SHOULD WE STORE OUR CASH AND WAIT FOR THE COMING RECESSION? I'M NOT STANDING ON THE SIDELINE.
Hello, Chief economist here with my crystal ball. Is it all about to come crashing down again? Is it going to be just like 2008, where many Americans were getting yanked from their homes? That was a once in a generation Great Recession, where major banks and financial institutions were folding. My guess is it will be more like the Great Correction, or maybe just the Good Correction. You notice I said, "my guess," because no one really knows what it will look like. I will tell you, though, my investor mindset has shifted about storing away cash like a squirrel storing nuts away for Winter.
Would I continue to invest in the ultra-volatile stock market? No. However, I used to subscribe to the saying, “Cash is King," and think that I should be sitting on cash, waiting for the next crash. I have since learned when you try to time the market, be it stocks or real estate – you get burnt. Rather than speculate, I now invest. But what to invest in?
People have their comfort zones, and mine happens to be investing in apartment communities. For one, people will always need a place to live. As I was saying to one investor, you cannot make living “virtual,” as you can with commercial retail. Now watch, pretty soon, there will be Amazon Apartments (stay in your lane Amazon). We can drill down further. What else about large apartment communities help you mitigate risk? Notice I said large? If four people lose their jobs and leave your four-plex, then you are 100% vacant. If four people lose their jobs and leave your 200 unit, then you are 2% empty. 98% occupied… that is healthy in the eyes of the bank (assuming that the bank has survived The Good Correction). With the housing shortage in America, I do not see the need for apartments going away.
Let’s get a little more granular. I have chosen to focus on B and C class apartments, and by this, I mean affordable housing; workforce housing. Don't confuse this with low-income housing. We are then talking D class, and this is not my wheelhouse. These are often referred to as war zones, and they go down the quickest in times of duress. One could argue that crack dealers make good tenants. They are very liquid, and they support the economy. Unfortunately, they are using that liquidity on buying more product, as opposed to paying the rent. They are also influencing your other tenants to use their rent checks on other buying options.
So why not A class? People that like the shiny nickel, also have the shiny car lease payment and the healthy credit card bills. If things become tight, they will have no choice but to scale back and move into your lovely B class apartment. B class apartments can have some excellent amenities. They can have the pool, the gym, the onsite laundry. They just happen to be a bit older. Usually a 90's build. Sometimes an 80's build, depending on what part of the country you are in. They are prime candidates for a make-over, which should allow you to gain some upside on a sale or refinance. This "forced appreciation" is entirely different from market appreciation. When you are waiting or hoping for market appreciation, then you enter back into the world of speculation, and that is precisely what not to do when heading into a correction.
So, is it wise to be sitting on cash? I hate the thought of my money eroding away with 2 ½ to 3 % inflation. I want my money continually working for me, and if I invest it in B and C class apartments, I feel like I am mitigating risk while earning healthy returns. Is there the potential for lean years? Yes. We cannot always be hitting home runs. Having said that, I would rather have some base hits in the works, instead of having my bank account erode away with inflation, or worse yet, losing my shirt in a stock market crash.