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Episode 51 | Rents, Inflation, Defensive Buy Boxes, & Asset Management with Danny Kattan

Episode Summary: 

Danny Kattan, owner of the PIA Group, discusses his experience in the real estate industry and the shift from single-family to multifamily properties. He emphasizes the importance of grounded principles in real estate investing and the need for a place to sleep as a constant demand. Danny explains the defensive buy box strategy his company follows, focusing on secondary and tertiary markets with strong economies and military presence. He also highlights the benefits of borrowing from government-backed lenders and the resilience of residential real estate during economic downturns. In this conversation, Danny Kattan discusses the factors that influence the pricing of residential real estate properties. He explains that the correct price for properties is determined by the rent people are willing to pay, which is typically above inflation and steady. Kattan emphasizes the importance of underwriting the team that will asset manage a property, as good asset management is crucial for success. He also discusses the impact of expenses, inflation, and interest rates on property underwriting. Kattan believes that now is a good time to buy multifamily properties due to lower prices and the resilience of the asset class.

*The following transcript is auto-generated.

Craig Fuhr (00:12)
Hey, welcome back everyone to real investor radio. I’m Craig Fuhr joined again by my good friend, Jack BeVier. Jack, I’m so excited for today. I’m rested, relaxed and ready did not get our haircut, but our guests did. And so without further ado, let’s not do any pre stories today, Jack, let’s just jump in and introduce Danny and jump into the conversation.

Jack BeVier (00:36)
Yes. I’m super excited to have Danny Kattan on the show with us today. Danny’s been a great friend. We met early in the kind of the emergence of the, you know, the, the institutional side of the industry. We met at sort of meeting with conferences, probably, probably 10, 11 years ago now. yeah, 2012. Yeah. 12 years ago now. Wow. Crazy. and, so Danny and his partners own the PIA group, which a PIA.

Danny Kattan (00:54)
2012.

Jack BeVier (01:04)
residential and they were aggregating single family houses in the Miami market. very early. We met him at some conferences and became immediate friends because we were on very much the same path. in terms of aggregating and interacting with the hedge funds and borrowing money and trying to see where the world was going. And they were getting phenomenal deals on houses in Miami. We were getting phenomenal deals on buying houses in Atlanta and to, and in Baltimore as well.

And so we’ve really kept in touch over the years and, you know, our, our good friends and, Danny had, had the opportunity to exit. He and his partners exited their single family rental portfolio, started investing in multifamily, didn’t leave residential, but just pivoted from single family to multifamily. And then, I’ve really just have tremendous respect for Danny as an incredibly intelligent.

operator who’s willing to roll his sleeves up, but also is always thinking where the world’s going to be 10 years from now. He’s, you know, the guy who’s always thinking about where the hockey puck’s going. And that has served him very well. And he’s got not only the multifamily syndication company that he and his partners put together six years ago now, as well as a new venture called sell to rent, which we’re very excited about. And I think is.

you know, frankly, an idea that time is coming right, you know, is, is, is now. And so we got lots to dig in with Danny and he’s always a joy to talk to. so Danny, welcome. really appreciate you joining us today.

Craig Fuhr (02:36)
Mm -hmm.

Danny Kattan (02:48)
Thank you, Jack. Correct. Yes, as Jack mentioned, we met in 2012, what I call the, you know, when the single family asset class started, I tell people that we were in the room when people decided that this was going to be an asset class and not a trade. Remember the conversations. And, you know, we became really good friends with him and Jack and Fred, his partner. And, you know,

It was amazing because we share the same principles, the same values, we see kind of the same life through the same lenses. We kind of open the kimono, exchange ideas. And I think this sort of openness was part of what led to create the IRR, right? Of let’s collaborate. And I think that there is, you go farther when you go with people than you do it alone.

Having said that, just a little bit on my background, we started buying houses. By the way, I’m from Columbia, South America. That’s because, you know, it’s the incredible accent that I have. I have better English, but then I lived in Miami, which became worst. Anyway, so we started buying houses in 2008, one at a time. Initially, we bought the house for an investor and, you know, we sort of turnkey it for them. After the third house,

We had to create a property management company. Then we realized we had to create software and then a maintenance company, a construction company and warehouses. And before, you know, we had a whole vertical integrated platform, much like Jack and Fred. And so we identified with the mutual pains of growing that. In 2012, a industrialist from Latin America came and gave us about $60 million, which we helped grow our portfolio.

And then about 2018, we ended up selling our portfolio to a company called Cerberus out of New York, about 400 houses, 400 small multifamilies that we had at the time. We sold about 200 and then we pivoted to large multifamily. And why we did that, people like, you know, aren’t you like, don’t you regret it that you sold in 2018? I’m like, in hindsight, yes. The reality, and by the way, just to give you an idea, we sold for $250 ,000 per unit per single family.

