Episode 1: Today’s Investing Landscape

*The following transcript is auto-generated.

Craig: 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 for the kickoff episode. I’m Craig Fuhr here with my co-host Jack BeVier of Dominion Group. Jack, I can’t believe we’ve actually pulled this together at the very last minute.

Jack: I know, I’m super excited.

Craig: So, two months ago, feels like maybe a month and a half or so ago we got together and Jack had an idea for a podcast. Why don’t you talk about sort of the genesis of the idea, what we’re trying to get out to the investors at large with real investor radio? Yeah,

Jack: Sure. So, I mean, the past three years have been incredibly volatile, changing market conditions like crazy 2020. No one was sure what was gonna happen coming outta COVID 2021 was a real estate market and mortgage market like we’ve never seen before. And then the hangover from that has been pretty significant in terms of, you know, the headwinds that everyone’s experiencing right now. So we’ve been having tons of conversations internally from a strategic direction point of view, how to respond to this. Are there gonna be opportunities that come out of it, but how do you stay away from the threats that this kind of volatility presents? And so we wanted to kinda, my thought was that for Main Street investors who are operating their real estate businesses every day, there’s not a gr a ton of great sources of content for like high level thinking about what’s going on in the market. How should I be responding to these, you know, to these changing market conditions, and what should I do about it? How does it affect my real estate business at the end of the day? What should I do tomorrow morning to either take advantage of these opportunities or protect myself from the threats are being presented right now. And so, like I I, I was just, I went out there and I was frustrated by I think like the lack of high level content that I found. There are a lot of great podcasts out there. There are a lot of great coaching groups, a lot of great masterminds, but the barriers to entry for those are, are relatively high. And so we wanted to kind of bring a high level of real estate investing conversation to the world and explore these topics, a place where we can kind of dig in, dig deep into these concepts and, and really translate what we see, you know, happening in the world to what Main Street investors should be doing in their real estate businesses. How does it affect them?

Craig: Well, that spoke to my heart because I think as we look across the sort of the pantheon of podcasts that are out there currently for real estate investors, Jack, you know, you mentioned that was gonna, that we want to go high level, but I think what you mean by that is we want to go deep on bringing as much valuable content, valuable actionable content to really established real estate investors, right? Yeah. That’s who we’re speaking with here. Look, if you’re just starting out in the business, all more power to you. I think that’s fantastic. But you know, it’s funny, I was thinking last night about sort of, you know, the business and how it’s evolved, especially since sort of that 2008 timeframe, Jack, where there was a lot thrown at us as investors back in the day, we all looked like brain surgeons from 2004 to 2007 ish, right? 

And then I think we all sensed that tide turning that, wow, this, the market is changing. And it’s felt like it was changing fairly rapidly when you start getting calls from your bank and they’re saying, Hey, you know, we’re not in the business anymore. So yeah, Jack, that was sort of, that’s, that’s where it touched my heart with the podcast. I wanted to be able to deliver deep content. So when you say high level, you know, we’re not going to cut around the edges here. We’re, we’re not gonna be three miles wide and a half inch deep with this. I think what we’re trying to do is the exact opposite. We’re trying to give people some deep content on what is affecting not only the markets, but in financing and everything that they can do to take actionable the content that we give them and then take action, right?

Jack: Yeah, absolutely. So like, this isn’t gonna be, I don’t, I don’t wanna talk about how to learn how to, you know, start doing wholesaling or how to buy turnkey rentals and the advantages of investing in real estate and, you know, alternatives to the real estate market. It’s gonna be how, you know, how what are the top players in the country doing right now to find deals? How are they financing those deals digging into their businesses? You know, what, what, in terms, from a strategies point of view, everyone knows right now if you’re listening to this podcast that, you know, kitchen and kitchen and kitchen and bath paint, carpet rehabs are not great margins right now. Right? But, but folks are still investing every day and making money and making a lot of money still. And so, you know, what are those folks doing, right? Like, we can find all of this data to see what the top players are doing in the market right now and where they are pivoting. And that’s interesting information, I think, for everybody who’s, who’s actively investing in, in real estate still.

Craig: Alright. So before we jump into the content that we’re gonna talk about today, sort of the sentiment of the market, maybe we should tell people a little bit about who we are and what we’ve done. I’ll let you start.

Jack: Yeah, sure. So my name is Jack BeVier. I’m a partner at the Dominion Group. We’re a real estate investment company based out of Baltimore, Maryland. I started when I was 23 in 2007, right when the market started to tick down. So got a, a quick education in down markets during that period of time. My partner Fred Lewis, who’s really my mentor in real estate investing, has, we, we’ve grown dominion to this point to be a real estate investment company that we buy about a hundred houses a year in the Baltimore metro area. We add some of those properties as rental properties to our portfolio, which today is about 800 units of single family houses. We’ll wholesale maybe 20, 30 houses a year, flip maybe 20, 30 houses a year. And then separately, we have a lending company called Dominion Financial Services that we make fix and flip loans and D S C R loans nationwide. And we do about 60 million a month. We’ve built that company up a lot over the past 15 years for, for Fred, 20 years. And so, yeah, we’ve, we, we, I’ve got, I’ve got exposure to a lot of deals and I’m op you know, we’re operating enough volume where we get to see a lot of things that different investors all over the country are doing. I love having that kind of national perspective in the lending business, and we’re still very active, you know, boots in the ground here in the Maryland area as well. So, as a result, I kinda like, I self-described housing nerd. I, I love this industry. I love learning everything about it so that I can understand how all the pieces fit together and, you know, from a selfish interest point of view, try to stave off threats that are, you know, happening because of what’s going on outside of us and take advantage of opportunities. That’s, you know, for me, the fun part.

