me it will come back, but I’m going to have to wait a couple years.” That places investors in a very precarious position if they plan to retire in the next five to 10 years, particularly since our country’s previous economic expansion lasted more than a decade. In theory, the contraction could also last that long. The novel coronavirus COVID-19 just throws another wrench into the equation, rendering Wall Street-based assets completely unpredictable.

In today’s economic environment, investors need something with staying power. They need predictable assets that have demonstrated demand and that offer flexibility in times of economic upheaval. In short, your retirement portfolio needs real estate – but not just any real estate.

Economic Crises are Inevitable

In an economy as powerful as ours and driven so heavily by consumer sentiment, economic “crises” are inevitable even when there is not a global pandemic caused by an as-yet largely mysterious viral infection. When the pandemic factor enters the equation and puts 43 million people out of work while eliciting trillions of dollars in newly minted money, things swiftly spiral out of control. When this sort of thing happens, most self-directed investors suffer as a result of a combination of negative behaviors:

  • They freeze and stop investing, which means their capital stops generating returns.
  • They make bad investments because they assume a downturn means everything on sale is something they should buy.
  • They liquidate everything, taking a loss in order to preserve “what’s left” of their investments instead of pivoting to a new strategy that will continue to sustain the investments or even generate cash flow.
  • They have placed their capital with project managers who have never experienced a recession or an economic downturn and those managers make one of the poor decisions we listed above.

If you truly want to make your retirement portfolio recession-proof, you need to create the right combination of elements in that portfolio to resist economic turbulence. The key to accomplishing that revolves around taking four simple steps as soon as possible.

4 Easy Steps to Recession-Proof Investing

When a self-directed investor decides to do something to make their retirement portfolio recession-proof, they often follow one or two of the following four steps. I must warn you: Failing to incorporate all four of these steps into your retirement planning will hurt you and your returns at some point in the future. Take the extra time now to prevent big losses later.

  1. Place your capital in fully functional investments with operators who are actively engaged in their business at the present time.
    For most investors, this is going to mean getting involved in some element of real estate, likely an investment that touches the retail side of the equation like a fix-and-flip or a rehab project. The federal government declared real estate to be an “essential service” even though several states tried to limit the degree to which investors could access their properties, so the advantage of selling to owner-occupants at the moment cannot be overstated. The feds have come right out and said you have to be allowed to get those sales done somehow.Of course, the phrase “The government is on my side” is not going to be enough on its own. Investors need to make sure their operators are active in the present environment. For example, at The PIP Group, we provide distressed real estate investment opportunities in two of the most popular markets in the country at this time: the Southeast and the Midwest. Our investors can invest in tax liens, tax deeds, pre-deeds, pre-foreclosures, and bank foreclosures using several different strategies. Not only do we have multiple strategic options available, but we operate in multiple states and focus on investor- and business-friendly locations where we are less likely to be locked out (or locked down) in the event of another shutdown.
  2. Look for opportunities with numbers that back them up.
    Lately, I hear a lot of real estate investors saying things like, “This is the crash we’ve been waiting for” and, “This isn’t going to last long, so you had better act fast.” Insensitive nature of those comments aside, people saying these sorts of things tend to act rashly and assume everything that is on sale during a downturn absolutely must be a good deal. The reality is far different. Think back to the housing crash in the mid-2000s. A lot of investors bought up distressed properties for pennies on the dollar in hardest-hit areas, then ended up having to sell those properties for even less because they were not able to enact a viable plan to save the properties or even maintain them. They bought on impulse because the price tag was cheap.
    Look for good deals, but make sure the numbers behind the action plan back up the idea that a deal is really a good one. For example, at PIP, we invest in a lot of bank foreclosures right now. We are also very experienced in tax-lien and tax-deed sales. Both of those avenues permit us to obtain good deals on properties and enable us to create viable strategic plans for generating returns in today’s environment. It is OK to buy at a discount with the plan to just hold property, but even then, you need to run the numbers and make sure you can maintain the properties until you are ready to enact a strategy.
  3. Look for areas and sectors where you will be supported, not hindered, by the government.
    I have been investing in real estate for 23 years, which means I have successfully invested through two economic cycles already. One of the things that was crucial to making The PIP Group’s investments so successful in the years between 2008 and 2015 was that we always focus our investments where the government is going to support our efforts and even step in and help us remedy a problem. For example, the federal government gives VA, HUD, and FHA homeowners and borrowers preferential treatment because these populations, along with first-time homebuyers, are important to policy decisions. As a result, homes that appeal to these buyers are the best investment during a downturn.
    When you invest in areas where the government, itself, has a vested interest in your success, you will soon find that you receive support for your investments from that very government. This may not mean you receive monetary support, but you will likely find you have a chance to access tax credits or fast-track programs that other investors do not get to use and, even better, your buyers get preferential treatment when it comes to financing. There is no better position for an investor recession-proofing a portfolio, and you can start this at any time before, during, or after a recession.
  4. Prepare an action plan for future acquisitions and investments.
    It is impossible to say with certainty what is coming down the line for real estate investors in 2020 and 2021. What is inevitable, however, is that there will be a rise in foreclosures. That sounds scary to a lot of investors, but in reality, it is great for the real estate business. Whether those foreclosures come in a full-fledged wave or just create a ripple in the housing market, real estate investors who want to recession-proof their portfolios need to be thinking now about where they will be finding good deals tomorrow. That part — finding deals — could be a little more challenging in the 2020s than it has been in the past.
    Fix-and-flips became popular entertainment after the last housing crash thanks to fake “reality real estate” television shows that created a thriving population of faux investors, inexperienced coaches, and generally misleading “education” in our sector. That means real estate investors who want genuinely good deals will have to get active in their markets. For example, The PIP Group acquires about 80 percent of all the properties we source for our clients at live auctions in Savannah, Georgia, and from probate leads. We rely on decades of experience and a fully developed lead pipeline to bring properties to us that are appropriately discounted for our investors’ preferred strategies and returns.

