{"id":179808,"date":"2024-12-13T14:44:03","date_gmt":"2024-12-13T21:44:03","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=179808"},"modified":"2024-12-13T14:44:21","modified_gmt":"2024-12-13T21:44:21","slug":"how-im-protecting-my-investments-from-everything-that-could-go-wrong","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/how-im-protecting-my-investments-from-everything-that-could-go-wrong","title":{"rendered":"Here’s How I’m Protecting My Investments From What Could Go Wrong Next Year"},"content":{"rendered":"\n

Has the Federal Reserve defeated inflation? Where are interest rates headed, and when?<\/span><\/p>\n\n\n\n

I don\u2019t know the answer to those questions, and you should be skeptical of anyone who claims to. But that isn\u2019t stopping me from investing in real estate\u2014far from it. <\/span><\/p>\n\n\n\n

Here\u2019s how I\u2019m protecting against the risk of inflation as we enter 2025, as well as the risk of interest rates staying higher for longer than any of the pundits expected. <\/span><\/p>\n\n\n\n

Investment Mix: Equity and High-Interest Debt<\/span><\/h2>\n\n\n\n

During inflationary periods, fixed low-interest debt investments (like bonds) lose money. <\/span><\/p>\n\n\n\n

Rewind to 2022, when inflation hit 9.1%, while some existing Treasury bonds paid 2% interest. Bondholders effectively lost 7.1% on them\u2014or sold them at a steep loss. <\/span><\/p>\n\n\n\n

Equity investments, specifically stocks and real estate, have historically held their own against inflation. Businesses can raise prices on pace with inflation, and property owners raise rents. <\/span><\/p>\n\n\n\n

Most of my investments are equity investments in real estate and stocks. <\/span>I <\/span>do<\/span> own some high-interest debt investments <\/span>as well<\/span>, secured by real property.<\/span> If inflation spikes again, it\u2019ll eat into those interest returns, but I\u2019ll still come <\/span>out<\/span> ahead. <\/span><\/p>\n\n\n\n

The greater risk of inflation to real estate equity lies in financing and exit cap rates. <\/span><\/p>\n\n\n\n

Long-Term, Fixed-Interest Financing<\/span><\/h2>\n\n\n\n

For several years now,<\/span> our Co-Investing Club has been wary of short-term bridge debt and floating interest rates.<\/span> <\/span><\/p>\n\n\n\n

Neither I nor any of our investment club members know how long interest rates will stay high. If inflation flares up again\u2014a real <\/span>risk under some of President Trump\u2019s proposed policies<\/span><\/a>, such as tariffs\u2014interest rates could stay <\/span>high longer<\/span> than anyone expected in mid-2024. <\/span><\/p>\n\n\n\n

When we meet each month to vet a new <\/span>passive real estate investment<\/span><\/a>, we like to see some <\/span>kind of<\/span> protection in place against high interest rates.<\/span> That could mean fixed-interest financing, <\/span>or<\/span> a rate cap, <\/span>or<\/span> a rate swap, or some other device.<\/span> <\/span><\/p>\n\n\n\n

We also like to see plenty of time remaining before the debt expires. That gives the operator time to either sell or refinance in a good market for doing so. <\/span><\/p>\n\n\n\n

Strong Cash Flow<\/span><\/h2>\n\n\n\n

There\u2019s nothing inherently right or wrong about investing for cash flow versus appreciation. I like to see both. But I prioritize cash flow.<\/span><\/p>\n\n\n\n

Why? Because investments with strong cash flow can wait out buyer\u2019s markets. We can sit back and enjoy 8% to 13% in distributions each year without feeling any rush to get our money back. The investment we just vetted as a club pays 8.6% in cash flow in Year 1, rising to 12.7% once stabilized. <\/span><\/p>\n\n\n\n

In contrast, investments with narrow cash flow can quickly <\/span>find themselves losing<\/span> money each month if conditions don\u2019t go their way. And investors are all impatient to cash out and get their money back if they\u2019re not earning any cash flow. <\/span><\/p>\n\n\n\n

As a real estate investor, strong cash flow gives you the luxury of time. You can cash out when the time is right\u2014and enjoy plenty of income <\/span>in the meantime<\/span>. <\/span><\/p>\n\n\n\n

Investments That Don\u2019t Hinge on Interest Rates<\/span><\/h2>\n\n\n\n

I wrote earlier this year about why <\/span>I\u2019m <\/span>done<\/span> hanging on every word from the Federal Reserve<\/span><\/a>. <\/span><\/p>\n\n\n\n

