“Contrarian investors have historically made their best investments during times of market turmoil.” Baron Rothschild.
As it relates to real estate lending, a contrarian strategy takes the opposite approach to what most traditional lenders are doing. The same analogy goes for real estate investors.
It is during extreme market fluctuations where a contrarian approach is most successful. In times of either total optimism where people get greedy and believe times are always going to be this good, or times of absolute fear and panic like what people are feeling now during this COVID-19 crisis, is where the contrarian approach can be an advantage if correctly done. However, it takes discipline and common-sense to stay focused on what you know and do best to be successful.
During the 2008 recession, I followed the contrarian approach to lending as a mortgage fund manager and real estate loan originator/underwriter. I made some well-secured loans during those times. I know the strategy works if done correctly. Now with the COVID-19 pandemic where fear has taken over the credit markets, this again has created some excellent lending opportunities.
Three reasons why now can be an excellent time to make real estate loans:
- Less Competition: The void created during an economic downturn with the absence of traditional lenders, i.e., banks, who are not lending to their clients, provide a unique opportunity for private lenders like Fidelis to establish new relationships with financially strong, secure borrowers.
- Financially secure borrowers become apparent during an economic downturn: It is during economic turmoil, where the financially secure borrowers become more evident. These borrowers have proven they can weather the storm and are excellent credit risks. They have demonstrated they can navigate the crisis and have the resources to do so with little chance of default. “It is like the old saying goes when the tide goes out you know who is swimming naked.”
- Real estate prices usually go on sale during an economic downturn. The discounted property values, combined with a conservative loan, makes for a well-secured asset.
Investments made during an economic downturn only get better and more valuable when the economy improves.
The combination of a financially secure borrower and a conservative loan on a discounted property equates to an excellent lending opportunity.
For accredited investors who want to mitigate the volatility of the stock market and diversify their investment portfolios, there is no better time than now to invest in a mortgage fund like Fidelis Private Fund.
Using wisdom and discipline with a contrarian approach to lending is an effective strategy that works. It’s a win/win for both investors in the Fund and good for borrowers who need liquidity when most lenders are not providing it.
In what circumstances have you been a contrarian? And did it work out for you? Why or why not?