Episode 10 | Syndications Continued

Episode Summary: 

Join Craig and Jack in their ongoing conversation on multifamily syndications with their guests, Fred and Ron. They dive into topics like capital raising in market downturns and explore the key considerations for less-experienced investors. The discussion also touches on the powerful influence of Wall Street in the rental market, addressing rising rates, inflation, and the state of the yield curve. Is there a recession on the horizon?”

*The following transcript is auto-generated.

0:00:01 – Speaker 1

You’re listening to Real Investor Radio with Craig Fuhr and Jack BeVier, where we cover advanced real estate investing topics to help you stay ahead of the curve in your real estate investing business. Hey, welcome everybody to Real Investor Radio. I’m Craig Fuhr with my co-host here, Jack BeVier. We’ve got Fred Lewis in the studio with us and, coming from remote, we’re back with Ron Phillips. Ron, thanks again for sticking around with us for this second episode. I appreciate you. I know you. We’re going to get you out of here, I promise, in a half hour. So we got a lot of ground to cover here. So, jack, we finished up the last episode. Why don’t you bring us back up to speed with what we’re going to cover here?


0:00:43 – Speaker 2

Yeah, we were talking about the equity getting involved in multifamily syndications over the past five, 10 years and how easy it became. Even at the mastermind, at Real Investor Roundtable, we were talking about how I would say five, six years ago it was, ah, how are we going to raise this money? And then two years ago the commentary was well, the equity. You’ll be easy, just put a deck out and you’ll be able to raise the equity. And so, like, the diligence. Last episode we covered a lot of stuff around the lack of diligence that we’ve seen in multifamily syndications over the past five years, but we wanted to shift gears here and talk about the other part of the capital stack that allowed those deals to happen, which is the fundraising on the debt side. So, something that we’ve seen a lot and when we were reviewing all those indications that we took a look at in late 2021, were how many of those deals. It was remarkable how many of those deals had a quote from Arbor that was a very active still is very active bridge lender on multifamily, kind of like two to 30, 40 million loan sizes, kind of their fastball, and they had a classic product was a three-year fixed rate interest only period with a one year extension and a bullet after that. So the loan, you know, matures at the end of that three years of the or the end of the extension, the one year extension, if you do that, and then you have to refinance them out and just a tremendous amount of multifamily syndications were financed with that Arbor or a very similar product from another originator, and the vintage of those, you know 2020, 2021, when you know, I think we saw we would all agree is kind of what we saw like the most dangerous activity, like the least diligence, was in that two year period. It felt like the Wild West for sure. Yeah, and that, so you know, do the math there, plus three years, plus a one-year extension, like the end of this year and next year, is when we’re going to be, when those loans are going to be reevaluated. You know, right now maybe they’re still getting payments, but when it comes to that extension period, that’s when there is a decision to make on the lender’s side and at the end of that one, well, the loan product is just, you know, definitely in special servicing at that point because it’s past its, you know, legal maturity and we haven’t seen that really kind of come to roost yet. So we you know we’re doing a lot of talking here about how we think that there’s a bunch of dead men walking.


Ron, you talked about some situations that you have, you know, particular personal knowledge of what’s happening. But you know, in the overall market though, we’re not seeing a ton of like distressed multi-family on co-star or you know I’m not getting a lot of emails about that kind of thing, so like the other shoe hasn’t dropped yet but the. So I guess you know from, let’s talk about from the debt point of view. What was it? What was it about? Fred, I know you got some, some thoughts on this about the structure of those loans particularly, and now that we’ve seen such a high an increasing interest rate environment. And how is that increasing interest rate environment going to affect those loans, given that prevalent structure?


0:04:00 – Speaker 4

Well, to some degree those loans had loan origination fees, and they had some, they had some juice on the front end for those lenders that they gave him a little bit of head start.


0:04:09 – Speaker 2

And then they had interest rate caps on the three year term which an interest rate cap, is that the interest rate may be floating, but it’s not going to exceed a certain level, so it required the borrower to buy and pay for that cap, and so it’s essentially an insurance policy.


