Latest / Real Investor Radio Podcast / Episode 15 | Housing Stats - Unpacking Episode 14
Transcript
- Craig Fuhr (00:02.282) Hey, welcome back to Real Investor Radio. I'm Craig Fuhr here with Jack Bevier today. This is episode 15 and we've got a lot to go through based on episode 14, Jack. So I'm really looking forward to jumping into the conversation. Jack BeVier (00:15.793) Yep, absolutely. Very fantastic interview with Logan Mohtashami from HousingWire. He's a super dialed in economist on everything housing. He's definitely weekly required reading for both of us. Because his insights and what he's paying attention to is very much on point. What's the HousingWire and Altos research go together and Altos has really exceptional data, real time MLS data, which gives this kind of additional level of insights that's like in real time. So you're not waiting for like last month's report or last quarter's report. Like they're looking at changes to listings, um, solds under contracts on a literally weekly basis by sub market and then aggregated across the country. And So I find them to be like a super high quality data source. And then Logan's paying attention to really everything kind of macro on top of that to try to give the, uh, to, you know, with, with the, with getting fed the data on what's going on in the local markets, he adds on top the, um, kind of the macro aspect of things. And so we had a super good conversation with him for about almost an hour, uh, just now and learned a ton. and I'm excited to hopefully have him on in the future as well. Craig Fuhr (01:40.854) Yeah, if you haven't had a chance to check out episode 14 yet with Logan, I would highly encourage everybody to go ahead and listen to that and then maybe catch up with us. What we found was, you know, brilliant guys has been doing it for a long time. And so he speaks, uh, quickly and at a very high level. We thought it would be an interesting thing to maybe break down, uh, that episode and some of the things that we heard, um, during that episode. And, um, you know, uh, Jack, uh, I thought it was a great conversation with regards to Altos and HousingWire. You're absolutely correct. It is required reading. There's just such a wealth of knowledge, not only from, you know, it's funny if you go to HousingWire, that is a paid subscription service. However, they put out amazing content via podcasts multiple times a week on YouTube and I guess on all the services that host podcasts and Altos. I didn't I didn't realize they actually analyze every single transaction, every single real estate, residential real estate transaction in the country, almost in real time. So they also have a very, very robust YouTube channel that I think people, any investor should be checking out. So that's great, great resources for you guys if you haven't if you haven't checked that out. Jack. You know, over the past several months, I've been talking more and more to Main Street investors around the country. And, you know, when I say Main Street investors, Jack, and I mean the guys that we generally have here on the podcast, like last week, we spoke to Dennis Cisterna, you know, there's a guy who's obviously riding at a very high level with his business. And most of the people in the real investors round table, a mastermind that you and Fred have are sort of in that genre. Wouldn't you agree? Jack BeVier (03:37.522) and Craig Fuhr (03:37.546) sort of that top 1% of investors in the country. I find that I'm talking to the guys that are sort of the next tier down quite a bit. And what I see is a lot of emotion. I see, uh, frustration. I see guys that are hopeful that, um, you know, the market will present opportunities, but I, but I think I see guys that are really dealing with a lot of headwinds right now. And the conversation that I got from Logan was, The guy feels pretty, he still feels pretty, you know, one, I think we both, you and I both agree, Jack, and we've always maintained that we're bullish long term on American real estate. But I think that Logan... I don't want to put words in the guy's mouth, but I felt a very sort of rosy outlook for sort of where we are. Would you put it that way? Not rosy, but he's not bearish. Jack BeVier (04:33.829) Yeah, I think that he's, I think, you know, from a macro perspective, which is the one that he's taking, you know, he doesn't think that there's going to be a housing crash from a pricing point of view. Um, and I think that the main driver behind that idea is that he, uh, he thinks that there's going to be a relative, there's very conceivably a relatively soft landing from the feds point of view. that we've got, we're in an environment where rates are going to stay higher, but may come down a little bit because what the Fed is doing to tweak the economy is working. Depending on how unemployment figures, the job market goes over the next three to six months, that'll be largely determining what the Fed does. But at this point, I got the sense that he thinks that the Fed's in tweaking mode. that the because the job market has been so strong, the American consumer has been so strong that, you know, things are going to be that the system as a whole is in a safe place. Now, within the same breath, he's talking about how, you know, we're in probably a