Don’t Expect Your Profits to be Picture-Perfect

One thing that many real estate investors working on recession-proofing their retirement portfolios tell me is that they are “afraid” of ugly houses. This is something that is a direct result of all that fake reality real estate programming. It is imperative you remember as you evaluate deals that:

  1. Good deals are nearly always ugly until you clean them up.
  2. The best assets are not usually high-end assets but rather in-demand “bread-and-butter” housing for first-time homeowners and people seeking affordable living options.

For example, a typical property in The PIP Group pipeline might have an after-repair value (ARV) of about $170,000. That is a property that is going to be very solid but will never grace the pages of a home-décor magazine. When you see pictures of this investment in the early stages, they are likely to be grainy and kind of dark because there will not be good lighting in the home and it will probably be pretty messy. The house may be boarded up, need new drywall, and require some serious updates. In some cases, the property has to be gutted. It makes for a fun renovation story, but at the end, you are still looking at a property that is worth less than $200,000 after all the repairs are done. The good news is that these properties are, with the right lead generation in place, easy to acquire at deep discounts. Even better, they are the best performers in the industry once you get the rehab done – after all, remember the government is supporting them and their residents and owners!

Self-directed investors are particularly fond of this type of investment because you do not have to have a massive amount of capital in your retirement account in order to acquire one or more of these assets for your portfolio. Even if the acquisition is more expensive than your account can afford, when you work with The PIP Group, we work together to handle the additional costs and bring the property “up to rent” or “up to sold,” depending on your stated preference. Furthermore, at present, we are buying in such a way to factor in the potential for extended vacancies in the event that investors want to fix-and-rent. Our ideal investments net 10 percent, even assuming our expected ROI is cut in half.

That type of “disaster planning” is the type of planning every retirement and self-directed investor should be doing right now when they look at their investment portfolio. If you are not holding assets that will help recession-proof your portfolio, then you must pivot now. It is not too late to adjust your strategies, but the time to do so is definitely today. And, of course, the sector is definitely real estate.

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