0:04:26 – Speaker 4

And so the in the immediate increase in interest rates in early 2022, those caps got blown out. And if not for those insurance products, a lot of these, a lot of the arbors of the world, would have been really in distress with these loans. They actually would be carrying these loans underwater, but the insurance policy has actually kept them above water just to now. And that’s where we are and it’s you know. We often think that if it hasn’t happened, it won’t happen. It hasn’t happened because things take time for them to flow through a system and for capital to, to a cent, for people to bleed out, and it’s those. Those caps are basically expiring as we, as we see them right now. Those lenders are at the end of their two or three year periods and the cost of the capital for those lenders Arbor cannot raise capital. Yes, the cost of their capital exceeds what they lent the money at.


0:05:25 – Speaker 3

Yes, because you know we’re talking about guys who are, who are not local and regional banks. But let’s throw local and regional banks into the mix because we just had massive upheaval in the local regional bank world from you know what everybody heard of with what SBD or whatever the bank’s name were. Yeah, well, I believe that the same thing is going to happen with commercial paper is we’re talking about multifamily, but the office space has already started to, to happen and multi multifamily is going to add to this, and many of the loans were given by local and regional banks. So I didn’t get my loans from Arbor, I got them from local and regional banks. Local and regional banks are going to aren’t going to give you know.


On a, let’s add into the equation all the bridge debt that has been taken out for the people who are going to do the 12 month flips. Right, that turned into two and three year renovation projects. All of that is also that’s due already, okay, and those guys are now trying to refinance into debt they can’t afford with cap rates that have expanded. Good, you know. On a $10 million deal, the difference between a 4% and a 7% interest rate is what? Probably a quarter of a million dollars a year in cash flow, maybe more. It’s a lot, okay. In addition to that, if you’re cap rate on a property that’s supposed to be worth $10 million goes from what you thought at 4.5% to even 5.5%, you’re underwater without the change in the interest rate, because all of the money that you planned on for the upside is getting eaten alive by an expansion in cap rates, which is currently happening. It’s just not happening as fast.


But you throw in the mix an upheaval in commercial paper on the lending side, where regulators are involved. All of a sudden it changes the game pretty quickly because when the regulators come in and the regulators say, hey, this local bank or this regional bank, you guys are upside down because you made a loan at 75% of value and 75% of value now is calculated as 6.5% cap rate Instead of 4.5% cap rate. The bank comes calling for hundreds of thousands, if not millions, of dollars, depending on the size of the loan. And oh, by the way, you have to. You have this. Here’s a capital call for you, and after you get done with the capital call, your interest rate is going to go up three or four points in addition. That deal’s done. You can’t save that deal.


0:08:09 – Speaker 2

Yeah, let’s talk about the game theory of that situation. So, like we have a you syndicate, your buys deal I’m just going to make up numbers with a $700,000 NOI and their business plan says that they’re going to get that NOI up to a million dollars over the course of the first 18 months within that bridge period. Now they bought that deal in 2021. So the rent increases that happened in 2020 and 2021 haven’t kept up since then, right, because we’ve had rising interest rates bringing, you know, rising interest rates and that’s really kind of put the lid on the real estate market, so you’ve had slowing increases of rent.


Yes, slowing increases yeah, yes, more modest increases. So instead of that million dollars of NOI, you only got to say you only got to 850. You know, like you’re not a terrible operator, you made it part of the way there, but the market didn’t help you out. And so then you go, you hit the end of your bridge period and you’ve got $850,000 of NOI and the bank doesn’t appraisal because you’re saying, hey, like I’m trying to refinance, right now you go to request to refinance. There’s only $850,000 of NOI. But today, instead of that debt service coverage ratio underwriting being calculated on a 4% interest rate, it’s being calculated on a what is it a 7?


0:09:26 – Speaker 1



0:09:27 – Speaker 2

And so when you calculate the debt service coverage, they say, hey, you know, like, frankly, there’s just not enough, NOI, to service this debt and re and send any money. Or would there be if you got it to a million? Yeah, right, exactly, yeah, so like there’s certainly no cash out. And, frankly, you know the 10 million I’m making up numbers here the $10 million loan that you have. Actually it needs to be 9 million. You know the new interest rate, 7%, and actually we need to refinance this $10 million loan and we need to dial it back a million dollars and it needs to be 9 million. So you need to go call your LPs who haven’t seen the distribution right Because everything’s been going to just debt service and facing this, like in this higher interest rate environment that we are now sitting in today and with still the possibility of a recession coming, and you need to go do a capital call for them and say, hey, I need you to pony back up, I need another mill into this deal. Do everyone. You know pro-rata, you know, if you put in 500 grand before, I need another 300 from you now, for example, on a deal that isn’t performing very well, and once you put that million bucks in. Also, they’re not going to see distributions, right? This is just to keep the bank from shooting you in the head, because they’ve got the option to do so. Those conversations I know that those conversations have started to happen and are just going to be happening more and more and more.


