What can a savvy investor do given this state of affairs? According to Sergio Altomare, Co-Founder and CEO of the real estate private equity and development company Hearthfire Holdings, a resilient investment strategy largely hinges on mastering the fundamentals.

Tip #1: Thorough research of the sponsor, market, strategy, and deal

“My top recommendation is to conduct a thorough research on a sponsor and a market that you will be investing in,” Altomare says. “After that, it would be to investigate the strategies and then lastly the deal members.”

Neglecting to do this can lead to big problems later. “If the sponsor is not going to do a good job, then the deal numbers won’t happen,” Altomare explains. “If the market isn’t a good market to invest in, then the deal numbers won’t happen. If the strategy doesn’t align with what you need as it pertains to taxes or structure, then the deal numbers don’t matter.”

Altomare also recommends a healthy dose of skepticism while vetting deals. “Projections of a project are merely numbers and Excel spreadsheet cells,” he warns. “Anybody can type 15% in an Excel box labeled Internal Rate of Return (IRR). The key thing is to move forward with partners that can realistically achieve that IRR, using real conservative modeling and a market that’s undersupplied and ripe for investment.” 

For Altomare, this due diligence is a crucial component in mitigating the risk of investment. “It increases the likelihood of having an investment go the way you like and be profitable,” he says. “It cannot be overstated that you should do a comprehensive analysis of the market that you’re looking to invest in, as well as the sponsor you’re looking to partner with. This can reveal patterns that may or may not be conducive for a successful investment.”

Altomare’s second piece of advice is to understand your own needs and keep them at the forefront of all your calculations.

Tip #2: Understand your needs

“If you’re closer to retirement and need cash flow, then you should focus on more cash-flow investments,” Altomare explains. “If you’re not in need of cash flow, then you should focus on equity or growth-focused investments.”

While a good financial strategy aligns with current and future goals, Altomare says it should also be combined with a resilient approach.

“It’s an age-old saying, but that doesn’t make it any less true — never put your eggs all in one basket,” Altomare says. “Diversification with sponsors or projects minimizes the impacts of downturns in a specific market or partnership.” 

Yet he also cautions against diversification for its own sake. “Diversification is key; however, blindly diversifying doesn’t actually help,” he says. “It just exposes you to more investments that potentially could have a problem. Put funds only into adaptable projects that can adjust the business operating strategy.”

Altomare’s last tip is to prioritize the right things.

Tip #3: Know what to prioritize

“Prioritize investments in assets that generate steady cash flow and that you can hold for a long time,” Altomare says. “These provide a financial cushion against fluctuations in the market. By getting fixed-rate loans, you can also benefit from long-term leverage and a hedge against market volatility in the form of stable debt.”

Altomare also warns that buying properties to make a profit in the short term can be risky, since unexpected dips in the market can suddenly undermine their value. “In uncertain times, it’s important to reduce your reliance on short-term market appreciation,” he says.

Altomare also recommends keeping the historical patterns for asset classes in mind.

“It’s important to look at historical trends when considering and predicting how future operations might play out,” he says. “For instance, self-storage experienced positive returns during the 2008 financial crisis and the Covid-19 pandemic, maintaining a high level of occupancy. This is indicative of the need for this asset type when in an economic downturn — Self Storage helps people move, and this relocation can stem from both positive or negative reasons.”

Fill your portfolio with resilient investments

To ensure your portfolio can weather possible downturns best, invest in resilient investments.

“Make sure the investment managers you put your money into are proactively planning for those proverbial rainy days,” Altomare says. “They should have a long-term perspective for navigating volatile market conditions. Invest in adaptable projects that are financially prepared with emergency funds and optimal debt. This ultimately protects your downside and better allows you to hit your financial goals.”