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Tag: inflation

How to Invest in 2024: Insights from Wealth Managers and Stock Market Experts

Wealth managers have been busy lately, answering clients’ questions about how to build and preserve wealth amid stock market turmoil, high interest rates and recession fears. While advisers maintain that their advice depends on each client’s goals, risk tolerance, age and other factors, there is a recurring theme to their recommendations: Don’t panic.  

“Clients want to be reassured and make sure their plans account for an environment like this,” says Ali Phillips, executive vice president and partner at Obermeyer Wood Investment Counsel, with offices in Aspen and Denver. “We spend time telling clients you don’t want to respond to a bad year. Any good plan takes three to five years to come to fruition.”   

READ: Unprecedented Impact of Soaring Interest Rates — What It Means for the Economy

The inflation rate was 3.7% in October, much lower than the 9.1% in June 2022. Still, high interest rates are making mortgages and other loans expensive. Meanwhile, stock prices are fluctuating, and investors wonder whether they should adjust their portfolios.  

Phillips tells clients not to overreact when they read dramatic financial news headlines, and to instead focus on their long-term goals. Clients sometimes want to move money into more conservative investments or increase their emergency savings, especially now that high interest rates are making certain savings accounts more attractive than a few years ago. “Those pivots are appropriate,” she says. “What we don’t want to do is make dramatic changes that can adversely affect the longer-term outlook.”  

Some clients simply want reassurance that it’s OK to travel and enjoy the life they saved for. Others seek guidance on starting discussions with their families about passing wealth and wisdom to future generations, or to charity. “You want to honor their concerns, remind them of the longer-term picture, and guide clients in this environment,” Phillips says. 

Economic uncertainty motivates people to examine their portfolios. “There has never been a better time to look at what you’re doing,” says Adam J. Moeller, president of AJM financial in Greenwood Village. “The biggest thing is evaluating where you are now, what is this money for, and what are the consequences if you don’t do anything.”  

READ: Diversify Your Portfolio — Beyond AI Stocks with Treasury Bills and Dividend-Paying Companies

Many clients don’t know about fees they are currently paying for certain investment products, or what is in their 401(k). “Retirement sneaks up on them and they say, ‘Now what do I do?’” Moeller says. “When you uncover what they have, they don’t know what they are investing in.”  

Some clients are heavily invested in the stock market, which historically goes up, but if the investor is relying on stocks to fund their retirement and the market declines, they might have to return to work. “I see a lot of people who have too much risk,” Moeller says. “They have not done a good job of rebalancing and reallocating.”   

The traditional portfolio strategy of 60% stocks and 40% bonds, and of increasing the bonds when the investor approaches retirement, has not paid off recently. According to a Nasdaq report, stocks, as measured by the S&P500, lost 18.6% in 2022, or 25% when adjusted for inflation. Bonds, as measured by the Vanguard Total Bond Index, lost 13.7%, or 20.3% when adjusted for inflation.  

Meanwhile, people worry about whether there will be a recession, as estimates by the Wall Street Journal and others have put the probability at about 50%. “It’s a flip of a coin,” Moeller says. High interest rates will eventually come back down, so he is educating clients about alternative solutions such as fixed and fixed indexed annuities so they can take advantage of these high interest rates and lock in rates for five to 10 years. 

READ: Higher Interest Rates — What Does It Mean for Consumers, Bond Investors and the Stock Market?

Wealth managers are advising clients to consider other investments. “We are using more hybrid types of investments that don’t necessarily track the stock market such as structured notes,” says Patricia Kummer, senior wealth adviser/principal at Mariner Wealth Advisors in Highlands Ranch. “That includes the upside potential of an index while the client receives higher interest coupons on their investment.” 

Advisers also tell clients to consider individual stock holdings, especially stocks that pay dividends, rather than an index or a fund. “There were only seven stocks that moved the entire market,” Kummer says. “So if you were in a mutual fund that holds S&P 500 stocks, 493 did not perform.” Clients are also looking at U.S. Treasurys, because as of October the yield was around 5% for short-term Treasurys.   

During challenging economic times, it’s important for people to continue to fund their retirement accounts. “The volatility allows you to buy at different opportunities or prices,” Kummer says. “If you don’t want to take as much risk, that’s fine. Go to your adviser and say, ‘I want to update my strategy,’ not that you want to stop, or you may never catch up again.”  

 

Nora Caley is a freelance writer specializing in business and food topics.

Unprecedented Impact of Soaring Interest Rates: What It Means for the Economy

You would have to be living on another planet not to feel the deleterious impact of higher interest rates. Just when we thought annus horribilis 2022 was finally in the rear-view mirror, the bond vigilantes have resurfaced to wreak havoc on both stock and bond markets simultaneously.

Since the Federal Reserve has been steadfast in its commitment to get inflation under control, inflation has dropped significantly from 9% to 3%. This is a huge positive, but the negative of these aggressive interest rate increases is starting to be felt everywhere by Americans looking to borrow money. If you haven’t been paying attention, these are the areas where higher rates hurt the most. 

READ: Higher Interest Rates — What Does It Mean for Consumers, Bond Investors and the Stock Market?

Home mortgage rates 

The latest 30-year mortgage rates have just hit 7.5%, the highest level since 2007. At these levels, first-time home buyers have effectively been shut out of the housing market and have no choice but to rent or live with their parents. So much for the American dream of home ownership.

Moreover, why would anyone move and give up their 3% 30-year mortgage unless they absolutely had to? Many wouldn’t. These factors have caused the inventory of homes on the market to stay low and prices high. Now there is serious talk of 8% 30-year mortgages, which was unheard of just two short years ago. These high rates have a massive impact on the economy; if people aren’t buying or selling homes, they aren’t buying items to fill up these homes, and consumer spending makes up 70% of GDP. 