Let’s talk about the game theory of that situation. Right, let’s say that’s where the syndicator puts himself into. If you’re the syndicator, what are your options? If you’re the LP, what are your options? And, by the way, if you’re the lender, what are their options? Right, because I think that some people say, like, well then the bank’s going to shoot you in the head. Which one do you want to start with? Let’s talk about it from the bank’s perspective, like the decision-making that the bank has to. You know, confronted with that situation, they’ve got a willing operator who just didn’t execute what he thought they were going to do, and you’ve got a deal that’s a little over-levered.


0:11:21 – Speaker 1

In a very real scenario, correct.


0:11:23 – Speaker 3

Yeah, Ron, I think that’s very generous, because you didn’t even really expand the cap rate, right. So that’s just an oops, we didn’t hit the rents. We had an oops, we didn’t hit the rents and oh, by the way, cap rates have expanded. I mean, on a deal you were just talking on a million dollars at a 4.5% cap rate versus a 6.5% cap rate, that’s $7 million in value. That is not chump change on that freaking deal. That is every ounce of the money that you thought you were going to make on it. And then some, and it’s called no cash flow. So now you’re right, I think it depends on the bank.


I’m not a banker, so I don’t understand exactly how the regulatory system works. There’s a few things that I think that people need to be aware of, because I’ve been through this once where a bank capital called me. That’s how I learned. The lesson is that I got capital called on a property. Thank God I had enough equity I could just sell it, so we sold it. I got capital called on a property that I wasn’t expecting and we had so much equity in the deal I couldn’t believe they were capital calling us. But they did anyway. And the reason they capital called us is because the regulators told them to. This is what I learned. They capital call the people who have money.


So there’s a lot of loans out there that are called demand loans and for whatever reason at any point, if the regulators say you need to call these guys and get money, they call those guys and get money and they make up some friggin’ reason and they go get money from the people who have money in the accounts and that’s how they fix some of the other BS stuff that they’ve got on their books, because that’s what they did to me and there wasn’t really anything I could do about it. It’s not like I go back and say, well, you guys are wrong about all of your assumptions, the bank sets the rules, it doesn’t make any difference. So read your loan documents, because it’s pretty important. I think it depends on what the regulators say when they go in, and I think that depends on how many loans that these guys have made, what percentage of their book of business is actually commercial paper and how is their commercial paper performing? Fred, you can probably weigh in a little heavier on this.


0:13:40 – Speaker 4

I mean, for good or bad, I consider myself a banker so nowadays. But I would say that the first thing is that banks review the files and they look at those covenants typically annually. So they know that the loans that are not covering right now but they don’t really want to deal with them. They want to deal with the people that aren’t paying. They want to deal with the actual issues and defaults. So banks have special asset committees that actually review this stuff and they’re punting right now on what they know is going to be some real pain later. But they rather kind of sequence that pain, starting with the guys who just default right away or can’t pay or have some other issues, and they’re extending loans 90 days, 120 days as we speak, where they’re looking at those covenants and they’re having conversations about why they don’t cover and they’re trying not to default those loans.


The issues with the regulators is simply that the regulators and this is really an interesting phenomenon over the last 30 days the regulators are looking at community banks all across the country and saying, hey, you’re Siri loans, which is your commercial real estate loans. You have too many of them, they represent too much of the book, the concentration is too much and we’re concerned that we’re going to see credit loss Now. Up until now, we could talk about a lot of things, but we haven’t seen borrowers default in any kind of size, which is what they view as credit loss. But now they’re starting to see credit loss actually increase. If you look at bank call reports across the country, credit loss and late and assets that are going to special assets have almost doubled just in the last 90 days.


0:15:33 – Speaker 1

Did we learn nothing in the run up to 2008, where we had all of these small community banks and even some regional banks that were just betting the farm on local real estate? Especially, in our case it was residential. In this case it’s multifamily. Do we learn anything from that, from all those banks that got shut down and bought and swallowed?


