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.

Luke 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.

What is a DSCR Loan and Is It Right for You?

Real estate is a big industry with a lot of moving parts, especially when it comes to facilitating a commercial purchase or sale. From negotiations to appraisals and contracts, there are several different steps to take, and multiple parties involved. One big factor that may help move this type of deal to the finish line quicker is the debt-service coverage ratio (DSCR) loan.

DSCR loans are a special type of loan for real estate investors and mortgage brokers seeking to qualify for a mortgage using the cash flow generated by their investment property instead of traditional income.

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

What is DSCR?

To put it simply, DSCR is the ratio of the net operating income of a business or property to its obligations, such as outstanding debts and expenses. This is a way of measuring whether the entity in question will be able to pay its mortgage from the cash flow generated by the property. This is ultimately the same idea as a debt-to-income (DTI) ratio in residential real estate. The only difference is a DTI is measured using your personal income, not a business income.

How to calculate DSCR

Calculating DSCR is simple. Divide net operating income (NOI) by total debt service (TDS).

To calculate NOI:

Revenue – Operating Expenses

To calculate TDS:

Principal Payment + Interest Payment + Lease Payments

For example, if a business has a net operating income of $200,000 and a total debt service of $150,000, the DSCR is approximately 1.33. The business has 1.33 times the cash flow to make payments toward debts. There are also real estate investing apps that can help you track and calculate these important numbers.

What is a DSCR loan?

DSCR loans are ideal for investors who want to qualify for a mortgage based on their investment property’s cash flow. This is in place of tax returns, personal income proof, and other forms of financial verification. It can quickly identify whether a borrower will be able to make necessary payments, helping lenders qualify for loans.

DSCR loans are available from many different types of lenders, including banks, credit unions, and private companies. In turn, they can be used to purchase, refinance, build or even rehabilitate.

Additionally, DSCR loans typically have a lower interest rate than other types of loans because they’re considered less risky. The DSCR gives lenders confirmation that the property will generate enough income to cover debts.

Who is a good fit for a DSCR loan?

This loan is ideal for investors who don’t want to provide employment or tax information to lenders, as well as self-employed borrowers who are living off rental income. An investor with several properties who has reached the traditional credit limit of ten would also be a candidate for a DSCR loan.

How do you qualify for a DSCR loan?

There are no hard and fast rules as every lender will have a different set of requirements. That said, most lenders will require a minimum DSCR that falls somewhere between 1.2 and 1.5. If a borrower’s DSCR falls below this threshold, a lender may refuse the loan or request additional collateral.

Benefits of a DSCR loan

If you’re a good candidate for a DSCR loan, it’s important to understand the benefits. Here are some of the advantages of going this route:

Faster processing time

Eliminating the need to produce personal financial information leads to a streamlined and quick application procedure.

Personal income is irrelevant

Because DSCR loans don’t evaluate personal finances, they’re more accessible to borrowers without considerable savings or other assets.

It provides opportunities for all investors

Whether you’re new to investing or a seasoned pro with large-scale pieces of real estate, DSCR loans are a smart option. They can provide the funding you need to grow your business and pursue new opportunities.

Although these are some of the big benefits to note, unlimited cash-out options are another appealing factor. Plus, you can commit to several properties at the same time.

What if your DSCR is too low?

If you’re realizing that your DSCR isn’t going to make the cut, there are things you can do now to improve your chances of being approved. First, pay down your existing debt as much as possible. Next, take a look at your operational structure and determine where you can reduce expenses. Identify problem areas and make changes to save money. Eliminating unnecessary costs will improve the big picture. Once your DSCR is higher, you can reapply and begin your search for a real estate agent.

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.

Frederick 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.

4 Key Asset Allocation Strategies for 2023

We all know how painful 2022 was for investors. To put it in perspective, conservative balanced portfolios with 60% in equities and 40% in fixed income were down almost 20%. The more aggressive, all-equity growth portfolios were down over 30%. Even 20-year treasury bonds lost 30% in 2022.

This carnage was caused primarily by the Federal Reserve raising interest rates seven times last year, though the war in Ukraine and China’s restrictive COVID policy did not help. After such a horrible year, what do you do with your money? How investors position themselves from a risk perspective is vitally important; one way to do this is through proper asset allocation strategies.

