Investing Tips for an Economic Downturn
Been getting several calls seeking some advice on investing strategies with some of the projected money coming in and money saved by limited options to spend based on this economic shutdown. So today, I will provide a scenario how to generate income through passive wealth through passive real estate investing. I have used passive real estate investing for almost a year now and this is an excellent time to buy now. Research shows that more millionaires are created from economic downturns through investing decisions made when the market is lower. Please note that you should consult with a certified financial planner, advisor, or a tax professional to understand the implication of this discussion:
Short definition of passive real estate investing: Where you are gaining income from investing through a company that specifically manages real estate properties and pass that profits through dividends. Passive real estate investing has been around for a long time, but this is catching more traction as of late based on the amount of knowledge available.
Why do I use it: Because I can place money into something that generates income “holding a property” without losing time or resources on the following activities: maintenance upkeep, no renter’s insurance, minimal risk and liability. There are risks associated with this with any investment whether it is traditional stocks, physical real estate investing, or even with your retirement accounts. Known as REITs (real estate investment trusts), this provide an opportunity to generate income to be reinvested over and over again.
Before going into this scenario, I want to provide a general fact compared to what you may hear from your friends or people who are randomly throwing ideas out: There is no investment vehicle that is better than another if your overall long term goal is to build and accumulate wealth. However, the first step is to ensure that you also have an emergency fund before maneuvering into riskier endeavors by shifting money that you can reallocate in other financial priorities. Therefore, crypto, gold, stocks, ETFs, passive RE investing and physical RE investing are all equally good based on your preferred taste.
Here is the scenario and I will provide quick definitions of terms in parenthesis: Premarket crash value: $25/share and you own 100 shares already. Dividend (how much a company pays shareholders, which is you if you own at least one share) pays at $.60/share quarterly (four times a year).
Premarket crash value = $2,500 ($25/share * 100 shares). The next quarterly dividend payout is $60 at the end of the quarter.
I can use the $60 dividend to reinvest the money back into my REIT by buying an additional 2 shares for $50. Most platforms only allow you to buy whole shares so that leaves me with $10 in reserve cash available. With the same scenario, the next quarterly dividend is upcoming by the next quarter and the share price is still $25/share:
$2,550 in new value prior to dividend payout and 102 shares (from the new money invested). Next quarterly dividend payout is $61.20 for a payout.
Now you may look at this and say what does this mean? This means that your initial $2,500 investment has paid you directly $121.20 in passive income in six months without you going anywhere, spending additional funds or resources, and you earned money in the real estate market without doing anything. If your dividend payout remains the same, you would earn over $250 without doing a thing. If you left $2,500 in savings account at a 1% annual rate (known as yield or return on investment), you would only earn $25, whereas your REIT investment gave you a nice 10% return on investment (ROI).
Now, let’s say that the share price for the REIT dropped to $7.34 a share. This is where individuals are generating wealth at this very moment by taking advantage of an opportunity. Before I continue let me explain it like this. You need a washing machine, and the regular price is $500. The Memorial Day sale is 20% off, so the washing machine would cost $400 based on a $100 savings. Who would not want to take advantage of that? Stocks, REITS, and other investing assets behave in the same manner but in reverse. Deep discounted stocks could produce additional passive income for you.
Another example to consider before I explain the investing effect is that home values will always go up and down. Your rent does not change. If acquired a rental property for income, the value of your property will go up and down, but that is more valuable when you wish to sell the property (This is where your tax and other professionals come in handy). The rental income still continues regardless of its property. The same concept applies to the REIT in question.
Current Share Price Affected By the Market: $7.50/share. 100 shares are now valued at $750. That is a huge loss, but what if the dividend pay out just dropped to $.50/share. You still would have $50 in passive income (equivalent to rent) come in. However, that $50 used to buy more shares now increase to 6 shares. So when you are able to buy more shares with the drop then when it was at $25/share.
Let’s use the proposed $1,000 from the government and invest it on the same scenario. Remember, that $1,000 in savings for a year at 1% yield at the end of the year would equate to $10 return on your investment.
Current Balance: $750 in value, but 100 shares (even though the current value dropped, the shares remain). You invest the $1,000 at $7.50/share and you now have 133 shares. Had you invested the $1,000 at $25/share, you would have had 40 shares. Now, let’s say that the dividend value remained at $.60/share for the next payout, you made the REIT purchase (133 shares), and this is what happens and compare it to holding it in a savings account:
233 shares (100 + 133) * $.60/share = $139.80 for a dividend payout to buy more shares at $7.50/share for an additional 18 shares.
In one quarter assuming you had the initial 100 shares, this REIT will grow by 151 shares in 3 months. If the value of the REIT returns back to a modest $20/share before the new quarter, your REIT is now valued at $3,020. If it returned back to $25/share in the same scenario you are at $3,775. Keep in mind that every month that passes, for every share, this company pays you a dividend amount for every share you earn.
Most physical real estate purchases for investing will require you to pay 20%. On a $100k property, this would equate to a $20k downpayment. Using this downpayment on this REIT today would net you, 2,666 shares at a $.60/share dividend payout to $1,599.60 in one quarterly payment. If the quarterly payout remain the same the entire year, you are earning upwards at the minimum without reinvesting back into the stock, you have earned $6,398.40 in passive income without visiting a property, paying broker fees, insurance, maintenance upkeep, etc. Your $20k investment into a REIT would yield you a ROI of 32% in dividend payments. Assuming the same property brings a net $350 in rental income, you are at $4,200 a year.
This also applies towards regular stocks, mutual funds, and crypto. This is how people generate wealth in an economic downturn. Please remember that there are always risks when investing into any asset class; however, for most who do consider these options the risk are worth the reward. As previously noted, your current financial situation takes precedence over chasing money. You should ideally not touch these investments for quite some time, if time permits, as you should allow it to continue to grow and produce more income. Also note there are tax implications that could occur when cashing out your stocks (note: There are tax implications in dividend growth as well as almost any additional activity that brings in income).
Hope this helps for those interested. ~Dr. T