0:15:56 – Speaker 2

And so we shoved so much PPP money into the deposit system. The banks were just sitting on gobs of free money and, frankly, just the greed factor of we can just leave this in our savings account, in our escrow accounts at 0%, or we can lend it out on these multifamily deals and compete with that market and the temptation to do that residential real estate. It had been up for the past 10 years. At that time it felt safely. I mean, I’m at 70%, 75%. What could happen? What is the Fed going to increase interest rates by 5%? And holy, that’s exactly what happened. Over the course of the next 12, over a 12 month period, the Fed said hold my beer.


0:16:36 – Speaker 3

And then the market said, hey, fed, hold my beer, and then everybody yeah.


0:16:41 – Speaker 1

In the 10 minutes that we have Ron left, I’d love to go continue to game this out from now.


0:16:48 – Speaker 3

I would ask.


0:16:48 – Speaker 4

Ron a question of how he’d react to this, because this is what I think is actually going to happen. I think that, as banks to your community point, banks are losing deposits not all of them, but a lot of them at alarming rates. Money’s moving into treasuries, money’s moving out of banks and, as a result of that, and at the cost of funds that banks are now experiencing, you cannot turn your computer off without seeing a promotion for a 5% money market rate. Banks cannot make money, borrow money at 5% and charge in 7% or even 8%. That cannot be their cost of capital long term.


So what’s happening is banks margins are thinning, their deposits are outflowing, their concentration of real estate loans are heavy, and so what the regulators are already saying is the headwinds here are pretty kind of tough, and if you’re not making money, you can’t earn out of it. You’ve got to get rid of some of your real estate paper. And so what’s going to happen is they’re going to call now. Is the regulator saying you’ve got to get rid of Ron’s loan? Not really. But the regulator is saying to the bank I’m going to say Not specifically, not specifically, but I’m going to squeeze you, bankers, and so you need to look at your book and you need to reduce it or raise equity, and that’s actually a very unique. It’s been a long time since the banking industry was forced onto the edge of the cliff to say, holy crap, we’re not making the money we were two, three, four, five years ago and we’re going to have to raise capital. Hell, no, I’m just going to go. Jettison Ron’s loan. Yeah, where are they going to raise?


0:18:26 – Speaker 1



0:18:28 – Speaker 3

I literally don’t know. I know that they’re my little bank. They’re trying hard to compete with the money markets and on deposits, but they’re only doing it for, you know, assets north of a million dollars, right? So if you’ve got a million dollar deposits in the bank, then you can get, because they need larger deposits. They don’t need checking account from grandma that doesn’t have any money in it. They need big amounts of money deposited in the bank.


But I think this is actually really dangerous, because I think you’re right, I think they’re going to start selling off loans at a discount or they’re going to be forced to mark to market those loans at a loss, which is exactly. This is almost identical to what just happened, where we had banks who were forced to mark to market their treasuries, right, that they had screwed up and bought way too long. Well, I think that’s what’s going to happen, because I don’t know, call me crazy, but I think there’s a lot of pressure on these local banks because the big banks want to roll up and gobble all these banks. They’ve been doing it for as long as the money has been flowing. They’ve been gobbling up little banks, and all of this At a record pace since 2000. Yeah, they’re focusing. They’re just swallowing all of this local where you can actually bank and have a relationship.


I’ve been at Chase forever. Those guys don’t give a rip, they don’t care about anybody. I finally moved to a local bank and they’ll actually work with me and they’ll listen to me and I can get loans there that Chase would never give me. I think if what I think is going to happen here happens, it’s going to be really bad for commercial lending because the commercial loans are all going to be concentrated in a what. The top five banks, which are going to gobble up all of the little banks and all of that local let’s play locally in the same sandbox is going to go away. I’ve gotten a lot of loans from those banks, man. They’ve been very aggressive.


0:20:37 – Speaker 1

If I’m one of the larger banks and I’m sitting on a massive amount of capital, I think, well, let’s just take a look at the amount of capital that JP Morgan has cash just sitting around in the edges right now and the larger of the top 10, let’s say why wouldn’t I be looking if the Treasury can backstop all of those losses from Silicon Bank, which they did, why wouldn’t I? Because they marked to market those Treasuries. Now, wait one second. Why wouldn’t I be a large institutional bank and say, oh yeah, if the regulators are going to come in and mark down this real estate, yeah sure, we’ll come in and buy that bank In terms of commercial lending. That’s the fear that I have that it gets further and further away from the community, that’s further away from regional. Now it’s all concentrated in the hands of very large banks who could care less about Ron Phillips or even Fred Lewis, right?