Craig: Yeah. Well, if you’re listening closely, there was a lot there that we’ll be jumping into deeply in terms of, you know, sort of all that you’ve learned in, in terms of experiential knowledge since you got into the business, you know, when you were 23 and, you know, 15 years ago now. I mean, you just threw a lot out there like what all that dominion does. And so can’t wait to talk more about that. Me, I’m Craig Fur. I am from Maryland, still live here in Maryland. Started in the business back in 2004 with just a single flip when I had no money to my name, wound up making a hundred thousand dollars on my very first flip net profit. And I married the girl whose father lent me the money. So that worked out pretty good. I, I think I’m, I’m welcome at the Christmas table now, still after all this time because I paid for the wedding and the ring and all the, and the honeymoon with the first deal, right?

Craig: So it’s been a, it’s been a long journey of, you know, a few hundred very large scale flips from that 2004 to 2013 ish timeframe. But what I’ve really connected with more in this business is the people. You know, I, I’ve, I’ve found that people, and bringing value to the investment community is really how I operate. It’s, it’s the thing that is most fulfilling to me. So I’ve done a lot of coaching. I know some of the biggest real estate investors, educators across the country, the biggest marketers in the country. I’m very, very good friends with all of those people for 15, 20 years now. And right now doing a lot of coaching as well with top-notch real estate investors from all over the country and business guys. So really looking forward to jumping into this with you today. We’ll obviously talk more about ourselves as the time goes on. We’ll try not to bore anybody with our long and arduous stories, right? So, man, we talked a couple days ago about this conference that you have been going to now for quite some time. It’s i m n, what does I m n stand for?

Jack: It’s a British company investment management network, and they, they run a series of conferences in finance, a lot of real estate, all, all kinds of industries, though. They started the single family conference back in, I think 2012 or 2013, which was Right, you know, kind of the bottom of the market, right? When Wall Street was, was starting to express interest in single family. The conversation at those first couple conferences was, is single family an asset class, you know, alongside industrial, apart, you know, multifamily office, et cetera, you know, is, does single family deserve a a spot next to those asset classes? And, you know, 10 10, they, they hold two conferences a year. And so, you know, 10 years later, 20 conferences later, I am in, they hold one on the west coast, one on the east coast every six months. The East coast is in Miami. That was the one that just happened in May. And, you know, there’s a thousand attendees, a hundred vendors. It’s become, over the years, it’s, it’s been, you know, as the market has evolved. So as the conference these days, there’s a lot of main street operators who go, a lot of vendors who are bringing new products and best practices to the industry, which is, which is great. A lot of lenders who go, right, because there’s been a lot of lending companies that have, that have sprouted out to, to serve this, this asset class.

Craig:  We’re not here to, to sell i m n. But talk about the value that you’ve gotten over the years, especially of late, you know, with the changing market from just attending that conference, meeting other folks with pretty large platforms as, as well as people that want to lend to you guys. Yeah,

Jack: So there’s, there’s a lot of great conferences. I’m not trying to put them out on some pedestal, but for us, the I M N conference has been the place where the most institutional capital goes. And so, so for us, keeping tabs on kinda where that larger sets of money, you know, there’s larger sets of money we’re going and, you know, really from an analysis point of view, the highest level conversations, I think, you know, that the high, the highest quality conversations are really happening there for us. So it’s been a great place to find kind of all the biggest, most sophisticated operators in the single family space in one place twice a year. We spend two, three days catching up with everybody, you know, hanging out at the bar to see what they’re really thinking after a couple drinks. Yeah. And so that’s been a, that’s been a great resource for us over the years. We, we, we always make time to go.

Craig: So episode one here, we’re talking really about sort of the sentiment right now, the mood, if you will, across the country for real estate investors across the country. And that’s what you and I were talking about the other day over coffee. What was the general sentiment and mood this year, just a couple weeks ago in May at I m n with these thousand people that showed up in the a hundred plus vendors? What, what was your take?

Jack: Yeah, sure. So 2022 was crazy, right? So, you know, we, we had 2021 humongous bull market prices up 20, 30% on average, still super cheap money. So just, you know, volumes, transaction volumes like crazy, right? Everyone ate phenomenally well in 20 21, 20 22. The Fed is just slamming the brakes on, on everything and faster than everyone expected. So a ton of turbulence by fourth quarter of 2022, the industry by and large was like a, a just, just straight afraid, right? Transaction volumes had been, were down at like, we’re down 60, 70% at that point. Everyone knew they were overstaffed, everyone’s business model was in question and no one knew how long that was gonna last. So the kind of in the last i m n conference was, was in December, right? Right in the middle of like, when everybody is just like, just fourth quarter

Craig: Was a bit of a bloodbath, right?