READ: How Do Interest Rates Impact Real Estate Investing? 

Variable rate debt 

If you have loans that are floating or variable rate, then you better start paying attention to when this debt comes due. Americans got very comfortable with adjustable-rate debt. You might have borrowed money at 2% a few years ago, but that loan will adjust in the next 3-7 years.

The higher new rates could easily double or triple, which means your interest payments could double or triple when these loans readjust. You better have a plan for when that happens. Either save more money to pay these higher interest rates or sell your home or car and rent or lease. Neither option sounds very appealing. 

Credit cards, auto loans, margins or lines of credit 

If you can’t pay your credit card on time, aren’t paying cash for a new car, or need to borrow on a line of credit or margin, you are in for a rude awakening. These interest rates have skyrocketed.

Interest on credit cards is well over 20%, auto loans are 7%, margin rates typically start at 7.5% and lines of credit loans are approaching 9%. It is incredibly expensive to borrow money for anything. If you don’t need to borrow, don’t. And definitely pay your credit cards on time. 

Silver lining 

The silver lining with the massive increase in interest rates is that you can finally get paid a decent return on your savings or cash.

READ: Finding the Silver Lining Amidst Rising Interest and Inflation Rates

CDs and short-term treasury bills now pay well over 5%. This is simply a matter of supply and demand. Too much supply and not as much demand. Don’t leave too much money in your checking account at your bank. Move excess cash to a brokerage account. Ask your advisor about rates on CDs and treasury bills. With the Federal Government borrowing more and more money to fund the ever-increasing national deficit, short-term interest could stay higher for longer than expected.

The three major buyers of U.S. debt in the past have been the Federal Reserve, China and Japan. Now, all three have either stopped buying bonds completely or have significantly cut back their purchases, which means new buyers need to emerge to take their place, and now at much higher rates. These new buyers will most likely be institutional or retail investors who like treasury bills at these much higher rates. 

It is always darkest before the dawn. When interest rates get too high, consumers stop borrowing. If they stop borrowing, demand dries up, the economy slows, companies stop hiring and may, in some cases, lay off employees to cut costs. This is exactly what the Federal Reserve wants.

The only way to kill inflation is to slow things down dramatically; the only tools it has at its disposal are to stop buying government bonds and keep raising the short-term FED Funds rate. Today, this short-term interest rate is at 5.25-5.50%. Could it go higher? That is the question driving markets these days.

As Fed Chairman Jerome Powell likes to remind us at every press conference, moves in interest rates are data dependent, but rest assured if inflation doesn’t get back to its 2% target, interest rates will remain higher for longer.

 

Fred Taylor UPDATED

Fred Taylor is a Partner, Managing Director at Beacon Pointe Advisors, LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information.

Effective Debt Management for Colorado Businesses: Strategies to Navigate Economic Challenges

As rising interest rates and inflation slow the economy, many companies are struggling to pay back debt. Listed below are few best practices for navigating the current environment.

READ: How Do Interest Rates Impact Real Estate Investing? 

Be proactive

Communication is the key. Yes, it can be a tough conversation with your creditors, but the result will be far better than if one waits.

Gather trusted advisors like your CPA and business attorney, formulate a plan, then schedule a meeting with your creditors. Many local non-profits like the SBA, Small Business Development Centers and local Chambers of Commerce can be a great cost-free or mostly-free resource for advice.

Short-term loan modifications and/or accommodations are usually in everyone’s best interest. Everything is a trade-off for both parties so be willing to give something in return.

Build trust

Tell it like it is. Provide your creditors with realistic projections and updated financial data. By creating a realistic forecast and plan, you are addressing the challenges you can control. This will create a lot of goodwill with your creditors.

If your lender feels they cannot trust you, or that you may be deliberately concealing information, they will likely not wait to act, nor will they advocate for you. Ultimately, it may cost you your company.

READ: Financial Forecasting Insights from Founder and Fractional CFO, Dan DeGolier

Vendors

Your vendors are often providing their own credit to your business in the form of trade terms. Meet with them often and let them know you are doing everything in your power to stay current. Hiding from vendors creates more stress and won’t make the problem go away.

You might be surprised; even partial or reduced payments can go a long way toward maintaining trust and keeping your trade terms from being cut off.

Perform a 13-week cash flow analysis

This is the “go-to” cash flow metric and an important tool in the turnaround industry. The purpose of the 13-week cash flow analysis is to show where an entity’s cash is being generated (cash inflows), and where its cash is being spent (cash outflows), over a specific period of time.

Why 13 weeks? There are four 13-week periods in a calendar year. Essentially, it’s a deep dive into one quarter and an essential tool for crafting a turnaround plan.

READ: How Businesses Can Increase Cash Flow Predictability

What would you say it is you do here?

Presenting your lender with a well-thought-out business review plan may buy you time and build credibility. Most businesses in distress display more than one of the following external or internal signs of trouble.

  • Ineffective management or missing management pieces.
  • Over diversification or not enough diversification in product or service.
  • Poor pricing model and low gross margins leading to low or no profitability.
  • Weak financial controls.
  • Weak operational controls.
  • Poor lender and vendor relationships.
  • Market lag or change.
  • Precarious customer base — too concentrated or unprofitable clients.
  • Even ultra-fast growth is often a (funding and operational) problem that needs solutions.
  • Family vs. business matters.
  • Operating without a formal business plan.

Is it time for alternative lending?