0:21:36 – Speaker 4

Well, I think what investors need to fear is not Chase coming in necessarily and buying your bank. I think they need to fear that the bank you’re with whether you’re with a good bank or not you’d start there Whether you think that bank is strong or not, it actually matters who you bank with. But the fear is that a regional comes in, comes into that market, buys your bank. They don’t give a shit about your loan, they really don’t. The first thing they’re going to do is they’re going to look at the entire loan book. They’re going to look at the real estate loans and they’re going to shrink it. That’s just what’s going to happen. That’s not a. I think that’s going to happen. That’s what will happen because that’s what happens in times like today and that’s what the regulators are actually telling the banks to go do anyway. Go shrink those books. Anyone who’s acquiring another bank is going to mark down part of that book, jettison what they can and shrink the book, and that’s what you’re exposed to.


0:22:29 – Speaker 3

It’s easier than getting deposits. It’s easier than raising money.


0:22:33 – Speaker 2

Yeah, shrink the loan base. That helps that deposit to loan to deposit ratio. It’s the other way to affect that. That’s what I think is so interesting about this game theory. If we agree and I think we all do that there are some walking dead syndicators right now. Lots of headwinds, the game theory around how that’s going to play out, though it’s not just that they’re all going to be lined up and shot right and we’re going to have a bunch of multifamily that hits that hits costar. That’s not what’s going to happen. No, no, I don’t think so.


The CLO special servicer has different motivations than the particular bank that you might be working with. If you’re at a bank with a very strong balance sheet that’s not worried about taking write downs, their behavior could be very different than another bank, that’s that bought too much mortgage-backed securities while they were doing your multifamily loan, and they’re actually they’re concerned about raising equity. Maybe the tail’s wagging the dog a little bit more there, like they’ve got a gun to your head, but the regulators have a gun to their head, and so it’s not necessarily going to be the first order of magnitude game theory it’s. You actually have to dig deeper to figure out how this is going to play out. So I don’t think the play. If you’re, hey, if you’re listening to this and you’re one of those syndicators who’s a little, who knows that they’re in a little bit of trouble, and you’re trying to figure out how to how to navigate the situation, the game theory is not so simple here.


Like, I think that digging deep into figuring out the motivations of your counterparties is going to be a lot more informative as to how this plays out. It’s not going to be a one size fits all. Just like hey for like in 2008, just foreclose on everything listed with an, with an REO agent. I don’t see that happening here. I could see a lot of blend and extends. I could see a lot of like recast with you know, bringing in new sponsorship where the existing equity gets diluted or wiped out. It could go a lot of different ways here, and not just about not just because of the quality of the deal, but because of the nature of the counterparties, and that’s that’s different this time than it was last time. We saw a big round of distress.


0:24:31 – Speaker 3

And I think that that’s going to benefit the operators who are honest with themselves and honest with their people and start actually talking to their banks now, instead of a year from now, because things aren’t going to get better a year from now. They’re probably going to get worse. And you know, if I were, if I were gaming this out on a property of mine and I didn’t have locked in loans, I would be calling my institutions now and I would be trying to figure out what part of the game I’m playing with each one of the properties that I have, and I would be very upfront. I think the most important thing listening to anything else on, on the show most important thing is that you need to start being honest, completely honest with yourself number one with your, your LPs number two and then with your banking partners number three. Everybody needs to know where you’re at, and if you’re not, you’re not Dude, you’re going to get smoked, and not only are you going to lose everything, you’re probably going to go to jail.


0:25:32 – Speaker 1

Hey, Ron, I know you got to get going. I just wanted to thank you so much for being our very first guest on the show. It’s been an awesome conversation with you, as I absolutely know it would be. Will you tell people how they can find you?


0:25:45 – Speaker 3

Yeah, rpcinvest.com is my company’s website and of course, you can look me up on, I think, any social media site.


0:25:56 – Speaker 1

Ron does an awesome podcast as well. Tell folks how they can.


0:25:59 – Speaker 3

It’s called the Get Real podcast. We do stuff a lot like this. It’s called the Get Real show because there’s a whole lot of them out there that don’t, so you can go to getrealestatesuccess.com and subscribe. It’s been a lot of fun guys. I’ve enjoyed it Absolutely.


