Real estate investors have experienced meteoric returns in their favorite asset class since real property began its recovery from the devastating global shutdowns mandated in 2020.
Whether you’re a buy-and-hold investor, a fix-and-flip professional, or even a private lender, there have been enormous and widespread real estate opportunities in 2021-2022.
The questions on investors’ minds today are:
- What impact will sustained high inflation have on returns?
- What types of real estate are poised to do the best in a recession?
We’ll take a look at those questions from the perspective of commercial real estate, but many of the observations and lessons from history relate just as well to residential real estate and decisions you might need to make about your primary residence as a sustainable financial asset.
Consistent Performers
Certain commercial asset classes, notably self-storage facilities and mobile home parks, have consistently performed well in recessions and are positioned to do so again even in the face of high inflation. For this cycle, certain multifamily assets should be added to the list, a result of underbuilding in the decade following the Great Recession (2008-2018) and again in 2020-2021.
Self Storage
Self-storage is a consistent high performer in periods of downsizing, dislocation, and budget cuts. It was the only publicly traded real estate asset type that had a positive return in 2008. There were several reasons that make it likely to repeat in recessions for decades to come:
- Costs can be driven very low. Management, on-site staffing, and security can all largely be automated. Marketing can be inexpensively performed locally because all the customers and your competition are local.
- Profit centers can be easily expanded. If the local moving company goes out of business, self-storage companies can expand their retail section for moving supplies and add rental vehicles.
- Tenants are incredibly sticky. Self-storage tenants tend to be long-term customers who are not as price sensitive; it is not convenient to move or acceptable to sell/throw away the storage contents. A $25 per month increase in the rental rate could represent a 15%-20% or larger increase yet still come in well under what tenants are paying for their cable services or cellphones.
- There’s high potential for lucrative exit strategies. Self-storage is a very fragmented industry—well over half the facilities are owned by individuals with only one or a few facilities. Yet, as we’ve seen during the past 15 years, they are frequently courted by hedge funds and institutional buyers flush with cash looking to pay high prices for assets that cash flow. This provides an opportunity for the individual investor to buy a facility at great prices in a recession, benefit from the advantages previously discussed, and exit with a great return.
Mobile home parks
Recessions drive families and businesses to eliminate luxuries and focus on the bare necessities of life (e.g., food, shelter, and clothing, plus payroll in the case of businesses). Those entering a recession with a stronger capital position can hold on longer in their single-family home or large office building (more on this later), but if the recession is long and deep enough, it will cause nearly all individuals to dramatically cut expenses.
Mobile home parks have been a consistent performer for decades. They typically don’t respond to the dramatic ups and downs of the economy, making them a stabilizing force in your portfolio during recessions. For housing, moving along the “downsizing waterfall” ends in two good options before homelessness or moving in with family: mobile home parks or older, smaller apartments.
Many families aren’t ready for, or simply won’t fit in, a small one-bedroom or efficiency apartment and will resist high-density living for a host of reasons. Owning their own home in a subdivision with a yard and some distance to their neighbors for pad rent that is likely lower than their food bill is appealing to many. Like self-storage customers, mobile home park tenants are much less likely to move than an apartment renter. The costs to relocate their home is tens of thousands of dollars more than they can come up with and simply not a prudent use of their money, even if they do have it set aside.
Multifamily apartments
The current stock of multifamily properties, those often classified as Class B and Class C that focus on working-class tenants and that were built more than 20 years ago, are poised to outperform during the next few years.
First, they share many of the same qualities as mobile home parks. They are at the end of the downsizing chain for families needing to cut back, and they represent a solution to a basic need for shelter. Although high interest rates have caused many recent apartment purchases to fall out of contract or require the sales price to be renegotiated, the corresponding high inflation has provided offsetting increases in revenue, enabling many buyers to continue, potentially with even higher projected returns.
