Recession Proof Real Estate Investments: Industry Expert Insights

All of us are inundated with what is happening in the economy. The big, bad word of recession looms like an ominous cloud in the headlines.

As individuals, depending on where you are in your life cycle, you have valid concerns. Right now, you are either losing on your investments, or you have it parked in your savings account, earning a whopping .01% to .03% annually.

Ignite Funding does not pretend to have a crystal ball, but as its leaders stare into the eyes of a possible recession, they continue to evaluate what the impact could be in the real estate industry.

Ignite Funding is a hard money lender established in Las Vegas in 2011 that provides thousands of individual investors with a low barrier to entry real estate investment. This investment yields a passive, fixed-income stream of 10% to 12% annualized returns, collateralized by real property via a trust deed.

In 2021, Ignite Funding paid out over $20.8 million in interest income to investors.

President of Ignite Funding, Carrie Cook, recently sat down with Director of Underwriting Pat Vassar to discuss what Ignite Funding does to continue delivering stability to its investors.

You can listen to the original conversation on the Ignite Funding podcast, Deeds in the Desert, on Spotify or Apple Podcasts.

Carrie Cook: What does the phrase recession proof mean to you?

Pat Vassar: Proof is a bit of a misnomer in the sense that no investment is guaranteed. However, there are pieces of investing, including real estate, that tend to do better in recessionary environments.

Real estate does well because it’s a physical asset that typically generates cashflows in rental income, dividends, or interest payments. These investment qualities are highly sought after when there seems to be an additional risk in the overall investing environment.

Carrie Cook: How is Ignite Funding working to provide investors with various investment opportunities at strategic times?

Pat Vassar: One of the ways we do this is by keeping an eye on factors such as increasing inflation or the GDP decreasing. Are we seeing high unemployment rates? For example, if we see high unemployment rates, we will want to stay away from the retail sector, specifically the “mom and pops” industry.

We want to be lending on projects that, even in recessionary environments, will tend to have what I like to call “sticky” cashflows, like self-storage and healthcare facilities. Healthcare, at times, is a necessity, not a choice. For example, if you break your arm—Are you going to wait until a better time to get it fixed, or will you seek medical attention right away?

Self-storage has historically been another one of those consistently “sticky” cashflows. Many variables can influence when people need to use self-storage, such as moving, downsizing, loved ones passing away and other factors. People will put their belongings in a storage unit and keep them there regardless of what is happening on a personal level and what is happening in the macro-environment.

Carrie Cook: Do you foresee in the coming year that we will expand on those asset types in our lending portfolio in 2023 and beyond?

Pat Vassar: These are definitely segments of real estate that we are looking to become more involved in the coming year. Just to clarify for those unfamiliar with Ignite Funding, this transition isn’t just a one-time occurrence.

At Ignite Funding, we are constantly evolving our portfolio to be on-pace or a step ahead of the moving markets. Much like the individual investor, the diversification of our lending portfolio across different asset types, borrowers and geographical locations is essential to mitigating risk.

In our industry, you will find many lenders that only work with one type of borrower, like fix and flips, in one region, like Southern California. What happens when that regional market slows down? During the pandemic, we saw record numbers of people moving out of California. Or what happens when interest rates go up as they have recently? Now the average homebuyer can’t afford a loan payment and will have to wait for rates to go down.

Now, who’s going to buy the flipped house so the borrower can pay off their loan? Those lenders put their entire portfolio at risk because they put all their eggs in one basket. That is not a position where we place our investors.

Carrie Cook: There are many months and sometimes even years, of evaluation, research and talking with borrowers to understand their strategy before we lend in a certain arena. That said, tell us about how Ignite Funding got into the self-storage industry?

Pat Vassar: Over the past 10 years, we have been courting and tracking the growth of various borrowers in this field. In one of the projects we recently funded in Houston, the borrower initially came to Ignite Funding for financing about eight years ago. The borrower was just getting their business off its feet. At that point, they were just a little bit too new of a company and we wanted to give them more time to season themselves and prove their abilities.

About eight years later, they have far exceeded the level of risk aversion. Ignite Funding is now in a position to grow with them and integrate their product type into our lending portfolio.

The same rules apply no matter what asset class we are looking to incorporate into our long-term strategy.

Carrie Cook: We have worked with one of our long-term borrowers to finance several healthcare/medical facility projects. Do you foresee this as a long-term asset class for this borrower?

Pat Vassar: I do for several reasons. Typically, builders only have to work with local municipalities to get approvals and ensure their real estate projects are up to code. With healthcare facilities, you are navigating local, state and federal levels of government from start to finish. Most builders will shy away from these projects because when you’re dealing with that many government entities, as you can imagine, it is like trying to herd cats.

This makes the barrier to entry for this type of asset class fairly high, which means less competition for our borrower. This also means that the margins to build will stay profitable. When the margins continue to remain profitable, the borrower is not likely to default. I do not foresee any of these factors changing drastically in the near future.

To learn more about trust deed investments with Ignite Funding, visit our website at https://ignitefunding.com or download our most popular whitepaper – 8 Steps to Trust Deed Investing.

Members of the editorial and news staff of the Las Vegas Review-Journal were not involved in the creation of this content.