Recession Proof Real Estate Investments: Industry Expert Insights


Recession Proof Real Estate Investments: Industry Expert Insights

All of us are being inundated with what is going on in the economy. The big, bad word of recession looms like an ominous cloud in the headlines.

As individuals, depending on where you are in your life cycle, you have valid concerns. Right now, you are probably either losing your tail on your investments or you have it parked in your savings account earning a whopping .01% to .03% annually.

Ignite Funding does not pretend to have a crystal ball; but as its leader’s stare into the eyes of a possible recession, they continue to evaluate what the impact could be in the real estate industry.

Ignite Funding is a hard money lender established in Las Vegas, Nevada in 2011, that provides thousands of individual investors with a low barrier to entry real estate investment. This investment yields a passive, fixed-income stream of 10% to 12% annualized returns, collateralized by real property via a trust deed.

In 2021 alone, Ignite Funding paid out over $20.8 million in interest income to investors.

President of Ignite Funding, Carrie Cook, recently sat down with Director of Underwriting, Pat Vassar to discuss what Ignite Funding does to continue delivering the stability that its investors have become accustomed to.

You can listen to the original conversation on the Ignite Funding podcast, Deeds in the Desert, on Spotify or Apple Podcasts.

Ms. Cook: What does the phrase “recession proof” mean to you?

Mr. Vassar: “Proof” is a bit of a misnomer in the sense that no investment is guaranteed. However, there are pieces of investing, including real estate, that tend to do better in recessionary environments.

Real estate does well because it’s a physical asset and typically generates cashflows in the form of rental income, dividends, or interest payments. These investment qualities are highly sought after when there seems to be additional risk in the overall investing environment.

Ms. Cook: How is Ignite Funding working to provide investors with various investment opportunities at strategic times?

Mr. Vassar: One of the ways we do this is by keeping an eye on factors such as increasing inflation, or the GDP decreasing, or are we seeing high unemployment rates? To give you an example, if we do see high unemployment rates, we are going to want to stay away from the retail sector, specifically the “mom and pops” in the industry.

We want to be lending on projects that, even in recessionary environments, will tend to have what I like to call “sticky” cashflows, like self-storage and healthcare facilities. Healthcare at times is a necessity, not a choice. Let’s say you break your arm, are you going to wait until a “better time” to get it fixed or are you going to seek medical attention right away?

Self-storage has historically been another one of those consistently “sticky” cashflows. There are so many different variables that can influence when people need to use self-storage, such as moving, downsizing, loved ones pass away, and so on. People will put their belongings in a storage unit and keep it there regardless of what is going on a personal level and what is happening in the overall macro-environment.

Ms. Cook: Do you foresee in the coming year that we will expand on those asset types in our lending portfolio in 2023 and beyond?

Mr. Vassar: These are definitely segments of real estate that we are looking to become more involved in. And, just to clarify for those unfamiliar with Ignite Funding, this transition isn’t just a one-time occurrence.

At Ignite Funding, we are constantly evolving our portfolio to be on-pace or a step ahead of the moving markets. Much like the individual investor, the diversification of our lending portfolio across different asset types, borrowers and geographical locations is essential to mitigating risk.

In our industry, you will find many lenders that only work with one type of borrower, like fix and flips, in one region, like Southern California. What happens when that regional market slows down? During the pandemic, we saw record numbers of people moving out of California. Or, what happens when interest rates go up like they have recently? Now the average homebuyer can’t afford a loan payment and will have to wait for rates to go down.

Now who’s going to buy the flipped house so the borrower can pay-off their loan? Those lenders put their entire portfolio at risk because they put all their eggs in one basket. That is not a position we ever want to put our investors in.

Ms. Cook: There are many months, and sometimes even years, of evaluation, research and talking with borrowers to understand their strategy before we lend in a certain arena. That said, tell us about how Ignite Funding got into the self-storage industry?

Mr. Vassar: Over the past 10 years, we have been courting and tracking the growth of various borrowers in this field. One of the projects that we recently funded in Houston, Texas, the borrower had originally come to Ignite Funding for financing about 8 years ago. The borrower was just getting their business off its feet. At that point, they were just a little bit too “green” of a company and we wanted to give them a bit more time to season themselves and prove their abilities up.

8 years later, they have definitely far exceeded that level of risk aversion that we are looking for. Ignite Funding is now in a position to grow with them and integrate their product type into our lending portfolio.

The same rules apply no matter what asset class we are looking to incorporate into our long-term strategy.

Ms. Cook: We have worked with one of our long-term borrowers to finance several healthcare/medical facility projects. Do you foresee this as a long-term asset class for this borrower?

Mr. Vassar: I do for several reasons. Typically, builders only have to work with local municipalities to get approvals and ensure their real estate projects are up to code. With healthcare facilities, you are navigating local, state, and federal levels of government from start to finish. Most builders will shy away from these projects because when you’re dealing with that many government entities, as you can imagine, it is like trying to herd cats.

This makes the barrier to entry for this type of asset class fairly high which means less competition for our borrower. This also means that the margins to build will stay profitable. When the margins continue to remain profitable, the borrower is not likely to default. I do not foresee any of these factors changing drastically in the near future.

You can listen to Mr. Vassar discuss these projects with Edward Homes in our "Meet Our Borrower" segment of Deeds in the Desert, on Spotify or Apple Podcasts.

By Ignite Funding on Feb 27, 2023 8:00:00 AM | | | 4 Comments