0:26:15 – Speaker 1

You are a man amongst men, my friend. Thank you so much for taking the time. You’re, Ron, great to see you. That was an awesome discussion with Ron. Let’s go ahead and tie this up with a bow and sort of. We were talking in the transition there and I think one of the salient points that you made was this notion that, like, who could have perceived a 500 basis point raise in interest rates? And one of the things that you said was all a good sort of sponsor can do at this point, given the market, given the headwinds, is become the best operator they can be. So speak to that.


0:26:50 – Speaker 2

Yeah. So I think that we’re kind of regardless how we got to this point, right, and regardless of how the money that you are interacting with, right, your LPs and the bank or your lender there’s going to be lots of different flavors of those and at this point, not a whole lot of those factors can you really change. That’s the bed and you’re going to have to sleep in it. The thing that you can do right now is to operate your project as the best that it can be operated and to be transparent and honest with your communication with both your LPs and your lender.


At the end of the day, the LPs don’t want to take you to court, right? No one wants to get into a protracted legal battle. The bank doesn’t want to foreclose on you, right, if you don’t pick up the phone and you stop paying them. Well, you were forcing them to drop the hammer on you, but if you are getting up in the morning and working that, building to the best of your money, to the best that it can be done, and sending the money that comes there to the bank and saying, hey, I’m doing the best I can here To Fred’s point, the special assets committee chooses who they drop the hammer on right and they don’t want to work.


They don’t want to just bust, declare a technical default on somebody over covenants. So if you’re transparent about what’s going on and acting with integrity to try to make it the best that it can be, I think you’re giving yourself. Frankly, that’s the only thing you can control and it puts you in the best position to make it through this, whatever the landscape that you’re looking at is One of the things we talk about at Real Investor Roundtable has been this topic of learning how to speak bank.


0:28:34 – Speaker 4

It’s just the topic and people will have to like. Why do I need to learn how to speak bank? Well, it’s because you need to learn how to communicate and now is more than ever, you have to be able to provide, as an operator, good quality information where your business is. A banker wants to know whether you know what you’re doing.


0:28:54 – Speaker 1

So, Fred, quickly take us back to that 2007, 2008 time period where Dominion owned any number of houses back then that were probably underwater, I would think, and you know I mean. The market declined. I was sitting on $2 million of paper on assets valued at $400,000 by the bank here in Baltimore, and so that was a very uncommon and uncomfortable time, and I remember hearing you and Jack speak one day sort of about that time and what it took to work through that period. What did you learn then? Are these the lessons that you’re talking about today? Is that what you learned back then? You know that communication that like, let’s really buckle down on operations.


0:29:41 – Speaker 4

I mean I think there’s a. You know there’s probably a long answer there, but I think the quick is that we learned to not live off of our rental real estate.


We never really did. We treated our rental properties like small, like our kids, and they needed to breathe, they needed to grow, they needed to actually cash flow. And so when the market went where it did in 2008, 2009, we just were not highly overleveraged. We weren’t one of those guys who just were just taking a bunch of money out and buying fancy cars, that’s what we’re seeing today.


So you know we just discipline. Whether it’s back then or whether it’s now or whether it’s in the future, discipline in what you’re doing on your real estate ventures is a guiding principle, and so you have to do that. And I think that if you have a good foundation of you, you tell the truth, you have integrity, you have discipline, then when you talk to your bankers it’s an easier conversation to have because you’re having one conversation the same way every time. Sure, and they see through it. I mean smart people in distress. It’s easier for them to pick off as Jack eludes the guy who doesn’t communicate or just tells them they know bullshit. So I think this is a moment where you just have to really just be honest about where you are and communicate it correctly.


Anything to add there? No, sir, that’s great. I’ll just add my thought here with where we’ve seen this distortion to such an incredible degree that I’m not sure I’ve ever seen a distortion like this in my business career and the Fed. As a result, we saw tremendous inflation and the Fed’s trying to unravel this distortion right now, and so the ride’s going to be bumpy and I think everyone just needs to understand that where we end up in five years, who the hell knows. But we’re in a period of unraveling what was a tremendous, incredible distortion.


