2018 was the most volatile year for stocks since the financial crisis. Major changes in the economy along with changes in regulations and technology are leading many investors looking outside of the stock market to assets like real estate.
A boutique investment manager based in Bend is trying to make it simple with a new fund designed to generate investor returns even if a recession comes. The Aerial Recession Resistant Fund is investing in three asset classes that are likely to continue to generate investor returns if there is a recession in the next few years and they are insulated from the volatility of the stock market. The assets classes are: mobile home parks, self-storage facilities and apartment communities.
2018 was a wild ride for the U.S. stock market, in the final two weeks the Dow fell more than 350 points six times and rose by over 1,000 — the biggest point gain ever in a single day. The total number of one percent moves, up or down, in the market was the most seen since 2009. Many of the tech giants like Apple and Facebook saw significant drops in share price last year, both are down over 35 percent off their highs. All this uncertainty has many investors concerned about 2019 and 2020.
As of today, the U.S. economy is in the second longest expansion in U.S. history, going all the way back to the 1700s.1 But after all this growth followed by 2018’s volatility in the stock markets, many investors are considering the impact of a recession in the next one-two years. Some major financial institutions are issuing warnings as well, Deutsche Bank recently released a report that 2018 was the worst year ever for the basket of global financial assets that the German bank tracks after calculating that 93 percent of all assets across the world were down for the year.2 That’s a higher percentage than at any time since tracking was started 1901. Also, the fact that 2017 was the best year in history with only one percent of global assets being down has many people feeling like the economy has topped out.
Seeing these and other financial storm clouds on the horizon, Bend entrepreneurs Ryan Andrews and Mark Khuri launched a new real estate fund called the Recession Resistant Fund. The fund targets three specific types of real estate assets that are most likely to continue to generate returns to an investor even through a recession or correction in the stock markets.
“These assets are unique because of how they act during recessions,” shares Managing Director Ryan Andrews. “If you look at mobile home parks, they are the most affordable type of housing available and demand for affordable housing goes up during a recession or financial correction. Our business model is to own the land and the infrastructure of the mobile home park and lease the pads out to individuals and families that own their own mobile homes.” A lot of investors don’t realize that mobile homes are one of the best real estate investments as far as generating income and cash flow.
“It’s often a misunderstood asset class,” adds Andrews’ partner, Mark Khuri who has been investing in mobile home parks for over six years. “When we first started investing we wondered if a strong gust of wind could blow them away or if they were all run down and in disrepair. But what we found is there are many beautiful mobile home park communities across the country in desirable locations with tenants that maintain their units with a real pride of ownership.”
The fund will also own self-storage facilities, one of the hottest real estate investments of the last five years. Self-storage has a unique business model because once people put stuff in a storage unit they typically do not want to spend their Saturday moving it across town to a different storage facility just to save a few dollars a month. People also tend to downsize in a recession and that often means putting some of their things in storage.
“As far back as 2015 and 2016, I could see a recession was coming,” shared Andrews. “I think a lot of investors saw what the Fed did as far as quantitative easing and low interest rates in the 2008 financial crisis and knew it was just a matter of time before another correction came.”
Andrews had been working on designing a fund that would continue to generate investors returns during a recession for a few years, but it was not until he met his partner, Khuri, in 2017 that they really started to make plans to work on the idea. “I had been investing in several types of real estate with friends and family for over a decade. When you invest your family’s money you really think about all the different scenarios to make sure you don’t lose it,” says Khuri. “That is when I really started to focus on these three asset classes because they all have fundamental reasons they are the best assets to be in during today’s tumultuous market.”
Khuri and Andrews are both transplants to Bend from California. “We both have young families and like everyone else, moved here for lifestyle reasons,” shares Andrews, who took up hunting, fishing, mountain biking and kayaking after moving to Bend. “There’s a strong community of support for entrepreneurship here, and there’s a lot of interest in real estate from local investors.”
Andrews moved here in 2011, initially keeping his Southern California job at PIMCO and working remotely. The last few years he managed a real estate construction fund that lent money to homebuilders before starting his own company. Andrews has also been very involved in the local entrepreneurship community. He was an early employee with CrowdStreet and an early executive with Droplr, both tech startup from Bend. Andrews has also managed the Social Impact Fund for the annual Bend Venture Conference where companies with a social or environmental aspect to their business model compete every year for money from venture capital and angel investors.
After growing up in New York and living in Southern California, Khuri and his wife moved to Bend in 2015 to ski. “I try to get up to the mountain as much as I can,” Khuri says. “Sometimes it means taking business calls on the chairlift or bringing a laptop into the lodge, but that’s kind of the Bend, Oregon dream!” Khuri started buying and flipping houses on his own in 2005 while he worked a corporate finance job. After a couple of successful projects, he went full time into real estate partnering with his father, a retired orthopedic surgeon and long-time real estate investor, and they pooled money from family and friends to start building a real estate portfolio. “Managing family money really drew me to be conservative and keep an eye out for a recession or a correction,” shares Khuri.