The current environment is making traditional bank credit harder to obtain. Alternative lenders can be a good short-term bridge (1-3 years) back to more traditional bank credit while providing more flexibility to recover. Alternative lenders often trade off charging a slightly higher interest rate for giving entrepreneurs more freedom. Essentially, you’re paying for three things that can be effective tools for recovery:

  • Flexibility: Generally a lack of strict financial covenants and cash flow requirements.
  • Availability: Usually this means higher advance rates than a bank will consider, as a percentage of the value of your collateral.
  • Scalability: This is the ability of a business owner to very quickly increase or decrease the size of their loan facility or revolving availability as their business recovers. This is usually achievable with very little additional underwriting and can be approved much quicker than a Bank loan — think days, not weeks or months.

 

Andrew Wilhelmy headshotAndrew Wilhelmy is VP of Business Development for the Western U.S. at Seacoast Business Funding. Seacoast Business Funding provides up to $30 million in fast, flexible, and economical non-bank working capital lines of credit to growing companies and businesses looking for turn-around funding utilizing their Accounts Receivable and Inventory.

Preparing for Economic Downturn: 4 Tips for Colorado Business Owners

Approaching the mid-way point of 2023, the economic downturn that many predicted would characterize Colorado’s economy this year hasn’t materialized. Despite uncertainty and rising interest rates, economic indicators appear to show a resilient market. But, there is a natural cycle of economic highs and lows that all business owners have to confront at times. As we approach the second half of the year, it’s a good time to examine your position and ensure you have some intentional strategies in place to avoid “survival mode” when a downturn does present itself. 

Balancing various economic variables in a way that protects profits and cash flow, especially in a downturn, is one of the biggest challenges that business owners must address. The most successful business leaders keep a finger on the pulse of economic cycles and are prepared with both short- and long-term plans to respond to variable market conditions. 

READ: 5 Ways Small Business Owners in Colorado Can Survive Inflation

Here are four tips that can help Colorado business owners prepare for a downturn: 

Proactively manage production, sales and workforce

These three functions of business, more than any other, can provide a steadying ground for businesses during periods of economic downturn or sustained declines in demand. Business owners can create a cushion to protect themselves from the market and avoid making knee-jerk reactions by getting ahead in these areas.

Look to optimize your accounting department and focus on data-driven forecasting. With better data, executives will have the upper hand when it comes to predicting slower periods. This information gives you more time to prepare and make sound decisions before you feel the full impact of a downturn. 

Human resources is another key area that can make or break a company’s ability to weather a downturn. Set up systems to ensure you have flexibility in managing your workforce. Avoid costly hiring-firing cycles that economic swings can set off by creating an all-the-time loyal workforce. Invest in workforce development. Look for opportunities to decentralize your management structure to offer more autonomy for decision-making. A culture that engages people will always be more resilient in tough times.

Work to ensure your product or service is creating essential value for your customers

Companies that create products or deliver services that people cannot live without will protect revenue during a recession because you’re unlikely to see major changes to demand. When the economy forces Coloradans to look for more ways to save, we naturally start evaluating needs and wants. Business owners who’ve positioned their product or service firmly in the ‘need’ category will fare better because a downturn has little impact on the value of something that consumers deem essential. 

Business owners can adapt their products and services to create more essential value by paying close attention to consumer trends and responses to market conditions. We saw many examples of this phenomenon during the COVID-19 pandemic. Companies shifted business models to stay relevant and meet changing needs; restaurants prioritized takeout programs while in-person dining was restricted; retailers developed the curbside pickup option; gyms pivoted to create on-demand programs for home fitness. Even though these industries likely experienced a decline, companies survived by adapting their offerings to hold value. 

If you experience a decline in sales, you can avoid rock bottom so long as your product or service provides essential utility for your customers. 

Diversify revenue streams

The ebbs and flows of the business cycle tend to vary across industry. The threat of a recession doesn’t necessarily mean doom and gloom for every industry as macroeconomic trends tend to affect different industries in dynamic ways. It’s an exceedingly rare economic event that challenges companies across all industries. 

What’s more common is that a downturn for some will be a boom cycle for others. Diversifying your business and creating multiple, and varied streams of revenue will minimize the impact of any slowdown.

READ: What Are the Safest Industries to Start Your First Business in 2023?

Solidify your capital management strategy

The old adage that cash is king holds true today. It’s no surprise that companies with reliable access to capital are going to be the best positioned to survive and thrive during economic downturns.

Analyze your working capital to identify opportunities for improvement. Can you decrease the amount of cash you have tied up in inventory with better data that allows you to predict demand and make your ordering of products more efficient? Another tactic to improve working capital, sit down with your vendors to identify opportunities for better terms. Finally, diligent credit procedures with your customers may allow you to more quickly convert sales to cash.

As with any area of business, relationships matter when it comes to capital, too. Having a strong relationship with your lenders is essential. Communicate with transparency and form a partnership with those who you borrow money from, ensuring that you are both ready to weather an economic storm together successfully.

If you have a solid financial foundation with accessible capital during a downturn, it can be an excellent time to take advantage of growth opportunities as acquisitions tend to pick up during recessions. Many companies need backing and support when times are tough. For example, the initial success of our business at Kodiak Building Partners was largely established as a result of the 2008 recession and housing crisis. Many of our first operating partners signed on with Kodiak as a holding company during a down period to access the financial strength the model offers. If you have a sound capital management strategy in place, your business is more likely to thrive during a recession. 

READ: Recession Ahead — How to Protect Your Financial Plan

Navigating economic downturns is a critical skill for business leaders. No one can predict with 100% certainty where Colorado’s economy will go in the next cycle, but business owners who work to create some protections with well-planned strategies will be better prepared to withstand a downturn, regardless of when the economic headwinds shift. 

 

Steve Swinney headshotSteve Swinney is Co-Founder and CEO of Kodiak Building Partners, one of Colorado’s largest privately owned companies. His experience as a financial executive spans more than two decades, with expertise in mergers and acquisitions, private equity-backed ventures, financial analysis, investor relations and overall business strategy.

