In the March Issue
- The Current Stock Market Climate
- Alternative Investment Strategies
- Examples of How TF Management Group LLC Finds Opportunities
Investing in the Age of Volatility
In recent years, the stock market has treated investors incredibly kindly with a steady upward climb.
Yet this past February, we saw a significant downward swing in the stock market (1,000 point loss at once) – a drop the likes of which we haven’t seen since the collapse of 2008. Naturally, some investors are nervous and are looking to shift money around considerably in the wake of this sign of volatility.
While market conditions are not as ominous as they were in 2008, it proves the point that the stock market ebbs and flows like a tide with periods of low and high volatility.
And today, we are certainly in a period of high volatility. So how does one mitigate the effects of volatility in their portfolio?
Before we jump into discussing alternative investment strategies (and we will), we need to understand the climate of the current market before we can capitalize on it. So let’s take a look at some of the fundamentals of why the stock market is fluctuating.
How Price-to-Earning Ratios Keep Investments Coming
When evaluating the stock market, it’s essential to consider the P/E (price to earnings) ratio.
In recent years, the earnings growth has been strong and the price per earning has remained high, encouraging investors to remain in the stock market. With the expectation that earnings will remain high due to the recent tax cut, many investors may be convinced to stay in the market.
There is nothing fundamentally wrong with this viewpoint; yet, we need to consider the other viewpoint, which is that the market has had its run up and is due for a correction. The bull market could return again after the dip, or it could jumpstart a period of high volatility with potentially significant correction.
Currently, P/E numbers are historically high, hinting that right now may be the best level of returns for the next 10 years. With expectations set quite high due to recent market performance, if any aspect of the market begins to slow down, some investors will start pulling their money out, which will drive the market even lower.
The Government Policy that Still Drives the Economy
The other driving factor in the stock market is monetary policy.
The Federal Reserve has held interest rates artificially low for a long time, which has boosted the U.S. economy and kept financing costs low.
The consequences, however, have been felt in the bond market with low investor returns and money flowing away from the bond market and into the stock market.
A Bleak Future for the Bond Market
Because the U.S. economy is experiencing high employment levels, the Federal Reserve is considering raising four different interest rates in order to “cool down” the economy.
As a consequence of this tightening of monetary policy, bond funds and individual bond prices will drop in price. The 10 or 30 year bond rates will be so low that inflation will erode the new value in those investments. In essence, there will be nowhere for “nervous money” to go from the stock market.
Investing in the bond market today does not look promising, given the potential rising interest rates. So what do nervous stock market investors do if they expect the market to see significant correction?
Diversification: Your Proven Strategy
You’ve heard the adage “don’t put all your eggs in one basket,” and it couldn’t be more true in the world of investing. Diversification is the key to a balanced and safe investment portfolio.
So here’s the big question: Where do you diversify when the bond market isn’t promising and the stock market looks increasingly volatile? Where is your money safe?
Your answer lies with alternative investments- anything beyond traditional investments like stocks and bonds.
Real Estate: A Safe and Predictable Option
One of the most common types of alternative investments is real estate.
Real estate tends to be less volatile and more predictable than many other investment strategies. Yes, there are still market conditions, changes, and variance that affect the real estate market. Even so, variance in real estate is generally lower than the stock market.
This alternative investment class is advantageous for several reasons, including predictability, depreciation, appreciation, availability of financing and cash flow.
For example, when owning or investing in a real estate property, it’s assumed that property will degrade over time, the process known as depreciation. Yet more often than not, the property will remain in good condition, which allows you to write “depreciation” off as a paper expense (in essence acting as a tax write-off).
So not only can real estate have more predictable cash flows, it can have tax benefits as well.
Why Funds Are the Next Best Investment Opportunity
When it comes to the real estate space, there are two big players: big real estate investment trusts (REITs) and small balanced real estate funds.
It’s true that REITs have benefits of their own; however, their returns and growth opportunities are slowing significantly. Small funds, on the other hand, are experiencing much larger returns due to opportunity and availability in the real estate space.