Jack: Yeah. Last year it was, it was rough. It was a scary time. Yeah. So coming into, so this one being in May, having made it through the first quarter, mor, you know, everyone saw mortgage rates dropped a little bit in the first quarter, so that increased transaction volumes. Some stellars started to capitulate. And so some more real estate transactions started to happen in the first quarter relative to the, the second half of last year. And so, frankly, everyone who was there was like, it was a happy to be alive, like happy to be here. Still not sure though, that we’re out of the woods. Yeah. And you know, the, the fed may not be done right, like the, the market’s pricing in between either flat or potentially even another quarter point hike right now that’s that off the table. So that’s still a concern. Now, you know, the banks and we just had the, the banking crisis, which, you know, arguably may still not, also, still may not be over.

Craig: We’re gonna talk more about that in episode two, so stay tuned.

Jack: Yeah, there’s a lot to talk about there. And so there’s a sense, and, and, and the, and, and the yield, you know, the yield curve is still inverted showing the kind of the highest point the, you know, the worst point in the market six months from now. And so there’s this sense that we’re not done here, there is going to, and as a result, there is going to be some volatility in the market, right? Like, just because you have a sound business does not necessarily mean that, or does not mean that you are going to not be affected by what happens in the world around you. And so everyone was very, that was very front of mind that like, hey, happy to be alive, but not out of the woods yet. Right.

Craig: So I asked you sort of what were the overarching themes of the conference? And you mentioned that it was really about the market and about financing, what’s going on in the markets, what’s going on in financing. And we talked briefly about, so yeah, let’s talk about that real quick. Sort of what was the overarching theme or, or conversations in terms of the market in addition to what you’ve already said at the conference.

Jack: It won’t be any surprise to, to listeners here that super low transaction volumes are still like the dominant theme from a purchasing point of view. Yeah. Everybody who is transaction based, who wants to go buy houses knows right now that sellers have, or that that, you know, because of the low interest rates that all, all the refis that happen that’s keeping a lot of inventory off the market, realtors are particularly feeling that pain right now. Lenders are particularly feeling that pain right now. And then the, so the amount of seller capitulation is what is driving the transaction volumes that are happening right now. And so that’s a kind of like starting to get a little bit better, but, but not good yet.

Craig: Are you seeing, ’cause you’re a lender all over the country in every state, correct? Yeah. So are, are you seeing far better markets than others? Exciting markets, still markets that you just probably wanna stay away from? Yeah, sure. What are your thoughts there? That

Jack: Seems to be a tale of a tale of affordability, frankly, is like, I would, what I would call the main driver there. People will call out different regions, like particularly Seattle’s getting hurt very bad, right? Yes. They’re now California’s getting hurt, you know, generally speaking right now, some of the northeast as well. I think it’s most easy to understand that. And from an affordability point of view, the luxury market was never affordable. So those that, that those markets are being, you know, are, are being hurt most significantly by, you know, higher interest rates and a pending recession. But we have this other tailwind that continues, which is a lack of supply not only for, from sellers coming outta the market, but frankly just from a building point of view, we are just not building enough houses relative to household formation. And so there is this still tailwind that everyone agrees with and, and, you know, agrees is still kind of like pushing behind the market on a general point of view that, that we’re not building enough houses for the, for the household formation that we have. And as a result, the houses that are affordable don’t seem to be as affected right now as the, the houses that are less affordable. So you’re, you’re 200 to $600,000 price point is real, is pretty stable right now. Still robust. Yeah. Kind of wherever you are generally speaking. I’m sure there’s micro markets where that’s not the case, but

Craig: With fairly low days on market for decent product. Yeah,

Jack: Absolutely. Right. And frankly, given the lack of lack of supply in the market, lack of competing houses from, from traditional sellers, flips are moving very quickly still because, you know, they’re the prettiest house on the market. You know, you have three houses to choose from you, you know, you kind of want the pretty one.

Craig: Are there markets that, as, you know, a large lender you would clearly stay away from right now? Or if, or if you get an investor that comes to you and says, Hey, I’ve got this deal, I found a needle in a haystack. Are you still willing to underwrite something like that?

Jack: Yeah, we are still willing to underwrite that. It’s not like we we’re, we’re not redlining any, any areas based off of, even though there has been some home price depreciation in, in a number of markets down 10, 15, 20 as much as 20%. But it, it ends up being that needle in the haystack conversation where if you’re a very talented investor, you can find a deal, but it’s harder to do so because prices are down. And so seller expectations and buyer’s willingness to hit that price, that that market clears less frequently just because of the, that misalignment.