Surviving Food Inflation — How Colorado Restaurants Adapt to Rising Costs and Labor Challenges

Like countless other industries, the restaurant industry has been completely redefined by the pandemic. Restaurant owners felt optimistic about the post-COVID world but were immediately presented with a continued headline problem — food inflation.

READ: 5 Ways Small Business Owners in Colorado Can Survive Inflation 

According to new data released from the U.S. Bureau of Labor Statistics, prices for food away from home, which include restaurants, vending machines, schools and other foodservice facilities, increased 8.4% year over year in the first quarter of 2023.  

Same-store sales began decreasing in July 2022 after 17 months of continuous increases, according to the National Restaurant Association. Many operators also reported lower customer traffic beginning in June, which was when gas prices hit record highs. 

Other supply chain-related events, which spanned from restaurant equipment (creating issues for restaurant development and timing) to the Avian flu and eggflation issues, also negatively impacted the industry. 

Where are restaurants now? 

Inflation has had a far-reaching impact on the restaurant industry — affecting everything from the cost of materials to wages. 

Although average food prices had decreased slightly by the end of summer 2022, they increased 16.3% from July 2021 to 2022, according to Bank of America. Locally, according to the Colorado Restaurant Association, food prices increased more than 11% in 2022, the most in four decades. Many critical food items like eggs, cheese and butter have seen even more dramatic increases, leaving restaurants no choice but to increase menu prices in response.  

READ: Plant-based Protein is Taking Root in Colorado’s Food Economy

Climate issues like drought, fires and record-setting heat have also limited the availability of crops, exacerbating the food inflation problem. Food brands have found themselves short on vital food products like potatoes and other grains. 

One especially stressful part of the equation for restaurant owners today is how much food inflation passes on to customers. Restaurants need to remain competitive while still retaining a profit. If your restaurant is taking a 10% menu price increase and competitors are only taking 5%, you’re out on a limb.  

In addition to struggling to combat increased food costs, restaurants are also navigating increased labor costs. Although restaurant industry employment has rebounded, employment is still 5% below pre-pandemic levels, according to the Bureau of Labor Statistics. Two-thirds of operators said their restaurants still don’t have enough employees to support higher customer demand. In Colorado, 8 out of 10 local restaurants are struggling to hire enough staff even as industry wages have risen an average of 20%, according to the Colorado Restaurant Association. 

Together, food and labor costs account for about two-thirds of every dollar of a typical restaurant’s sales, according to the National Restaurant Association, which is why 2022 has proved so challenging for restaurant operators and their bottom lines.  

Restaurants have increased wages not only to attract workers but also to compete with other employers, particularly retail outlets. When major employers like Target, Amazon and CVS move to a $15 wage, it doesn’t matter what the federal minimum wage is. Restaurants must compete. 

READ: Rising Food Costs Create Unique Challenges for Hunger-Focused Agencies

What’s next? 

Although the outlook is uncertain with the threat of a possible recession on the horizon, indicators are displaying that any recession will likely be modest and manageable. Restaurants should take advantage of the lessons they have learned in the past few years and find hope in the signs that the worst is behind us. 

Grocery store costs increased at a higher rate than restaurant costs in the summer of 2022. Now, that widening price gap makes restaurant meals a better deal for many consumers. With about half (46%) of adults reporting that they are not eating at restaurants as often as they would like, the higher cost of groceries could drive customers back to restaurants. 

What’s more, chicken prices are expected to decrease in 2023 due to a significant improvement in production, although the impact of a lengthy war in Ukraine still hovers over future supplies and prices. And the labor situation seems to be stabilizing as well, as stimulus payments have ended, and people are reentering the workforce. Job openings peaked in March but tumbled by 1.1 million by August. 

The key components for restaurant owners are employees and partners, making labor and training significant factors for restaurants. The labor market continues to be tight but there are signs of hope. Restaurants have learned to operate with fewer people and rely more on technology which is necessary as the labor market continues to tighten. Unemployment appears to be on the rise which allows for more workers to be available to work in restaurants, serving as line cooks, servers and hosts, among a number of other services. 

READ: Veteran Unemployment: Untapped Workplace Resources

Restaurants must learn how to quickly pivot, whether that means embracing innovation or improving their services by being more flexible and adaptable. Restaurants must also learn to operate with fewer employees and rely more on technology.   

While restaurants have faced countless challenges and rising food inflation in the past few years, the setbacks have only proven how resilient the industry is. Those that made it through 2022 relatively unscathed should be proud. The future seems promising for brands that can weather these storms and welcome eager consumers back to their tables.

 

Cristin O’Hara headshotCristin O’Hara is the Managing Director and Head of Restaurant Group at Bank of America.

 

 

 

 

 

 

 

 

 

 

 

Ty M. Aslin headshot

 

Ty M. Aslin is the Colorado Market Executive for Business Banking at Bank of America 

 

 

Buying a Home in 2023 — High Mortgage Rates, Low Inventory and Tougher Approval Process

Have you tried buying a home lately? The pandemic days of 20 offers, waiving inspections and closing prices 15% above asking prices may be gone, but major issues remain. I am married to a realtor, so I can assure you I hear about it all the time; it still isn’t easy to buy a home. The new issues are high mortgage rates, low inventory and a tougher approval process. However, if you can navigate all the headwinds, owning a home can still be a terrific long-term investment.

READ: The Pros and Cons of Investing in Real Estate During a Recession

High mortgage rates

During the pandemic, mortgage rates on 30-year mortgages were below 3%. Today, they are around 6%. Variable rates were even lower. That is a significant difference for a first-time homebuyer. In fact, many younger people may not qualify because home prices haven’t come down commensurate with the rise in mortgage rates. This difference in mortgage rates could mean hundreds of dollars more on a monthly basis. As of March 31, nearly two-thirds of primary mortgages had an interest rate below 4%, and about 73% of primary mortgages had fixed rates for 30 years, according to Black Knight data.

