Alternative Investments

The 3 Recession-Proof Real Estate Investments

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The smart money is on a stock market downturn sometime in early 2018.

When that happens, what will be some of the best “recession-proof” investments to have in place?

Nothing is a sure thing, but for the sake of safety, passive investing on crowdfunding real estate platforms like Fundrise and RealtyMogul are just one approach.

Another is choosing one or two real estate ETFs, and putting some of your money into sectors of the economy that traditionally do very well during economic downturns, like tobacco, alcohol, and discount retailers.

Here’s a look at each of those three strategies for making your portfolio recession-proof, with an emphasis on the first: real estate crowdfunding.

Using Real Estate Crowdfunding to Beat a Recession

Crowdfunding is an ideal way to take advantage of the real estate market without having to put much money on the line. Average investors can recession-proof a portfolio with whatever level of funding they feel comfortable with: there are very low minimums.

Fundrise: The best-rated, and the oldest, crowdfunding platform in existence, Fundrise allows everyday investors, many of whom are on a budget, take part in eREITS and eFunds without having to be an accredited investor and without having to pay high up-front fees. Keep in mind that investments on crowdfund real estate sites tend to be illiquid; meaning you can’t readily exchange them for cash. So, unlike a share of stock, a crowdfund investment can’t be sold on a moment’s notice.

Minimums on Fundrise are $500, and the platform now offers self-directed IRAs, as long as you only invest in eREITs. The eREIT is much like a standard REIT but it is non-traded publicly. The long and short of the matter is that crowdfund real estate investing is a smart way for anyone with $500 to take part in major real estate transactions as part of a “crowd” that has pooled its money together, in this case through the Fundrise platform. Fundrise is constantly adding features to the platform to make it more user-friendly. You can check your account level at any time and even print tax forms right on the site.

Realty Mogul: Realty Mogul is another crowdfunding real estate platform and has many of the features discussed above in the section on Fundrise. However, RM’s minimum investment is currently $1,000, so the entry cost is twice that of Fundrise. To counter that comparative disadvantage, RM’s REIT fees are just .3-.5 percent per year compared to Fundrise’s .85 percent. RM also offers private REITs and has a universally high rating within the now crowded crowdfund niche.

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Note that both Realty Mogul and Fundrise investments are not liquid, which means there is no secondary market where you can sell your shares. Fundrise, however, has just introduced a feature that lets members redeem their shares on a quarterly basis.

There is no guarantee that there will be a redemption opportunity every quarter, but at least it’s a possibility. Except for that potential liquidity characteristic, most crowdfund real estate investments are totally illiquid and must be held to maturity. When selecting projects to invest in on either site, make sure to scrutinize the “length of investment” so that it fits with your financial goals. A six-month contract will return your principal to you in a short time, while a 120-month REIT is a 10-year commitment of funds.

The “Sin” Sector

Industries that produce alcohol, tobacco products and sweet snacks, like candy bars, tend to do well even in tough times when consumers forego large pleasures and continue to partake of the small ones. While some investors have a moral dilemma when it comes to putting their money on alcohol and tobacco, the huge majority do not.

Many analysts lump gambling and casino stocks into this category, but is really doesn’t belong in a recession-proof portfolio. Even though gambling-related stocks can perform quite well during good times, recessions usually put a damper on gambling and related activities.

But bad habits, like smoking and drinking, become the only form of recreation for some who can’t afford other pleasures, which is why the sin sector is ripe for anyone who wants to build a truly diverse portfolio.

Candidates in this category are TAP (Molson), BUD (Anheuser-Busch InBev), PM (Philip Morris) and MO (Altria Group). All are high performers in their respective categories, and all have solid track records of doing well when the economy goes south.

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Real Estate ETFs

Not all exchange-traded funds (ETFs) are created equal, which is why it helps to familiarize yourself with the top funds and their performance histories. VNQ (Vanguard REIT ETF) and IYR (iShares U.S. Real Estate ETF), are the big two in this niche.

VNQ: For investors who want to put their money into the very largest of public corporations, yet stay centered on the U.S. real estate market while doing so, even novices should consider VNQ. The fund’s expense ratio is reasonable, it is diversified to an extreme, and it aim for high income in good and bad times. The fund’s top 5 stock holdings represent the nation’s biggest REITs, namely PSA (Public Storage), HCN (Welltower), EQIX (Equinox), SPG (Simon Property Group), and PLD (Prologis). Boasting an average volume of more than 3 million shares and net assets in the $63 billion range, VNQ’s yield is 4.8 percent as of late 2017.

IYR: Similar in some ways to VNQ, this iShares fund stays focused on U.S. holdings, and makes sure to never let its mix of assets dip below 90 percent from the Dow’s RE index. Even though the fund is weighted toward large-cap companies, there are enough small- and mid-cap firms represented to call the mixture diverse. Share volume stands at almost 6 million, with net assets approaching the $4 billion mark as we head into 2018.

Either one of the above ETFs could play a “diversifier” role in a typical portfolio that needs some protection from a potential economic downturn.

Looking Forward to the Crash?

Where will you be when the stock market rally finally ends, and the nearly inevitable downturn kicks in?

The above three options are at least a starting point for most investors, and have a certain amount of logic and history behind their performance in tough times.

Taking advantage of the new crowdfunding platforms can be a way for diversification and recession-proofing that nearly any investor can take advantage of. It always helps to have a plan, especially when the stock market is soaring to new records every week.

Consumers who plan well and invest wisely will not have to lose much sleep when the “correction” finally arrives.

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