Understanding Defensive Investing in Turbulent Times

stacks of pennies on a desk with person in background

During times of market volatility, defensive investing emerges as an anchor of stability. This investment strategy is relevant for institutional investors and high net worth individuals alike. Both of whom prioritize capital preservation and consistent returns over the tempest of market volatilities.

Philip Fisher's poignant observation that "The stock market is filled with individuals who know the price of everything, but the value of nothing," underscores the principle of defensive investing, applied to markets well beyond stocks. Fisher's wisdom reminds investors of the importance of discerning true value — which lies not in the erratic swings of market prices, but in the enduring strength and consistent performance of robust assets. Rather than focusing on the daily ticker, a defensive strategy involves selecting investments that demonstrate long-term stability and reliability, aligning perfectly with Fisher's philosophy.

The Essence of Defensive Investing

Defensive investing avoids the allure of speculative gains, focusing instead on stability and reliability. This approach prioritizes assets that remain strong during economic downturns, such as essential services, healthcare, and other consumer staples—sectors known for providing essential services irrespective of economic conditions, along with an asset like multifamily real estate.

Diversification: The Investor's Shield

"Diversification is a protection against ignorance; it makes very little sense for those who know what they're doing." —Warren Buffett

While Warren Buffett's approach to investing contains layers of strategic depth, the basic principle of diversification is still widely embraced as a key defensive tactic. Instead of putting all one's financial eggs in one basket, spreading investments across different types of assets helps shield an investor's portfolio from the negative effects of any single investment that may perform poorly.

Put simply, diversification means owning a variety of assets. This strategy can reduce the risk that an investor's overall portfolio will suffer if one particular investment decreases in value. It's like having different types of crops in a field; if one fails, the others may still thrive, providing a safety net.

The Pursuit of Quality

When building a solid portfolio, defensive investors look for high-quality assets supported by strong financial performance and stability. These are the investments selected for their proven resilience in tough economic times and serve as the anchor for a defensive investment strategy.

The Bulwark of Bonds

Fixed-income securities, like bonds, are extremely predictable stalwarts. They provide consistent income streams and maintain their footing due to low default risks, becoming a safe haven when the investment climate turns volatile.

Navigating a Smooth Course with Low Volatility Stocks

Defensive investors prefer low volatility stocks for their more predictable nature, allowing them to enjoy steadier, if not spectacular, returns—an approach that embodies the investment maxim "slow and steady wins the race."

Cash Reserves: The Strategic Reserve

Liquidity is a key yet often overlooked element in defensive investing. Maintaining a cash reserve is essential for investors, as it allows them to stay adaptable during market downturns and to seize investment opportunities that may appear, much like an emergency fund can help weather financial storms.

Timing and Patience: Navigating the Long Haul

Defensive investing advocates for a long-term perspective, focusing on the steady accumulation of wealth and its protection rather than trying to predict short-term market fluctuations. This strategy highlights the value of patience and the passage of time in creating a robust investment portfolio.

*Multifamily real estate remains in demand, complementing defensive investment strategies.*

Anchoring Stability with Multifamily Real Estate

Multifamily real estate, with its persistent demand regardless of economic cycles, naturally dovetails with the principles of defensive investing. This form of investment is not only about maintaining equilibrium but also about benefiting from diversification, cash flow, tax advantages, and appreciation potential.

Stability and Cash Flow

"Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world." Reflecting on the words of Franklin D. Roosevelt’s 's words, the allure of real estate as a stable and tangible asset becomes clear. It not only offers the promise of security but also the potential for generating consistent cash flow, making it a cornerstone for those seeking a defensive approach to investing.

Diversification Benefits

The unique characteristics of real estate can help counterbalance the performance of securities in a portfolio, providing a buffer against the ebb and flow of stock market volatilities and the surrounding economic climate.

Tax Advantages and Appreciation

Real estate's attractiveness in a defensive investment strategy is significantly enhanced by its tax benefits and potential for appreciation.

Tax Advantages:

Depreciation: Investors can deduct the property's depreciation from their taxable income, providing a valuable tax break.

Mortgage Interest and Property Tax Deductions: Reduces taxable income further.

1031 Exchanges: Allows deferring capital gains taxes by reinvesting the proceeds into another property.

Opportunity Zones: Offers tax incentives for investments in designated areas.

