Mike Zlotnik - TF Management Group LLC

Why Many CRE Deals Are Delayed Until Late 2025 and Beyond

Many investors are asking about the timing of exits for commercial real estate (CRE) deals [...]

14
Oct

Sustainable Investment Models in a High-Risk Market

Many commercial real estate (CRE) investors are rethinking their strategies to find more sustainable and [...]

11
Oct

Economic Indicators Every Real Estate Investor Should Watch

Keeping an eye on key economic indicators can make the difference between capitalizing on a [...]

11
Oct

Mezzanine Debt and Preferred Equity: Strategic Opportunities in the Current Multifamily Market

Executive Summary The multifamily real estate sector has experienced a sharp rise in distress rates, [...]

01
Oct

The FED has cut rates by 0.5% in Sept 2024. What’s the impact & opportunities ahead?

As of late September 2024, we have officially entered a new era of easing in [...]

01
Oct

Navigating Market Uncertainty: Strategies for Commercial Real Estate Investors

In today’s economic landscape, commercial real estate (CRE) investors face various challenges—from higher for longer [...]

26
Sep

The FED’s Path Forward: Rate Cuts, Economic Outlook, and the Impact on Housing and Debt

The Federal Reserve (FED) cut rates by 50 basis points in September—great news! However, as [...]

25
Sep

Intuitive vs. Data-Driven Investing: Finding the Right Balance

Hello, everyone! Big Mike here, and today I want to dive into the fascinating topic [...]

26
Aug

Commercial Real Estate Investment Trends

Why Now Might Be the Perfect Time to Invest: A Strategic Insight

In the world of investing, timing is crucial. As we navigate the middle of 2023, [...]

26
Aug

Learning from Investment Errors: Crucial Insights for Smarter Decision-Making

There is an old saying, “Fools learn from their own mistakes, but the wise learn [...]

02
Jul

Generate Equity-Like Returns Without Equity-Like Risk

It is Memorial Day weekend. It is important that we remember those who have fought [...]

28
May

We Are All Forced To Do Business With The Biggest Drug Dealer Out There, The Fed.

Who is more powerful: the FED Chairman or the President of the USA? In the [...]

07
Feb

Is a Recession Actually Your Friend?

The term “recession” often evokes fear as it signifies adverse news for the overall economy. [...]

12
Jan

Unlocking Your Financial Potential: Year-End Tax Planning and the Benefits

As we approach the end of the year, it’s the perfect time to not only [...]

24
Oct

Turning the Tide: The Inspiring Transformation of Spanish Cove into Spanish Lake

In the heart of a once-troubled community, a remarkable story of revitalization and renewal has [...]

10
Aug

Making Use of Tax Advantages: The Benefits of Investing Qualified Funds in Tempo Growth Fund II LLC and Executing a Roth Conversion

For investors looking to maximize tax advantages and grow their retirement savings, a strategic approach [...]

24
Jul

Understanding the Four Stages of the Real Estate Cycle

The real estate market operates in cycles, experiencing periods of growth and decline. These cycles [...]

28
Jun

Invest now or wait for better deals later?

It is no secret that rising interest rates are causing massive pain for the US [...]