No inventory

If homeowners don’t sell, “the movement up the ladder is sort of grinding to a halt,” said Sam Khator, Chief Economist of Freddie Mac. “It is getting much harder for first-time home buyers to jump into the market because of the lack of supply.” According to the National Association of Realtors (NAR), a healthy housing market has between four and six months of supply at current sales rates. The existing home market, which makes up most of the housing market, hit a record low of 1.6 months’ supply in January of 2022 and stood at only 2.6 months’ supply in March of 2023. 

Can’t move

People that were lucky enough to lock in a low mortgage rate of under 3% now don’t want to move because they can’t afford to pay double the interest payment. It doesn’t matter if their house is too small, in a bad location, or if aging baby boomers want to downsize. They are stuck in a home that may no longer work or be appropriate for their needs. They may have considered selling last year, but now it doesn’t make any financial sense to do so. Until interest rates drop, they have no choice but to stay where they are.

READ: LLCs and Real Estate Investing: Pros and Cons You Should Know in 2023

Tougher approval process

One nasty side effect of the recent regional banking crisis is that local banks and mortgage companies are under great scrutiny in terms of loans on their books. Buying a home requires more money down, higher credit scores and a longer job history to qualify today. The number of lenders that even want your business may have shrunk, too. Be prepared for approvals to take longer with even more paperwork than before.

Good investment

Is buying a home even a good investment? Odds are if you can stay in your home for more than five years, buy in a good location and don’t overpay, homes can potentially be one of the best investments you can make. Homes have acted as a great inflation hedge as well. If prices for goods and services keep going up, the price of your home should, too.

Baby Boomers who are selling their homes now after living in them for 20-30 years are making a small fortune. Typically, 70% of Americans’ net worth is tied up in their homes and because they are paying down the principal every month, they are building up equity in their homes over time. However, the cost of selling your home can be as high as 6% if you use a realtor, so you want to make sure you really need to move.

The good news is that your mortgage should be tax deductible. If you move but keep your home, you might be able to create a source of rental income and increase your cash flow. You would also be able to offset this rental income with depreciation and other expenses, so you shouldn’t have to pay taxes on the rental income.

READ: Purchasing a “Second Home” as Your First Property

The solution

Hire the best realtor you can find in your local market who might have pocket listings (they know about homes not currently listed but sellers would sell at the right price), have a mortgage lender letter ready showing you are a qualified buyer and finally take advantage of the 2-1 buydown concession. This buydown is a new financing tool because of higher mortgage rates.

Sellers are now subsidizing, in escrow, at the time of closing the first two years of the buyer’s mortgage at a much lower interest rate, 4% instead of 6%. After the two years are up, the mortgage goes back to the original rate. However, if mortgage rates are lower at that time, the buyer can refinance at a more favorable rate. Buyers must make sure they can afford the higher rate in case interest rates don’t come down.

Although buying a home has been difficult historically, artificially low-interest rates in 2020 and 2021 made it an incredibly attractive time to lock in a long-term mortgage. Today that isn’t the case. Higher rates are probably here to stay for the foreseeable future. My first mortgage in 1985 was at 13%, and when I refinanced at 10%, I thought it was as good as it would ever get. From that perspective, a 6% mortgage still looks like a great rate; we were just really spoiled for those two pandemic years.

The American Dream is still buying a home, and over the long term, has been a great creator of wealth in this country. I don’t see why this time in history is any different just because of higher interest rates. It could be much worse, like 1985.

 

Thumbnail Fred Taylor HeadshotImportant Disclosure:

Fred Taylor is a Partner, Managing Director at Beacon Pointe Advisors, LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information.

Batten Down the Hatches: Fine Tune Your Small Business Plan for Any Economic Environment

In recognition of the more than 33 million small businesses in the U.S., we are sharing helpful best practices to fine-tune your small business plan to weather economic shifts. 

Responsibly manage your business debt

Interest rate changes have significant impacts on business lending. To effectively manage your debt, consider these financial tactics before applying for a business loan: 

READ: Higher Interest Rates — What Does It Mean for Consumers, Bond Investors and the Stock Market?

Convert floating debt

Consider converting any floating-rate debt to fixed-rate debt, which flips the mindset from short-term financing to a longer-term solution that may be more suitable for your small business paln. Although many borrowers use their investment portfolio as a natural hedge for floating-rate debt, it may still make sense to lock in a low, fixed-rate now for any variable-rate debt you may have.

Consolidate debt

If your company has extensive overhead costs with bills and outstanding balances, debt consolidation could be a smart strategy to move existing debt into one streamlined payment. Debt consolidation can potentially provide a longer repayment period and/or lower interest rate — both of which can help improve available liquidity. 

Clean up your credit and tax liens

A tax lien is the government’s legal claim against your property when you fail to pay a tax debt. Make sure your credit and tax debt are up to date and tidy to ensure you’re getting the best rates available. 

Transition from alternative lending sources to conventional

If your business has alternative financing on the balance sheet, but you’ve been able to stabilize your profits and expenses, now may be the right time to convert your debt to more traditional loans and lending. 

READ: How Colorado Businesses Can Benefit from Nontraditional Funding and Private Equity Firms

Be honest with your banker

This may seem obvious, but you’d be surprised how many business owners inaccurately fill out loan applications whether intentionally or inadvertently. Filing for bankruptcy or having a tax lien is not an automatic disqualifier in the application process. With that in mind, it’s better for your relationship with your banker to be transparent about details. 