Appreciation:

Real estate values tend to increase over time, offering the potential for profit upon sale and contributing to long-term wealth growth.

Benefits for a Defensive Strategy:

Stability: The tax advantages improve returns while adding stability, fitting a defensive strategy's goal of wealth protection.

Inflation Protection: Appreciation can help maintain purchasing power over time, aligning with the objective of steady, risk-adjusted returns.

These aspects underline real estate’s role in safeguarding against market volatility and ensuring consistent, long-term value growth.

Strategic Considerations

The defensive investor must be astute in selecting properties in vibrant markets and managing costs and operations effectively to ensure real estate serves its intended role in the broader investment strategy.

Integrating Defensive and Growth Strategies

Adding multifamily real estate to your investment portfolio can be a smart move, especially when the goal is to fortify against unpredictable market swings. This kind of investment often brings stability and consistent income that can be hard to find in more volatile markets.

Defensive investing isn't just another choice—it's an essential part of any smart financial plan. Institutional investors and high net worth individuals alike are looking for ways to protect and grow their wealth, even when the economic outlook is volatile. As Benjamin Graham famously advised, investment is more about managing risks than chasing returns, and that advice is especially relevant today.

At CF Capital, our focus is on multifamily syndication, which allows our investors to pool their resources and invest in properties they might not have access to on their own. We're not about chasing the latest stock picks or jumping into volatile markets. Instead, we believe in the long-term stability and potential for passive income that multifamily properties can offer. Whether you're new to investing or looking to diversify your holdings, CF Capital is dedicated to helping you navigate these complex investments with confidence.

Recession vs Depression: Navigate Market Volatility

When it comes to investing, understanding the differences between a recession and a depression is helpful nuance for navigating market volatility, mitigating risk and capturing opportunities. An economic downturn can cause concern and confusion among even the most skilled investors, so having strategies in place to minimize risk and capitalize on opportunities becomes crucial. The comparison of recession vs depression, two terms that describe periods of economic decline, has distinct characteristics and impacts on the market. By grasping these differences and implementing strategies to navigate market volatility, investors can make informed decisions and protect their assets. Let’s go over the essential differences between recessions and depressions and provide strategies to navigate market volatility.

Recession vs Depression: What’s the Difference?

Recession: A Moderate Economic Downturn

A recession is a significant decline in economic activity lasting for a relatively short period. It is characterized by a slowdown in economic growth, a contraction in business activity, and an increase in unemployment rates. During a recession, consumer spending tends to decrease, so business revenue and profit margins decrease, too.

Recessions can be caused by various factors such as high-interest rates, reduced consumer spending, natural disasters, or financial market crashes. One significant historical example is the 2007-2008 recession, which was primarily triggered by the bursting of the housing bubble and subsequent financial crisis. However, it is important to note that every recession has its unique combination of factors and causes.

Key indicators of a recession include declining GDP (Gross Domestic Product) for two consecutive quarters, a rise in the unemployment rate, and a decline in consumer confidence. Recessions can be caused by factors such as a significant shift in supply demand dynamics, employment market volatility, geopolitical instability, inflation, trade disruptions, and financial market crashes.

During a recession, investors face unique challenges and considerations. The reduced consumer demand during this period can directly impact businesses and subsequently affect the stock markets. Therefore, it is crucial for investors to closely monitor the financial health and performance of the companies they have invested in or are considering investing in. Stock markets often experience increased volatility, with prices fluctuating based on investors' perceptions of the overall health of the economy.

To mitigate risks during a recession:

Diversify your investments and focus on defensive options.
Research and select investments with strong financials and a history of resilience.
Maintain a long-term perspective and avoid reacting to short-term market fluctuations.
Stay informed and monitor the financial health and performance of your investments.
Keep a cash reserve to provide a buffer in case of emergencies or investment opportunities.

Depression: A Severe and Prolonged Economic Downturn

A depression is a more severe and prolonged economic downturn . While there is no universally agreed-upon definition of a depression, it is generally characterized by a significant decline in economic output, widespread unemployment, and a lasting impact on various aspects of the economy. characterized by a significant decline in economic output, prolonged periods of reduced economic activity, a significant decline in GDP, widespread unemployment, and a lasting impact on various aspects of the economy. Unlike a recession, a depression extends beyond a few quarters and can last for several years or even a decade.