READ — 7 Crucial Investment Strategies for 2023

According to Investopedia, “asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance, and investment horizon.” Investors must ask themselves how they would feel about losses of 30% versus gains of 30%. Is it more comfortable psychologically not to lose that much money on paper in a bear market or miss out on major upside during a bull market? If the answer is “I would rather not lose 30%, ” then you may want to add more defense to your portfolios through diversification. Typically, this is done with bonds, cash, or alternative investments. Another aspect of picking the right asset allocation strategies is whether income is important. If it isn’t, then a total return approach is another way to invest. The third option would be a balance of the two.

Asset Allocation Strategies: Income Investing Approach

For some investors, buying stocks and bonds for income feels better than just investing for growth, in principle. At least your portfolio is generating positive cash flow. After a year like 2022, this makes perfect sense. However, from 2019 to the end of 2021, you would have missed out on a lot of upsides when growth stocks were up double-digits.

The good news for income investors today is bonds offer much higher yields than just a year ago. In fact, you can get almost 5% on a 6-month treasury bill. With the 20% correction in stocks last year, companies’ dividend yields are higher too. Alternative investments may even pay 6-8% in distributions. With the uncertainty surrounding inflation and the possible moves by the Federal Reserve, if you can get paid 3-5% in income from dividends, interest on bonds, or distributions from alternative investments, that might be a safer way to go after last year’s carnage and nowhere-to-hide mentality.

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

Growth Approach

Another approach to investing is to buy investments strictly for growth. This was a very successful investment strategy for many years until last year. In the low-interest rate environment from 2008 to 2021, companies with no dividends and strong sales did extraordinarily well. The largest technology stocks were the obvious winners, but cryptocurrencies and real estate took off too. The mindset was to buy riskier assets because inflation didn’t exist, and with yields near zero on bonds and money market funds, you were losing money on your cash. In a higher inflation and rising interest rate environment, riskier assets get sold, and investors gravitate toward safer investments. We saw this in 2022.

Balanced Approach

When it is difficult to decide between an income or growth approach, then a great alternative is a combination of the two. This simply means having 60% of your portfolio invested in stocks and 40% invested in bonds, alternatives, and cash. This strategy worked great from 2019-2021 but did not work in 2022 because of the massive increase in interest rates and the selloff in bonds. Now that the bond market has recalibrated and yields are so much higher, today is a much better entry point to build a balanced portfolio. You may be able to get a 3-4% cash flow stream with good diversification and less volatility, too.

The Bottom Line

Investing isn’t easy, particularly after a year like 2022, but as our Chief Investment Officer, Michael Dow likes to say, “volatility is the price we pay for long-term wealth creation in the markets.” It is time in the market that counts, not timing the market. Nobody can perfectly time the market. In fact, if you miss the best five trading days of the year, you will make significantly less money over the long term. However, having said that, you also need to sleep at night with asset allocation strategies that allows you to do that. If you get that piece of the puzzle right, hopefully, you’ll be able to retire comfortably down the road.

READ — Mapping Out Financial Success with Retirement Planning

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.

8 Questions to Ask a Potential Real Estate Investing Partner

Investing in real estate is both lucrative and challenging. For this reason, many people choose someone who shares the same vision and offers a complementary skillset as their real estate investing partner.

The ideal partnership will take your business to new heights. You may even achieve a level of success that wasn’t possible on your own. On the other end of the spectrum, a failed partnership can lead to legal feuds and wasted money. Picking the right real estate investing partner is crucial and can easily make or break your vision.

In addition to selecting a reliable real estate agent, choosing a real estate investing partner is one of the most important decisions you will make. Here are eight questions to ask potential candidates to help you get it right the first time.

READ — 6 Advantages of Getting a Real Estate License as an Investor

Are You in a Good Position Financially?

This is a question that goes far beyond a person’s salary. The answer should encompass every aspect of financial health, including debts owed and other active investment commitments. The right person will be open and honest during this type of conversation, providing a clear picture of their financial standing. Be wary of anyone who seems guarded or private in this discussion.

Do We Share the Same Values and Vision?

Your values make up who you are and determine how you embrace success or navigate challenges. Honesty, respect, and integrity are all examples of values that help a person develop a moral compass. Ask your potential real estate investing partner about the values they find most important.