0:31:37 – Speaker 1

One of the we’ve got a few minutes left here about 11 minutes and maybe tie into these last hour or so of conversation here and this I was reading. One of the articles that you sent over to me was in Bloomberg and it was talking about how, basically, wall Street loves rentals. They love the rental business and JP Morgan Asset Management just struck a new rental house deal partnership and it was $650 million $625 million with AMH. So no reluctance there in terms of JP Morgan to jump in the business and one of the things that I always I read this a while ago, but I read it again today so when I do the research for the shows, I’ll try to go back a year or two years. I try to get what’s in the news in the last month or so. And so one of the things that MetLife just did a big study where they feel that all new homes this build to rent Wall Street backed investment firms control. Currently, I’m sorry, by 2030, they’re going to control about 7.6 million single family homes, or about 40% of the market.


0:32:57 – Speaker 2

That would be a humongous change for where we are right now Many.


0:33:03 – Speaker 1

That is like a huge increase.


0:33:05 – Speaker 4

You disagree with that? No, I agree. There would be a tremendous change in the market dynamics.


0:33:10 – Speaker 2

Oh, it’s certainly going to be a lot of opportunity if they’re going to come in with. I mean, that idea has to be based off of like this, this, like the fundamental idea being that they’ve got an advantage from a cost to capital point of view versus main street investors. Sure, because I do not believe that they’re like I’m not this guy who’s like, hey, you know, if we get to enough scale, then there’s, then there’s efficiencies.


0:33:31 – Speaker 1

We’ll make up crap in volume.


0:33:33 – Speaker 2

Yeah, like managing single family homes is hard. If you have two, it’s hard. If you have 200, it’s even harder, but maybe you can afford some people. But the further away the money is from the asset, I think that there are not necessarily efficiencies there, and so the idea that institutional capital is going to take 40% of the market. What do they have right now? Like two, something like that.


0:33:59 – Speaker 1

I think it’s about four.


0:34:00 – Speaker 2

Oh four, and that’s got to be predicated. On that they’ve got a cost of capital advantage which would come through the securitization market. Now we did see, we have seen that pre COVID, we saw that currently that’s not really the case and so that would be a you know that that would infer a real stabilization of the capital markets so that institutional investors can raise money very cheaply and that institutional investors are then going to. At that point, at 40%, they’re gonna be taking a chunk of inventory either away from the mom and pop investors, but they’ll also, just by definition, be competing with first time home buyers. There’s already been some blowback on that side. I don’t know that.


I think that the single, I think that single family homes are more emotional than multifamily and I know that there was in the history of the multifamily asset class there was a lot of aggregation. That happened. It’s 25, it’s really 30 years ago. But I don’t think that the, frankly, just the politics of multifamily are, I think, are very different than the politics of single family, and so I’m a little skeptical about 40, I guess is my point. But certainly I think that to your point about the JPMorgan transaction, that is certainly an example that Wall Street is not going away. They are not viewing. This has not been a trade for them.


0:35:27 – Speaker 1

They are in this business.


0:35:28 – Speaker 2

They just made a $625 million investment in this operator and this is a month after that DR Horton deal for whatever, how many thousands, 4,000 houses, and so I do agree that institutional capital is gonna continue to be in this space. I think Build to Rent’s a great place for them to deploy a lot of capital and, hey, if it aggregates to the point where they’re gonna own 40% of their rental inventory, that means there’s gonna be a lot of very motivated buyers in the market for us to sell to. To find one at a time houses, fix them up and then put them in that pretty state to sell it to these guys who are aggregating with this super-cost to capital.


0:36:11 – Speaker 1

So it was Predium that got into the deal with 4,000 houses with DR Horton.


0:36:15 – Speaker 4

Well, I think it’s a Build to Rent conversation. I think that’s where it’s all coming from and I think it makes sense why it’s coming from there, because small investors really can’t. They can’t get through that whole process of what’s involved with Build to Rent right now cost of funds and you have to go deep into the development process to really produce enough. Now, do those economics work? Build to Rent right now Not really. You have to assume replacement cost argument and continue growth of cost of build as well as inflation. They may be correct in the long-term. Again, institutional funds it’s not really always their money either, so they want to deploy. This is a great place to deploy capital that narrative also other than to Build to Rent, and that doesn’t make sense. There’s always this edge that institutional guys who write these offerings think that small investors are stupid. There’s always that in there, whereas I’m gonna roll up the single family business because the small guys really aren’t that smart.


0:37:22 – Speaker 2

Mom and Pop is like, there’s the derogatory, you know, inference.


0:37:25 – Speaker 1

I think we could look at sort of industry in general over the years and say, okay, they, wall Street was never in the hardware store business. And then Home Depot comes along. The modification of America let’s get rid of the mom and pop one main street. We can do it better.