Depressions typically have a cascading effect on the economy. Job losses lead to reduced consumer spending, which dampens business activity, leading to further job losses. The cycle perpetuates itself during the economic downturn and creates uncertainty, fear, and distrust in the overall economy.

Depressions are often accompanied by massive bankruptcies, widespread business closures, and financial crises. Stock markets can experience significant declines, causing widespread investor apprehension. Governments often intervene by implementing fiscal and monetary policies to stimulate economic growth and stabilize the financial system.

Investing during a depression can be challenging but here are a few tips:

Assess your risk tolerance and invest accordingly.
Diversify your portfolio across different asset classes.
Stay informed and adapt to changing market conditions.
Maintain a long-term perspective and avoid reacting to short-term fluctuations.
Evaluate investment opportunities selectively.

*Multifamily syndication investors saw stable rental income during the economic downturn.*

Navigating Market Volatility through Multifamily Syndication

Though we are not in a recession or depression at the time of this writing, it is always important to protect your assets against market instability. At CF Capital, we operate with a long-term viewpoint at all times, and recognize that we operate in a cyclical investment class that goes through various phases of the market cycle: expansion, hyper supply, recession, and recovery. In the event of a potential downturn, multifamily syndication can be an effective strategy to achieve risk mitigation and wealth protection. By pooling capital from multiple investors to acquire and manage larger real estate properties, such as apartment communities, investors can gain access to steady cash flow, diversification, professional management, tangible assets, tax benefits, passive income, and potential for appreciation.

During periods of economic turbulence, multifamily syndication can offer a safe haven for elite investors looking to protect their assets and generate stable returns. The consistent rental income generated by these properties can offset the impact of economic downturns, and investors can benefit from the expertise of professionals who manage the properties on their behalf.

There have been historical instances where multifamily investing during a recession or depression has proven to be a wise investment strategy. One example is the Great Recession of 2008. During this time, while the housing market experienced a significant downturn, the multifamily real estate sector remained resilient.

Investors who had allocated their capital into multifamily syndications found that the consistent rental income from residents helped offset the impact of the economic downturn. Additionally, the demand for rental properties increased as individuals and families affected by foreclosures or financial hardships turned to renting instead of owning homes.

Explore Multifamily Syndication Opportunities with CF Capital

Understanding the differences between a recession vs depression and having strategies to navigate market volatility is crucial for investors. By investing in multifamily syndication, individuals can protect their assets during economic downturns.

At CF Capital, we specialize in multifamily investments and leverage our expertise in acquisitions and management to deliver superior risk-adjusted returns. Our primary focus is on prioritizing the preservation and growth of our investors' capital. We are committed to protecting your financial security and building lasting partnerships. With our track record and dedication, we strive to be a reliable option for investors seeking more exposure to the multifamily real estate market.

Take the next step and explore the multifamily syndication opportunities with CF Capital today.

Elevate Your Invesment Portfolio with this infographic outlining 9 key benefits of investing in multifamily real estate

Investing vs. Speculation: What's the Difference

When it comes to the world of finance and investing, two terms that are often used interchangeably but should definitely not be confused are investing and speculation. Both involve putting money into assets with the goal of generating a return or profit, but the approaches and outcomes can vary significantly. Therefore, it’s crucial to understand the differences for making informed financial decisions and aligning your investment strategy with your goals and risk tolerance.

Investing vs Speculation: Definition and Approach

Investing can be defined as the act of putting money into an asset or venture with the expectation of generating a return or profit over time. The investing approach is typically focused on long-term growth and stability. Investors prioritize fundamental analysis: carefully evaluating an asset's underlying value, financial health, and growth potential. They take a patient and disciplined approach, aiming to harness the power of compounding returns over time.

On the other hand, speculation involves taking risks with the purpose of making quick profits. Speculators are less concerned with the long-term value of an asset and are more focused on short-term price fluctuations. They rely on market trends, rumors, and technical analysis to make speculative investment decisions. Speculation often, but not always, involves rapid buying and selling, attempting to profit from short-term price movements. Speculation generally is making an uncertain bet on what the future could hold, without firm concrete rationale for that future materializing.

