What is the Market Giving Us in 2023?

Sometimes it’s really obvious what the “market” is giving us, right? Up to 1st Quarter 2022, the market was giving us all-time low interest rates, banks were flush with cash and they were eager to lend, bubbles in most asset classes, and everyone that could were refinancing debt to take advantage of all time low interest rates.

The game we were all playing in real estate was to lower debt service (our financing cost). This worked extremely well for investors that already had assets and could increase their net income simply by refinancing the debt. In addition, inflation spiked sending top line revenues even higher.

The stock market also flourished from all the cheap money. Many speculative and start up companies went to the moon and investors couldn’t get enough. Think Tesla or any of the COVID stocks that rallied far beyond realistic valuations.

Fast forward to 2023, the Federal Funds Rate has moved from 0% to 5.25% in just over 1 year! This rate of change to the cost of capital has never been experienced by the “market”. In real estate, the bid/ask spread is massive. Sellers do not want to take less than 2022 highs; from their perspective the value of their property has been set in their head, and they won’t take less! Especially if you’re not motived by the 3Ds; death, divorce, or debt.

On the buyer side, the cost of capital has made the old marketplace difficult to pencil out. Many real estate investors are taking a pause to allow the markets time to digest the unprecedented increase in the cost of capital. “Pencils Down” is heard often these days.

The stock market resilience makes absolutely no sense to me. Maybe Tina (There is no alternative)? Or maybe the “Fed Put”? The Fed Put basically says that in a market downturn the Fed will intervene in the markets to prevent a severe downturn or crisis. Just look back at the COVID shock where the Fed unleashed trillions more than any other time in history. And the recent bank crisis where the Fed stepped in to prevent further run on the banks. Investors may be feeling a sense of security that the downside risks are limited and eventually the markets will head back up and to the right.

Opportunities in the Stock Market:

The stock market offers a range of opportunities for investors, from long-term growth investments to short-term trading strategies. Here are some of the opportunities available in the stock market:

1. Long-Term Investing: Long-term investing in the stock market can be an excellent way to grow your wealth over time. By investing in blue-chip companies with a strong track record of growth, investors can earn significant returns on their investments. This means maintaining a buy list of quality companies that you want to buy and hold on to forever (think Warren Buffet growth style value investing). Timing is of less consequence and you can simply continue to buy great companies with less concern over the current market valuation.

1. Dividend Stocks: Many companies pay out dividends to their shareholders, which can provide a steady source of income for investors. Dividend stocks are an excellent investment opportunity for those looking for a reliable source of passive income. If you can find a dividend payer with heavy growth potential it’s a great investment recipe. Let’s say you reinvest the dividends and buy more stock if you don’t need to live on the income yet. This strategy can prove to be powerful and you will get rich slow.

1. Sector Investing: The stock market is made up of various sectors, such as technology, healthcare, and energy. Investing in a particular sector can provide significant opportunities for investors who understand the market dynamics and trends. You could focus on sectors that are in your sphere of competance, and perhaps you know more, have an edge on the markets? I like this approach of investing, where the investor purchases a company that has been beaten down more than valuation fundamentals support.

1. Trading Strategies: Short-term trading strategies such as day trading and swing trading can provide investors with opportunities to profit from the volatility of the stock market. These strategies require a significant amount of skill and knowledge, but they can be very lucrative for those who master them. I consider these speculative stragies for “play money” or money that you can afford to lose.

Opportunities in the Real Estate Market:

The real estate market is another popular investment option that provides opportunities for investors to generate passive income and grow their wealth. Here are some of the opportunities available in the real estate market:

1. Rental Properties: Rental properties can provide investors with a steady source of passive income. By purchasing a property and renting it out to tenants, investors can earn rental income that can cover the mortgage payments and generate a profit. Purchasing buy-and-hold-forever rental properties is my personal favorite. It’s great to buy good property at a discount, but if you hold forever and paid 10% too much on the purchase it’s not going to matter much on the overall ROI for the investment. Typically rents are pretty stable during recessions so the income is stable, which makes it a good bet during various economic cycles. While your holding the property, inflation is pushing the replacement cost of building materials higher, which increases the safety factor. The debt service is part of the expenses for the building which is covered by rents.

Where we might see an opportunity to purchase in the next several years will be in properties financed with short term debt. The debt service has more than doubled in a year, making it difficult to refinance assets purchased in the last 3 years. If the owners can’t find financing, they may just let the properties go back to the banks, which would be a great time to pick up some rentals.

1. Fix and Flip: The fix and flip strategy involves buying a property that requires some repairs and renovations, fixing it up, and then selling it for a profit. This strategy requires some skills and knowledge of the real estate market but can be very profitable if done correctly. In a rising real estate market, any flipper looks like a rock star with the “tide rising”. In a correcting market like we’re in currently, you need to be able to hold your flip in case you can’t sell it for a profit, or simply take a loss.

1. Real Estate Investment Trusts (REITs): REITs are companies that own and manage real estate properties. By investing in REITs, investors can earn passive income from rental properties without having to own the property themselves. With rising interest rates, REITs have been hammered. I currently have a REIT that participates in industrial properties leased to “agricultural growers” that is paying a 10% yield. The stock price has corrected hard in the last year but I don’t really care that much, and since I reinvest dividends I’m picking up shares on the cheap!

1. Real Estate Syndications or Crowdfunding: Real estate crowdfunding allows investors to invest in real estate projects with a small amount of money. This strategy provides investors with the opportunity to invest in high-value real estate projects that they would not be able to afford on their own.

Personally I have not invested in a Crowdfunding deal and probably would not. I have invested in several real estate syndications. Syndicating is basically a partnership, where multiple investors can pool resources together to fund a single investment. These are great if you have capital and want exposure to real estate investments but do not want to be involved in the investment in an active capacity.

Conclusion:

Both the stock market and real estate market offer a range of opportunities for investors to grow their wealth. While each market has its unique risks and advantages, investors can benefit from diversifying their portfolios and investing in both markets. Constructing portfolios of both real estate and company stock work magnificently together.

I prefer to keep my company stock and any investment that provides interest income in self-directed retirement funds. There’s nothing better than finding a 100-bagger stock and owning shares inside of a ROTH IRA/401K. Owning real estate is best done outside of retirement accounts to take full advantage of all the wonderful tax benefits.

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Best,

Derek

Derek Petersen

Chief Compounding Officer

Aviara Capital Investments