Craig: I was doing some show prep for the episode and I was looking at a couple of surveys yesterday. There’s a company called Peer, p e r e, leading publication for investors. They have 35, 40,000 readers a month of the publication. And they were, they did a survey of their readers and they were talking about the proportion of investors who feel like they’re over allocated right now in real estate. In 2022. 9% of them said, yeah, we’re probably sitting on, you know, probably too much need to be selling some of this stuff. 20 23, 20 1% of them said, yeah, we’re over allocated. Almost a third of them said that they feel that they’re gonna underperform their benchmarks in the next 12 months. And one third of investors in the private real estate space said they will probably not hit there at Mark in the ne in 24, either of what they were expecting. Yeah. You kind of feeling that? Yeah, I’m not, that’s sort of like, we’re not out of the woods yet type of feeling.

Jack: Yeah, I’m, I’m not surprised by that in the long term. I still think that housing is undersupplied and therefore I think that, you know, with a five year, 10 year outlook, I, I still love residential real estate. That’s

Craig: One of the things I think I can’t stress enough to those who are listening. We now have operators in the space, real operators with significant platforms like Dominion across the country, and these guys don’t have a six month outlook. They’re not flipping a house or getting a rental and saying, well, I’ll turn it around in six months. These guys have 3, 5, 10 year outlooks where they can weather the storm and sort of move through the, the economy, the economic changes, right? Yeah,

Jack: Absolutely. I mean, when we got into the business that, you know, someone, I don’t know who it was, but someone said like, Hey, real estate is not the place to get rich quick. Those guys fail. It’s a great place to get rich slow. Yeah. And you know, me being a 23 year old, I, you know, I kind of fell in love with that. I’m like, well, I got time. You got

Craig: Another of a time,

Jack: So let’s, so let’s do this. But yeah, that, no, that, that rings true though in terms of the, the investor sentiment right now, we just saw a huge run up in rent prices, which, but if you’re continuing to factor in rent growth, like, and a lot of people did, right? A lot of multifamily syndicators in 20 20, 20 21, early 2022 we’re still projecting rent increases when they were raising capital. That’s not going so great right now. A lot of the debt assumptions that went into the investments in that period of time have not played out at all and speak

Craig: Specifically. So bring it down to my level on that, a lot of the debt assumptions, so

Jack: Yeah. Just folks who were, you know, the interest rate at the time was 4.5% and they supposed that they would be able to refi in three years at four point a half percent. And that’s just not gonna happen.

Craig: And so what happens to an operator like that? Yeah. As we are now in 7% territory.

Jack: Yeah. Yeah. So if you executed on that value add proposition, I’m, I’m picking on multifamily syndicators right now, but if you executed on that business plan of adding value to the property, turning all the units over, pushing rents 200 bucks because they were below market, which

Craig: Everyone has been doing for the last 10 years. Yeah.

Jack: Every, every and every deal has been value added for the past 10. You know, even if, like, that’s just table stakes, right? Executing your business plan from an operational point of view is just table stakes. Even on top of that, when you go to refi, there may, there there’s probably, or you know, the, the amount of cash out that you projected, you know, returning equity to your, to your LPs, to your investors. Yep. If you’re able to return any to them, it’s a much lower number. The real concern is if you faltered in any way on the execution of your business model, and you go and you, you hit that balloon period in the bridge, the three year bridge loan that, that you took, and you do the math on your new rent roll without the, and you didn’t get the rent increases that you thought you were going to, and then you go calculate the refi proceeds based off of the 7% interest rate that that’s available right now, that you may not be able to take that bridge loan out and you know, you had 5 million of debt. I’m making up numbers. Sure, sure. You have a check. You had 5 million of debt on that bridge loan, and when you calculate the refi proceeds, you can only get four and a half or four of refi proceeds. And the bridge lender’s actually like, Hey, no, you need to go back to your LPs and do a capital call. Have them write new checks into this deal just to take out the bridge loan. Because at this point, the bridge, you know, the, the bridge lenders got a gun to your head.

Craig: Well, let’s, let’s slow it down. So again, we were talking about sort of the overarching themes of the conference and one was markets, one was financing. Now we’re, I guess we’re into the financing part here. Talk about what you’ve seen over the last 10 years, typical multifamily deal. What’s the financing stack look like on something like that in terms of the loans limited partners and why? This is just, let’s go a little bit deeper on why this is not, may not work in this environment when they go to refi out. Yeah, Sure. Which is always the play. I’m gonna buy this asset, I’m gonna put value into it, I’m gonna, I’m gonna push rents and then I’m gonna refi my people out and at a different cap rate, right?

Jack: Yeah, yeah. Absolutely. So the two tailwinds that, whether it’s multifamily or single family, the same trend applies that both of those asset classes I have had for the past 10 years was a declining interest rate environment. So when you went to refi, your debt service coverage was better just because the interest rate was better. Yep. So easy to hit your proforma. Yep. And rising rents. And rising rents was the one that I think surprised even the most sophisticated investors, no one really projected rents to rise as aggressively as they have over the past 10 years. Yeah.

Craig: It was a, it was a nice treat.