Be sure to discuss your vision for the partnership and future endeavors. You should be on the same page regarding both short-term and long-term goals. For example, are you open to exploring FSBO listings or would you rather stick to investments that are backed by a real estate agent? Is the goal to create a lucrative business to put on autopilot, or do you want to actively and continually grow the portfolio?

Many disagreements arise from real estate investing partners who don’t share the same vision for the business.

What Are Your Expectations?

Realistic expectations are essential when it comes to real estate investments. Many people make the mistake of assuming they’ll achieve maximal results with minimal effort and small amounts of capital.

Although real estate can provide passive income in some situations, it usually takes time and effort to get there, not to mention a substantial initial investment. Discuss the expectations your potential real estate investing partner has and ensure you’re on the same page, both grounded in reality.

READ — How to Invest in a Rental Property with No Money Down

How Do You Handle Stress and Pressure?

Real estate is a high-stakes business where things can quickly go awry. Even the smoothest transactions are filled with pressure and stress. It’s important to know how someone handles these types of situations. Ask your potential real estate investing partner for an example of a time they navigated intense stress or scrutiny. You may even want to provide a hypothetical scenario as a prompt to find out how they would navigate various types of situations.

What Are Your Unique Strengths?

Everyone brings their own experience and strengths to the table. Hone in on what your potential real estate investing partner can offer. Do they have proven success in the commercial space? Are they drawn to multifamily housing in large metropolitan cities? Perhaps they’re an expert in flipping houses. Make sure you have a full understanding of what they have to offer and how you can work together to achieve big goals.

How Would You Prefer Profits Be Divided?

Although many partnerships are 50-50, this isn’t always the case, and it doesn’t have to be if you agree on a different arrangement. Ask your potential real estate investing partner how they’d like profits to be divided. Will the division be based on how much money each person invests? What happens if one of you is putting in more time and effort? Will fees and realtor costs be split evenly? This is an important conversation that will help you put a plan in place.

Who Should Be in Charge of What?

Partnerships can be organized in many different ways. Although it may seem ideal to have each person completely involved in every decision, this is rarely easy to accomplish.

Some of the most successful partnerships are built on mutual trust that allows each individual to act on behalf of the other person. Whether you’re on vacation or tied up with other business ventures, it’s helpful to have someone who can act in your interest if need be.

Discuss the ideal landscape of your partnership and whether certain tasks can be delegated. Who will conduct property research? Will someone be in charge of coordinating with the investment real estate agent you choose to work with? Develop a plan for your individual responsibilities from the outset.

What Happens If Things Aren’t Going as Planned?

Even with the best intentions, some partnerships don’t go as planned. In the ideal scenario, this is a mutual revelation that leads to an amicable parting of ways. Discuss the possible scenario of one or both parties wanting to dissolve the partnership. This conversation may be difficult, but it could help you prevent drama and turmoil in the future.

7 Investment Strategies for 2023

In 1992 Queen Elizabeth was famous for saying “annus horribilis” when three of her four children’s marriages dissolved and Windsor Castle caught fire – a horrible year. The same could be said about 2022 for investors and investment strategies. A portfolio invested 60% in stocks and 40% in bonds was down double digits, one of the worst years for these types of balanced accounts since the 1930s. Investors lost more money in the iShares 20+ Year Treasury Bond ETF than the S&P 500 Equity Index. This is an extremely rare phenomenon; investors, and their typical investment strategies, typically don’t lose more money in bonds during equity bear markets.

With the Federal Reserve aggressively raising short-term interest rates since March, there has been nowhere to hide in either the stock or bond markets. Wall Street analysts recently readjusted their FED Funds estimates higher. It appears short-term interest rates are headed to 5% by the end of the first quarter of 2023. So, with this as a backdrop, how do maximize your investment strategies in the new year?

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

Time is on Your Side

There is an old adage: It is time in the market that makes you money, not timing the market. This is particularly relevant in the case of 401(k) and IRA accounts. If you are five or more years away from retirement, you can afford to have a higher allocation to stocks than bonds, and quite frankly, you should. One way to take advantage of the current bear market is to dollar cost average by adding more equities in your 401(k)s with every paycheck or to your IRAs annually. If you choose this option, be sure to set up a dividend reinvestment plan. If the markets continue to get cheaper, at least you are adding additional shares at lower prices. Eventually, when the markets turn around, you will have added to your equity holdings during a tough bear market.

