“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.” – Warren Buffett, no introduction required.
Welcome to the Supplement! We’ve kicked off this week with Uncle Warren, and there are so many times I want to quote the great man, on a daily basis – I forget the record but it will be many dozens. But there’s also method to the madness. Thanks to all of those who participated in my mini-poll on Facebook in the Partners in Property Community Group this week to choose what they’d like me to focus on; the resounding winner was alternative investment strategies for 2023.
If you haven’t seen it yet (I’d had a quick go, but had a longer blast this week) – before we go any further, you MUST check out ChatGPT. The first thing I thought was – imagine being a student with access to ChatGPT. It is INSANE. After this article, go and ask it some questions. To prove why it will one day be the number one content provider on the internet (if it isn’t already) – check this out:
I asked it what alternative investment strategies there are – generically. In merely a few seconds, I had this back:
There are many different alternative investment strategies that investors may consider.
Some examples include:
Private equity: investing in private companies or in the buyout of public companies
Real estate: investing in physical real estate properties or real estate investment trusts (REITs)
Hedge funds: funds that use various strategies (e.g. long/short, market neutral) and instruments (e.g. derivatives) to generate returns
Commodities: investing in physical commodities or commodity futures contracts
Art and collectibles: investing in rare or valuable items such as art, wine, or stamps
Cryptocurrencies: investing in digital currencies such as Bitcoin or Ethereum
Agricultural land: investing in farmland or agricultural businesses
Timberland: investing in forests or forestry-related businesses
Natural resources: investing in oil, gas, or mineral deposits.
Alternative investments may be less liquid and more volatile than traditional investments such as stocks and bonds, and they may also involve higher fees and greater risks. It is important for investors to carefully consider their investment objectives and risk tolerance before deciding to allocate any portion of their portfolio to alternative investments.
(ChatGPT paste over).
Interesting. I’m happy to say I think I can at least add some value to this list. Why are we going down this particular rabbit hole this week, first of all? Well……there is a bit of a split in the camp at the moment. The elephant in the room is that a lot of buy to let purchases just don’t stack up right now if you are using leverage. This leaves you working to smaller margins on HMO or SA, or pursuing something different (rent to rent has never looked so comparatively good, in my opinion, as it does today).
For those already owning assets – particularly if you have nice, long fixed mortgage terms at sub 3.5% – things look fairly rosy for the next few years. Arrears – sure. Voids – unlikely. Competition – dwindling (remember, it is hard for people to buy new stock if they are using leverage!). Legislation (well, OK, that’s not going to get easier). Rent growth though – it looks huge. This is not good for anyone, or for the system, but you’d obviously rather be the landlord than the tenant in such a situation!
For those looking to expand (whether they already have a portfolio or not) – that’s tougher. Work harder for the same money, or do the same for less money. That’s where things stand as at today. This, however, is why we take long term views. I am happy to have a balance between income generating tasks for today and involvement in projects that I might not see any actual cash out of for the next few years. The key, as so often, is in that balance.
That takes us to alternative investment. Let’s start by attacking the megabot’s efforts:
Private equity – sounds scary, right? Simply means shares in unlisted companies. HIGHLY risky, even if getting involved when CrowdCube or Seedrs have been involved in the due diligence (other providers are available). Buying out public companies will be beyond 99.99% of us, buying a share or making a loan to a private company may not (that would be private debt, of course, not private equity). Many readers may already do more of this than they think, actively, in their own property investment companies. What do you need at the moment – strong balance sheets, low LTV debt (or higher LTV long-duration fixed debt at low rates), and strong cash flows. And if they’ve got all that, why do they need the money……hopefully for scaling/expansion!
Real Estate as the US prefer to call it – REITs with a decent amount of long-duration fixed debt might perform well, especially if rent growth is likely. Not too alternative to many readers, more of a truly passive effort with a loss of control and fees to pay to managers, but perhaps a tax-efficient way of looking at property. Not to be written off without consideration, many REITs are trading below their Net Asset Values at the moment (but are those NAVs accurate……)
Hedge Funds – you need to remember that true hedges are rare. Often, this catch-all term is used just because there are options and other volatile derivative strategies being employed. Not for the faint hearted – the best ones make great returns but keep nearly all of that for themselves in the form of fees. Just one thought here – net net net net net.
Commodities! One of the only performers in the difficult markets of 2022. Again – not for the faint hearted. Sometimes considered a zero-sum game, perhaps more accurately something that should keep pace with inflation but with massive volatility. Many ways to attack this – holding as a hedge/insurance style product, buying things like precious metals because fear is the expectation for the markets……not high on my list of priorities though.
