Are You Ready to Invest in a Volatile Real Estate Market? - Real Estate Investor Magazines (2024)
By Jimmy King, Founder, Contrarian RE Fund 1, LLC
The recent announcement by Blackstone the final close of its latest global real estate fund, Blackstone Real Estate Partners X (“BREP X”) with $30.4 billion of total capital commitments (the largest real estate or private equity drawdown fund ever raised), reflects confidence for investing in real estate during periods characterized by market volatility. In a news release announcing the fund, a Blackstone executive stated that the company has made some of their best investments in periods characterized by market volatility and dislocation.
The market is certainly volatile at this time, and plentiful opportunities exist to invest in distressed real estate.
Being successful at these types of investments requires the ability to identify and acquire real estate properties that are being sold at steep discounts. Many of these opportunities exist in multifamily and manufactured home communities that are suddenly being made available for well under the original asking price as owners struggle with increased debt and/or escalating fees. Some are even selling for as little as 60 percent of their original value (2019 highs vs today) . And while opportunities exist, being a successful investor requires a great deal of insight, information and investigation before a purchase is made.
The Contrarian RE Fund 1, LLC, actively researches and identifies distressed real estate assets and reviewing if they are viable options for the fund’s “Value-Add” business model. If they are, the team of experts make purchase decisions regarding the properties by investigating the level of enhancements and improvements that need to be made for each property.
The “Value-Add” business model has realized significant profits since it was first implemented in 2009. By purchasing properties with low rental rates and making substantial physical and operational enhancements that improve both the property and resident experience, the model has been proven to be able to consistently achieve higher rental rates and refinance initial capital investment.
Some of the key factors to consider when making the decision to join a fund that invests in distressed real estate includes:
Are you interested in investing in a massive fund, like the $30.4 billion fund structured by Blackstone, or a fund that is less than $50 million? The key differences between massive and smaller investment funds are (JIMMY, WHY WOULD A PERSON CHOOSE A SMALLER FUND? FOR EXAMPLE, DOES A SMALLER FUND PROVIDE A FASTER RETURN ON AN INVESTMENT? ARE THERE FEWER PENALTIES/RISKS? ETC)
ADVERTIsem*nT
Personal Interaction
A smaller fund will provide you with the opportunity to interact on a personal level with the management team, whereas a larger fund won’t go beyond the standard paperwork to update you on your investment. You’ll also have the opportunity to meet members of the team (the craftspeople and contractors who are working on a real estate renovation that you’ve invested in, for example). It’s highly unlikely that the management team at Blackstone is sharing their cell phone numbers with investors in that fund.
Decision Making Process
As an outcome of the personal interaction with the management team of a small fund, you’ll have the opportunity to contribute to the decision making process. While the team for a smaller fund brings strong real estate market knowledge on a local level, they will also likely be willing to accept input and ideas from knowledgeable investors. Opportunities will present themselves that the management team may not be aware of, but that investors can bring to the table, for the good of everyone.
Intangibles
While the opportunity to invest in distressed real estate is intended to show a profitable return, there are some intangible outcomes as well. For example, renovating properties will help to improve neighborhoods and communities by eliminating blighted real estate. This type of contribution goes far beyond the initial investment, especially when investors are personally familiar with the property and can visit it and feel pride in what they’ve accomplished.
As more and more opportunities to invest in distressed properties present themselves, the time to act is now. If this seems like an appealing investment option to you, be sure to take the time to research what’s available and which type of fund is the best fit for you.
James King is the Founder of the Contrarian RE Fund 1, LLC, and along with his team of professionals has successfully owned and operated more than 2,000 units across the United States. He can be reached at KingCommunities.com ([emailprotected]) or 562-208-7649.
Invest for the long term. To help calm the jitters caused by short-term fluctuations, it's best to focus on long-term trends and your long-term goals. Volatility isn't necessarily a bad thing. As the chart on the next page shows, dramatic short-term changes in value can be positive or negative.
You get to set the rent price, but if you are overpriced compared to comparable units within the area, you will likely have empty units, which decreases the value of your investment. In that sense, real estate is a volatile investment because the market largely dictates the value of a given piece of property.
The housing market is predicted to improve overall, and it may be a good time to invest in real estate. Fortunately, for those beginning their search for a home, experts predict a slower increase in home prices this year. However, this will vary greatly and will depend heavily on the local market supply.
In terms of averages, stocks have tended to have higher total returns over time. The S&P 500 stock index has had an average annualized return of around 10% over very long periods (higher if you include dividends), while average annual real estate returns are often more in the 4-8% range.
Buying stocks in this way lowers your average cost-per-share, which helps to improve your portfolio's performance when markets eventually rebound. The process is the same when a stock rises quickly.
If your diversification is still lined up with your goals, then you likely don't need to make changes and you can ride out the market volatility. If it's not, then realigning your allocation based on your goals, risk tolerance, and how long until you'll need the money will help you achieve long-term success.
Real estate offers an easy way to invest and save for the future. The best words to summarize the real estate investing landscape halfway through 2024 may be "cautiously optimistic." While home price increases have slowed since the madness of 2022, so has inflation, which should help reduce the costs of construction.
Buying a home this year, particularly in early 2024, might mean you're able to beat the rush, as the market could get more crowded if or when rates drop further. Waiting, however, could give you more options to choose from as supply improves, along with the potential for increased mortgage affordability.
If your credit score is strong, your employment is stable and you have enough savings to cover a down payment and closing costs, buying now might still be smart. If your personal finances are not ideal at the moment, or if home values in your area are on the decline, it might be better to wait.
The 2% rule is a rule of thumb that determines how much rental income a property should theoretically be able to generate. Following the 2% rule, an investor can expect to realize a positive cash flow from a rental property if the monthly rent is at least 2% of the purchase price.
Unlike real estate, stocks are liquid and are generally easily bought and sold, so you can rely on them in case of emergencies. With so many stocks and ETFs to choose from, it can be easy to build a well-diversified portfolio.
Over the long term, our research found that REITs have outperformed stocks. Since 1994, three REIT subgroups stood out for their ability to beat the S&P 500. Here's a closer look at these market-beating REIT types.
A volatile market presents many opportunities for profit. However, the possibility of loss is also heightened. Volatile markets are riskier than stable markets but the significant price movement during volatility opens up many trading opportunities in the forms of overbought or oversold securities.
It's likely that you've heard of it in a negative way, as something to be avoided. The numbers, however, show that if you are investing for the long-term, as most people do, volatility is actually something you should embrace.
Money that you'll need soon or that you can't afford to lose shouldn't be in the stock market—it's best invested in relatively stable assets, such as money market funds, certificates of deposit (CDs), or Treasury bills.
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