26
Oct

Spring Season is here in the Northern Hemisphere, but the economic weather is not getting warmer. Instead, it is looking more volatile now with both, raging high inflation dominating media headlines and the quiet talk of an upcoming recession. The FED was sound asleep at the steering wheel for too long, but they woke up in March 2022, and set a very aggressive expectations of many interest rate increases this year in order to fight the inflation, as well as reducing their balance sheet, which implies selling treasuries in the open market or not buying new ones that mature, likely pushing interest rates up along all spectrum of the yield curve (short to long maturities). Yield curve technically inverted on April 1st, with the 10-year treasury yield being 2.39% and the 2-year treasury rate at 2.44%. And that is a technical leading indicator that many experts look for to predict a likely recession in 6-24 months after that event. One thing that is highly probable now is that the FED will accelerate its interest rate increases to slow down the accelerating inflation. Given March reported inflation of 8.5% from a year ago, it is almost a certainty now that the FED will increase its target rate by 0.50% during its May meeting and will proceed with a plan to start shrinking its balance sheet and continue projecting many rate increases in 2022 and beyond. This anticipated FED action plan can have a few unwelcome outcomes: A) Economic Recession: slow or negative economic output growth (very slow or negative GDP growth and high in unemployment) B) Stagflation: high inflation combined with high unemployment and slow growth. Economic recession combined with the high inflation environment. It is almost unreal to be talking about an Economic Recession or Stagflation on the horizon, when the US Economy is running red hot today and the inflation is almost out of control. It is important to acknowledge the fact that the rapidly increasing interest rates will slow the economy down for sure, but it doesn't necessarily mean a full-scale major recession is coming imminently. We live in a bit of an unprecedented time with Covid disrupting a global supply-chain that has never been seen before, and therefore, many past trends and patterns may not exactly hold today the way events took place historically. Nonetheless, rapid interest rate increases from a very low point are extremely damaging to the economy because of the immediate and relatively heavy impact on the cost of the debt service they create. It is not about the rate increase on the absolute terms, but rather it is all about the relative cost to the borrowers that these increases create. For example, the cost of borrowing for Single Family Residential (SFR) investment properties from the most of large portfolio lenders has gone up from under 5% to around 7%, 200+ basis points over a period of about 30-40 days. That is effectively a 40% increase in the payments on those mortgages. Similarly, debt service under most Lines of Credit (LOC) and other variable rate products linked to short term interest rates is similarly up by 30%+. That is a massive change over a very short period of time. And obviously there are more increases coming. The real danger is that the FED is acting on the data coming from the past, and the current interest rate increases may slow down the inflation many months out. And as a result, by the time they are done with the interest rate increases the economy might very well be in recession. This has happened multiple times in the past and probably will happen again. So, what moves can a prudent investor make today that can help weather the potential economic Winter storm? Let's talk about the high-level strategy here. Rapidly rising interest rates are extremely painful to bond investors, especially when the rates are very low to start with. If you have been invested into bonds, you have already taken it on the chin, but the beating is not over. It just started. Perhaps, now is the time to exit most of the bond investments (or bond funds) as quickly as it makes practical sense. Bonds do terribly in a high inflation and rising interest rates environment in general. Stocks aren't happy about the rising interest rates either, especially the companies that have heavily leveraged balance sheets, or those who don't have a big customer install base to increase prices during the high inflation era. Another important concept is that the US Government bonds are perceived to be "risk free". As rates rise, the returns in higher risk investments just look less and less attractive, as investors can deploy their capital without risk into the US Government bonds per say. This concept applies to many equity investments that have a substantial degree of risk. Most of the interest rate sensitive stocks and mutual funds don't look attractive at this stage of the game. Now might be a good time to rebalance an equity portfolio and move a portion of the capital into alternatives, such as Real Estate. But I am not talking about diving into public REITs (Real Estate Investment Trusts), although these investments might have a place in a portfolio. What I have in mind are private Real Estate Investment funds and syndications, carefully selecting the best fund managers and operators, and the best products available to investors. Before we dive into these Real Estate investments, let us first discuss some the basics of the portfolio management to protect against the likely risks ahead: 1) Review your portfolio goals: - Risk / Reward tolerance - Cashflow needs - Risk Adjusted return target - Tax Efficiency - Diversification - Time Horizon - Liquidity Obviously, life events drive changes in goals. For example, making a decision to retire in say 2 years should impact multiple elements of the portfolio composition, lowering the risk, increasing cashflow needs, shifting time horizon of certain investments, adjusting for the likely tax liabilities in retirement. It is prudent to periodically reevaluate your portfolio and its goals even without the life events. Consider going through that exercise now. 2) Rebalance and further diversify: Investments that have run up a lot become good candidates to sell or partially sell, moving the capital into investments that are less volatile, more defensive, and more predictable. The concept applies to Wall Street investments and the alternative investments too such as Real Estate. In Real Estate, there are many hot markets that have outperformed the steady-Eddie markets, and the play today is to diversify out of the highly appreciated assets into more predictable regions of the country that generally withstand economic volatility well. For example, hot markets like Phoenix, Las Vegas, Southern CA, or FL, look a lot less attractive today vs. some of the real estate investors friendly markets in the Midwest. Rebalancing out of heavily appreciated, but interest rate sensitive stocks into defensive Real Estate investments is another idea that makes sense today. Look at broadly diversified Real Estate funds as a mechanism to quickly achieve broad diversification and risk reduction. 3) Invest with people you know, like and trust, and into the projects that make more predictable and less volatile returns in any market. Most investors want to sleep well at night, especially in a down market. All investments have risks. But investing with people who know how to manage risk, especially in a down market can make a big difference in the results. Project selection is also critically important. Selecting projects that are more of "Investment Grade" with more downside protection rather than "Speculative Grade" is critical going into a down market. Now, let's shift our focus into the discussion of what Real Estate Investments make good economic sense today, looking into a rising interest rate environment, with the risk of a recession on the horizon. Affordable or workforce housing projects present a very attractive, downside-protected sector of the economy, given that there is a massive shortage of affordable housing and a strong demand for it. We love the strategy of hotel conversion to workforce multifamily living. Cost basis of these conversion projects is typically substantially lower than the reconstruction cost. These assets cashflow well upon stabilization and are very refinance able. This strategy should perform well in a recession. Next, we really like Class B light value-add multifamily investments in the steady Midwest markets, especially, with the partners who have a large footprint in specific markets with the strong execution capacity. Ability to execute renovations at a good pace, while maintaining at least the breakeven cash flow, makes all the difference. These projects purchased at the very attractive cost per door basis have strong downside protection and can generally withstand a typical recession. Self-storage continues to be an attractive sector of the economy that generally does well during recessions. However, deal selection is critical as many markets have been oversaturated with supply. Light value-add, better management, better marketing opportunities are much more attractive vs. ground up projects that have major development risk. Distressed and performing conservative LTV hard money loans is an asset class that should do well in a down economy too. There are other "defensive" strategies out there. Investing in Preferred Equity rather than Common Equity is a way to reduce the risk, and have a higher degree of safety, while capturing a decent level of the project upside too. For example, Tempo Growth Fund II LLC offers investors two classes of units: Preferred Equity Units and Common Equity Units. Preferred Equity units have the seniority of the cash flows as well as the priority of the return of capital, while still capturing 30% of the portfolio upside. In summary, prudent investors today are selling highly appreciated assets in speculative markets, repositioning the cash into more conservative assets, steady markets, investigate investments in preferred equity to increase safety, while maintaining strong diversification.