Jack: Absolutely, it was a nice treat for everybody, particularly in 2021. No one underwrote that. Everyone’s thrilled for it. But when you look at a graph right now of affordability, rent affordability versus

Craig: Income Yeah.

Jack: Versus income in the country right now, we are at one of the most unaffordable points in time today as unaffordable, if not even a tick higher than, than 2006. And that was, and that was fueled by a bunch of, you know, bad underwriting financial products that allowed that to happen. This is actually, you know, if rel relatively sound underwriting by general accounts Sure. On the, on the lending side of things, but affordability is the, the upper limits of affordability are really being tested right now. And so when you’re prognosticating what’s gonna happen in the future, the idea that you’re gonna get rent increases from this point forward, or if you, you know, underwrote a deal in 2021 based off of 2021 rents and you thought that you were gonna get any rent increases above that high watermark. It’s just not, it’s, it’s generally speaking not happening like in the market as a whole. So that, that has made it much more difficult as a point in time, right? Like, I’m not talking about for the next 10 years I love real estate for the next 10 years, but for the next 24 months, it’s tough. It’s hard to see an a world where we’re gonna see increasing rents and there’s a lot of debate about what financing costs are gonna do, particularly over the next 24 months. Sure.

Craig: So Jack, I was looking yesterday at the case Schiller National Price Index, which I highly recommend to everybody by the way. The show notes are available for each episode. We’re gonna put them@realinvestorradio.com slash notes. It’s just a P D f. You can go in there and check out all the links that we researched, any graphs and stuff like that that we’re not able to put up on the screen. So highly encourage you to go check out the notes for the show. But taking a look at the housing index, I, I, I can’t say I was surprised to see that prices have risen 62% since 2006 around the bubble. And just this year alone, I’m sorry, between March of, you know, year over year prices actually rose 4.3%. So says the Federal Housing Finance Agency. So let’s talk about sort of that, Jack, where do we see prices heading given the headwinds that we’ve got right now?

Jack: Yeah, sure. So the, the K shilla data is fantastic. N ar puts out some excellent data as well. There is a, a blog that I’m a religious follower of called Calculated Risk

Craig: Bill McBride. Fantastic. Bill McBride. Bill, you gotta come on the show.

Jack: Seriously. Yeah, I’d love, love to have you. He puts out fantastic data on housing economics, highly focused on, on residential real estate and really just I think the best compilation and analysis. So I’m, I’m Bill, I apologize in advance. I’m gonna be ripping off your analysis every episode probably. So the, one of the things that, that Bill put together that I thought was incredibly insightful was just a graph of nominal, well, first was a, a graph of nominal real estate values, home prices over time. And, you know, there’s a general upward trend, not a whole lot of periods of, of down other than after, you know, 2000 7, 8, 9, which, you know, that which was calamitous, right? And then you see what happened in 20 20, 20 21 and just this massive spike. Like, it was like, like, like we’ve really never seen before. The, the

Craig: Trajectory was really staggering at how different it was over even two thou that 2004 to 2007. Exactly. It was a pretty high, high trajectory. But when in that, in that last few years, it went even steeper.

Jack: Yeah, yeah, exactly. Now that wasn’t the insightful part. The insightful part was then he presented the same graph adjusted for inflation. So what are real housing prices doing? ’cause just ’cause housing prices didn’t go down, you know, you did lose ground to inflation. And so when you look at housing prices over time on that basis, you see that there are cycles of d of, of decreases in net returns on, on real estate from a pricing point of view once you adjust for inflation and it looks a lot more cyclical. So this idea that by real estate, it never goes down other than 2006. And that’s just the one asterisk that is, you know, generally true, but on a, but you really, as an investor, we should all be looking at this on a real basis because we could, you know, absent transaction costs, sell that real estate, go invest in something else, right? Like everybody here is, everybody who’s listening to this has, has the opportunity to sell that real estate and go buy the s and p go invest in in private notes. There’s other way everyone, you know, listening to this has other ways to deploy capital. And so I must invest in real estate should not be our mantra, right? Like, that would not be the intelligent way to like to, to approach this business. So recognizing that there are periods of, and sometimes very long periods like, you know, mul many, many years, you know, five, seven years over time where there are actually negative real returns from a housing price point of view is an important thing to keep in mind when deciding do I go buy that next house?

Craig: So even though we saw that, you know, just meteoric rise of, of appreciation when you factor in inflation, I believe McBride was saying that over that course of, I, I don’t recall the timeframe, Jack, maybe you can help me out on that, but the price adjusted for, for inflation, we were actually, we’re actually four 4.2% below peak right now. Was that what you got out of that?

