With Recession in the Wings, Real Estate Will Continue to be a Hot Topic

While some debate that the U.S. is already in a recession per the definition of two straight quarters of shrinking GDP, President Joe Biden doesn’t agree. The Commander in Chief recently told CNN’s Jake Tapper that he does sees the potential for a “slight” recession, but he doesn’t anticipate one. The International Monetary Fund disagrees, issuing a warning that the U.S. economy will continue to stall as part of its downgraded outlook for 2023.

Whether politicians want to call it a recession or not, an economic downturn looks quite probable next year. While not ideal, there are opportunities in every contraction, with savvy investors often looking to real estate for ROI (return on investment). Why? There are several contributing factors. For starters, demand. People always need someplace to live, even during a recession. Second, for properly positioned property investors, a recession creates opportunities to acquire new assets at discounted rates. Furthermore, real estate historically has a low correlation to the stock market, providing stability if stocks get volatile. History also shows that real estate prices tend to grow at the rate of inflation on average, despite varied prices through the cycles.

To that point, it is a fortuitous time for Gold Quest Group LLC founder and CEO Miguel Sanchez to launch his newest real estate endeavor. Incorporated over 22 years ago, Gold Quest Group, or GQG for short, has become a well-known firm primarily focused on brokering hard money loans. This means the company looks at a slew of real estate development deals looking for funding, packages them in appropriate bundles and matches them to financers in their network. In Wall Street terms, GQG is a deal maker in the financial brokerage and loan syndications sector. For its efforts, GQG takes an origination fee for every transaction initiated.

One deal, one origination fee, and then on to the next. In any given year, GQG brokers hundreds of millions of dollars in deals.

Now Sanchez wants to move into the other side of the transaction as well, becoming a lender and developer too. To do so, Sanchez formed a new company, Gold Quest Capital Inc. (OTCPK: AVVH), and brought it public through a reverse merger with AVVAA World Health Care Products Inc. in January. The company has said that an official name and ticker change are in the works.

The benefit of being a real estate mortgage lending company means that Gold Quest Capital will not only collect an origination fee (as is normal in the industry), but it will also, by being the lender, collect monthly payments plus interest.

GQG will remain a private entity in the broker business and completely separate from Gold Quest Capital, which will specialize in three primary lines of business: hard money lending, Small Business Administration (SBA) lending, and real estate development and redevelopment.

The diversified approach mitigates risk for Gold Quest Capital, and each has recession-proof advantages to outperform the general markets. Hard money lending includes higher interest, fast payback loans that are collateralized by the property. These loans, which can generate returns above 15% Internal Rate of Return (“IRR”), are a large part of the real estate market, creating steady cash flow for Gold Quest Capital. The company intends to lend up to 70% of the value of the asset or acquisition price, whichever is lower, and secure its capital with a first lien.

SBA loans are guaranteed by the real estate, personally guaranteed by the borrower and, better still, guaranteed and insured by the U.S. government.

Real estate and redevelopment are sweet spots as mentioned above to acquire properties (frequently rentals, which are in high demand during recessions) at favorable prices. “[The] lending business is extremely profitable but very passive. In order to utilize our time and resources that best meet our shareholders’ interest, we will buy distressed real estate assets in all sectors and invest in their development,” said Sanchez in a letter to shareholders.

While separate, GQG should prove to be an invaluable partner to Gold Quest Capital considering the large volume of deals Sanchez already entertains. The agreement is that Gold Quest Capital will have the right of first refusal for all commercial and industrial loans that GQG originates. That alone could be a lucrative business for Gold Quest Capital, but Sanchez intends to work with other originating and lending firms as well, such as CBRE Capital, JLL Capital, and Meridian.

Currently, management is working to meet important milestones that will signal inflection points. These include recruiting and hiring the personnel (account representatives, account managers, and account executives) that are the lifeblood of the company. Given the nature of its business, the company needs to secure substantial amounts of capital to trigger its lines of credit to fund loans that the team will sell and service.

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Published by Alan Masterson

Alan has over 25 years of trading experience in the U.S. equity markets. He began his career in finance working on a program trading desk specializing in over-the-counter stocks. His career progressed from that point to his current position as senior trader on an institutional trading desk. In the evenings, Alan teaches economics at a local community college. He has contributed articles to various publications over the last six years, including feature articles for an economics magazine and various financial blogs. You may contact Alan via his email (alanmasterson@wallstreetpr.com) or his Google+ page (https://plus.google.com/103338576216002376250).