Craig Fuhr (05:03)
I’m going to go ahead and close the video.

Danny Kattan (05:10)
unit in what people thought was a crazy price. I mean, I got a phone call from a, I think he’s a CEO right now at a very large fund asking me if I had some type of pictures or intelligence on the people from first key because they paid so much. So it wasn’t a cheap price. But the reason we sold is because we always thought that

in residential, at least real estate. Real estate needs to be grounded in solid principles. And the way I explain it is the cow is worth the milk it gives. Otherwise, it’s a pet, and pets are very expensive. And so that’s the difference between having an asset, you know, not one credit, copyrighted, by the way. So we were called the cow guys in Florida, because all our entities were named

Craig Fuhr (05:59)
I’ve already written it down and I’ll be, I’ll be using it later. Later.

Danny Kattan (06:08)
Like it was green cow, purple cow, red cow, Cuban cow, Mexican cow. Literally, our company was green cow holdings. We always saw, you never knew this, Jack?

Craig Fuhr (06:13)
Love it.

Jack BeVier (06:17)
I didn’t know that. I didn’t know that. I didn’t know that.

Craig Fuhr (06:19)
Danny, Danny, can I stop you for one second and say that very few people know that my favorite animal on earth is the cow. Not because they’re so delicious, but because they’re just so goddamn cute. And so I find that, I mean, absolute favorite animal on earth. So keep going, I apologize.

Jack BeVier (06:28)
Really?

Danny Kattan (06:32)
man.

OK, listen, there’s countries, different countries where. All right, so again, real estate is grounder, regardless of the asset class, anything, companies. Warren Buffett made his money buying value because they analyze things as cash flow. And so at that moment, when we started buying in 2008 and 2009, which by the way is a shit storm.

Craig Fuhr (06:42)
Yes, of course, of course.

Danny Kattan (07:05)
People thought that we were crazy. We called people, probably you Jacko, that had a lot of money in the bank. It’s like, listen, we’re buying this house that it was worth $200 ,000. We’re buying it for $70 ,000. We’re putting $30 ,000 in. The government, the US government is going to pay you a section 8 money that is going to be a 10%, 12 % cap rate. no, it’s too risky. The market might double. So between 2008 to 2012,

market was scared. Right? And for me there was no reason to be scared because you were buying cash flow. Most important you were buying below replacement cost which is by the way the number one thing that you have to look for in addition to cash flow. And equally important you were buying above economic, I’m sorry below economic value. So let’s define economic value. Right? There’s a there’s a there’s a there’s a metric out there with is cheaper to rent or to buy.

So think about it. Think about it. You don’t have to be a macroeconomist or microeconomist to be to be to be to understand this. Right. And by the way, just on a part the other day, my my very smart daughter, 16 years old, asked me, you know, what does an economist do? And I’m like, you know, I tried to explain and she by herself, she’s like, it’s like a meteorologist. I have no idea. OK. Yes. Anyway, so if you think about it from the layman’s perspective.

Craig Fuhr (08:21)
Yeah, we a bullshit artist.

Jack BeVier (08:21)
Yeah.

Danny Kattan (08:30)
If it’s cheaper to pay a mortgage than to pay rent, and you have the ability to buy a house, then you will buy a house. If it’s cheaper to rent than to pay a mortgage, then you will not buy a house.

From 2009 to about 2017, it was cheaper to buy a house than to pay rent. So if you took a rent payment, let’s call it $2 ,000, and you converted it into a mortgage payment, and you could afford, let’s say, $250 ,000 homes, and the homes were trading at $200 ,000, then logic will have it that that house eventually will settle, you know, will buy it for 250.

And that’s what I call the economic value. So these three legs of real estate, you know, they’re already redlining in 2017. You know, we, we sold for, you know, what we thought it was a really good price and cap rates of five and a quarter, five and a half in 2018. The cost of capital was way more than that. Okay. We sold for $250 ,000 per unit. By the way, sold one check occupied.

which means that you didn’t have to retail it. So that was the equivalent of about selling for 10 % more. So it’s close to $75. By then you can actually build a brand new house in the places where we’re buying houses for about $150. Right?

Jack BeVier (09:59)
Yeah. So you’d hit both of those equilibrium where you were selling at a price where the market should get to and a mark to market on replacement costs.

Danny Kattan (10:02)
There were red lines and it was… And the reason we sold is because the rents did not increase as much as the prices.

Right? So it was, eventually it was cheaper to rent than to buy. Okay?

