by Guest Contributor, Professional Investor David Campbell, founder of Hassle-Free Cashflow Investing
As a professional investor with over a billion dollars of transactional experience, I believe a recession is looming, and in this email, I’m going to show you how to profit from it.
Recession and expansion of our economy are inevitable. It doesn’t take a rocket scientist to see that our current economic expansion is one of the longest in history. What goes up always comes down.
In 2008 the economy was in the toilet, but it was an incredible time to buy income real estate. Prices were low. Rents were high, and tenants were plentiful. Sellers were motivated to strike a deal. From 2008-2016, I built hundreds of single-family rental houses as a developer and helped hundreds of clients build investment portfolios of Hassle-Free Cashflow real estate.
In 2016 I put up the caution flag as the real estate market headed into a seller’s market. Prices had risen faster than rents. CAP rates had fallen lower than interest rates. Sellers were not motivated to anything except choosing between multiple all-cash offers at their asking price. Except for 1031 exchange buyers and a few “needle in the haystack” opportunities, I recommended my clients to stop buying real estate and invest heavily in mortgage notes. Mortgage notes are an excellent investment vehicle for security and hassle-free cashflow while you sit out the seller’s market. We will see the next buyer’s market when the economy goes into recession. Investors can then sell their income-producing mortgage notes and use the cash to scoop up properties at bargain prices.
This investing strategy does not require that you time a market with pinpoint accuracy. It does require that you pay attention and reallocate your portfolio as the general economy shifts.
In a period of inflation, prices will rise. That is great for borrowers and bad for lenders. While I would love to invest everything in the simple and relatively safe asset class of mortgage notes, inflation can be a massive drag on yield for note investors. A hassle-free cashflow investor owns some real estate through all market cycles because of the tax advantages and inflation hedge that mortgage notes don’t provide. The point is to reallocate your portfolio from mortgage notes to real estate and back again as the market cycle shifts. Fund managers do this by shifting their capital from stock equities to bonds. Real estate is a type of equity. Mortgage notes are a type of bond. To invest like the pros, you need to shift your portfolio allocation back and forth between equities (real estate) and bonds (mortgage notes).
Based on my interpretation of current economic conditions, a market shift is coming, and it’s time for a portfolio reallocation. While it will be exciting to be a buyer at the next market bottom, what does a Hassle-Free Cashflow investor do in the multi-year transition period between a seller and buyer’s market?
What does a Hassle-Free Cashflow investor do in a period of inflation during a stagnant economy (stagflation)?
My investing strategy during this transitional period is three-fold:
- Continue adding mortgage notes to your tax-deferred accounts (self-directed IRAs). Even during a down market, most “overwater” homeowners will continue paying their mortgages as long as the cost to own is not significantly above the cost to rent. I always have private mortgage notes available.
- Outside your IRA (in your personal tax capacity), acquire leveraged real estate that will benefit from the implementation of a business plan. You can’t just buy and hold passively in this upcoming market shift.
- Outside your IRA (in your personal tax capacity), acquire leveraged real estate that will benefit from the affordable housing sector.
In a period of recession, there is a surge in demand for affordable housing. While it could seem smart on the surface to buy rentals that appeal to the lowest-income tenants, that can be a problematic strategy. Low-income rentals are not hassle-free from a management perspective, and they often struggle to create enough gross income to pay the fixed operating costs of maintenance and insurance.
Mobile home parks provide the most affordable housing possible. The individual mobile homeowners are responsible for the maintenance and insurance costs of their trailer in addition to paying their space rent. The perfect mobile home park investment involves owning dirt and letting individual trailer owners pay you rent for that dirt.
In periods of recession, income growth and investment yield on mobile home parks exceed all other classes of investment real estate. Unfortunately, ownership of mobile home parks requires a large amount of capital and management experience that most investors do not possess.
You can force equity in a mobile home park by acquiring a park with deferred maintenance, under market rents, and a high rate of vacancy, and then solving all of those problems through a fresh injection of capital and superior management. It is feasible to acquiring a distressed mobile home park for all cash. Fix the deferred maintenance, raise the rents, and fill up the vacant spaces. The net operating income from the improved park could support a cash-out refinance, allowing investors a complete return of capital followed by infinite return monthly cashflow.
To learn more Hassle-Free Cashflow Investing strategies visit David Campbell’s blog at www.HassleFreeCashflowInvesting.com