Art and collectibles: One thing to remember here. Past performance is no guarantee of future returns. A lot of these investments have been fractionalised – so just check what the commission is that is going to the fractionalisor before you get too far stuck in, would be my recommendation. I feel more Uncle Warren coming on here – don’t invest in what you don’t understand, and just because it went up 1900% in the past 10 years, makes it quite a lot less likely it will continue in anywhere near the same vein.
Crypto – my old nemesis! I’ve made my thoughts very clear over time – Crypto is pseudo-gambling. That’s OK, if you like gambling – or you can control yourself to an incredible degree. Ideally you’ll be an experienced trader of other commodities or currencies. Most aren’t, and most have taken a bath. Bitcoin looks a hell of a lot more attractive than at the beginning of 2022, but I still worry about the overall lack of utility, that I’ve posted about many times before.
Farm/agricultural land. This one really interests me because of repurposing. Sometimes, people are only looking at potential residential development sites. Not a bad play, of course, but farmland can also yield; there is also other potential repurposing to look at, and a fixed stock of it that dwindles every year thanks to erosion of green belt and worsening of the climate.
Timberland (should have asked ChatGPT to keep it UK friendly eh?) – another really interesting one. Repurposing into things like renewables sites is a potential – other variants of this also exist. As so often, thinking outside the box or understanding requirements and opportunities can lead to some really different and interesting (and lucrative) plays.
Natural resources – often lumped in with commodity trading, due to the volatility. You don’t really want to be trading physical oil unless you have some pretty big ranches in Texas available, and stick to WTI! Mega rewards, mega losses, and stress levels await……
So – what of these am I looking more into for 2023? Well, I have dabbled in private equity and angel investment for nearly 10 years now. Things have moved up a little as the red hot market of 2021 and half of 2022 took over and made it very difficult to buy well without speculating too much on capital growth. Involvement in 4 limited company acquisitions in 2022 makes me more of a private equity player than perhaps you thought, also being involved in acquiring the assets of a fifth in what’s called a “pre-pack” – a prepackaged administration situation where the deal is done, with the administrators-in-waiting, before a company actually goes into formal administration – the benefits being that the deal effectively has the administrators’ seal of approval and is highly likely to be unwound – and also you are very likely to have the jump on any other potential buyers of the assets of the company.
Not all upsides – you may well also be required to TUPE all of the staff over, deal with some pretty hacked off customers and suppliers, and there will be skeletons in the closet because it’s likely that the timeframe is very short and proper DD cannot have been carried out.
What’s the attractiveness? Well, cash is likely to be king – not in terms, necessarily, of big lumps of it – but more where it comes from. That’s the key for 2023 to me. Vendor financing, at attractive rates for borrowers and lenders…..consider this. Savers have become cultured to returns of 1% a year in the bank, or lower. There is much better available now, but some degree of tarting involved – and also, income tax will be attracted at the marginal rate. When you can borrow at 3% on a mortgage, money from the vendor at 4, 5 and 6% isn’t as attractive – depending, of course, on where it sits within the capital stack. However, when the mortgage is 6%, that 4-5% region could be the difference between a deal stacking up and it not stacking up.
If you need to hit monetary targets, or a certain price to get a sale – then vendor finance might make it work. If the vendor wants their cake and to eat it, January 2023 I’d gently suggest isn’t the right time to sell their property……
My private equity efforts are still at this point almost exclusively asset-backed. These companies already own properties. However, a couple were more operations and trading heavy than they were asset heavy – and the pre-pack only had contracts and contacts to buy, really – nothing physical.
There’s one major trap I’d just highlight at this point. The business buyers club. The algorithm works so freakishly powerful these days that just by posting the word “acquisition” alongside having a social media profile like mine – very business-heavy – means I’ve seen a metric ton of static adverts, videos and other media about buying businesses for no money down.
Is it possible? Sure. Is it easier than buying property no money down? No, not in my opinion. It also never discusses the simple tradeoff between money up front and hard work needed. Not everyone wants no money and all time in terms of a commitment. This is before we even begin to start on risk…….
As usual – beware shiny pennies and those bearing gifts. If you are experienced in creating lots of property deals – there’s also no real silver bullet to fire. Tax structures get very important. Listening to the vendor is always important. Solving problems – as ever – is the number one skill we are talking of.
You’d be better to invest time into due diligence and learn by doing, in my view – and also there’s worse places to start than YouTube.
As we approach Chinese New Year I’d suggest that 2023 is the year of the income statement…..cashflows will carry you through. Until next time…..keep calm and carry on!