Strategies to improve income

If cash flow is top of mind, take inventory of your equipment and see if there is anything old or outdated that can be sold, refinanced or salvaged. Also, spend time reviewing your assets to determine how they can help the business work smarter and improve liquidity with your small business plan in mind.

If your business is inventory-based, assess your supply regularly and consider buying in bulk or shopping around to get the best purchase price. Another option is to restructure your pricing to align with the current market, inflation and competitors. However, be wary of aggressive price increases to avoid upsetting your current customer base. 

Another way to improve cash flow is to streamline your accounts payable and accounts receivable processes. Review timing, steps and ways to reduce your business bank account churn. 

Combat supply chain challenges

Small and large businesses alike are being impacted by supply chain disruptions like slow manufacturing and delayed shipping. As a result, we continue to see increases in shipping costs, storage expenses, delivery delays and logistics issues.

To combat the supply chain challenges, consider ordering material further in advance than typical so you can more confidently predict what you need. This can impact upfront costs, but can also help assuage concerns about products, parts and shipping timing. 

Implement employee-retention strategies

With unemployment in the U.S. at 3.5%, it’s important as a business owner to develop employee-retention strategies to not only keep your employees but ensure they are happy in their roles. With nearly historical lows and despite some recent softening, the labor market remains competitive.

READ: Navigating the New Era of Employee Engagement — Everything You Need to Know

Here are some financial considerations in today’s labor market: 

  • Invest in and strengthen your current team through talent development, wage reviews, internal promotions and hires to help retain your current workforce. 
  • Recognize that hiring costs have increased and plan accordingly. If raises and promotions are not in your small business plan, focus on benefits to make up any difference in salary or hourly pay.
  • Embrace the hybrid home-office schedule and provide flexible work environments. Consider how the work-from-home shift can help you cut costs if your industry allows for virtual or asynchronous work.
  • Be shrewd in your resourcing forecasts knowing you may not have the upper hand in resignations and new hire negotiations.

Maintaining an effective small business plan requires an immense amount of discipline and perseverance, even in the best economic conditions. In today’s volatile environment, this is more important than ever. As a business owner, you must be willing to adapt to any changes that come your way and pivot to ensure your business is successful. Strategize and plan well by having a strong relationship with your banking partner, managing your debt, improving cash flow, finding alternative financing options and focusing on employee retention.

 

Jake Hymes HeadshotJake Hymes is the senior vice president, director of small business at UMB Bank.

The Pros and Cons of Investing in Real Estate During a Recession

Regardless of your finances, investing in real estate during a recession might be a hard concept to wrap your head around, and understandably so. Although a potential 2023 recession won’t be like the Great Recession of 2008, which was directly related to the housing market, people and businesses alike are tightening belts in anticipation of financial hardship on an unknown scale.

READ: What Does a Recession Mean for Your Finances? 

A recession is broadly defined as an economic contraction or two consecutive quarters of GDP decline. A potential 2023 recession would impact various individuals and industries, especially the real estate industry.

Home prices rose in 2021 and stayed high in 2022 as more people sought new homes further away from city centers. Now, rising interest rates and daily layoffs will have some bearing on real estate in the coming months.

This doesn’t mean all hope is lost if you want to invest in real estate this year. Real estate buyers in good financial standing will still have options to invest in property. Here are some of the pros and cons of investing in real estate during uncertain economic times.

Pros of Investing in Real Estate During a Recession

1. Lower purchase prices for home buyers

Even the rumors of an economic downturn can be enough to drive down the demand for residential real estate. This decline in demand will likely lead to a decline in real estate prices, which spiked in 2022.

Home prices are not as threatened as they were in 2008, but interested and prepared buyers can take advantage of a likely dip in listing prices in hot real estate markets like Colorado’s.

2. Diversified assets

The stock market is one of the most visible ways a recession manifests for consumers. People who have money invested in the market may benefit from investing in real estate and other alternative assets while stock prices are on the decline.

3. Reduced competition

Despite the pros, investing in real estate isn’t part of most people’s recession finance strategies. Recessions often lead consumers to reduce their discretionary spending and instead shore up cash and emergency funds. 

The result could be the opposite of the buying frenzy many markets have seen since the start of the pandemic. With less competition for real estate, you won’t have to take as many risks to win any potential bidding wars.

Cons of Investing in Real Estate During a Recession

Higher interest rates

Many recession fears began when the Federal Reserve quickly drove up interest rates in 2022 to ease the effects of inflation. These high interest rates are still in place, making it more expensive for potential buyers to borrow money. Lenders are also likely to be more selective when evaluating candidates for a mortgage, prioritizing higher credit scores and increased down payment requirements.

READ: Higher Interest Rates — What Does It Mean for Consumers, Bond Investors and the Stock Market?

Increased personal financial risk

Recessions are unpredictable, but they often trigger an increase in unemployment as businesses let go of employees to cut costs. Before making a real estate purchase, make sure you have enough cash flow and stable income sources. If you were to lose your job or face any other short-term financial hardships, it could jeopardize your ability to pay for essentials. 

Real estate is still a costly purchase when you consider the associated closing costs and broker fees. Find ways to reduce some of these costs, such as working with a discount real estate agent or negotiating the total price.

Fewer people selling homes

If you’re planning to sell a property you already own in favor of a new one, a decline in listing prices could mean lower profits from the sale. Smaller profits will make it harder to buy a new, high-value investment property. 

Best types of real estate to invest in

If you have cash flow and income stability, a recession shouldn’t stop you from investing in Colorado real estate. Aside from a single-family home purchase, here are some alternative types of investments to consider.

READ: What Is the Difference Between Class A, B, C, and D Properties?