Jack: Yeah, yeah. From 2006 you mean? Yes. Yeah. Yeah. And so yeah, right. So like buying it, buying, so in 2006 from a, you know, from a a net return that’s 17 years. Yes. 17 years and you’re up 4% on a real basis, like not a not great. Right. You know, like there’s a lot of other things that you could have done better with your money. And so now buying in 2009, 10, 11, 12, those trough to peak values are like tremendous returns, right? Like phenomenal returns. And so many of today’s investors got into the market in the wake of the great recession that we’ve all been benefiting from tremendous real estate impression appreciation for a long time. So everyone looks smart, right? Well, I think that particularly after the, what the, the, the spike that we saw in 2021, the idea today, right. On a going forward basis, right? Like this isn’t gonna wipe out in an entire industry of real estate investors like 2006 generally did this just not, you know, this just gave you everybody a couple body shots and a shot to the jaw. But

Craig: When you say this, explain

Jack: The interest rate increases of 2022 Gotcha. Just this, you know, lower transaction volumes, higher cost to capital, which is really like put a damper on everyone’s business. Yeah.

Craig: So sort of what, what you’re this By this you mean the the current economic climate? Yeah,

Jack:  Exactly. Okay, gotcha. Yeah, yeah.

Craig: It’s not gonna wipe everyone out.

Jack: Yeah. But it, but it’s all kind of like got us a little bit stunned right now. And so as we do our kind of like planning for the next 12 months, 24 months, you know, how should we be approaching the business? I think there is a significantly different set of underlying, you know, assumptions right now that we have not seen before. No one has seen this set of assumptions before. And, and, and I guess I am concerned from a, an affordability point of view, affordability is at, you know, the worst, you know, ultimately, you know, very poor affordability levels. There’s, we just went through a huge bout of, of rent increases and so hard to say that we’re gonna be able to continue that trend. So from a going forward basis, you know, like if I buy a house today for a $200,000, what’s this gonna be worth a year from now, two years from now, three years from now? I think that real estate prices are generally sticky to the downside. Okay. Unless you have forced sellers, like we’d, like the banks were forced sellers, right? They were, you know, they’re very unemotional about the need to get this stuff off their balance sheet. So

Craig: I wanna talk in, don’t let me forget to talk in a bit about sort of who’s the net sellers right now. Yeah, sure. Okay. So, so keep going. Like we’re talking right now about sort of like all the boxes that you think we need to be checking over the next 12 to 24 months in terms of buying criteria, right? Yeah,

Jack: Keep going. Yeah, exactly. Yeah. So, oh yeah. So the, the real estate values on a going forward basis are generally, you know, they, they’re generally sticky to the downside, but when you adjust them for inflation bill’s data shows that you actually can have protracted periods of negative real home price appreciation. So in the house that you buy today for $200,000, what’s it gonna be worth a year from now, two years from now, it may still be worth $200,000. That doesn’t mean that it was a good investment, right? If we lose 5% to inflation, well you lo you just lost 10 grand is what you did. And so are you factoring that idea into your investment criteria?

Craig: I think we should stop right there and just put a little asterisk on that to, because I think that, you know, look, we know a lot of investors around the country and everybody’s got their model, right? Everybody’s got their spreadsheet. And I wonder if people are actually tweaking the spreadsheets now, the models to say, Hey, we are going to be in a protracted period. This, the, the inflation that we’re seeing right now is not transitional, it’s structural. Right? It’s possible. Could we be in a place of two years, three years, five years of inflationary periods? If so, how do you adjust the model to accommodate that? We can no longer, I, I think what I hear you saying is if we’re just basing our model on appreciation, which really is just the icing on the cake in terms of the returns that we can get off of real estate, if we’re just basing our model on interest rates that that may or may not exist 12 months from now, we could be in for a rude awakening. Yeah,

Jack: Absolutely. And, and you, but the thing is, for the past 10, 15 years, it bailed you out, right? You didn’t have to be tight on the operational side of things because appreciation made you money regardless of how good of an operator you were.

Craig: Someone once said in a great market, everyone looks like a brain surgeon. Yeah, yeah. Until they’re not. Yeah.

Jack: And so, you know, we’re all dealing with more headwinds right now and we’re not. And, and there’s not no more safety net for us, right? Higher cost to capital, you know, the free money’s gone so higher cost to capital, in my opinion, won’t get the home. You certainly won’t get the home home appreciation that we got. And so that’s not gonna bail you out. So the importance for operators right now to understand how good, to be honest with themselves about how good of an operator they are or are not, has never been more important than it is right now because the tide is out. And it’s gonna take some time for people to realize, but it would be, you know, you, it’ll be a lot less painful if they are honest with themselves upfront and can make decisions before their, their hand is forced. Let me make one other point. Everything I just said, I do not mean to say that I think it’s a bad time to invest in real estate. I’m buying every house that I can get my hands on right now. ’cause I think we’re good operators. ’cause we’ve built a great team and a great platform that can buy a hundred houses a year. And, and I think that in the long term, real estate is a still a pheno. American real estate is a phenomenal investment. And part of that though, which is gonna be the case for everybody listening to this, is that we think that we can find deals below market value, right? Like sure. Our, our business model is based off the idea that we’re finding off market deals and then we’re finding off market deals and then we are adding value to those properties by renovating them. So there is a spread between our cost basis and the value of the property. And so if I’m into it for 75, 80 cents of value, well I’ve already, I made money right there doing that. Of course. And so, and I’m sure that’s the case for ev for every person who’s, you know, who’s listened to this podcast. So I’m not suggesting that get out of real estate, you know, get outta real estate. It’s a terrible time. Sell, sell, sell. But I think that being honest about your operational numbers right now is more important than it ever has been before. And we’re gonna, and we’re gonna see some like slow, we may see some slow attritions, some slow fallout, right? Like in 2000 6, 7, 8, it was like, boom, this guy’s out and then this guy declared bankruptcy and then this guy, it was like every month a new big name in the market, in your local market will like disappeared, right? Yeah. This, I don’t think is gonna be quite as shocking. It’ll be more of an attrition. It’ll be more people saying like, ah, yeah, I just decided to do something else. At the end of the day, I think a lot of that’s gonna be, they’ve realized, you know, that, that their bank account finally convinced them that they were not as great of as an an operator as they had put themselves up to be. Are