Diversification May Work Better Next Year

This is the first year in three decades where diversification did not work. You lost less money in the S&P 500 ETF than in a 60/40 balanced account comprising stocks and bonds. Bonds normally act as an effective hedge against a weak stock market or financial crisis; however, in 2022, bonds were hurt by rising interest rates.

There could be good news though for 2023. After all these rate increases, and with treasury bills yielding 4% (a year ago, they were zero), the odds of bonds producing positive returns next year have improved dramatically. With the yield curve being inverted, you can take less duration/interest rate risk because short-term treasuries pay more in interest than 10 and 30-year treasury bonds today. Once the Federal Reserve stops raising rates, you can buy longer-term bonds and lock in rates, but until that happens, there is no reason to add interest rates or credit risk to your bond portfolios.

READ — Does an Inverted Yield Curve Portend a Recession?

Maximize Retirement Account Contributions

Bear markets are the best time to optimize your investment strategies and invest the maximum you can. Try to put 10%-12% of your paycheck into your 401(k) every month. Not only is it a great way to save money, but it lowers the amount you get taxed from paycheck to paycheck. For example, if you make $100,000 a year and put $10,000 into your 401(k), you will only get taxed on $90,000, not the full $100,000 – A win-win. If you haven’t opened a Roth IRA or regular IRA yet, now is a great time to do so. Next year you can contribute an extra $500. If you are over 50, you can contribute $7,500 in 2023.

Pay Off Debt

If you have cash earning close to zero in a checking or savings account at a bank, use this extra cash to pay off high-interest credit card balances. If possible, it is best to avoid paying double-digit interest rates. Additionally, if you have any adjustable-rate loans, like a home equity line or an auto loan, you could see a considerable increase in your monthly payments if your loans are set to readjust higher. If you have student loan debt above 6%, it may be best to pay that off too.

Buy Dividend-Paying Stocks

Technology and other riskier stocks were great investments when interest rates and inflation were low, but now that has changed. With massive inflation and interest rates up 4% in 2022, these stocks are down twice as much as dividend-paying stocks. The market is now favoring companies that pay dividends, and more importantly, have the cash to increase their dividends annually. If we have a recession in 2023, defensive sectors such as healthcare, energy, and consumer staples will be a safer place to focus your investment strategies until conditions improve.

Buy Short-Term Bonds vs. Cash

For the first time in 14 years, you can get paid 4% on your cash if you invest in treasury bills that mature in less than one year. You buy them at a discount, and when they mature, you get all of your principal back. For example, if you invest $10,000, you only pay $9,900; six months later, you get your $10,000 back with a $1,000 gain (yield or interest earned/accrued).

Buy I-Bonds-Savings Bonds

These savings bonds offer a very attractive interest rate of 6.89% until April 2023. However, there are two things you need to know: 1) you can only buy them in $10,000 increments per family member, and 2) you can only buy them directly from the U.S. government on their website.

The Bottom Line

No question about it: 2022 was a challenging year to be a conservative investor. As Winston Churchill was famous for saying during the start of World War II, “Now is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” The same could be said for the Federal Reserve’s mission to bring down inflation by raising short-term interest rates. If inflation continues to come down next year, they can stop hiking interest rates. Once this happens, investors may feel more comfortable investing in bonds with higher yields and stocks with lower price-earnings ratios. Wouldn’t that be a nice change in 2023?

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. Beacon Pointe provides links for your convenience to other providers’ websites. Beacon Pointe is not responsible for errors or omissions in the material on third-party websites and does not necessarily approve or endorse the information provided.

5 Things to Know Before Investing in a Warehouse Space

Among the many options available for investing in real estate, a warehouse space is a unique commercial niche with growing opportunities.

It’s no secret that online shopping has been on the rise for quite some time, especially in the wake of the COVID-19 pandemic. As e-commerce demands continue to tick up, warehouse space is becoming more and more valuable. Consider the projection that Amazon alone is slated to have at least 355 warehouses covering 319 million square feet by 2023.

If you’re an investor searching for more passive income, warehouses may be the ticket. But this is a unique industry that requires a little knowledge and preparation before you dive in. Here are 5 things you should know before investing in a warehouse space.