0:37:41 – Speaker 4

But there’s always gonna be bad operators, good operators, even on the mom and pop side. But the small investor who owns a few houses, that is their retirement, that is their net worth. A lot of them don’t even have debt on them. They’ve owned them, you know, quite a long time. So they’re not necessarily gonna take away that asset, that they’re gonna operate those two, three, four houses they’re gonna pass them to their kids.


I don’t ever think we’re gonna get to 40% because of that factor, because of the stickiness of the small investor who covet their two three four properties.


0:38:13 – Speaker 1

I think. I believe that there’s a you also read about sort of the changing sentiment. It’s sort of stepping away from the financial aspect of everything. Right, like, let’s look at through that prism. There’s a changing sentiment amongst sort of the 20s and 30s that we could probably ask a couple people in this room, would you rather own or would you rather rent? And all of those people but 40% of them have said we’d rather rent. If you couple that with the fact that we’ve got 60 million of the world’s poorest and least educated people crossing our border right now who desperately need a place to live but don’t have a job, you could almost see a time where, holy cow, who’s going to own all of these houses that we need quickly? And so that’s the point I was trying to make here less from that financial prism, that’s supply demand, it’s no, we’ve got some changing, really structural changing demographics in this country right.


0:39:11 – Speaker 4

Those are great points. I think there is an argument that we don’t have enough houses. It’s clear we don’t have enough supply, and so who’s going to own that supply, who’s going to have the advantages to get that supply? I think that small investors moderate sized investors are not dumb, and I think we should not undervalue what they’re capable of. I think there’ll be a distribution amongst all those classes of owners and buyers.


0:39:38 – Speaker 1

That’s interesting. You know. I want to believe, Fred, that we can compete. Not necessarily you, because I think you and Jack are really at a much different level than the average investor and I know you would agree with that, but it’s the. How does the small self-storage at the corner of Caten Avenue and Wilkins compete with the extra space storage that they threw up right next door to him, right?


0:40:06 – Speaker 4



0:40:07 – Speaker 1

I’m sure he does compete well, he’s fine.


0:40:10 – Speaker 4

but I got a little local there. But let’s just mention that five years ago the small investor who wanted to hold a rental property had to go to their local bank and plead to get them to finance their one rental property or five. Now there’s a national market. I mean Dominion has a product. It’s a fantastic product, as we all know, shameless.


0:40:33 – Speaker 1

To do that Absolutely shameless.


0:40:34 – Speaker 4

So it’s easy. It is incredibly different and easier for an investor today. Yeah, there’s a national market.


0:40:41 – Speaker 1

It’s a wonderful. Jack and I have spoken at length on the podcast about sort of how the market in terms of debt and equity has opened up for the mom and pop investor, which is fantastic. It’s leveled the playing field, whereas I don’t have to go to the hyper local guy who’s gonna be lending at 16 and eight. I can go to the national lender like Dominion plug number two Exactly.


At a much better rate. At a much better rate and probably get a far better service. Yeah right, and so. Yeah, man, we can wrap up this topic with sort of where we are in the pantheon of Wall Street getting into the rental market. I mean, go ahead if you wanna speak to anything further on that.


0:41:26 – Speaker 2

No, no. I think these are great points. It’s still clearly early innings for the consolidation. There’s still a trend towards consolidation. Your point about hey this is we’re not gonna fix this under supply issue without scale and, as a result, it lends itself to greater institutional involvement in the asset class, and I think those are excellent points.


0:41:47 – Speaker 1

So I think we can wrap there. We got about 20 seconds left in this episode. I think it’s been. Thank you so much for taking the time. Yeah, it’s fun. I know you’re a very busy man, so did we bring you up from Florida.


0:41:59 – Speaker 4

No, jack told me to show up, so I canceled my coffee this morning. I just came right here, awesome.


0:42:06 – Speaker 1

Well, it’s been awesome having you, that’s great. Hope you come back again soon Jack.


0:42:09 – Speaker 2

No, we’re good, Sounds good, fun episode.


0:42:12 – Speaker 1

Hey guys, thanks for checking us out Once again. On Real Investor Radio. We’ve got more episodes coming every week, so be tuning in. Give us any comments that you’d like, questions that we didn’t cover. Love to hear from you. This is Craig Fuhr. Co-host Jack BeVier. Great to see you guys. Thanks for joining us. We’ll see you next time. Thanks.

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