INFLATION IS HERE. How Are Investors Best Positioned to Weather the Storm?

Dec 16, 2021 3 MIN READ

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History never repeats but it rhymes.
— Mark Twain

As an investor, I find myself bombarded with a never-ending stream of the 24/7 news cycle, and it’s easy to see why you can adopt a herd mentality.  Pick your outlet today and you’ll hear the same pundits arguing about inflation, FED rate hikes, the Build Back Better bill, COVID impacts, Supply Chain crisis, wealth inequality, and corporate greed surrounding taxation. 

As investors, we’re having to become Marco Economists!  This is a game we cannot control, and while it’s important to understand the Marco picture, it should never become the focal point.  It feels as if these narratives are hijacking sound investment judgments, given the amount of uncertainty, and it’s easy to fall into this trap.  

CPI was reported this week at 6.8%.  I know plenty of individuals that take heed of the CPI calculation.  For example, Bill Ackman this week just demonstrated that when accounting for Owners’ Equivalent Rent (OER), which relies on owner surveys to estimate inflation in the housing cost model, business performance is grossly inaccurate. The largest single-family rental company nationwide reported 17.7% YoY growth vs 3.5% surveyed by owners.  Taking this into account, CPI should be closer to 10.1%.  Wherever you fall on this analysis or argument, 6.8–10.1% inflation is nothing to scoff at.  This is a hidden tax, no doubt about it!

If you’re not in control of monetary policy, you have little to no control. So, how do we look at investing in this climate?  Trying to “time” this market is certainly a strategy but difficult in practice.  The smartest asset allocators can’t time the market, but they do leave clues on how they invest: 

  1. Invest in great businesses with low capital needs with existing cash flow.

  2. Look for investments/companies that can raise prices during this time (Inflation-hedged).

  3. Steer clear of “fixed low yielding” investments that return negative “real” returns.

  4. Utilize low fixed debt to hedge against inflation.

  5. Focus on value creation and increase your core competency.

How this relates to Real Estate Investing: 

We love real estate and clearly, we are biased.  The Central Texas market fundamentals are strong: employment, population growth, rent growth, historical appreciation, and lack of supply to meet demand.   However, not all real estate companies and real estate sectors/asset classes are created equal. 

Every once and a while, I read Trammel Crows notes for surviving a tough market as a reminder of how to run a real estate company:  Run a lean business with minimal overhead; Hire only +10x employees; Be fiscally responsible with cash and reserves; DO NOT GET OVER-LEVERAGED; and Always, always, always force value creationDo not expect the market to push appreciation for you; this is just an added bonus if you get it. 

If you can find investments or real estate companies that match these criteria, you’ll be better positioned to handle the headwinds we are dealing with or that are forthcoming.  With Capitalization Rates at or near historical lows, we find it difficult to assume higher prices on even lower capitalization rates. 

Regardless of the market, finding ways to buy underperforming/distressed real estate while simultaneously forcing value through renovation, more efficient property management/leasing, and saving cost operationally is the best defense in our opinion. 

We can’t control where capitalization rates will be in the future or the cost of debt, but we can focus our energy on ways to increase occupancy, rents, and cost savings.   Using responsible leverage at low-cost “fixed” rates is also a huge advantage right now. 

If you can borrow at 3% (Inflation is 6-10%) and you can deduct the interest payments on the loan, you are supercharging your investment.  These are just a few of the strategies we harness with TRE Growth Fund I. 

Interested in learning more about how we invest? Visit our website at TRE Growth Fund I

Author- Jason Ricks

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