Rental Properties

A recession may slow down first-time home purchases, but people will still need housing. Purchasing a rental property provides another source of income for your household, whether it’s a short-term lease or a consistent vacation rental. Colorado in particular has become a desirable destination for remote workers who value the flexibility of short-term and vacation rentals, and an economic downturn might mean rental property owners are ready to sell.

As with any property investment, owning a rental property also means taking on landlord responsibilities and maintenance costs. Be sure to factor those in as you evaluate whether a rental property purchase is right for you.

Properties you can “flip”

For those with time, patience and the real estate knowledge to flip a house, banks and owners selling homes for cash provide an opportunity to turn a respectable profit on a real estate investment. But flipping a house isn’t as simple as reality television makes it seem. Ensure you have the cash on hand to make the purchase and cover any expenses incurred during the renovation.

If you’re not ready to take on the financial risk of a fixer-upper, try wholesaling to earn extra income from real estate during a recession. Wholesaling is a short-term strategy similar to flipping but that doesn’t require the wholesaler to purchase the property. Instead, wholesalers work as intermediaries to help eager sellers let go of their properties, accumulating capital in the process.

READ: How to Sell Your House in a Down Market — 6 Easy Tips

Real estate and REIT ETFs

Investors who want the financial benefits of real estate investing without the burdens of home or property ownership should consider real estate or REIT exchange-traded funds (ETFs). REIT ETFs add the diversity that real estate investment offers in a financial portfolio without the surprise costs of physically owning and managing a property. These ETFs are also often low-cost, an added benefit during a period of economic downturn.

Investing in real estate during a recession is still possible

A recession shouldn’t mean an end to your dreams of real estate ownership. Potential buyers with cash flow and strong credit can take advantage of the decrease in competition and listing prices. Real estate investment, like any investment, comes with risk. As a potential investor, it’s important to evaluate how much risk you are willing to tolerate in exchange for the addition to your portfolio.

 

Screen Shot 2021 12 28 At 113128 AmLuke Babich is the Co-Founder of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers and investors make smarter financial decisions. Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, the LA Times, and more. 

Exploring Opportunities in the Global Stock Market: Unlocking Profit Potential in 2023

There is an old adage on Wall Street: “Sell in May and go away.” In theory, on a calendar basis, the worst months to be invested in the stock market are from May to November.

Whether this is true or not is anybody’s guess, but last year it certainly was. Today, investors must decide how best to position their portfolios for the rest of 2023. Should you buy dividend-paying stocks, longer-duration bonds to lock in yields, or invest money overseas? Before you can answer any of these important questions, consider what the Federal Reserve might do with short-term interest rates for the rest of the year to combat inflation, and how the debt ceiling gets resolved. Both issues will impact the direction of the markets and, quite possibly, your investments.

READ: 4 Key Asset Allocation Strategies for 2023

Interest rates & inflation

Since the fall of 2021, the Federal Reserve has struggled with the issue of inflation. At first, they considered it transitory, but last spring inflation became the real deal. Consequently, the Fed had to aggressively raise interest rates nine times. Fortunately, inflation has begun to come down, from over 9% to 5%, but the Fed’s inflation target is 2%. This means the Fed still has some more work to do. There is a chance with the latest regional banking crisis in March, small businesses and individuals will find it harder to get loans from their local banks, which, in turn, could slow down the economy. However, the Fed is poised to raise interest rates at least one more time on May 3. After that, it will be data-dependent, with the unemployment and consumer price index numbers being scrutinized carefully to get a read on inflation.

Debt ceiling

Looming in the not-too-distant future, the debt ceiling issue could turn into a full-blown crisis if the Republicans in the House of Representatives and President Biden do not raise the debt ceiling before the government is no longer able to pay its bills.

Treasury Secretary Janet Yellen has warned Congress that time is running out — if the April tax receipts are not high enough, the due date could be as soon as early June instead of August. Republicans would like to extract spending cuts from the Democrats/President Biden in exchange for passing a debt ceiling resolution. At this point in time, neither side wants to compromise. If they do not find common ground, the country could face financial Armageddon by defaulting on its debt. The consequences would be catastrophic. We came close to a debt default in 2011. Because of that threat, America’s debt rating was downgraded by Standard & Poor’s from AAA to AA+ for the first time. A default could make borrowing costs increase, cause a massive sell-off in the stock market, or bring on a recession.

READ: What Does a Recession Mean for Your Finances?

Investment ideas

Despite higher interest rates, inflation, and the debt ceiling issue, the stock market is the greatest discounting mechanism ever created. By the time all the bad news comes to fruition, investors are already looking ahead and markets tend to climb a proverbial wall of worry and go higher. Knowing this, where are logical places to invest money for the rest of 2023?

Dividend-paying stocks

When markets are volatile and the headlines are scary, a great place to ride out the storm is with a diversified mix of blue-chip dividend-paying stocks. Invest in companies that can increase their dividends regardless of what economic cycle we are in. Today, stocks that provide meaningful and growing dividends are in the consumer non-durable, industrial, energy, and utility sectors. Another positive is that these stocks have been underperforming year-to-date versus the largest technology stocks and should be able to weather a recession because their products tend to be essential.

Bonds and money market funds

After the worst bond market in decades and much higher interest rates, now is a decent time to buy bonds or money market funds. In the bond market, you may want to consider a barbell approach. You do this with bond ladders, where you buy both short-term bonds and long-term bonds. If you do this, you could benefit if interest rates rise because you will have new money from your shorter-term maturities to reinvest annually. If interest rates drop, you will get appreciation on your longer-term bonds. If you want to have more liquidity and less interest rate risk, you can keep your money in a brokerage money market fund yielding almost 5%. 

International stock market

For the first time in a decade, the international stock market is outperforming U.S. stocks. This makes sense for a myriad of reasons.

