Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
There was an article in Pensions & Investments that caught my interest: “Threat of Rising Rates Shifts All Eyes to Yield.”
I’m a geek for this type of thing because I like articles that give me a window into what might happen so I can get out in front of it. And this is one of those articles.
The subheading was: "Asset owners move higher on risk spectrum with shift into non-traditional strategies.”
What was your first thought when you read that?
If it was “Private Investors,” mark yourself down for one point. Because that’s the first thing that came to my mind too.
Why?
Well think about it. Why do private investors give their money to you and me? I can tell you that it’s not because of our sparkling personalities, that’s for sure. They give us their money for one reason - yield. The interest rate. ROI.
Whatever you call it, they give us their money because of how much they’re going to put in their own pockets by doing so.
And if you’ve been following what’s happening in the economy, you know that the folks with the cash have a really big problem on their hands right now – due to the absurdly low interest rates they aren’t even making enough ROI to cover inflation.
And if there’s one thing that rich people really hate, it’s when their money isn’t making them any MORE money. When that happens, they get busy looking for other ways to invest their money. Or I guess I should say that they get their PEOPLE looking for other things to invest in.
That’s basically the focus of the article. It explained that, while "some are moving into more typical yield-seeking bonds, others explore non-traditional investments that straddle the line between bonds and alternative investments.”
Care to take a guess what fits in that space between bonds and alternative investments?
Yup. You do. And it’s a pretty good fit too. How good? Well the article described two scenarios that are hot right now with the deep pockets crowd:
1. "Direct lending, such as leveraged loans transactions, also is very hot right now, among asset owners. A lot of money is being raised in it”
2. "Also garnering asset owner interest are debt private placements. They have long duration and low liquidity, but they have a 20- to 40-basis-point premium to public bonds and less risk than high-yield.”
Either of those sound familiar? They should. Both are just fancy-pants ways of describing types of private lending.
Ch, ch, ch, changes…turn and face the stranger.
It’s going to take some work though to tap into these funds, because it’s going to involve getting these folks to change investment vehicles.
The article described the situation this way:
"Concerns about shifting from core and core-plus strategies center around predicting just when rates might increase, and risking the loss of downside protection with a move toward more esoteric investments in an asset class that historically has been staid and conservative.”
Yeah I know. More ivy league speak…
All it says is that the deep pockets crowd is afraid to change investment vehicles because they don’t know when interest rates are going up and they don’t necessarily want to be early and take on the additional risk associated with these new-fangled investments. And that they’re worried about losing their money with these new-fangled investments once they make the switch.
The crazy thing is, we as real estate investors have something pretty cool to offer this crowd.
Investing in real estate when interest rates are going up works great, because if you’re a flipper the money gets turned over every few months, and the interest rate can be reset higher as necessary with every new deal. So they’re protected on the upside.
And guess what? Unless we experience the Armageddon scenario or a meteor strikes earth, real estate prices aren’t going to zero any time soon. And in fact they’re going in the other direction. So unlike investing in Lehman Brothers, GM, Enron, or a bunch of other “blue chip” companies, real estate is actually a far safer investment than the stock market.
The icing on the cake.
Ask your deep pockets friends if they can touch or drive by their stocks and bonds.
Not fair, I know…
But my private investors sleep really well at night knowing that they can drive by their collateral any time they want. It’s local. They can see. And they can touch it. I do ask them though NOT to disturb the tenants. :)
How hard of a sell is this?
It sounds like a no brainer to me.
But just to whet your appetite a little more - the article concluded by saying that the "flow out of traditional fixed-income investments into more next-generation strategies through 2018 will be at least $1 trillion.”
And that: “A lot of money is waiting on the sidelines with full intention of moving ahead to do this.”
The bottom line to me.
It’s two simple things really…
1. You need to have a viable business. Meaning you have to be active and not just a tire kicker. Believe me, the deep pockets crowd can tell the difference.
2. You need to be known in your area as a real estate investor.
That’s it. Because those two things are all you need to get your piece of the action.
Notice though that I didn’t say that you should go carpet bomb every deep pocketed friend that you know with this information. Because I tried doing that myself at first. I failed miserably. And I poisoned a lot of wells.
So get out there. Get your business going. Get your Facebook page going. And get noticed, and get KNOWN in your local community.
Because there’s a cool trillion bucks floating around out there looking for you.
Thoughts?
What do you think about the stuff this article talked about? Agree with me? Lemme hear from you in the comments section below.