Jack BeVier (10:16)
Yeah, that was our experience and that was our experience and very much the same logic we used to sell in when we, when we sold our portfolio in Atlanta. And, you know, what we all didn’t know was that, was that we were going to see some inflationary times and that rents were going to continue to increase.

Danny Kattan (10:33)
we’ll talk about inflation later, Jack. But you know, this is so I’m from Colombia, like Latin America. Inflation is a daily basis thing. You know, I mean, you guys, you guys had inflation, forgot about it, blame it on the oil wars. And then, you know, you had inflation again and blame it on the bad government. And now we’re back to inflation. And you know, you can blame it on whatever it is. I think it’s here to stay. But.

Jack BeVier (10:35)
You’re right.

Hehehehe

So why the pivot into multifamily? Why do you still like residential real estate? And you mentioned, when we were chatting before we got on, that you thought now is a good time to be buying in multifamily. What?

Danny Kattan (11:09)
Sure. So let me walk you through that logic. So we ended up selling and then, you know, now we have some good money, right? And we also thought that, you know what, it’s 2018, it’s already been 10 years, there is a recession that is going to come.

Right. It’s fair. Right. You know, it’s recessions in the cycle. This whole thing of, you know, there’s a book way back in the early nineties written by Ravi Batra called, I forget the name of it, The Great Recessions of the Nineties. And he actually argues that economic cycles come in seven year periods. And that’s where the seven cows in the Bible come, the seven fat cows and seven skinny cows. Right. So it’s already been 10 years of growth. You know, you have to. Right.

Jack BeVier (11:51)
We’re overdue. Yeah.

Danny Kattan (11:52)
So now we’re sitting down with some money. We said, okay, there’s a recession coming When we were buying houses, I literally saw 6 ,000 homes to buy 400 I walked into like I drove and one of the things that actually impressed me a lot during you know The early times and the great financial crisis that you have shopping centers that were empty warehouses that were empty and you know all this Impact that you know down economy has on real estate

Yet when we had single family homes, we could always rent it. It wasn’t a question of who was rented. It was going to be $1 ,500 or $1 ,400. As long as you’re not in Detroit at the time, and we’ll call it the Detroit effect later, and you’re a city where people are migrating and it’s growing and so forth, you’re always going to be able to rent it. So we said, you know what? There is this thing, recession, coming. And that’s when I also started thinking about there’s technology that will affect real estate.

Right? So simple, right? I mean, nobody’s going to go buy a Barnes and Noble because you have Amazon, right? So if you have a triple net Barnes and Noble, you have to think about what Amazon is going to do. I started talking about that Jack, as you know, started reading about it, writing about it saying, you know what, there’s a lot of technology that will affect real estate. You have to understand what technology which affects each real estate.

And so now we will probably not go by a gas station, that the gas stations will disappear, but definitely will be different in five years from now, three years from now. So we said, what is, what is.

Jack BeVier (13:22)
Because the self -driving car is an EV and all those facts, yeah.

Danny Kattan (13:26)
Yeah. What is the constant? The constant is people need a place to sleep. And the Maslow theory of priorities, yeah. There you go. You said nice here. Right? Food is number one. I mean, you got air and water. Food is number one, right? But my saying is that right now, food is not important because there’s food everywhere. You have.

Jack BeVier (13:36)
creative needs. Yeah.

Danny Kattan (13:53)
food banks, you can really go anywhere. And listen, I’m from Latin America and I can tell you that, you know, aside from political conflicts, people in the world, they’re not dying of hunger. They might die of malnutrition, but they do die for exposure of the elements or the insecurity of not having a home or living in the streets. Right? And so what we experienced in 2009, 10, 11 is that people were clinging to the

possibility to live underneath a shelter. So, you know, if they couldn’t pay, then two families got together and, you know, they basically, you know, in a house that was a four bedroom, there were three families living together, right? Because that, it’s very important. And so we believe in our heart of hearts, and I will challenge people to question it, that right now shelter is the number one priority for a human being, right?

Jack BeVier (14:45)
Yeah, even when COVID hit, like I, and I missed this, I screwed this up. I was like, hey, when COVID hit, it’s really poorly affecting the economy. And so houses are going to become in distress and people are going to need money. And the opposite happened, right? People got scared and so they shut the doors and they closed the doors and they made their mortgage payments and they made their rent payments because the last place you wanted to be,

was having to bunk up with somebody or out on the street. And so like, yeah, that, like that physical need for shelter in a, in a, in when people are afraid was like COVID really like, you know, drove that home for me. And I missed that, right? I, I was bailing on contracts cause I thought we were going to buy houses cheaper a year later. Couldn’t have been more wrong. Right.

Danny Kattan (15:13)
was in this.

Craig Fuhr (15:17)
So true.

