Most investors today are acutely aware of recessions. We were around for the US-driven global recession that spanned from 2008 to 2010. This was among the most crippling economic downturns in recent memory. If you live in Nigeria, you’ve also experienced another recession that hit the country much harder in 2016. This was when a downturn hit global oil prices and we saw Naira values fall apart against the Dollar, inflation skyrocket and economic growth turn negative.
Having seen all that, investors are understandably worried about a repeat. So one of the questions we get a lot when we talk to investors about investing in dollar-denominated real estate investments with us is this:
What happens if a housing market crash like what we had in 2008 happens again? What happens to my investments?
This is a question we have spent hours of research, modeling, and careful deliberation trying to answer. We have designed our business model to respond to the insights we’ve gathered from this process. We can tell you with confidence how your investments will perform in a recession and the steps we have taken to protect your funds from extreme downturns.
- Asset Class Choice
The reason we choose to invest in real estate as an asset class is that it has a far lower risk profile than stocks and bonds while providing a similar level of returns. (Read: “Buy a House, It’s Safer than the Stock Market”)
In addition to the inherent safety of real estate, we also carefully select properties that are selling below its market value. This is to keep with the principles of value investing that encourages having a margin of safety. What this means is that our investments are even less risky, as prices during a market downturn are still not likely to fall below our own purchase price. This gives you relative peace of mind that your capital is well protected in the event of a downturn and that your returns are more probable. Because the demand for real estate is constant and the asset is tangible, once an economic recovery is underway, any decline in value caused by a recession will be quickly reversed. Land and property will always be valuable.
2. The Stickiness of Rental Returns
Cashestate’s returns are mostly generated from rental incomes and cash flow from rent rather than from capital gains. This is important for many reasons.
For one, capital gains depend on rising values of homes, which is something we don’t fully control and which may or may not materialize. Also, when recessions hit, home prices tend to fall precipitously. Rental prices, on the other hand, tend to only decline slightly in recessions, and in many cases, they stay the same or even rise. During downturns a lot of people lose their homes and switch to renting, increasing the demand for rents. This is why we select our markets and purchases carefully so that the rent from our properties already cover our expected returns every year. Any gain in the value of the properties become an additional bonus to you, the investor. In fact, because rent levels tend to stay the same in recessions, falling house prices become a buying opportunity for us to add new properties to the portfolio at cheaper prices leading to higher rental returns for our investors.
3. Equity Approach
Most people who buy US properties purchase it with debt. We don’t. We prefer to buy our properties with equity and in very rare cases we might take on a small amount of debt to finance remodeling. The reason for us is simple. A lot of the damage to the housing market in the last recession came from people who had high amounts of debt on their properties while betting on continuously increasing prices. When prices fell, sometimes even as little as 7%, these people found that the value of the debt they carried was higher than the value of the property they were paying for, leading to mass defaults.
In other cases, when economic hits affected their income, they found themselves still stuck with debt payments from these loans. As we all know, if you do not make those payments, you’re getting your house repossessed.
By removing debt, we make our portfolio more resilient, we don’t have to worry about bank payments, price declines and other conditions. The best part is, while we may pass up on some opportunities today because we want to stick to our equity first approach, in a downturn, some of those who are taking on a lot of debt today will be forced to sell at low prices which we intend to take advantage of.
4. Our Market Approach
Cashestate selects for markets where there are strong fundamental economic forces that provide an advantage for our investment portfolios. We favor areas with a young educated population, manufacturing job growth, university presence and other signals. Even though they are affected by economic recessions, they are not likely to be sustained declines. We also keep our eye on several different markets and try to diversify the markets we buy property in. Given the last recession, the likelihood of another nationwide property market bust is highly unlikely. It’s more probable that individual markets may have downturns while other markets continue to grow. Because of this, we always look across over 30 markets for which represent the best long term buying opportunities and which are currently overbought and thus, vulnerable to a downturn. As Warren Buffet would say, no matter how good of an investment an asset is, you’re not likely to get good performance from it if you overpay. We don’t overpay.
The final step we take in protecting your investment is to purchase insurance policies on it. These policies guarantee that in the case of loss, damage, even vacancy, we are compensated to the extent that our investment returns are not negatively impacted. In some cases, the property value or lost rent amounts are paid out to us if need be.
In all this we want investors to understand that we go to great lengths to make sure that we protect your investments from the most extreme economic conditions one can expect. However, despite the best risk management procedures anyone can engage in, you can never completely eliminate risk from an investment. Investors should always remain aware that investment comes with risk and markets can be unpredictable.
No one does a better job of generating risk-adjusted returns for you in US dollars, than Cashestate. You should sign up and fund your account today.