Craig: You seeing much of that? Right now?

Jack: Just starting to see it, you know, this is more me looking forward and saying like, Hey, here’s the landscape and so here’s the trends that I would expect, you know, given this new landscape, here’s how I would extrapolate those ideas out into the future. I frankly am not seeing a whole lot of that. But I think that that’s a dot, dot dot yet statement and I think that that’s gonna be a trend on a going forward basis. Yeah.

Craig: Obviously a lot of large players in the market, getting back to I m N, who did you not see this year at I M N?

Jack: Yeah, so noticeably absent, and this is well noticeably absent, were the, were the institutional, the really the, the big institutional buyers. I’m sure that they all sent a couple folks to the, to the conference, but the, you know, the large single family REITs, the large private equity groups that have amassed a tremendous amount of, of houses, they’re still relatively small to the overall market. I was

Craig: Looking at a report yesterday that listed the top public companies who own basically rentals in the United States. And it looked to be about 350,000 units between I think like maybe the top 100. I have the data here somewhere in my stack of stuff, but I don’t feel like going it looking for it. But does that sound about right to you? Yeah,

Jack: Sure. That, that would make sense. Yeah. Like, you know, relatively speaking a drop in the bucket relative to the, to the overall market. But they are, you know, they do move some markets in the Sunbelt. They have been the game for wholesalers. That’s been the game for the past two, three years

Craig: Selling to those guys. Yeah. Talk about the growth quickly. We, we spoke about it just a couple of days ago over coffee, this build to rent market that you saw sort of a, a bit of a tide change at, at I M N and I wanna speak specifically about that because of what you just said. A lot of real estate investors that we know have made a lot of money selling to the institutions. They’ve been selling basically turnkey rentals or wholesale deals or whatever. And some of these guys are selling hundreds a year in the overall market of tens of thousands a year. So, so yeah. Speak about that. The build sort of the build the rent and where that’s going. Yeah.

Jack: So build to rent got really popular at the conferences maybe three years ago. Low cost to capital, decre, you know, decreasing supply of, of, of houses that fit the institutional box, which tend to be newer vintage Yep. Sunbelt build to rent’s phenomenal for that in that they’re giving out permits in, in the south. Yes. Like they, they, they, you can actually get a permit on a predictable basis in the south and you can deploy large amounts of capital, which is what the institutions are looking for, right? Right. Like they’ll buy our one-off houses, but they love the relationship where they can buy 10, 20 a month or working with the builder where they can go add 300 that actually moves the needle for them. It’s really hard for institutional capital to move the needle one house at a time. And so build to rent as a, as a model really got popular over the past three years. And, and it’s a bet on American real estate long term. And I think it’s a phenomenal bet. Like I, I actually, I think it’s a, a great model,

Craig: Especially in the, in light of the ex extenuating affordability crisis. Right, exactly. How do you have 60 million people who may be the poorest people coming into the United States and, and not have housing, right? Yeah. So I, I see affordable housing as sort of the guiding issue of the next 10 15 year. Yeah,

Jack:  Absolutely. Absolutely. And so this build to rent as a, as a concept, as a strategy really got, I mean, by the way, some people have been doing that for decades. Yeah. Yeah. But it really got a lot of popularity over the past three years and was more institutionalized over that period of time. Also, the, the, you know, the prevalence of very cheap money allows, it’s easier to land bank for a longer period of time when you’ve got access to very cheap money. And so, so the institutional capital that wants to deploy into that segment though, the, the gross yields on those deals are not phenomenal though. You’re buying to maybe a 10 gross yield. So when I say that, I mean that the cost basis, which are gonna be into the land plus the construction costs, you know, every, everything fully capitalized, finished house, you know, buttoned up Yeah. Divided by your annual rent, right? Annual gross rent. So we’re not talking about expense ratio here is 10%. So that’s been a, a general target in, in the build to rent market, if you use the 1% rule, that’s a 12% gross yield. Okay. So actually just a little bit worse than the 1% Rule. We saw a tremendous amount of compression in that in 20 20, 20 21, and then rents went up tremendously that no one really underwrote. So it actually made all those deals work, right. But all the land sellers also saw that happen, right? And they say all saw, all those assumptions change and so the land prices really increased as a result of those significantly deals being able to work. And then now you’re in a position where, but, but, but that 10 gross yield is works if you have a very cheap cost of capital and today you do not have a very cheap cost of capital and that changed in, in 12 months. Right. And so to make a build to rent deal pro forma today, given today’s cost of capital, much, much harder than it was. And so you’ve seen a significant decline in the transaction activity in that, in that business model as well.