How to “winterize” your portfolio now with the possible recession on the horizon

Spring Season is upon us here in the Northern Hemisphere, but the economic weather is [...]

15
Apr

What is a better investment: private equity real estate syndication or REIT?

Folks from all walks of life want to improve their families’ financial standing through investing. [...]

19
Oct

Freedom Founders Due Diligence trip to NYC

This last weekend Mike and I had a chance to meet with a few of [...]

12
Jul

Investment Quadrant: How to Make Better Real Estate Investment Decisions

What is the investment quadrant? To get started, let us take a look at the [...]

04
Jun

How to Take Advantage of Tax Saving Strategies as Real Estate Investors

Introduction: Tax Strategy vs. Tax Compliance I’m always on the lookout for ways to help [...]

03
May

Mike Addresses the State of the Market: Early Spring 2021

The residential real estate market is booming all across the United States. Barring a few [...]

02
Apr

Socially Responsible Investing: Hotel Conversion to Multi-Family Housing

It’s no secret that hotels have been struggling. Discount sites constantly loom. Cost-effective alternatives like [...]

04
Mar

You should know what you are investing into!

Top questions to ask before investing into any fund or syndication. Big Mike answers these top [...]

01
Feb

Financial Outlook into 2021 based on Podcast Interview with Frances Newton Stacy

Recently on the Big Mike Fund podcast, Mike had the honor of speaking with Frances [...]

01
Jan

Happy Holidays from TF Management Group LLC!

26
Dec

Pandemic Proof Your Investments

Opportunity during a pandemic? The ongoing pandemic has certainly brought many challenges. The security and [...]

11
Dec

Does your fund check these 5 boxes?

September 1, 2020

1. Is it safe? The safety of your investment correlates directly with the process in [...]