Khuri and Andrews were introduced by a mutual friend and immediately found they both thought the economy was fragile and it was smart to position money in assets would were safer in a recession. They spent almost a year designing the fund to fit what they were looking for. The Fund launched in November 2018 and already has an ownership position in an apartment community in Austin, Texas that will undergo renovations to improve the units, and holds mobile home parks and self-storage facilities across six states.
The fund has raised about $1.5 million from accredited investors and remains open to new investors. An accredited investor is a designation set by the SEC for people investing in private funds like the Recession Resistant Fund. Accredited investors need to have at least $1 million of net worth excluding their primary residence or have made at least $200,000 in income for each of the last three years to qualify.
Private investment funds like this one have a long history in the U.S., but it was not until the JOBS Act was passed in 2012 that the door was opened for investors to connect with fund managers to find unique investments outside of the stock markets. “The JOBS Act really changed this space,” comments Andrews. “Before 2012, private funds could only be marketed quietly to small groups of wealthy insiders. But the JOBS Act opened up the opportunity to be able to market investments like this online, through social media, and other public advertising.” This means investors have a lot more choices outside the stock market and mutual funds. They can even invest 401k or IRA money into private funds like this through Self-Directed IRA Custodians.
“Given the volatility and uncertainty in the stock markets, and the scars people have from the 2008 financial crisis, we see a lot of investors looking outside traditional investments like stocks and bonds and into real estate and other assets,” Andrews continues. “But since it can be daunting to find good real estate investments that are likely to be stable in a recession, we are just trying to make it easy for investors that are a little afraid of the stock markets and like real estate but wouldn’t go buy a portfolio of real estate on their own.”
About the management:
Ryan Andrews, managing partner, brings 12 years of experience in investment management and real estate finance to the organization. The Aerial RR Fund is the fifth investment fund he has capitalized and managed. Andrews has also structured, capitalized and managed numerous joint ventures and special purpose entities that have acquired and improved real estate assets including multifamily buildings, land developments, single-family residential developments and rehab/fix- and-flip properties.
Alongside Aerial Investment Management, Andrews is also currently a manager of Nesttun Development Group and is developing a 163-unit apartment building in the Ballard neighborhood of Seattle, Washington. Prior to founding Aerial Investment Management, Andrews was a principal and director of Capital Markets for Trueline Capital, a Pacific Northwest construction and development private portfolio lender. Andrews oversaw day-to-day operations of Trueline Capital Fund II including underwriting over 100 debt investments over three years totaling over $40 million in real estate investments. Andrews grew Trueline Capital Fund II from launch to over $20 million in capitalization in 2.5 years. The fund returned an annualized 10.6 percent to investors during his tenure.
Prior to his role at Trueline Capital, Andrews was an early employee at CrowdStreet where he managed investor relations for the first series of online investment opportunities offered by CrowdStreet after the passage of the JOBS Act. Prior, he held numerous leadership positions in finance, including CFO/COO roles, for venture-backed technology companies. Andrews also spent four years working for Pacific Investment Management Company (PIMCO) in their Newport Beach, California headquarters where we worked on the institutional account management teams focused on servicing foundations and endowments and public pensions clients. He started his professional career at LPL Financial working first in a financial advising office and then in the San Diego corporate headquarters. Andrews holds a bachelor of science in Business and Finance from California Polytechnic University San Luis Obispo.
Mark Khuri, managing partner, brings over 12 years of real estate investing experience to the organization. His career started in 2005 when he began investing in residential real estate in California and Florida.
Throughout his career, Khuri has been involved in sourcing, underwriting, acquiring, raising capital, rehabilitating, managing and selling both residential and commercial investments throughout multiple markets in the U.S. Khuri has analyzed hundreds of investment opportunities over the years and has successfully bought, renovated, sold and invested in over 100 properties with a combined value over $250 million and created and managed over 40 real estate partnerships.
Khuri is currently the vice president and co-founder of SMK Capital Management where he continues to focus on the acquisition and performance of SMK’s assets. Over the years, Khuri and affiliates of SMK have invested in over 30 commercial real estate opportunities across numerous asset classes including mobile home parks, self-storage facilities, multi-family communities, retail shopping centers, oil wells, student housing, vacant land and short-term debt. Prior to his role at SMK Capital Management, Khuri was the vice president of sales and operations with a private retail distribution firm and worked as a financial analyst with a fortune 500 Company performing budgeting, planning and internal audit roles.
Khuri continues to place a strong emphasis on risk mitigation with the goal of helping clients earn consistent passive income and creating a truly diversified investment portfolio. Khuri holds a bachelor of science in finance from Bentley University in Waltham, Massachusetts and is a California licensed real estate broker.
1https://en.wikipedia.org/wiki/List_of_economic_expansions_in_the_United_States
2https://www.zerohedge.com/news/2018-12-21/2018-officially-worst-year-record-93-all-assets-down