Craig: Who are you seeing getting outta that space?

Jack: It’s not really getting out of that space as much as they were running into that space and now everyone’s like decided to jog or maybe like walk, right? So they’re still generally moving in that direction. There was a deal that was just announced a couple days ago, I think, between d r Horton and one of the major institutional investors to buy, I think it was 4,000 houses from d r Horton. So institutional

Craig: Yes, that’s correct. I saw that. Yeah.

Jack: Institutional capital is still moving in that direction, but, but I guess with, with, you know, with pickier assumptions and probably at a slower pace, but I think we’re gonna, we’re absolutely gonna co see that trend continue.

Craig: I read the story, d r Horton is actually getting out of some build to rent markets, but they’re still running towards Florida, you know? Yeah, no shocker there. Yeah. Break it down in the last few minutes that we have Jack, sort of Wall Street versus Main Street. Let’s talk to the investors that are listening. Let’s talk to the audience that’s listening now. Give them some guidance on, you know, on what, what they need to be, what they could be doing right now to sort of batten down the business, be better operators, you know, let’s, let’s tie it up with a bow for here.

Jack: Yeah, sure. I mean, we’re gonna get into a lot of these topics in future episodes because they deserve more a attention Sure. Than just a, you know, the soundbite. Yeah.

Craig: I would call this a, a, a deep overview.

Jack: Yeah. Yeah. So the, and something that we’re gonna get into in an episode is, is the, what’s happening in banking right now is episode two. There is gonna be, there’s a lot to unpack there because our assumptions regarding cost to capital that we can get at our local banks has changed in the past 90 days, whether you’re aware of it or not. The term sheet that you do, that you ask for tomorrow is materially different than the one that you got 90 days ago from your local bank

Craig: If you can find a local bank. Yeah.

Jack:  And yeah, and that’s being even more and more the issue. And so the capital markets don’t always trend together. Sometimes they’re a little countercyclical to each other between, between kind of for, for for real, for main street real estate investors. Where are we gonna find our capital? Right? We can, we can go completely private, right? Like creative financing solutions, which I think are gonna make a huge comeback over the next five years. Agreed. Because of this increased cost of capital, our local banks, which have had a, a big edge from a cost to capital point of view because they had very l very cheap deposits, which are getting much less cheap very quickly. Yep. And then kind of the Wall Street access to capital, which is funded ultimately by the securitization market. And we’ll do a lot of deep diving into that, into those ideas in that market and how that works.

Craig: I just wanna alert people to episode two. I think you’re going to be quite surprised at who’s buying the paper right now. I was shocked when you told me the other day Yeah. That,

Jack: Yeah. Yeah. It’s interesting. And it’s been changing every, you know, nine months, a completely different cast of characters is, is the best bid for what ultimately connects to the main street real estate investor,

Craig: By the way. That’s what we call a tease in the business. Yeah. How’d you like that one, Rachel? Huh?

Jack: This Is good. It’s good. All right. So there’s a, you know, understanding it, it’s, it’s tempting to just put your head down and say, Hey, I’m just gonna focus on finding good deals. Yeah. I’m

Craig: Gonna make it through.

Jack: Yeah. And I’m gonna make it through because I’m good at finding good deals. That’s, in my opinion, that is table stakes right now. And understanding these other factors, understanding the macroeconomic conditions and, and how those, but on a very detailed level, right? Like, not just like understanding, let’s just, let’s talk about inflation for 60 minutes. Like no, like who are the player? Who are the large institutional capital players, and how are those trends intersecting with each other? And how, and what does that mean to how that’s gonna affect my real estate business three months from now, six months from now. I have a hard time, I find it impossible to plan our business, to grow our business without understanding those ideas. Sure. And having studied those ideas for the past 15 years, it is, I, I find, I think that that has been a tremendous asset to, to the growth of dominion, to the growth of our business. And so we’re gonna dig deep into a lot of those ideas so that we can give some, kinda pull the curtain back, so to speak, and try to give transparency for other main street real estate investors so that they can understand these trends and frankly, beat, you know, the other investors that they’re going toe to toe with every day because it’s a competitive environment. And I think understanding these concepts is gonna be a differentiator over the next five to 10 years, even more so than it has been the last.

Craig: Well, as always, we’d love to hear your thoughts for the entire audience who’s listening. Again, we just sort of, we opened the tent, set it up, sort of laid out the groundwork of what we’re gonna be drilling down into over the next several episodes. Our hope here is that we produce relatively consistent content. We’re really looking forward to bringing you guys an episode a week. So stay tuned for that episode two Coming Real Investor Radio. I’m Craig Fuhr, this is Jack BeVier. Thanks for listening.