With the stock market in a virtual free fall and the drumbeat of a recession that is long overdue, what is a real estate crowdfunding investor to do? The short answer is to be cautious, but do not panic. Our economy has always been very cyclical and real estate in particular has always had very distinct cycles. The last 6 years have been highlighted by a very slow and steady recovery from our 2009 lows, but all good things must come to an end and we as investors must be prepared.
No one knows exactly when the next recession will hit, but we do know it will hit. We are over due. I suspect it will not be as severe as the “Great Recession”, but there will be significant pain for investors if they do not proceed cautiously. Over the last 6 months, I have changed my investment philosophy and criteria for both equity and debt investments.
On the real estate debt side I have pulled back quite a bit. I still invest with Patch of Land, but I am now very picky on which loans I pick up. I no longer invest in homes that will sell for over $500,000. The high end will be the first to go south in a slowdown. Most of my high dollar fix and flip loans from 2014 took well over a year to sell and some sold for 75% of the projected ARV. All my Patch of Land investments paid on time and I had no defaults. One high end loan on Realty shares returned all of the principle, but did not pay any interest. My new loan criteria is an LTV of 65% or less with an ARV of between $125,000 and $400,000. Ie house selling close to the median price. The very cheap houses in the “ghetto” are also way too risky at this stage of the cycle. Invest in properties that will have the most buyers when complete.
On the corporate debt side, I redeemed my investment in the Broadmark commercial debt fund, I turned off auto investing with Funding circle, and I am no longer investing with Bolstr. I recently wrote a blog post about my reservations with Bolstr and may invest again in the future if they revamp their due diligence process.
On the equity side, it’s also time to be a bit cautious. I am staying away from deals that are highly leveraged (over 75%) and from deals that rely on variable rate debt. 80% of my investments have been in counter cyclical plays such as self-storage and mobile home parks. I am also considering value add projects that have a compelling story. I think it’s the wrong time to invest in the typical low cap rate strip centers or office buildings. It will be very tough to make money on sub 6% cap rates with either rising interest rates or a recession. Building up some cash will be prudent as bargains pop up over the next few years.