Danny Kattan (15:32)
Yeah, well, I think everybody missed COVID. Missed, not, I mean, sometimes we miss it, right? Being left in the home with the family, but we missed the opportunities that COVID brought. So what we decided in 2018 is that we’re gonna keep doing what we were doing on the residential side because on the residential side, the rents are very resilient. And if you really think about it, the person who I think, you know,

Craig Fuhr (15:55)
Sticky.

Danny Kattan (16:01)
gets clear indication the best way to make money is Warren Buffett. First rule, don’t lose any money. Second rule, look at rule number one. Right? And yes, right, you can, you know, you can hit home runs and, you know, once in a while, but you know, we’re in the business of asset preservation. Me and my partners are in the business of not losing anybody any money, period. Right? Investor money is sacred. We don’t take risks with that.

So we created a very defensive box in which people can invest money with us. And what we said is we’re going to get out of South Florida because it’s already frothy, and we’re going to go to secondary and tertiary markets that behave very well in a downturn, that are in the Southeast, where people are migrating and jobs are being created, and then you don’t have a specific concentration on an industry, which is, you know, so avoid the Detroit effect.

So funny enough, we ended up being in, we looked at a deal in Pensacola for a single family portfolio that was there. And so we became very familiar with Pensacola. So when we started looking at properties in a multifamily showed up in Pensacola, we thought it was a great opportunity because Pensacola is a, you know, it’s a military market where people migrate to the retina griviara. You know, you have vacation people, you have retirees, and then you have all this.

economy based on the military. So people retire there because they have a good VA system, a hospital, right? And you know, people, you know, companies put in their call centers and factories because there’s people migrating there. And of course you got, you know, Florida, which is a very pro -business state. We bought that building Pensacola, that was in 2019. Always using Freddie or Fannie Depp.

Okay. And make a note of it because I like to talk to about what I call the government put. Okay. And always with 10 year fixed. So right now there’s a lot of people who are in a lot of trouble because they decided that real estate was basically a gambling machine where you gamble with the bond. Right. We initially said real estate is we’re buying the real estate. We put you’re fixing the debt for 10 years and you take the risk out of the day.

Jack BeVier (18:29)
What’s the explain to everybody what the government put explain that.

Danny Kattan (18:33)
Okay, so one of the issues that happen in real estate when it hits the fan, right, is that you might not be able to pay your mortgage. Okay? So if your lender is a bank or if your lender, let’s say, is a CNBS loan, private guy from New York, whatever it is, that loan will get sold to eventually somebody who’s a vulture.

It’s not going to come from your blood. The government, Freddie and Fanny, keeps their loans. They control their loans. They securitize them, but they control their loans. So when we started looking at this, we had, you know, dealing with Freddie and Fanny before in a small multifamily, we realized that there’s an embedded sort of protection when you borrow from the government, which is the government doesn’t want to go take the property away from you, unless you’re cheating.

Jack BeVier (19:30)
Yeah, right.

Danny Kattan (19:32)
right, and you’re stealing. So the cool thing about this is that, you know, when we were buying in 2019 and we designed our defensive buy box, we said, you know what, we will only buy with Freddie Fannie loans, long term debt, fixed rates, so forth and so on. Okay. COVID happens.

Couple of months after COVID happens, we get a call from our servicers. Guys, this is our servicer. Don’t worry about it. You cannot pay any more. It is because people are paying the rent. Don’t evict them, so forth and so on. So the government is telling you, don’t worry about it. We’re not going to come after you. And that, for me, it’s hugely important because one thing that we cannot underwrite to is that Black Swan event that you might be left high and dry. Now.

Jack BeVier (19:59)
Right, we know, we know it’s hard.

Danny Kattan (20:19)
The cool thing about it is that this is a military economy. Most of the people that were in our property were either military or affected by the military. I mean, the cool thing about a property is that you can see the blue angels, you know, flapped up because it’s next to the Pensacola neighborhood station. So, yeah, theory worked, checked. OK.

Then COVID hits, we’re gonna go out and buy more properties, but now it’s the time to buy, there’s blood in the street, everybody’s scared. And we realized that every time that everybody’s scared, you have to go buy. It took us a while to convince people to go into and buy another multifamily. We bought another multifamily in Jacksonville. Jacksonville again, military market, hospital, banking, port. Strong economy, South Florida, migration, so forth and so on, right?

Craig Fuhr (21:04)
Heavy net migration.

Danny Kattan (21:11)
Then we started analyzing a lot of things and then you start seeing the like sort of the dumb money come out with the low interest rates. And so 2021, we got to see a lot of properties, we wanted to buy one. We bought another one in Savannah, Georgia. And Savannah basically, you know, when I went to Savannah first time, I’m like, idiot, idiot, idiot, idiot. I should have been there like five years before. Huge post -Panama export, tourism, education.

