Manage Investment Risk With Romano Capital

June 29, 2022 at 9:51 am PST

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Furthermore, real estate investing takes many forms with varying degrees of risk. Investors who wish to benefit from the inflationary pressure on property values without assuming the risks of direct equity investment can still participate. As the Fed increases interest rates to combat inflation, investment in real estate based debt instruments becomes more attractive.

In response to the 2008 credit crisis the banking industry adopted wide ranging lending criteria that are more stringent and restrictive than before. While this has reduced conventional lending risk, it has also made the process of obtaining a commercial loan more costly and time consuming. It often takes months for an approval from a bank where an experienced private money lender can fully evaluate the merits of a project and provide capital in far less time.

Private lending does not come without costs. Private lenders charge a premium over banks for the services they provide. These additional expenses can make a significant impact on the financial viability of a long-term loan but are muted with short term debt. In many situations the benefits of a private money loan outweigh the hassle and time spent dealing with a bank.

Private loans are generally secured by a deed of trust on collateral property. The lender can mitigate risk associated with the loan by adjusting the amount of money advanced relative to the value of the collateral. This is the reason why investing in real estate debt can be less risky than direct equity investment. An owner of real estate will feel the full effects of any changes in value, while a lender’s exposure is limited to the size of their loan.

Investor returns are tied closely to risk. It is expected that debt investment may not be as profitable as equity investment, however many find this to be a desirable trade off during times of economic uncertainty. Kess Romano, an experienced lender and developer in the greater Portland metropolitan area considers risk management the primary function of his investment company, Romano Capital.

Mr. Romano designs investment funds to adjust to market conditions based upon current risk assessments. According to him, “during an economic contraction, we generally invest more of our cash assets in debt. Purchasing at the top of the market is inherently risky, and lending provides an opportunity to manage that risk while remaining active in the market.”

As a developer, when Romano evaluates lending opportunities, he always looks at the underlying collateral and determines whether it’s an asset that he would be capable of taking over and completing. A lender can get in trouble if it gets stuck with undesirable assets that are difficult and expensive to improve. Here is another advantage of investment in private lending. In general, banks are not in the business of owning real estate and will seek to liquidate an asset as quickly as possible. For a private lender who is also an experienced developer, this represents an opportunity.

Mr. Romano began his lending career in 2003 with a mortgage brokerage company, Romano Financial. Amid the recession following the ’08 crisis, Romano pivoted and formed a Registered Investment Advisory (RIA), Capital Preservation Management to manage Private Placement debt funds. In forming his RIA, Romano became a fiduciary, fully regulated by state and federal agencies. With regulation comes transparency and ultimately, investor peace of mind. Transparency and risk mitigation remain the central focus of the RIA today.

The economy will always cycle through periods of uncertainty and volatility. Kess Romano and Romano Capital understand that during these times, the highest priority is protecting and preserving investor capital. Real estate debt investment is a proven way of achieving this goal.

With the stock market in decline and fears of a recession on the horizon, investors have begun to look beyond traditional markets and consider moving more of their wealth into alternatives such as real estate. Real estate investments continue to perform at historically high levels and respond favorably to inflationary pressure.

However, many investors remain wary after losses experienced in the last recession.

While all investment involves risk and property values may see corrections as markets find equilibrium, underlying fundamentals are entirely different than they were in 2008. Most economists do not expect a recession driven by real estate shocks to the credit markets.