Time Horizon

One of the key differences between investing and speculation lies in the time horizon. Investing is centered around long-term growth, compounding returns, and riding out market fluctuations. Investors understand that financial markets can be volatile in the short term but tend to trend upward over the long term. They apply a patient mindset, allowing their investments to grow over time.

Speculation is driven by shorter-term bets and the hope of quick or outsized profits. Speculators aim to take advantage of short-term price movements and may engage in rapid buying and selling. Time is of the essence for speculators, as they seek to maximize gains within a short period and/or well outside the market norms by participating on the outer edge of the risk spectrum.

*With investing, you are more prepared to weather market volatility and take advantage of compounding returns.*

Risk Level

The risk level associated with investing and speculation can also differ significantly. Investing, especially in already existing and financially operating commercial real estate, is generally considered a lower-risk activity. Investors meticulously analyze an asset's fundamentals and take a comprehensive systematized approach to mitigate risk. They sometimes spread their investments across various asset classes, markets and industries, reducing exposure to any single investment. Furthermore, because of the long-term vision investors employ, they are more prepared to weather market volatility and take advantage of compounding returns.

Conversely, speculation involves higher levels of risk. Speculators may take long positions, use leverage, or make investment decisions based on short-term trends. The approach is based more on speculation, with the potential for larger gains but also the risk of significant losses. Speculators must be prepared for the possibility of their bets not paying off.

Which Method is Considered the Better Approach?

Investing is generally considered to be a more prudent approach for most investors compared to speculation for several reasons. Firstly, investing takes a disciplined and long-term perspective, allowing individuals to harness the power of compounding returns over time. By staying invested in well-performing assets and weathering short-term market fluctuations, investors have a higher chance of achieving consistent and sustainable growth. Additionally, investing promotes a diversified portfolio, spreading risk across different asset classes and industries. This diversification helps mitigate the impact of any single investment's performance, reducing overall risk. Lastly, investing offers stability and predictability. With a focus on fundamental analysis and research, investors have a clearer understanding of an asset's value and growth potential, reducing the reliance on market speculation or sometimes unpredictable or unreliable rumors. Ultimately, the patient and calculated approach of investing provides a higher probability of long-term success and profitability. There can be a time and place for speculative bets, such as in real estate development, but you must consider the risk profile of those speculations and still perform your proper due diligence to understand the likelihood of your assumptions coming to fruition.

Invest with CF Capital for Long-Term Stability and Growth

Understanding the difference between investing and speculation is crucial when it comes to making financial decisions. It helps individuals align their investment strategy with their goals and risk tolerance. While speculation can be potentially lucrative at times, having a solid foundation of long-term investments provides stability and growth over time. At CF Capital, we recognize the importance of having a diversified investment portfolio that includes long-term stable investments. Our real estate investment firm focuses on acquiring and operating multifamily assets that offer stable cash flow, capital appreciation, and a margin of safety. With our expertise in acquisitions and management, we provide investors with superior risk-adjusted returns and prioritize capital preservation. Contact CF Capital today to start maximizing your returns through long-term investing in high-value multifamily communities.

From the Desk of CF Capital: October Investor Report

Hello Friends and Investors,

We hope you and yours are well as we welcome the vibrant season of autumn. October is a time of change, and in the real estate investment landscape, change is the cornerstone of progress and growth. As we dive into this month's report, we're looking forward to sharing with you an update on the multifamily real estate market, a glimpse into CF Capital's recent endeavors, and an exciting announcement regarding our current analyst position recruitment.

Market Overview: Multifamily Real Estate Update

Multifamily real estate fundamentals in our target markets have remained dynamic and resilient despite the drastically evolving economic landscape. Demand for quality apartments in our markets continues to be robust, propelled by a range of factors, including high mortgage interest rates pushing people away from home purchases, population growth and job growth. In comparison, some higher cost of living markets across the country are seeing actual rent rate declines in today's marketplace. Our slow and steady markets continue to chug along.