It’s a city that will just work because it’s the vein for where all the sort of containers go to Atlanta. And so it’s always going to be there. I mean, Savannah is a little town with a huge port. It has intrinsic demand. 2022 rolled over. And by the way, every property we’re buying with an SPV, GPOP structure, we sort of.

brought in investors that we knew and then they brought in investors that they know. And, you know, we, you know, after the single family platform, we kind of became an open platform. Initially with single family, we’re, you know, dealing only with one wealthy individual. And then we started thinking on some money out of which you guys, you know, Fred and Jack are investors. And then in 2022, we bought one in Fayetteville, North Carolina. Fayetteville is for brag. And, you know, it’s one of the largest military bases in the United States, even in the world.

So again, military economy, very resilient. In 2022, then we saw another property in Birmingham. And by then, our investors, which in most cases are very sophisticated family offices, ultra high net individuals, a couple mom and pops, some bankers, Wall Street people, they started saying, listen, every property you put in front of us, we buy.

got four out of four, it looks like a fund, why don’t you create a fund? And so we got in the idea of creating a fund. A fund by default is less risk to an investor because you’re investing in several properties at one, has less fees. Okay? And so we created the fund, we bought the fund, we bought the Birmingham property with the fund.

You know, most of the money came from the fund. And then, you know, the sidecar of some of the large investors are still invest with us that, you know, they don’t invest in funds because they’re not allowed because they’re foreigners and the tax situation that is basically, you know, bite by, by, by design, they’re not allowed to invest in funds. And then now we have a property in Atlanta on their contract that we’re about to close in about three weeks or four weeks. Now, the reason, the reason, the reason,

Jack BeVier (23:55)
So what’s your experience?

Danny Kattan (23:58)
So I was going to tell you why is it a good time to be buying right now. So in 2022, when we bought the Birmingham property, we ended up looking at 800 and so properties to buy one property. 2023 came in, the rates started going haywire. Okay. And then prices started coming down. And one of the issues that we saw that did not allow us to buy properties is because we always on the right to about a 7 % cash on cash net to an investor. Right.

and about 14 to 15 percent are net one investor. But all that is trottled by your replacement cost, your price per pound. So what was happening in 2021, right, in early 22, was that people were buying great cash yields, low cap rates at high acquisition cost. So if you look at underwriting,

on a 2021, let’s say late 2021 property, yes, the exit cap rate is about a four and a half or whatever it is, but the price per pound was like $350 ,000. I’m like, why will you sell at $350 ,000 five years from now or three years from now a property you can build for 250? Right, so it didn’t make sense. And so my point is that there is this intrinsic sort of self -sustaining, self -correcting thing about

residential real estate, okay, which it tells you what the correct price for things are based on what people pay for rent. And that rent has been proven over time that it’s always above inflation and it’s very steady, it’s very resilient. It’s not that volatile, contrary to what people think, especially if you go to a workforce theory, which is, you know,

if you’re doing workforce rents, $1 ,500, not many people can build a building today that can sustain those rents. So you’re going to have supply -demand imbalance at some point.

Jack BeVier (26:05)
What if you…

What have you seen in terms of, so what’s your experience been over the past five years in terms of expenses versus pro forma rents versus pro forma as inflation has, you know, as things have gotten a little bit weaker over the past year or two, have you seen any nom, have you seen nominal rent decreases and then, and how is that experience that informed the way that you’re thinking about your underwriting for properties that you’re looking at today?

Danny Kattan (26:36)
It’s a good question although we’re very very very conservative we always get hammered somewhere so there’s two things that you cannot you know really think about which is what’s the cost of insurance is going to be in three years from now.

Craig Fuhr (26:49)
Mm -hmm.

Jack BeVier (26:50)
In terms of been crazy, it’s been brutal.

Danny Kattan (26:51)
Right? So take away insurance. If you take away insurance, then you’re basically left with, you know, how much my rent is going to grow, because that gives you the top line, right? And what are my expenses going to be in the bottom line? Okay. And I think those two complement each other. And let me explain why. Take away insurance and taxes. Okay. And now you’re left with property management, which is a percentage of income. Okay. You’re left with maintenance.

which is basically a human factor. Okay. And then, you know, bad debt and all those things. But at the end, that is, that is forecastable. Okay. You more or less know what the maintenance is going to be in a 2005 building and a 1983 building.

The hardest thing that we have faced is the human element. So the properties were underperforming because we had a human element that didn’t work well. Meaning, for example, in one of our properties, when we took it over, the property manager had cancer.

