Patrick Grimes is the founder of Invest on Main Street, a private equity firm managing passive multifamily investments in emerging markets.
As an investor with a diverse portfolio and in-depth real estate industry experience, I have navigated many economic “roller coasters.” And I’ve always found that downturns, despite their challenges, provide a unique opportunity for rapid portfolio growth.
Based on my experiences, here’s how to unlock the opportunities that exist during downturns, with some practical strategies for using recessionary acquisitions to do so.
A Proven Strategy: The Tortoise, Not The Hare
My experiences have taught me the importance of cautious, strategic investing. This means not speculating on pre-development or new construction in boom economies, but instead focusing on recession-resilient markets, existing construction and consistent cash flow.
The key is to invest like a tortoise, not a hare. By prioritizing a cautious approach and embracing lower leverage, I found success. From a single-family portfolio, I founded my company, scaled up to larger multifamily apartment complexes, and built a recession-resilient and asset-protected portfolio for investors to diversify their retirement investment strategy.
Navigating The Current Economic Landscape
Today’s economic landscape has been reshaped by diverse factors and unique challenges for investors, including:
• The Covid-19 pandemic.
• Surging inflation.
• Escalating material and labor costs.
• Rising interest rates.
• Decreasing property valuations.
• Surging insurance premiums and taxes.
• Increases in delinquencies.
• Extended eviction processes.
These shifts, though troubling, highlight the importance of a diversified portfolio and the need for strategic and thoughtful investment approaches.
Unlocking The Upside During Downturns: Recessionary Acquisitions
One of the crucial lessons in navigating downturns comes from Warren Buffett: “Be greedy only when others are fearful.” I have always hated that quote because the engineer analyst in me wants to not be greedy or fearful, but instead be calm and calculated in my analysis of opportunities. But Buffett’s remarks are correct, and times of economic fear are fertile grounds for great deals.
During earlier economic downturns, investors who emerged victorious often had a common strategy: They made their returns on the initial buy, focused on distressed operators, not assets, and traded forward quickly.
Here are the seven steps of recessionary acquisitions:
1. Immediate Cash Buys
The strategy kicks off with a cash buy, allowing investors to quickly seize distressed assets at the most advantageous terms. Cash purchases often provide the buyer with greater negotiating power and eliminate the extended timeline and uncertainties associated with trying to get a loan in a volatile debt market. This quick initial cash outlay provides the best basis for future transactions, thus setting the stage for rapid expansion.
2. Quick Refinancing
Almost as soon as the first asset is acquired, the next step is rapid refinancing. By doing this, investors can free up their initial capital investment without waiting for the long-term appreciation of the property. This liquidity is critical to the strategy’s speed, enabling the investor to move on to subsequent acquisitions.
3. Purchasing The Second Asset
The capital freed from the refinance doesn’t sit idle; it’s immediately used to purchase a second asset, also in cash. Again, cash transactions are key to this strategy, allowing investors to secure favorable deals swiftly.
4. Sale Of The First Asset
As soon as the second asset is in the portfolio, the first asset is sold. The idea here is that if the investor has made their return on the initial buy—thanks to the favorable terms the cash purchase secured—they don’t need to hold on to the property for the long term. With minimal effort, investors can swiftly liquidate and move on.
5. Utilizing 1031 Exchanges
On selling the first asset, a 1031 exchange is initiated. This tax-deferral mechanism allows investors to roll the proceeds from the sale into the purchase of a third asset without incurring immediate capital gains tax. This exchange isn’t just a tax-saving mechanism; it’s a critical wealth-building tool that allows investors to continue growing their portfolios.
6. Multiplying Assets
By repeatedly applying this method, investors can quickly turn one property into two, then two into four, and four into eight very quickly. This high-velocity strategy stands in stark contrast to traditional long-term buy-and-hold methods. Rather than waiting for the asset to appreciate—or investing in costly improvements that may not keep pace with deflating market prices—the emphasis is on quick, calculated moves to step up portfolio growth at each acquisition.
7. Rapid Portfolio Diversification
The result of this high-velocity strategy is not only rapid growth but also rapid diversification. With each new asset acquired, the portfolio becomes more diverse, helping to spread risk and protect against market fluctuations.
Timeless Investment Principles—Even In Recessionary Times
It’s important to note that the risks are very great if you are not careful and do not structure your investments correctly. Many things can go wrong if you don’t follow the principles and end up being the distressed owner that you are buying from in a downturn.
Despite the changing economic climate, certain traditional investment principles remain crucial. One of the most fundamental is maintaining healthy cash flow. Although generating considerable cash flow today might be challenging, it can be achieved by adopting an investment strategy that prioritizes the swift expansion of holdings. It is also critical to maintain a low loan-to-value ratio on refinanced loans, limited to around 50% to ensure stability in cash flow and valuation during short-term holds.
Securing adequate insurance and reserves and investing in recession-resilient asset classes and markets adds another layer of security. These principles, when combined with a strategy focused on swift capital expansion, can offer rapid and diverse portfolio growth.
In this way, economic downturns are not dead ends; they are detours to better opportunities. Embrace them and make the most of your investments. While the journey may be difficult, the rewards are undoubtedly worth it.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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