Crisis Investing 101: The Most Recession-Proof Real Estate Niches
No one saw it coming. No one could have predicted it. It’s crazy to think that an infection that started with one or two people on the other side of the globe has brought the entire world to its knees.
And this thing is far from over. We all know that.
But consider that crisis is indisputably the absolute best place for smart entrepreneurs and investors to create wealth like never before.
Creating Wealth in a Time of Crisis
Joseph Kennedy, Bill Gates, and Steve Jobs created their companies in times of crisis. And you can be a hero too if you position yourself NOW to capitalize on opportunities in the coming months and years.
Did you know that Warren Buffett made a fortune buying financial stocks in the midst of the financial panic in the fall of 2008? He is known for his saying: “Be fearful when others are greedy, and be greedy when others are fearful.”
Buffett also said, when discussing going against the crowd:
“You pay a very high price in the stock market for a cheery consensus.”
Legendary investor, Howard Marks, of Oaktree Capital was buying financial stocks in Fall 2008, too. A reporter interviewing Marks asked about what he was selling. He informed her that he was buying financial stocks to the tune of half a billion per week—as much as he could get his hands on.
She seemed perplexed, to which Marks said, “If not now… when?”
(By the way, have you taken my repeated advice and read the wonderful Howard Marks book called Mastering the Market Cycle: Getting the Odds on Your Side? You should buy that right now. Then buy and read my friend Brian Burke’s new book on due diligence and passive investing called The Hands-Off Investor by BiggerPockets Publishing—but I digress.)
Marks and Buffett repeatedly talk about the concept of catching a falling knife.
You see, it’s easy to pick up a sharp knife from the kitchen floor without being cut. Even a child can do that well.
But the real skill is in learning to catch a falling knife. It takes skill, focus, and nerves of steel. But if you can do it well, as Buffett and Marks did in the Great Recession, you could be positioned to make yourself and your investors a lot of profit and wealth.
Marks says that to do this right, you don’t want to wait until the panic is over. Don’t wait until the dust settles, and the world is on the way back to normal. Don’t wait until people take a deep breath and see the light at the end of the tunnel.
He says you need to pull the trigger when things look worst—when gloom and doom abound and when pundits are saying, “The world as we know it is over.”
Though I don’t like the imagery, British nobleman Baron Rothschild reportedly said…
“Buy when there’s blood in the streets, even if the blood is your own.”
So, needless to say, I’m a huge advocate of buying real estate in a down market. While Marks’ knife is falling, and pessimism is at its height.
But I have a thought on how to play this card even better.
Assets That Do Well in Any Market
What if you could invest in real estate asset types that perform well in a great market… and in a recession, as well?
What if you could invest in or acquire assets that benefit from a degree of unwarranted panic-selling—and pay a very fair price to acquire them from mom-and-pop operators who were about ready to retire anyway?
2 Types of Investments Well Worth Your Consideration
The other day I was listening to a Crowdstreet webinar on the devastating effects of the coronavirus crisis to real estate markets.
(Please don’t listen unless you want to be depressed. It was full of doom and gloom, and honestly, it was unnerving to hear how bad things really are in so many sectors.)
About 44 minutes in, however, the expert panel took on a brighter tone. They said, in essence, that they wanted to turn to two asset types that were actually performing well in the past month—in the face of the devastating stock market roller coaster and real estate volatility among other asset types.
Can you guess what they are?
Self-Storage and Mobile Home Parks
They went on to say that…
“As we know, self-storage can be a counter-cyclical asset… Within the industry, they talk about the 4Ds. We’ve got downsizing, divorce, dislocation, and unfortunately death. These are real things, and this is where the self-storage market sits and the needs that it serves…. therefore, it puts self-storage into a relatively good spot from an asset class perspective.
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“Arguably right now [manufactured housing]is the darling of the commercial real estate industry. You know, if there is one thing that you can look at in terms of wanting to see the leading edge of where we are, go look at the public CRE markets, right? You’ve got hospitality REITs that are getting wacked 40 to 50 percent… They [manufactured housing]are positive because there has been no supply. It’s the most affordable form of housing in the United States and the NIMBY-ism (not-in-my-backyardism) basically makes this stuff difficult to obtain.”
What Makes Self-Storage and Mobile Home Parks Recession-Proof Investments?
So, you may be asking… WHY? What’s so great about these two asset classes?
I’m glad you asked.
Why I Love Investing in Mobile Home Parks
Mobile home parks have been called "the darling of all commercial real estate." That's a pretty big label considering this asset class was basically laughed at a few years ago.
But real estate’s most successful investor, Sam Zell, was laughing, too… all the way to the bank.
Here’s a quick list of what I love about this overlooked asset class:
- Recession resistant: Steady in all cycles
- Shrinking supply: Unique asset class
- Affordable housing crisis: Equates to increased demand
- High switching costs: Equates to low tenant turnover
- Fragmentation: Mom-and-pop owners
- Reduced costs: Low maintenance & capital expenses
- Less competition: Stigma of mobile homes
- Portfolio opportunity: REITs looking to buy stabilized assets from us
Why I Love Investing in Self-Storage
I just spoke to our operating partner who we invest heavily with. He informed me that he is renting self-storage at record rates in certain locations.
(This is in a week where hotels, airlines, retail, and restaurants are sucking wind like never before.)
He said that the four Ds—downsizing, divorce, dislocation, and death—are causing increased rental activity. And his facilities near colleges are getting an influx of students who are heading home for the year… or permanently. They are leasing online and going straight to their units while keeping their social distancing intact.
Self-storage REITs are the only real estate asset type that was positive in 2008. That doesn’t guarantee this will repeat in this cycle, but as you will see below, there are many reasons to believe this will happen again in the black swan event that we find ourselves in during 2020.
Here’s what I love about this asset class:
- Win-win: Recession resistant and strengthened in economic booms
- Rents are price inelastic: Tenants not particularly price-sensitive
- Tenancy duration: High switching costs & perceived vs. Actual length of stay
- Fragmentation: About 75% independent operators (top 3 <15%)
- Industry size: Similar to number of Subway, McDonald’s, & Starbucks combined
- Management: Easy to manage a mediocre facility—hard to manage a great one
- Powerful business plan: Mom-and-pop seller—institutional buyer
- Ability to meet demand: Simplicity of unit reconfiguration
- Ancillary income: Significant opportunities
- Staffing: Highly trained and supported staff vs. lockbox model
- Competition: Prohibitive cost of land for new competitors
- Value-adds: Low-cost opportunities
- Adaptability: Flexible lease terms & easy eviction process
Here is a graphic showing the performance of various real estate asset classes since 2000. Manufactured housing and self-storage lead the pack. And check out the dip in manufactured housing.
There was no dip!
This doesn’t mean that this cycle will repeat this time around. But it sure is encouraging for those of us who invest in these two asset classes.
So, Now What?
There may be a few more that will perform well. I’m thinking of data centers and perhaps healthcare facilities. I would look into both of those if I was you.
I’ve only touched on these two recession-resistant asset classes briefly here. But I’ve written e-books on mobile homes and self-storage. And look out for the new book I’m writing on self-storage investing to be published by BiggerPockets!
I hope and pray that you all stay safe in this unprecedented time. And I hope you utilize this time to prepare for some of the greatest investing opportunities of your lives! Because they are right around the corner.
So, what are you doing to prepare to build wealth right now?
Share below in the comment section!