And I mean, they’re going to treatment this, this and that, and you don’t fire somebody who has cancer. You just don’t go like, I’m sorry, you know what? Right. And so even though we have really good property management companies, because we hired the best and the brightest in every market, we don’t like property management. We did it. We know how to do it very well. And so we took those experiences and we parlayed them into being really good asset managers. So if you think the best property manager in the world, if you’re not on top of them, they’re going to screw it up.

They’re basically going to go hire the most expensive person that they have in their roster.

Jack BeVier (28:29)
Yeah.

Yeah, makes it easier. It makes it easy for them, right? Like, you know, like they get they get the high service level right from the expensive labor.

Danny Kattan (28:37)
Right, it’s easy.

And the local property manager doesn’t want to have a vacancy. And so for them, they’re not going to go push somebody in apartment 305 to either increase their rent for $200 or leave because that creates more jobs for them. Right? I mean, property manager wants to have a property 100 % full and not to worry about it. A property that’s 100 % full, it’s badly managed. Okay. And so the question is very valid, Jack. Everybody talks about the underwriting part.

Jack BeVier (29:01)
It means you’re not pushing rents enough. Yeah. Yeah.

Danny Kattan (29:12)
of the property, but I think that the most important thing that you have to underwrite, when you’re looking at an investment, you have to underwrite the team that will asset manage that property. And that’s where we actually excel because we have so much experience like you guys, like I’ve done evictions myself, I’ve done clock toilets by myself, I’ve been on top, like we’ve done it, right? So when somebody calls you up and said, you know what, we’re gonna change this toilet.

and it’s going to cost you 250 bucks. You go like BS, go to Home Depot, buy it, get a wax ring and you know, it’s $30 later or 30 minutes later, you can change it. Right? And so we know the prices of those things. We know how to push rents, you know, how to deal with operations. And so that asset management aspect, it’s key. And we’re learning. We’re learning. Every time we buy a property, something new comes up and we’re learning. We don’t have the advantage of having a platform with

20 years worth of experience in large multifamily. But the most, I will say the one of the smartest things that we did is when we pivoted from our small multifamily sort of single family portfolio, we realized that although we had the great expertise of dealing with highly complex operational situations in single family and small multifamily, we didn’t have the expertise of a large multifamily operation. And so we brought into our

platform people who you know what I call it no hair or gray hair people who had been there for 30 40 years who have been through the cycles who understand and know what to do.

Craig Fuhr (30:43)
that died in the wool, multi -family guy. Right.

Danny Kattan (30:46)
Yes, correct. And so, yes, there is a lot of risks that come from the operational side. Now let’s talk about the rent side. Rents behave extremely well with inflation for a simple reason. What does inflation mean? Inflation means that, you know, things in the past that are worth more, which means a brick is worth more now than it was worth before, which means construction is worth more now than it was worth before. So rent has to go in order to sustain the value of that brick.

Otherwise, you know, nobody’s going to build anything. Okay. And so rents went really up when COVID came because of what you said. And people started getting the check and they said, you know, mother, I’m going to leave my basement and I’m going to go rent an apartment because I got a free check from the government. And then they stopped getting the free check from the government. But also what happened in COVID, the rates were very, very cheap. And people started building with money that was very, very cheap. And because rates were very cheap,

You had all these doctors and dentists and people just throwing money at syndicators who had no idea what to do with it. And they just syndicated things and put money here and there. And now you see a lot of people losing money in multifamily deals, not because it was a bad asset class, it was because they’ve been on the wrong operator, on the wrong structure, the people took risks. All these syndicators that you see now hidden, the wall, it’s because they structure it with extremely…

Jack BeVier (31:51)
Mm -hmm.

Danny Kattan (32:14)
high leverage, a lot of financial engineering trying to sort of, you know, take as much milk from the cow today and then the cow eventually died. Okay. So, so I do believe that this, the asset class is extremely resilient, extremely resilient and well managed, it gets to state anything.

Jack BeVier (32:32)
Have you seen, have you seen like the building that you were looking at in 2021, is it available now? Is that building available now for a cheaper price? Not people nominal price, 20 % less from a, like a price per pound point of view.

Danny Kattan (32:46)
20 % less. 20 % less.

Yeah, and right now is the best time to buy. Why? Everybody’s on the sidelines waiting for interest rates to drop. So what do you think it’s going to have? I mean, there’s billions in the sidelines waiting for interest rates to drop. What do you think?

Jack BeVier (32:57)
Yeah.

Craig Fuhr (33:05)
It feels doesn’t it feel like to Jack comment as well. Doesn’t it feel like to the people are still waiting for the knife to drop as well. You know, like, it’s, I don’t know that the average investor knows that multifamily is 20 % less in some markets. We just I don’t hear that. You know, Jack, are you were you familiar with that? That that multifamily? Go ahead.

