The combination of COVID, higher inflation, growing urban problems, and war have led to growing concerns from many investors on what they should do now to protect their net worth and re-allocate investments to limit exposure to market disruptions.
We are very fortunate at First Guardian Group to have developed relationships with many experienced investors and investment managers over our 19+ year history. While no one should be relied upon to provide a perfect roadmap to navigate the current bumpy environment, there are several guiding principles that are being followed by many of our knowledgeable clients that we would like to share in this blog post.
Cooler Heads Often Prevail
When reading today’s frequently troubling headlines it is understandable that many investors will be motivated to take immediate actions that may prove to not be in their long- term best interests.
Avoid the temptation to make headline driven investment decisions. Take a pause and seek out advice from several creditable sources before changing course. If you are motivated to make investments in new areas, start slow, and invest the time to learn more about how to evaluate and monitor new investments before taking a deeper dive.
As an example, we are often referred to real estate investors who are learning about DST investments for the first time. Many begin their educational journey by first making a small cash investment in a DST and holding it for a period prior to selling a rental property so they can gain more knowledge to determine if DSTs should become part of their future 1031 replacement property strategy.
Confronting Inflation
It has now become very common for our investors to consider the impact of inflation when making investment decisions. While investments in real estate can provide an excellent inflation hedge, some real estate asset classes provide greater flexibility to allow investors to raise rental income to keep pace with rising prices. In particular, residential properties including single-family rentals and apartments, senior and student housing, and storage are among the classes of real estate that provide investors with the greatest flexibility to raise rents to meet changing market conditions.
By contrast, properties having long term leases such as triple net (NNN) investments including retail, service, office, healthcare, government, etc. commonly have limitations on the amount of permitted annual rent increases. Most triple net properties are restricted to maximum annual rent adjustments of no more than 2% to 3% which may not be sufficient to keep up with rising costs and could lead to a loss of value relative to other investment options.
Neutralizing Volatility
During volatile periods, many financial advisors advocate staying the course with well-diversified investments that have sound fundamentals. Real estate investments tend to be less volatile since they are not traded as frequently as equities and values are driven more by strategic trends than by the latest headlines. Our experienced real estate investors however closely watch and consider reallocation of their funds to better match anticipated long-term shifts in population, employment, and quality of life considerations that impact the value of their investments.
Many are now liquidating properties in troubled urban areas and moving their equity to more landlord friendly locations with promising long-term growth prospects.
When Cash is Not King
Holding excess cash during an extended inflationary period is a concern among many of our clients due to the accompanying decline in purchasing power. Investing cash in poor investments also should be avoided – so where do experienced investors invest to maintain the liquidity benefits of cash with inflation protection?
Recently we have seen a growing number of investors gradually shift excess cash into commodities, energy, and real estate investment trusts (REITs) through acquiring publicly traded (and therefore liquid) equities in well positioned companies with strong balance sheets that are more likely to retain and grow value over time rather than decline in value as the dollar has done over the past many years.
Bottom Line
Experienced investors will tend to be more cautious in changing their investment strategies since they have learned that making quick decisions can often led to poor outcomes. They also avoid reacting to daily headlines and instead favor making and sticking with investments that follow well-researched strategic trends.
Reallocating funds to take advantage of projected longer-term population shifts and to hedge against persistently higher inflation makes sense to a growing number of our clients.
If you would like to learn more about long term real estate investment options, please contact us by phone toll-free at 866 398-1031 or via email at info@FGG1031.com.
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