That cash-flowing investment that our Co-Investing Club just vetted? It doesn\u2019t hinge on the Fed cutting (or raising) interest rates. The plan is to refinance somewhere in the three-to-five-year range to return 100% of our investment capital as an \u201c<\/span>infinite returns<\/span><\/a>\u201d play. <\/span>But even if rates remain high, the investment will keep <\/span>on<\/span> paying strong cash flow until the right moment comes for <\/span>either<\/span> refinancing or selling.<\/span> <\/span><\/p>\n\n\n\n

And that\u2019s just the start. A few months ago, we invested in a land-flipping fund that doesn\u2019t require low interest rates to succeed. It turns over its parcels every 4.1 months on average and has <\/span>successfully<\/span> earned fund-level returns in the low 30s since inception. The fund pays 16% in distributions like clockwork. <\/span><\/p>\n\n\n\n

Over the last few months, we\u2019ve also invested in several <\/span>private partnerships<\/span><\/a>. <\/span>These include a series of house flips<\/span>, as well as<\/span> a project to build several new spec homes.<\/span> <\/span><\/p>\n\n\n\n

Could lower interest rates add a tailwind to help inflate our <\/span>returns even higher<\/span>? Sure. But if the headwind of higher interest rates hits, these investments will do just fine. <\/span><\/p>\n\n\n\n

The same can\u2019t <\/span>be said<\/span> for some multifamily syndications financed with short-term bridge debt. <\/span><\/p>\n\n\n\n

Opportunistic Distressed Deals<\/span><\/h2>\n\n\n\n

While we focus on downside risk protection first as an investment club, we also see <\/span>that there\u2019s<\/span> plenty of opportunity right now to buy <\/span>up<\/span> great deals at a discount. <\/span><\/p>\n\n\n\n

Last month, we got together and vetted a deal that was <\/span>being sold<\/span> at a <\/span>huge<\/span> discount by a hedge fund that had gotten into trouble with floating-rate debt. It had to liquidate, and its loss became our gain. <\/span><\/p>\n\n\n\n

That property is already paying 8% in distributions, forecast to rise to 9.5% within a year or so. We expect over 20% annualized returns on it, with a medium-term turnaround of around three years. <\/span><\/p>\n\n\n\n

And like every other investment <\/span>we look at<\/span>, we view it through the lens of risk. If interest rates are still high three years from now, the operator can hold it another year or two and wait for a better market for selling. <\/span><\/p>\n\n\n\n

Diversification<\/span><\/h2>\n\n\n\n

As<\/span> a backdrop for my entire investment real estate strategy<\/span>, I value <\/span>diversification<\/span><\/a>.<\/span> <\/span><\/p>\n\n\n\n

Other people can try to pick the next hot market or hot asset class. I invest passively in all property types, all across the U.S. <\/span><\/p>\n\n\n\n

Think you can time the market? Be my guest. I used to play that game, and it never worked out the way I thought it would. The market is just too complex and unpredictable. <\/span><\/p>\n\n\n\n

Today, I practice <\/span>dollar-cost averaging<\/span><\/a>, investing $5,000 <\/span>each month<\/span> in a new group investment through SparkRental\u2019s Co-Investing Club. <\/span><\/p>\n\n\n\n

Don\u2019t Be Clever\u2014Think of the Long Term<\/span><\/h2>\n\n\n\n

Diversification isn\u2019t cute or clever. It doesn\u2019t make you sound like a smarty-pants at cocktail parties. <\/span>But if you invest across many timelines, markets, property types, and operators, you\u2019ll still be standing in the <\/span>next<\/span> market downturn when everyone else got bowled over by an unexpected shift.<\/span> <\/span><\/p>\n\n\n\n

I <\/span>might<\/span> take a hit occasionally on an investment.<\/span> But my portfolio as a whole will keep growing and keep me in the game so I can keep investing while everyone else tries to pick themselves up off the floor. <\/span><\/p>\n\n\n\n

\u201cClever\u201d is a fool\u2019s errand. Invest for longevity.<\/span><\/p>\n\n\n\n \n

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Has the Federal Reserve defeated inflation? Where are interest rates headed, and when? I don\u2019t know the answer to those questions, and you should be skeptical of anyone who claims […]<\/p>\n","protected":false},"author":158586,"featured_media":179811,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4433],"tags":[],"class_list":["post-179808","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-opinion"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/179808","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/158586"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=179808"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/179808\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/179811"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=179808"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=179808"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=179808"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}