Passively Investing in Real Estate During a Recession

It is important to make your money work for you, rather than simply working for your money, particularly during a recession. Our cash is literally becoming less valuable by the day, and our buying power is decreasing. With inflation at, let’s say 8% - meaning at its core that most things we purchase are becoming 8% more expensive - and our “high-yield” savings accounts collecting a 1% return, it is becoming clear to many what is happening to our cash. Passively investing in real estate is a great hedge against a recession, and inflation, and needed portfolio diversification.

Joint ventures or syndications allow everyone to have a smaller piece of a bigger pie. In joint ventures or syndications, investors pool their money together to purchase an asset. A sponsor, or general partner, puts the deal together by sourcing the deal, underwriting it, conducting thorough due diligence, arranging financing, bringing investors together to fund the deal, building a business plan, sometimes guaranteeing the loan. After closing, the sponsor is responsible for asset management, including managing the day-to-day operations.

Diversifying to real estate helps mitigate risk attached with our other streams of income. Perhaps contrary to popular belief, there is risk associated with most of our traditional income sources. If the pandemic taught us anything, it is that some “safe” streams of income are not so safe after all. Most recently, some companies have enacted hiring freezes, and we have seen some mass layoffs, as can be expected during a recession. Stocks and mutual funds have seen wild swings during the past two years, leaving many investors uncomfortable with the volatility and access to capital.

Passive investors can own pieces of larger assets that they otherwise could not have purchased themselves, and take advantage of all the benefits of being an owner. Some of the benefits include:

1. 1. Ownership

Generally passive investors are owners of the property and are entitled to a percentage of any refinance or resale of the property.

1. 2. Cash flow

Passive investors are entitled to a portion of the cash flow, allowing them to put their money to work in real estate without exerting the effort required by a sponsor.

1. 3. Tax benefits

Passive investors should always consult their tax professionals, and while it depends on the structure of the deal, passive investors sometimes are entitled to tax benefits as the owner of the property. These tax benefits can include: depreciation and reducing tax burdens.

1. 4. Less Headaches and Risk

While a passive investor is an owner of the property, the passive investor is not usually responsible for bringing all the investors to the deal, nor are they responsible for managing the property. The sponsor will form a team on the ground to ensure the property is inspected and, sometimes, retain a professional management company. The sponsor will also be responsible for handling all maintenance and managing contractors. Finally, if required, the sponsor will personally guarantee the loan on the property, meaning that passive investors will not be responsible for paying back the loan if something goes awry.

1. 5. Forced Appreciation

Smaller residential properties are valued based on comparable properties in the market, while larger commercial properties are valued based on their net operating income. A sponsor can force appreciation by raising rents or reducing expenses, thereby forcing appreciation to the property.

1. 6. Scaling Up as a Team

Some partnerships scale up together. For example, if a partnership owns a 20-unit apartment complex, the partnership may decide to sell the 20-unit, after experiencing appreciation, and purchase a 60-unit apartment complex. Scaling up increases the cash flow and equity for all involved.

1. 7. Hedge Against Inflation

During inflationary times, rents and property values increase. This is logical because the more money an individual is earning, the more that individual will spend to purchase a property or rent an apartment or storage space. Investing in larger commercial deals gives a passive investor a solid hedge against inflation by investing, at a large scale, in real estate.

There are other benefits to partnering with established real estate investors, and depending on your situation, it could be a win-win.