READ — Pros and Cons of Investing in Student Housing

1. Types of warehouses

As you begin searching for warehouses, it’s important to know the various purposes for which they’re used. This will help you determine the best fit for your interests and financial needs. Here are some of the most common types of warehouses in the U.S.

Distribution

Distribution centers are typically focused on providing customers with products in a timely manner that ensures quality. These spaces are filled with items for a short time before they’re packaged and shipped to people who are in the surrounding areas. What’s more, many of these warehouses are outfitted with advanced technology because of the need to facilitate processes efficiently.

Manufacturing

Manufacturing operations require many different materials, components, and parts. To ensure that assembly or production goes smoothly, manufacturing warehouses nearby must keep these various items in stock. These types of warehouses are often connected to the manufacturing plants themselves for easy transfer.

Public

Small businesses have a unique opportunity to reduce costs by relying on public warehouses. These are typically available on an on-demand basis with flexibility in offerings. Business owners may have the option of monthly terms, as well as per pallet or square footage pricing. This business model is especially ideal for seasonal businesses or those with short-term needs.

Private

Private warehouses are owned by retailers who must store large amounts of inventory and generally want more control and ownership of their processes. Although the costs associated with maintaining a private warehouse are high, the return on investment is often promising for large businesses.

Climate-controlled

From medicine to perishable food, plants and even cosmetics, a climate-controlled warehouse is designed to protect items that need a cool environment. Many of them also use refrigerated trucks for transport to and from the warehouse.

2. Warehouse design elements

Every warehouse will have different design elements depending on when it was built and what it’s used for. Newer warehouses likely include advanced technology to assist businesses with communication and automation. This can be a huge benefit when it comes to finding tenants.

Although it’s possible to purchase an older warehouse and make the necessary improvements, this usually requires an extensive investment. If you decide to go this route, work with a low-commission real estate agent to at least minimize your purchase costs. This will give you a bigger chunk of change to use when you upgrade the space and optimize it for your desired tenants.

3. Projected ROI

There are two benefits of renting out warehouse space. First, the average lease period is between seven and 10 years. This longevity results in predictable tenant income without the stress of frequent turnover.

Further, the ROI for a warehouse usually comes in at approximately 8-10% annually. A rental property calculator can help you take the guesswork out of a potential deal and determine what your cash flow will look like. Cash on Cash Return (CoC return) is another method of evaluating the money earned on the actual cash you’re investing into a property.

Remember, setting rental rates for your space is an important part of this equation. A rate that is too low won’t yield the cash flow you need, but a rate that is too high will make it difficult to fill vacancies.

4. Location and accessibility

Location is a huge factor when considering whether a warehouse space is a smart investment.

Many e-commerce businesses require close proximity to major highways, big cities, and even railways or airports. It’s also helpful to search for warehouses in logistics parks and other industrial zones. These investments are profitable because they naturally promote an efficient supply chain.

Likewise, the geographical location shouldn’t be so remote that it’s difficult to hire workers. Fulfillment centers and manufacturing centers often require hundreds of employees, providing a boom in local job availability. Knowing that this will be a need, you want to ensure there is demand in the region.

5. Tenant profiles

Your tenants have a significant impact on your ability to be successful in warehouse leasing. Depending on the type of warehouse you invest in, there will be certain types of tenants that are ideal to fill the space. These should be financially stable companies with promising track records and solid projected growth.

READ — Tenant Scams: How Landlords Can Spot and Avoid Them

In addition, it’s helpful to find tenants with interest in long-term leases. This is usually a win-win for both you and them as it leads to stability.

If there are existing tenants in the space you’re considering, research their operations and the current terms of their lease. Again, the financial health of your tenants will determine your long-term success. If the current tenants are dependable and you can keep them after purchasing the property, this reduces the strain of screening new tenants.

Are Warehouse Spaces Right For My Investment Portfolio?

If you’re interested in building wealth through real estate, warehouses present a unique long-term opportunity. The key is to diversify your portfolio and be patient. Although real estate always requires some level of risk, the rewards can be great if you do your homework and make careful choices.

If you’re unsure about a particular investment opportunity, seek out a trusted financial adviser to help you analyze the details. In addition, a realtor with affordable commission fees will help you keep more money in your pocket during the transaction.

Mapping Out Financial Success with Retirement Planning

Planning your retirement can be overwhelming, but it is also one of the most important things you can do for yourself. You may think that this happens later in your life when you’re about to retire. However, it starts earlier than you think.