First, the dollar has quite possibly peaked; when this happens, international companies make more money by selling their products to consumers in the United States. Second, China has recently reopened for business after three years of tight COVID-19 restrictions. Third, international stocks are inherently cheaper. Today they trade at significantly lower price earnings multiples. And finally, Americans typically have a home investment bias and may be under-allocated overseas. If international stocks continue to outperform, money could move out of the U.S. to international markets to find higher returns.

The bottom line

It has not been easy being an investor since the spring of 2020 and the pandemic, but despite all the volatility and negative headlines, we believe you have been better off staying invested through all the ups and downs. Moreover, for the first time since 2008, if you want to play it safe, you can own short-term bonds and brokerage money market funds. They all yield close to 5%. For longer-term investors, collecting dividends from great companies here and abroad is not a bad way to go either. 

Thumbnail Fred Taylor HeadshotFrederick Taylor is a Partner, Managing Director at Beacon Pointe Advisors, LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances. 

OPINION: Higher Costs, Higher Crime, and More Red Tape — How Government Interference May Be Hurting Coloradans’ Wallets

Coloradans are feeling the consequences of recent elections: higher costs, higher crime, more red tape and new regulations on just about everything we do. The inflation in Colorado is getting out of hand.

When voters turned out in November, they were faced with 11 statewide ballot measures, more than 150 state and local races, plus local ballot initiatives. Voters also faced a real challenge — finding reasonable candidates from either party who support economic empowerment for all Coloradans, or candidates willing to sacrifice Colorado’s traditional political pragmatism on the altar of ideological extremes.

Colorado by and large had a ‘blue wave’. Heading into election night in Colorado, experts and officials had predicted that the Democrats’ majority in both the state House and Senate would narrow, especially with poll after poll showing staggering inflation in Colorado and soaring cost of living as top concerns in the lead up to the midterms. Instead, Democrats narrowly won some closely watched — and heavily financed — legislative races across the state, padding majorities in both state chambers and easily winning all statewide offices.

READ: The Colorado General Assembly Is Open for Business — What Should Employers Expect in the 2023 Legislative Session?

Most winning candidates promised they would reduce costs and increase affordability. “We will save Coloradans money,” they touted. They would restore our cities, protect our families and rebuild our economy post-Covid. But just look at the major bills that have come so far and ask yourself if any of them actually restore communities or reduce the price of anything:

  • Rent control (which has made housing scarcer and more expensive everywhere it’s been tried) would have been laughed out of the Capitol a year ago. It’s now passed the State House.
  • The flexible scheduling employees requested post-Covid was nearly made illegal under the guise of creating a “Fair Work Week.”
  • The healthcare system that was so resilient through Covid is now the target of State control and unfair competition – the state’s more expensive plans are algorithmically promoted ahead of lower-cost private plans (that doesn’t save money), while elsewhere the state’s attempting to prohibit funding for outpatient hospital care. It doesn’t save people money when they have to drive to Denver for care because their rural hospital was shuttered by state rules.
  • Clean, affordable natural gas is vilified and called unreliable (which is demonstrably false) — and they are, in fact, coming for your stoves (and boilers, and chillers, and light bulbs and lawnmowers – no joke). Rushing through mandated change doesn’t save people money.
  • Hundreds of millions of dollars are dedicated to homelessness and substance misuse, and the problems are getting worse and more visible everywhere.
  • Organized efforts to eliminate or minimize responsibility for committing what recently were considered serious crimes.

Controversial bills that significantly and radically change Colorado’s well-diversified and well-balanced economy are literally flying in from the coasts, written by national political ideologues and interest groups, and passing on party-line votes. And none of them are making anything less expensive.

READ: How the Inflation Reduction Act May Impact Your Business

As we reach the midpoint of the 2023 legislative session, the Denver Metro Chamber is calling on legislators and the Governor to slow down and more carefully consider whether they’re actually introducing legislation that “saves Coloradans money.” Are you making it easier or harder to live and work here? Are your economic plans coming from the small, medium and large Colorado businesses who are local Chamber of Commerce members, or are they coming from national interest groups who introduce the exact same no-compromise bills nationwide hoping to get a foothold anywhere they can?

We would assess that our legislators are too frequently acting as activists instead of pragmatists. They are still politicking and not really governing. Nuanced and precise debate on complicated and complex issues is degrading into pure party-line politics and poll-tested talking points. It’s kind of astonishing to see just how expensive it can be when the government tries to ‘save us money.’

Thus far, legislators are making Colorado less competitive by interfering too much in markets. They are increasing costs while attempting to defy basic market principles. Housing prices, crime and substance misuse are still going up, public safety is still challenged, and new pathways for litigation and division are being created. The 120-day constitutional limit on their session, and veto threats from the Governor, seem to be the only things that will stop them. We don’t agree with the Governor on every issue, but the legislative majority would benefit from his private-sector business background and market knowledge.

Contrary to virtually every press release title, inflation in Colorado is increasing across the board. Our government seem unwilling to acknowledge that basic economic laws still apply at altitude. Efforts at the Capitol to legislate, regulate and litigate every issue under the sun is only making it less affordable to live in our state and increasingly difficult to operate a business.

Coloradans understand the importance of a thriving, healthy economy; that employers care about their employees and that employees want their companies to succeed. Just 10 months ago, Colorado added some 500 new laws to the books and countless new regulations on top — some are still to be written.  Before that ink is even dry, more than 400 new laws have been introduced this year already.

If you really want to save us money, give us all a chance to catch our breath and earn a little first. If there’s anything we can do to slow down inflation in Colorado, now is the time to do it.

 

J J Ament Headshot 3J. J. Ament is the president and CEO of the Denver Metro Chamber of Commerce.