The near total void of housing construction that plagued the United States during the Great Recession a decade ago finally started to be addressed before the pandemic, only to be exacerbated by another construction shutdown in 2020 that created supply shortages and dramatically higher construction costs that still exist today. All of these factors have dissuaded new construction in the multifamily space, keeping occupancy rates near record highs and causing unprecedented demand for the existing stock of multifamily assets. It is hard to imagine this demand lessening even in a recession, where historically the sector has softened
Funding Is Vital to Success
How efficiently you fund your purchases and operations determines your level of performance and returns—and whether you survive at all in a deep recession. For example, many sponsors of multifamily properties are still using the techniques that worked well in the 2010s: fund with short-term bridge loans, rehab, assume they can then raise rents, get a higher valuation, and be able to replace expiring temporary financing with a long-term fixed rate loan. That can be an extremely risky business model in a recession where valuations could be lower; further, banks may not lend, even if there is sufficient equity to do so.
What is the solution? You must have tremendous staying power. In the world of investing, staying power equals capital. Times of crisis are emotional times for all of us, specifically the fear you may not make it to the other side as well as excitement for new opportunities. Those with large financial reserves fall in the excited camp; those with lean margins are filled with fear.
Many who are in the excited camp were there also in 2020 as they entered a period that was uncertain while they enjoyed substantial liquidity. These people had embraced a core practice of those who’ve obtained generational wealth: infinite banking.
Infinite Banking
Infinite banking is storing family emergency funds, business and property operating reserves and capital for your investments in uniquely designed whole life insurance. This essentially allows you to operate your own family bank.
Your dollars earn uninterrupted compound interest in a private, tax-advantaged account achieving several times current bank rates. Those who practice this centuries-old method of capital management find themselves in positions of high liquidity when they encounter revenue shortages and when unique buying opportunities come up.
You’re not compelled to put the money earning nothing in the bank to work. It is already at work, compounding at high rates in a tax-advantaged and protected asset. You’re able to use a life insurance company or a traditional bank’s money as a loan with terms and payback schedules you dictate—not the banker. There is no application process to manage and no credit score to evaluate. Given the guarantees within these types of policies, your cash value only goes in one direction—up. Plus, you have a built-in line of credit that collateralizes your cash value and that is accessible when you need it—with terms that fit your situation.
Despite its many benefits, real estate is not foolproof. There are inherent risks, especially during recessions. That is why the wealthiest individuals in the world have a comprehensive plan consisting of other financial products and strategies that help mitigate these risks and add to their overall growth of wealth. The key features of this asset are privacy, tax-free growth, and guaranteed financing.
This complementary asset, infinite banking, is a uniquely designed insurance policy that is offered by a mutual life insurance company. The purpose of this vehicle is to build liquid, immediate wealth that can be utilized right away; it’s a personal banking system without limits and shielded from tax. Sophisticated business owners and investors have used this account as a foundation for their wealth for hundreds of years without fail.
So, why isn’t this account mainstream today? For the wealthy, it is. For the rest of us, Wall Street has drowned out everything but its own financial agenda. But now, with the right advisor and knowledgeable company, you too can establish an effective foundation to magnify your real estate gains. The key features are more valuable today than ever before.
A real estate investor’s best friend, and worst enemy (especially in recessions) is financing. When credit is good, money is cheap. When credit is bad, money doesn’t exist or is drastically expensive. That caused many bankruptcies in 2009, 2020, and every previous economic correction or financial crisis.
The guaranteed financing feature allows an owner to borrow from this account at the rate it is earning. The financing feature is similar to a line of credit. When you make payments to your principal loan balance, you can take another loan at any time—as long as the total balance of the loan does not exceed the total cash value in your account—without any repayment requirement.
Start today to grow your war chest. Establish and maintain abundant amounts of liquidity to support months and months of staying power. Then, with a clear mind, sit back with a feeling of abundance and watch for opportunities to prosper.
Gary Pinkerton is a wealth strategist, veteran, bestselling author and real estate investor. He’s passionate about freedom, small business, building wealth, legacy, and reducing taxes.
A graduate of the U.S. Naval Academy, he commanded the nuclear attack submarine USS Tucson, was a Pentagon division director for the Joint Chiefs, and a senior ethics professor before retiring as a captain.
Pinkerton owns and helps others couple high cash-value life insurance with real estate and alternative investments.
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