Here’s everything you should know about retirement planning to help you build a financially stable future.

READ — Choose Your Own Adventure: What’s Your Investment Path?

Why Should You Consider Retirement Planning?

Retirement planning is setting up your finances so you’ll have enough money to cover your living expenses after you stop working. Determining how much money and income generated from investments you’ll need are all part of the plan. This will ensure that your needs are met, and your savings can sustain your day-to-day in retirement.

There are many reasons why you should consider retirement planning as early as you can. Here are some of them:

Planning your retirement early can help determine when you can stop working and how much money you’ll need to live comfortably without working.
This can also help you decide the type of retirement lifestyle you want.
It may even relieve some of your stress and anxiety concerning your financial security after retirement.

What Do You Need to Consider?

Retirement Age

You don’t want to be working until your bones are frail and brittle. As such, it’s essential to know when you want to retire and how much time you have until then. Knowing when you plan to stop working will help guide you through the rest of the process.

Income Needs

After determining when you want to retire, it’s time to consider how much money you’ll need each month. This is where income concerns come into play. This includes the cost of necessities like housing and food or other expenses like entertainment and travel.

If you plan on taking up a new hobby or pursuing a sideline entirely different from your career path, your income needs may be higher than others.

When planning your income needs, consider your current financial situation. This will help you determine how much money you can save and what expenses to eliminate. Also, don’t forget to leave some room for inflation as this can affect the prices of your needs.

Investment Options

The investment options available vary from person to person based on their needs, goals, and risk tolerance levels. If you’re a risk-taker and have disposable income that you don’t mind losing, stocks may be a good option. But for those who like to keep it safe, government bonds are one of the best options for you.

The best investment strategy is not to put all your assets in one basket. You can split your money into stocks and the other 60% into bonds. This means you have more chances of generating a greater investment. Make sure you follow the strategy that suits your needs for the present and future.

How Much Do You Need for Retirement?

The first step in figuring out how much money you’ll need for retirement is how long you’ll live. The longer your retirement period, the more money you’ll have to save and invest. This ensures you have enough income when the time comes to stop working.

Your age is also important. If you’re in your 20s or 30s, it might make sense to focus on saving up as much as possible. Doing so can take your worries away about running out of cash later in life if something unexpected happens, like a medical emergency.

On top of this, your retirement savings should keep pace with your lifestyle. Although there will be changes to it when you grow old, you may have non-negotiables that you’d want to spend on.

Also, don’t forget to leave some room for inflation and tax rates since these will significantly affect your expenses.

READ — What Does a Recession Mean for Your Finances?

What are the Types of Retirement Plans?

Employee-Sponsored Retirement Plans

The money you contribute to these plans is tax-deferred. This means you don’t have to pay taxes on your contributions until you withdraw the money later. Additionally, many employer-sponsored plans offer matching contributions that help boost your savings even more.

It has several types, including thrift savings plans, 401(k)s, 403(b)s and 457, all of which are tax-advantaged savings plans, giving you tax benefits for contributing money.

Individual Retirement Accounts

This is one of the most popular methods for retirement savings. It allows you to save money tax-free and deduct contributions from taxable income depending on the account type.

You can choose from two types, varying in their tax benefit. Traditional IRAs don’t let you pay taxes when withdrawing during retirement. However, when you remove them, you’ll need to pay any growth within the account.

Meanwhile, Roth IRAs require you to pay taxes at your rate when withdrawn during retirement. However, withdrawals are made tax-free once retired, giving Roth IRAs a better advantage over traditional ones if your tax rate is expected to be higher when retired than when working.

Pension Plans

Pension plans provide long-term income in exchange for contributions made by both the employee and employer. They’re meant to supplement other retirement savings vehicles such as an IRA or 401(k).

Self-Employed Retirement Plans

Self-employed retirement plans allow you to set up your retirement plan and save for your future without relying on other people or companies. This can be a 401(k) or an IRA; the only difference is that it is flexible and customizable to suit your needs.

Save Up for a Financially Stable Future

Having a financial game plan is essential for any young professional. Whether you’re a stay-at-home parent looking to build a retirement fund or have several decades of work, having a plan can often be the difference between retiring financially stable and retiring with financial headaches.

