The New Way Investors are Breaking into Hot Markets in 2020
At the end of September of this year, a popular website for investors ran a series of articles addressing how investors of different ages were adjusting their views of their assets in response to the COVID-19 pandemic. Interestingly, there was quite a bit of resentment reported, particularly among Gen X and Baby Boomer investors, many of whom felt they had dedicated a great deal of time and capital to investments like stocks and bonds in order to enjoy their retirement years only to have those years of leisure snatched away thanks to the ongoing economic correction. As one source put it, “I’m almost ready to retire [and] buy the convertible….and it’s all going up in smoke. Thanks a lot, COVID!”
This sentiment is exacerbated by the weird “pause” that the novel coronavirus has placed over most investors’ lives thanks to lockdowns, stay-at-home orders, remote working, remote schooling, and furloughs with no end dates in sight. The “new normal” (and a desperate hope that somehow today’s “normal” is not permanent) creates a feeling of ongoing frustration. Most responsible investors and, more generally, most responsible adults feel a certain compulsion to plan for the future. Today’s absolute unknowns make that nearly impossible. All anyone knows for sure is that times are changing and time – with family, friends, and enjoying the things you love and value – is more valuable and precious than ever.
Enter the real estate investment as the most attractive option for investor capital in today’s pandemic economy.
While economists and talking heads dedicate their time and energy to wondering why the stock market is just so very unpredictable, savvy real estate investors are taking advantage of the huge opportunities for wealth generation in today’s market. Every real estate investor with a means to obtain leads on good deals is out there doing so; every individual with liquid capital is trying to get it deployed into single-family housing as quickly as possible. And the markets are responding. In Savannah, Georgia, for example, affordable single-family residences for rent or retail sale have nearly doubled in value thanks to investor and owner-occupant interest in these types of “bread-and-butter” properties. Smaller cities, suburbs, and even rural areas are reaping the home-value rewards of having relatively affordable housing that does not require residents to be sandwiched into multifamily living spaces with little or no outdoor recreation areas.
However, as the demand for housing continues to grow, the competition in attractive markets rises as well. The heat is certainly on, and that makes it difficult for newer investors to “break into” these markets. Now, more than ever, investors are seeking something predictable to do with their capital. Fewer things are more predictable than single-family real estate. There are several ways investors can potentially get involved in markets that seem “closed” to newbies – even newbies with capital to spend.
Work with an established local investor.
Since the beginning of real estate, new investors have been teaming up with more experienced investors to learn about the business. Usually in this scenario, a newer investor needs to have a fair amount of capital to put up so that the more experienced investor can do a deal with that capital. The payment comes when the deal is done, making the relationship more like a joint venture (JV) rather than a coaching or mentoring relationship. The goal of this type of JV is usually for the newer investor to gain experience and, in exchange for training, the experienced investor gets a substantial portion (half or more) of the returns on the deal even if they put very little liquid capital into that deal.
Investing in blind pools and other syndications.
If you want to get involved in real estate but do not have the connections to access great deals on your own, you might consider investing in a blind pool or other syndication. These types of funds enable experienced project managers (emphasis on experienced) to raise money to do more deals in competitive environments while their investors simply provide the capital and receive payouts from returns on a predetermined schedule. However, there are a few pitfalls associated with this type of investing if you are a new investor.
For starters, you need to be able to evaluate both the deals and the project managers accurately and effectively. While you should receive a description of the fund’s goals, it can be difficult to ascertain if the market or strategy is really viable if you have little or no experience in real estate. Similarly, it can be hard to determine if a project manager really has the experience they say they do and, furthermore, if that experience will “translate” into today’s tough market. Finally, particularly if an investor has been very accustomed to monitoring their investments regularly, it can be hard to go into this type of fund and simply wait to see if your investment pans out. Most funds do not require (or permit) regular input from the investors in that fund, and new investors often struggle with what they feel is a lack of transparency. Also, if the fund is a blind pool you will not know in advance what specific assets are being acquired. You have to trust the fund managers to identify good opportunities and then leverage those opportunities using your capital on your behalf.
Invest passively in single-family residential properties.
If the many factors that go into a fund make the concept unappealing to you, then you will likely be best suited to passive investing in a more traditional format. By working directly with a boutique investment firm specializing in single-family residential real estate, you will be able to leverage your retirement capital in a relatively predictable way in order to generate returns in proven, hot markets. Unlike syndications and funds that do not necessarily offer much transparency, boutique investment firms tend to work closely with investors during the acquisition stage so that an individual investor is able to have their goals met with each and every investment property. While some firms do permit multi-party deals, they usually encourage a one-to-one investor-project ratio in order to keep it simple for passive investors who want to track the progress of their investments. This option essentially provides investors with the best of both worlds since they can leverage a boutique firm’s access to deals and established place in a market as well as enjoying transparency and regular updates on the progress of their specific deals.
Time is of the Essence in Today’s Pandemic Economy
Whether we enter a truly “new normal” or, as some optimistic economists predict, get back to the “old normal” sometime between 2021 and 2024, the time to act if you are concerned about your investment returns is now. Leaving capital in stocks and bonds is full-on foolhardy at this point in time; the markets are too volatile to trust and could send your hard-earned capital up in smoke without leaving you time to recover your losses prior to retirement.
“The pandemic has brought about a lot of disappointment and changes,” a lead therapist at San Diego’s Sharp Mesa Vista Hospital told MarketWatch at the end of September 2020. She added that many individuals nearing retirement may feel “a sense of urgency about the need ‘to get on with it’” both in terms of investing and in terms of having life experiences that one would expect to have in retirement. The best way to accomplish that in today’s economy is to invest in real estate in a predictable way that generates regular returns, and if you can access a “hot market” in order to do it, then so much the better.