Three Strategies To Fight Against An Inflationary Environment
A brief survey of investment letters and real estate blogs this week shows that inflation is front and center right now. This is what every investor is thinking about. This is what real estate investors SHOULD be thinking about, BUT, it really shouldn't own you. By "own you", I mean it shouldn't paralyze your investing strategy. Here are three things I'm doing to not only fight inflation, but to protect against the possible recession the economy is headed into, and perhaps is already in now.
Continue To Pursue Strong Cash-Flowing Opportunities
This is something that really doesn't change for me. In finance school, they teach you that "cash is king." I say that if cash is king, then cash flow is the king of the universe. (I mean to say its king of the financial universe, of course, I'll reserve the "King of the Universe" Title for the Almighty Himself) What this means now is that I'm looking to increase my cash flow across all my businesses and asset purchases. I want cash-flowing investments. I'll then favor investments that create cash flow faster and sooner in the deal. It also means that I'll start going much lighter on deals where equity growth is the primary strategy. Mind you, I may only deploy this strategy for 9-18 months. So, practically, I'll take the deal offering a higher cash flow immediately after an acquisition rather than a cash flow I have to wait for 6 months down the road. Also, I want to know that these cash flows are durable and proven.
The reason for this focus is that everyone is squeezed in a recession. Corporate profits are thinning, people are being laid off, and residents could struggle to make higher rent payments. Cash flow is a mitigant against this risk. When the economy is booming in an expansion phase, I'll lay off the cash flow and go for the equity growth. This is especially prudent because most of the gain in real estate is made on the equity side. But, apart from strong value add plays where equity is "forced-in" through development or intensive rehabs, it's time to play for cash.
Trim Excessive Spending
This strategy is a variation of the previous one. I'm looking everywhere to trim excessive costs that have gotten a little out of hand during the boom and printing cycle over the last couple of years. This applies to businesses as well as to my personal household expenses. I have subscriptions to magazines, online services, and a couple of streaming services that I'm really not using very much. The truth is, I've gotten lazy. I'll be getting out the knife and cutting away the fat now. Additionally, I have rentals where I've done the same. It's a cost-cutting season. This strategy will not make as big an impact as adding additional cash-flowing investments or revenue streams, but it's a good discipline to invoke as there are always financial moths that invade your budgets and eat away at your cash flow.
Manage Your Career Like an Asset
This is a time to think carefully about the value you add to your company. If layoffs are going to happen, managers are going to begin to evaluate everyone and try to calculate the economic value of their people. It's just good management to do so. Now is the time to add value to your company and prove yourself. Your manager or boss needs to know why you are there. They need reminding as to why they hired you. Evaluate what value you're adding to the enterprise and look for ways to enhance that. In a layoff season, you'll want to be someone who stays. Your biggest cash flow is coming, probably, from your career and hence, this is your biggest asset right now. If you're on flimsy ground, then perhaps you need to look ahead a few moves and figure out how and where you'll go next. The key is to be proactive. Of course, many investors who are business owners or already retired don't have this problem, but owners may be thinking of key client relationships or partnerships that if lost could cost them dearly. Now is the time to reaffirm partnerships, renew leases and contracts in a way that is self-sustaining for everyone.
I think the biggest mistake investors will make is to try to time the market, or take no action at all. I don't think this means we need to sit on the sidelines. Inflationary periods and recessions can be some of the best times to invest if it's done right and based on fundamentals. Strong and growing cash flow is a mitigator to increasing costs and shrinking margins. Those who manage cash flow well will do well and also be able to capitalize on new opportunities that will emerge here in the near future.