By outlining an action plan and taking steps to maximize your retirement contribution, you’ll be able to make the saving process for retirement easier and more rewarding. But that’s a big part of it—it’s up to you to create your roadmap for success.

Marc Daner is a Registered Investment Advisor with three decades of experience. He is a staunch and knowledgeable advocate for financial success. He can help plan for a secure retirement; manage assets, liabilities, and cash flow; and avoid or defer income, capital gains, and estate taxes.

How Do Interest Rates Impact Real Estate Investing?

Inflation is rising at a historic pace, putting pressure on budget-conscious consumers that hasn’t been felt in decades. Prices for goods and services have reached a year-over-year rate of 9.1%, the highest the U.S. has experienced since 1981, according to data from the Bureau of Labor Statistics.

In addition to rising prices for everyday goods and services, home prices have leaped even higher than the inflation rate in the past two years.

In the face of this inflationary climate, the Federal Reserve continues to raise interest rates in an effort to slow spending and tackle the economic problems Americans are experiencing. As a result, the housing market may experience challenges in the months to come.

How will this affect real estate investors? Each portfolio is different, which means situations will vary. Here are a few things to consider.

The Economic Impact

The higher cost of borrowing results in more expensive credit card and loan payments, which usually encourage people to reduce spending.

For most families, saving will become a top priority. Americans may be less inclined to go on vacation, visit restaurants, and spend unnecessary money.

This conservative spending also translates to businesses, which may be more likely to reduce investments if the economy feels rocky. This can even have an effect on hiring.

The Real Estate Market Impact

When interest rates rise, buyers become more hesitant. They often analyze their pocketbooks, reevaluating whether it’s a good time to take out a mortgage — especially when high interest rates make borrowing more expensive.

A downturn in prospective buyers could lead to more supply, prompting a drop in home prices.

Your Existing Portfolio May Be More Profitable

Rising interest rates can actually be good news when it comes to your existing properties because as interest rates rise, so does rent.

Assuming you have a fixed-rate mortgage and your monthly payment won’t change, raising your rental prices to reflect the current market will increase your monthly income.

Selling May Yield Strong Returns

Investors who are planning to sell their properties may expect strong returns, but it depends on their situation.

As interest rates rise, there may be less demand for housing because borrowing is so expensive. When demand is down, it can result in two different scenarios.

If the property is highly desirable, buyers may be willing to make a competitive offer on the home, especially if they’re moving to escape high prices in other cities or states. However, some sellers will find that they must reduce their price to attract buyers.

For investors who want to sell their investment properties, there are many options to consider when determining where to invest those proceeds.

READ — Pros and Cons of Investing in Student Housing

New Investments Will Likely Cost More

Unfortunately, real estate investors will likely face higher home prices, just like the average home buyer.

Even if you find a property that would normally fall within your budget comfortably, rising interest rates can make your monthly payment more expensive.

Even a 1% difference in interest rates can result in a difference of more than $100 on a home that’s priced at $200,000. Although that may not sound like much, over the course of a year, this small difference will add up.

For investors who need to borrow much more than $200,000, the difference will be felt on an even more significant level. You may be able to shop around and find more appealing loans for your investment properties, but it won’t be easy in this economy.

READ — How to Invest in a Rental Property with No Money Down

How To Move Forward

First, remember that real estate is a worthy investment strategy that can usually weather economic storms.

Financial advisors recommend real estate investing because it can help Americans preserve and build wealth, and the value you’ll reap is much more predictable than other methods of investing, such as the stock market.

As you evaluate your portfolio, think about your long-term goals and when you’d like to reach those goals. For some investors, it may be best to look for a real estate agent who can help you advance your purchasing goals, especially if you’re already in the business of flipping homes or have capital readily available.

On the other hand, many investors may want to hold off on acquiring new property. There’s nothing wrong with patiently paying down your mortgages as you wait for the market to turn around.

Your investment strategy in the midst of rising interest rates and inflationary pressure will depend on your portfolio and goals.

Luke 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 also 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.

Pros and Cons of Investing in Student Housing

While college enrollment has declined slightly since the onset of the pandemic, there are still nearly 16 million college students in the U.S., and around 63% of high school graduates go on to enroll in college, including 56% of Colorado high school grads. That’s a lot of college students — and they all need somewhere to live.