Recent market "whiplash" from the fastest rate hiking cycle in history remains a significant headwind. Looking back, rates today are 5 times higher than where they were 18 months ago, an unprecedented sea change creating distress and potential opportunity for investors. Capital markets remain extremely volatile, influencing current operators' decision making for capitalization, growth targets and the resulting overall investment landscape. Looking ahead to 2024, there are reported to be hundreds of billions of dollars worth of multifamily debt coming due (comprised of hundreds of thousands of apartments across the country), and the story is still unfolding with regard to how the landscape will take shape regarding positioning to recapitalize, refinance, or dispose of assets at depressed pricing due to increased interest rates and cap rate expansion. Time will tell, and a lot will likely change, while we remain dialed in to protect investor capital and keep open options for flexibility as best as possible as the storm passes.

CF Capital Updates

At CF Capital, our team remains committed to delivering exceptional value and superior service to our investors. Over the past month, we finalized our partnership with JG2 to begin the process of bringing property management in-house to further align investors interests to the property management function. Over the course of the next 24 months, we will be leveraging JG2's outstanding team, systems, functions and expertise in property and construction management as we work together to build out the same within CF Capital's four walls. Our ongoing projects are progressing, and we're focused on driving operational efficiencies and enhancing the overall value of our portfolio. Our dedicated team works tirelessly to ensure that our investors' interests are at the forefront of every decision we make.

Also, during September we closed on Elevate at Nulu, and have been very pleased with an extremely smooth takeover. Our property management partner for this asset, BH Management, shared that from their perspective it has been one of the smoothest takeovers they've seen even from the perspective of over 100,000 units under management. Furthermore, we're seeing immediate organic rent growth already begin to exceed our proforma on renewals and make readies. This is great news for our investors as renovations begin to ramp up, as we anticipate continued positive momentum. If you'd like to join us in this deal, there's still a couple of slots available!

Lastly, we continue to identify and assess potential multifamily acquisitions that offer compelling value and align with our investment thesis. We're seeing more compelling opportunities than we've seen in quite some time, and anticipate that trend continuing as capital markets continue to be volatile. With a long term perspective, such investors are positioned well to capitalize on the state of the market.

Exciting Announcement: Analyst Position Recruitment

We're thrilled to announce that CF Capital is actively recruiting for the position of Analyst to join our team. This role offers a unique opportunity for driven and experienced individuals to join a fast paced and high performing team of real estate professionals. If you or someone you know is passionate about real estate analysis, possesses strong analytical skills, and is eager to take their career to the next level, we invite you to explore this exciting opportunity by visiting our careers page here.

Thank you for being an integral part of our community. We look forward to keeping you updated with the latest developments in the real estate market and our journey at CF Capital. If you have any questions, comments, or suggestions, please feel free to reach out to us.

Wishing you a prosperous October!

In Partnership,

Tyler & Bryan

PS. There's no higher compliment than you referring us to your friends, family, and colleagues. We'd be honored by the opportunity to become a part of their trusted networks. Share your experience investing with CF Capital & invite others to become an investor here.

Cap Rates and Interest Rates in Commercial Real Estate

Investing in commercial real estate requires forecasting current and future performance. This involves many variables, but for today’s discussion, we want to focus on two important metrics: cap rates and interest rates. As an investor, it’s imperative to pay close attention to the movements in these two metrics since they impact commercial real estate investment performance.

What is the Cap Rate?

Cap rate, also known as capitalization rate, is used in commercial real estate to determine the rate of return that is expected to be generated on an investment property, if purchased without leverage. It describes the relationship between a property’s Net Operating Income (NOI) and its market value. The formula used to calculate the cap rate is:

Net Operating Income = Total Income – Operating Expenses

Capitalization Rate = Net Operating Income / Purchase Price

Cap rate is a basic calculation for how real estate investments are valued in the marketplace. If there are lower cap rates, it generally means that the property is less risky, and the asset price is high. Conversely, the higher the cap rate, generally the greater the risk and potential return. Lower value cap rates typically indicate the property is steady and has reliable growth, a characteristic commonly seen in multifamily properties. Higher cap rates imply relatively lower prospects of return on property investment and are therefore considered riskier investments.

What are Interest Rates?

Interest rates are the amount charged by a lender to a borrower and can have a profound effect on the value of income from real estate investments. If interest rates are low, the bank will earn less on the loan issued and a borrower will pay less to obtain the loan. When rates are high, a bank earns more, and a borrower pays more. Higher interest payments reduce your net cash flow and investment returns, which is called the cost of financing.