How Small Funds Find Their Opportunities
Small balance fund managers use networking and creative marketing tactics to find the best deals in even the worst market conditions, non-listed market opportunities that no one shops for, for example.
These “off market” opportunities (“hidden gems,” if you will) procured by small balance funds present interesting opportunities for strong returns on both the income side and growth side.
This is exactly what Tempo Opportunity Fund LLC provides its investors.
These investments certainly have a degree of risk, but the upside is significant and risks lower than what’s available with stocks and bonds on the current environment.
At the Tempo Opportunity Fund LLC, we secure a large majority of projects through personal networking. We invest with people we know and trust and take time to learn about the key players in the real estate field. We spend time with these frontline builders, developers, and rehabbers in order to understand how they invest and appraise their track record because we want the most profitable opportunities for our investors and for the fund as a whole.
Let’s dive into some specific examples the Tempo Opportunity Fund LLC has recently found for its investors.
One type of alternative investments we have found success with is in the real estate space of “turnkey” properties. These turnkey providers seek unconventional financing because conventional banks don’t want to get involved due to the small size of the project and the high cost process to them.
*Note: A turnkey property is a type of property that is fully renovated and ready to be rented or sold immediately. These properties are known for their strong cash flow month-to-month.
That’s where we step in with hard money loans.
For example, we received an inquiry from a turnkey property provider who was buying properties for $40K- $80K each. He would then rent these $40K properties for $800 a month, resulting in a 2% monthly yield.
In this situation, we would offer a standard 5 year loan at an interest rate of 15%. You might ask how they can afford such a high interest rate, and the simple answer is that it’s because turnkey providers experience very high returns. In this specific example, he was yielding 24% a year.
If we decide to invest in this project, the Tempo Opportunity Fund LLC would yield 15%. Not a bad deal.
The Tempo Opportunity Fund LLC also invests in other alternative investment classes like single family residential properties and self storage facilities.
The self-storage sector has boomed with opportunity in recent years. One reason why this sector of real estate is so appealing is due to the limited amount of management issues (no tenants and toilets to deal with).
Another reason is because of the high demand for self-storage facilities, especially those with environmental controls. In markets that have a strong need for storage, these facilities are quickly leased and become a phenomenal cash flow opportunity.
The Tempo Opportunity Fund LLC currently invests in a ground up construction of a self storage facility in Houston, TX. When Hurricane Harvey hit the city, there was a desperate need for self storage facilities to store homeowner’s belongings while their homes were going through renovation.
We are looking to invest in a few more of these type projects with some key experts in the storage facility space. Like we mentioned before, the key to finding successful projects is through networking.
As a small, balanced real estate fund, The Tempo Opportunity Fund LLC has unique advantages compared to other alternative investment strategies in the space.
Our goal is to invest in projects with forced appreciation rather than natural appreciation. With forced appreciation, the owner of the project works to renovate and manage these projects in a way that will increase their value and longevity, which will ultimately increase the yield for the fund.
But the options are limitless when it comes to alternative investment strategies. With an increasingly volatile stock market on our hands, it’s important to start researching other investment opportunities, such as individual real estate and small balance real-estate-centric funds, where your predictability can be higher and your returns greater.
If you would like to learn more about alternative investment opportunities such as these, please contact us and we’ll be happy to discuss them with you.
Thanks for reading,
CEO, TF Management Group LLC
This newsletter and its contents are not an attempt to sell securities, nor to sell anything at all, nor provide legal, nor tax accounting, nor any other advice. The presenter is a private lending and real estate fund management business, and the information represented herein are purely for educational purposes and represents the opinions of the presented. Prior to making any investment or legal decision you should seek professional opinions from a licensed attorney, and a financial advisor.
TF Management Group LLC (TFMG) is an investment fund management company that specializes in both short-term debt financing for real estate “fix and flip” projects, and long-term “value-add” equity deals.