Student housing is perennially one of the soundest real estate investments you can make, especially when it comes to accessibility for the novice investor. While you might be able to unearth value by hunting off-market, that takes luck and experience, and while using a low commission real estate agent can help you increase your profit margins, that won’t save you if the market turns. On the other hand, investing in student housing just means finding a college town, buying a property, and putting a “for rent” sign out.

That said, investing in student housing isn’t for everyone. While maintenance requirements are some of the lowest of any real estate type (for reasons we’ll touch on below), rents are often guaranteed by co-signers, and there’s a constant and growing supply of new tenants, it also comes with some unique challenges that can be intensely frustrating. Check out these pros and cons of investing in student housing.

Pros

High Demand

Colleges generally provide housing for some of their first- and second-year students, but the majority of the student body needs to find off-campus housing. This means that there is a consistent, durable, high demand for student housing in college towns. It’s also relatively easy to find good value in a college town, which makes student housing an attractive option for an investor who’s just starting out.

While a conventional residential neighborhood may experience surges and declines in popularity (and rents), when it comes to student housing, the closer you get to campus, the more valuable the property is going to be, and not much is going to change that. That means your investment is going to be profitable even if you’re paying premium prices and full real estate commission.

High Rents

Rents are generally pretty high in college towns. Part of this is due to expenses on your end; turnover and vacancies are high, and students tend to put a lot of wear and tear on their housing. The rest is due to the simple fact that you’re in a captive market. The students you’ll be renting to can’t commute from farther away, and they can’t live on campus. They have to rent student housing, and for all practical purposes, they’re confined to a pretty small physical area.

On top of that, students tend to live pretty densely. That single-family home you might rent to a family for $1,800 a month could now rent to five roommates who’ll pony up $500 apiece.

Relatively low maintenance

In general, college students aren’t going to demand high-end finishes like marble waterfall counters or a stainless steel chef’s range. (There are exceptions, of course — high-end student housing is still high-end.) College student tenants are satisfied with a clean, functional home, and won’t nitpick about the kind of small problems an adult professional or family might make into an issue. That translates to fewer demands on you and your professional property management — so much so that you may even be able to manage the property remotely.

Cosigners offer special security

Since most college students haven’t yet established a credit history, it’s fairly common to get parents to cosign the lease. So if your student tenant forgets to send in the rent, loses their job, or even drops out of school, you can still be assured that you’ll get your rent.

READ — Tenant Scams: How Landlords Can Spot and Avoid Them

Cons

Wear and Tear

Although student housing is one of the soundest investments you can make, college students can put a lot of hard miles on a property. From weekend parties to setups where six people are sharing four bedrooms (and one and a half bathrooms), student housing tends to age in dog years. College students aren’t known for being meticulously clean, either, and problems like mold, leaks, or pest infestations can quickly lead to more serious damage.

High turnover

Among landlords, long-term, dependable tenants are highly prized. That’s because cleaning up and repairing a property between tenants is costly and time-consuming (and that vacant time represents lost money), and each time you get a new tenant in a property, there’s a chance they’ll be difficult or negligent.

With student housing, you’re essentially guaranteed to have turnover every year or two. That’s going to put a lot of pressure on you to get the property fixed up and rented quickly once a tenant moves out, and to properly screen new tenants. That can be tough if you’re an inexperienced investor.

READ — 7 Tips for Reducing Tenant Turnover

Seasonal demand

The rental cycle for student housing is going to revolve around the school year, so if your property becomes vacant in the off-season, you’re probably going to be stuck with a vacancy until the students come back to town. You might also have to deal with summer subleasers in your property, and short-term subleasers can be flaky. The complications from this kind of uneven demand can be very disconcerting to an investor who’s just starting out.

Experienced student housing landlords have also noted that, due to the strong seasonal demand cycle for student housing, you more or less have to rent your property before the start of the school year or face a year-long vacancy. Once the school year starts, students aren’t going to be trickling in a month or two into the semester looking for housing. Another issue is that non-students don’t typically want to live in or near student housing.

Dependent on the university

You’ve probably seen a common theme through all these pros and cons: the success of your student housing investment is intimately tied to the college or university. While the college thrives, so will your property. On the other hand, if the university fails or contracts, your investment will likely suffer too, regardless of the property type. Make sure the educational institution you’ll be tying your prospects to is thriving, stable, and secure!

Luke 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 also 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.

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