Jack BeVier (33:27)
I thought it was down the 20 % makes a lot of sense though, right? Like it’s down enough that the equity is not wiped out. The syndicator is still going to work every day. You just, you know, they’ve lost money on paper, but no one’s actually been forced to recognize it. And then the, you know, as long as the lender doesn’t want to put a gun, you know, take you out to the back, you know, and then shoot you in the back of the head, you just continue to operate, you know,

Craig Fuhr (33:34)
Yeah, yeah.

Danny Kattan (33:49)
Well, Jack, the easiest way to get to that, I believe that that’s the equilibrium point. And the easiest way is that sort of the returns that are requested by investors in the market are sort of still the same, like seven and a 14, right? So now that interest rates are higher and you need to solve for that seven and a 14, right? Instead of getting 80 % onto value, now you’re getting 60 % onto value, that the 20 % has to come from something which is the price drop, okay?

Jack BeVier (34:11)
Right.

Danny Kattan (34:17)
And again, the issue that we were having two years ago is that when you were solving for the exit price, the price per pound was so high that it didn’t make any sense. Might as well build it now and deliver it in the future for that price.

Jack BeVier (34:31)
Why do you think prices aren’t going to continue to slide? If interest rates stay up for longer, rents aren’t really increasing and we may, you know, maybe going into a more, you know, boring or, you know, maybe small recession market. Like, why don’t you think that the knife is falling further, is going to fall further?

Danny Kattan (34:49)
A couple of things. One, first of all, it should fall further in certain places and in certain specific buildings that were badly financed. So yes, you will see somebody who bought something for a hundred and I’m talking talking multifamily real estate class B, right? In good places. I’m not talking the office building that, you know, it’s a hundred, so for 20. OK. Because rents have not fallen nominally.

Jack BeVier (35:12)
Mm -hmm.

Danny Kattan (35:19)
a little bit. They went very high up and then they started to come down because of deliveries. So all those deliveries are going to burn down in 2025 or 2026 because high rates and high cost, nobody’s building anything. But just think about the following rates are so high, people cannot buy a home, which means they rent, right? Rates are so high because there’s inflation, because people are getting more salary. So,

Jack BeVier (35:23)
Yeah, yeah. Yeah.

Right.

Danny Kattan (35:49)
I call bullshit on this whole thing that people don’t have money to pay to buy a home. Okay, because if you look at the rates, historical rates, six and 7 % mortgages were kind of the norm. What happens is these days is people I think don’t have the necessary discipline to save for that. You have the phone and the coffee and this and that. And the other thing, and again, I think the American dream of that you can buy anything with a 40 day…

for a 40 -hour work week, it’s gone. Like now you really have to work 60 hours, right, in order to sort of like, you know, be able to afford things. And so this whole concept of I’m going to go work 40 hours, you know, you know, pay $10 for avocado toast and $3 for, for, for, for a coffee, right. And my lunch hour, we’re going to go to Chili’s for 20 bucks lunch. You have to save somewhere, right? before you get…

Craig Fuhr (36:47)
You’re really laying down some hard law right now. Yeah. Couldn’t agree.

Danny Kattan (36:49)
Yeah, before you were getting people paid $8 at McDonald’s, now everything is starting at 15.

So they have a 100 % increase and people still don’t want to work, which means that they have better things to do with their time or their money. So I think that when people are like, the rent went up by 10 % in a year, yes, that’s $150 and a $1 ,500 rent. It’s a shitload of money, right? But it’s three hours or four hours or five hours, 10 hours worth of work in a month.

So I think it’s still affordable. The most important thing that I think it is in this, this is what I call the elephant in the house, not in the room, is that everybody thinks that properties are not being built because of interest rates and the cost is the government.

right? And the government basically is not allowing things to happen because of cost of doing business in the local cities, because of, you know, the regulation, the land, you know, the time it takes. So it doesn’t, it doesn’t jive, right? If the government, I think, wants to solve this issue, it needs to take a top -down approach and the federal government has to say, you know what, this is what we think it needs to happen in every county and state.

where you have to facilitate the building of workforce and affordable housing.

Jack BeVier (38:06)
So what are you seeing? What are you seeing on the seller side of things then? Like in the market, as you guys are making offers, are you finding that the bid ask spread has tightened and deals are starting to happen again at these prices that are 20 % lower? And who are those sellers, right? Like, is it the busted syndicator? Is it just the old guy, the fund that’s shutting down?

Danny Kattan (38:18)
Yes. Yes.

I said, I said.