When it comes to investing in commercial real estate, there is one type of interest rate benchmark that is important to track, risk-free rate. That is the rate paid on a bond issued by the U.S. Department of Treasury with a 10-year maturity. It is called the risk-free rate because it is considered the safest place to put money and investors can be confident that they will be repaid, with interest, on time. However, in comparison to investment returns on commercial real estate, the return on investment is low.

As an investor, how much more risk are you willing to take in order to capture higher returns? This is where the relationship between cap rates and interest rates comes into play.

The Relationship Between Cap Rates and Interest Rates

Commercial real estate cap rates and interest rates are historically highly correlated and understanding the relationship between the two can give you insights into the market. As interest rates go up and down, cap rates also go up and down. Both are not static, which means both are constantly changing, impacting real estate valuations. Economic conditions and investors' demand are factors that drive changes in the 10-Year Treasury rate. During economic setbacks, investors tend to lean toward the safe side and use Treasuries, which drives prices higher and rates lower.

Cap rate changes are driven by numerous factors, but the most prominent are supply and demand expectations. When there is a low supply and high demand, investors will accept a lower return because there is a lower risk. Cap rates fall and prices rise, meaning investors are willing to pay more for potential growth. So, depending on the economy, the spread between treasury rates and cap rates expands and contracts. When the spread is at a high, it means the potential return may be higher, but if it is a lower spread then it is a lower return.

Invest with CF Capital Today

The relationship between interest rates and commercial real estate can significantly impact property values. That’s why it’s important to strategically monitor changes in interest rates and how it might impact the market. At CF Capital we carefully research and due diligence, to find investment opportunities that offer the potential for high returns even in today’s current market. When you passively invest alongside our team, you can have confidence we are closely monitoring and optimizing these factors for your real estate investment success.

From the Desk of CF Capital: November 2022 Investor Report

Dear Friends and Investors,

We hope you're doing well and having a wonderful beginning to your November. Our CF Capital family has settled into our new Downtown Louisville Office, our families had an eventful Halloween, and we've been productive on the asset management and acquisitions fronts. Tyler shared a Halloween Horror Story on the highly acclaimed "Real Estate Guys Radio" Program, and you won't want to miss it. (Listen to the podcast on Apple Podcast or on Spotify.

As of October, upon returning from the phenomenal New Orleans Investment Conference, we finally settled into our new space on Main Street in Downtown Louisville! We'd love to host you the next time you're in town, whether you're in to enjoy the world-famous bourbon trail, check out a world-class horse race, or get onsite to some of our collectively owned properties in the area. We're always welcoming you with open arms to come say hello, and have enjoyed hosting several investors over the recent months.

On the business front, we've been investing heavily into the execution of our investment business plans at our current communities via detailed asset management, working with our on-site and regional teams in an effort to exceed our property goals for the quarter and for the year. On the renovation side, we're currently investing over $7mm in capital expenditures across our portfolio - in amenity enhancements, unit renovations, and exterior improvements. This past month, we repaved and re-striped two of our most recent acquisitions' parking lots, overhauled the landscaping and installed new on-site signage. Our rehab teams are busy renovating dozens of units each month, and our leasing teams are busy securing qualified residents at premium rental rates. We're focusing on driving occupancy, revenue and optimizing net operating income (NOI).

On the acquisitions side, we're very active in the market making a healthy amount of offers on deals; we're seeing some more attractive opportunities than we have in the past few years. The recent market turmoil is starting to shake loose more compelling deals, and we're anticipating our next opportunity for you to invest with us to be coming soon. While the cost of debt has substantially risen in recent months, the resulting market dynamics are more compelling than we've seen in a long time; it's now just a matter of putting the Rubik’s Cube of the capital stack together in a manner that allows us to amplify returns, protect capital, and optimize our investments. As you know, we remain picky, patient and prudent, and when we secure an acquisition, it's passed the rigorous standards that we have set. Stay tuned, and we hope to be announcing the next new deal soon.

In Partnership,

Tyler & Bryan

P.S. There's no higher compliment than you referring us to your friends, family, and colleagues. We'd be honored by the opportunity to become a part of their trusted networks. Share your experience investing with CF Capital & invite others to become an investor here.