Fund shutting down, some syndicators, you know, we’re starting to see some really interesting opportunities on, you know, how do you call it, developments that are in stabilization. And, you know, so the developer that had a cost basis that they started in 2021 and it’s a good cost basis, right? Now it says, you know what, I need to cycle out my money, okay? But equally important, I think that…

I mean, sellers just basically realize that if you want to sell it has to be in this market. Not a lot of people can afford to have a property operating with double the insurance and double the interest rates. Having said that, everybody’s waiting for blood in the street. I don’t think there’ll be blood in the street.

Jack BeVier (39:10)
Are you seeing any lender restructurings and.

Danny Kattan (39:13)
Yeah, sure. But again, remember that the reason we were able to buy things in 2009, 2011 is because there was no financing. Everybody was too scared and all the investors didn’t want to put money in. Now you have rescue capital, you know, all the types of rescue capitals you want, you have preferred equity.

Craig Fuhr (39:23)
Yeah, correct.

Jack BeVier (39:26)
went to a cash number, had to be a decent unlevered return.

Craig Fuhr (39:30)
Exactly.

Danny Kattan (39:38)
you know, the banks are solid, they can rework on it, they can sell it. I mean, there’s so much money on the sidelines waiting for it. When we were buying houses here in 2008, you buy a house, the bank will call you and say, I have 10 more, you want to buy them? So that doesn’t happen right now. Sort of the inventory, I think it’s under control, right? And so if there will be blood in the streets, it will be in a specific deals that are, you know, really badly structured or people who thought that they can, you know,

tame the beast in a class D property and convert it into a class B and they didn’t know what they were doing. And so, you know, some of those things will probably be trading badly. My experience is we didn’t buy from the court. We bought in the REO world. We were buying single families because we had the pick of the crop. We can go see it and the whole thing. So there’s funds is like, we will only buy if it’s totally distressed and they’re just waiting on the sidelines.

In the meantime, we’re having conversations with all the brokers that are bringing us deals. And sometimes, you know, it makes sense like this deal that we are buying in Atlanta, in McDonough, we’re assuming that a three and a half percent six -year fixed.

Jack BeVier (40:49)
Yeah, that’s a nice feature right now.

Danny Kattan (40:51)
Right? And so we are coming in at, they want cash on cash of about 7 % in a deal that we’re buying at a 191 ,000 per unit, town homes, you know, in McDonough, which has 56 million square foot of a warehouse, which is a solid city outside of Atlanta, Atlanta MSA.

But how did we get there? Because we underwrote 550 deals in a year, right? And we’re people who are known in the industry for, you know, doing what we say we’re going to do. So, you know, we’re not posers or anything like that. You know, we don’t want things to put in retrade and, you know, we’ve always closed in our deals. Like, you know, I’ve always, like, we never sort of retraded, even when we’re buying single family houses, we never retraded.

Right. And so you have to build a pipeline and a reputation. And obviously the capital is stuck in the back with the fund in order to be able to acquire it. But I do believe that right now it’s the time to buy because again,

Acquisition price cost basis is permanent. Financing is temporary.

Okay, so now we’re buying a price per pound that is much lower.

And so I believe that that’s where if you have very good money, you should be looking at multifamily because I think that’s resilient and it’s going to be there for the next 10 years. Easy.

Craig Fuhr (42:19)
Hey, Jack, Jack, we have a couple of minutes left in this episode. And one of the questions that I failed to ask on, you know, most of the smart guys that are on the show is what if you were wrong? And we’ve I love your forward thinking, Danny. And I’d love to talk in the next episode if we could have, you know, what if we’re wrong? What if there’s another black swan event like the GFC or covid and, you know,

Danny Kattan (42:47)
I love that. I love that question because it reminds me of my wife. What you’re wrong.

Craig Fuhr (42:50)
Yeah, exactly. I probably got the same from mine. But

Danny Kattan (42:54)
See, Jack was recently married, he’s just starting to laugh about that one, before he didn’t get it. But anyway, okay.

Craig Fuhr (42:58)
No, so let’s end this episode here and we’ll come back with Danny Kattan of PIA Investment Group and Seldarant. Yeah, yeah.

Danny Kattan (43:07)
Let’s assume Craig, let’s assume that we’re wrong. GFC, shit hits the fan, everything goes south.

Craig Fuhr (43:14)
Right. Jack knows I love these kinds of conversations. So.

Danny Kattan (43:17)
Right? What happens with your money in the bank? What happens with the money in your stock account? What happened with the other asset class? I go back to the same thing and I wrote, as I told you,

Craig Fuhr (43:20)
Yeah, yeah. All right.

Don’t don’t don’t give it away. We got this a big tease for the next episode here. We’re going to end this one here. This is real investor radio at Jack BeViere and our great guest Danny Kattan. I hope you guys have enjoyed this one. Stay tuned for the next one. We’ll be right back.

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