perpetually or a long term lower transaction volume environment. And I feel like that detail is like the one that most negatively affects, frankly, our yeah, what we do. Yeah. And so, you know, I would say it's like, you know, he's bullish in the point of view that he doesn't think that housing prices are going to decrease significantly, going to decrease at all, and certainly not significantly. But yeah, transaction volumes are going to stay low. So like, all right, you know, that's that from a planning your business point of view, though, that's actually not great news. Craig Fuhr (06:01.707) we do. Craig Fuhr (06:12.823) Mm-hmm. Craig Fuhr (06:25.719) No. Jack BeVier (06:26.493) But it's, you know, and I think it makes sense. Like I think that perspective makes sense. Craig Fuhr (06:31.542) You know, honestly, Jack, he kept saying that it all really comes down with him to jobless claims and yield curve, jobless claims and yield curve. And so what are we seeing right now on jobless claims? Well, we're seeing 3.8% unemployment. But the thing that I think that most people don't talk about is the increasing labor force participation percentage. And that is actually increasing. Jack BeVier (06:39.189) Mm-hmm. Craig Fuhr (06:59.898) it's about 63% right now. And so at its highest in 2000, it was at about 68. It sort of came down since then, but it's still rocking up, you know, in an upward trajectory right now, labor force participation is really at some of the highest it's been in quite some time. And I don't, and so what do we know about labor statistics? Jack BeVier (07:08.021) Mm-hmm. Craig Fuhr (07:27.33) they're generally lagging indicators. For where the economy is going, correct? It's it's something that so when he talks about jobless claims, you know how soon how bad does it have to get? Where does it go? You know? What are you feeling there in terms of his his? His model of of. residential real estate and that it really hinges so much on jobless claims and yield. Jack BeVier (08:00.637) Yeah, I think that the from the jobless claims point of view, did you know, he points out that the jobless claim it's ticking up like the feds, the feds efforts are working, right? And so the jobless claims have X rather, the labor market is softer, we'll put it that way. So the labor market is softer. And ultimately, that suggests that what the feds doing is working. that the Fed agrees that what they're doing is working. And they, and that, but with an understanding that the Fed has an understanding that they're in restrictive territory right now at these levels. So like, I think that, you know, he'd probably flip a coin on whether, what's gonna happen at the next Fed meeting. And he would probably say that, and that's a good thing, because let's just wait for the data, see what jobless claims do. But if we continue to have softening in the labor market that a modest decrease in the Fed rate is probably appropriate. I don't think that anything that he's saying of what he thinks is going to happen is going to change the status quo for real estate investors though, like their day to day, very much, right? Like this is kind of, this is a new normal, get used to it. There isn't going to be like a... hundred basis point drop in mortgage rates, unless we have a recession, which leads to its own set of issues. And frankly, that's probably not going to happen because the Fed is watching that super closely and has tools in the bag right now to affect the economy because interest rates are so high. So I think that from a real estate investor, from a supply of inventory point of view, that this may be the new normal that we need to get used to. And yeah, I agree with the pain commentary that that's not great news, right? From our perspective. Craig Fuhr (10:08.938) Let's pivot real quick. I was reading a story earlier this morning. So Powell, Fed Chairman Powell spoke twice, once in August, and then right after that again in September, it was August at Jackson Hole, where I had read that he basically ripped up his longer speech and then just had like a little five pager. And he mentioned, you know, when you listen to the Fed, They're not they're not doom and gloom guys. They like they generally the doom and gloom comes generally too late. They're generally they talk a much more rosy game because that's their job, which is to keep everybody. You know, they're not going to come out and talk about doom and gloom. But what he did say three times during that short speech was the word pain, pain and pain. And so he said that. Let's see here. So while higher interest rates, slower growth, and a softer labor market will bring down inflation, they will also bring some pain to households and businesses, he said in his prepared remarks there. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain. And so I don't know, Jack. I just don't feel like that we're sort of that we're out of the woods. And I think what, you know, what I was hearing from Logan was that we may see a very slight change in rates, but it's not just as you just said, it's not going to be significant. It's not going to be Hey, rates are going to fall back down to in the fives or in the We're living in a sort of a different environment right now that appears to be a sticky one that could be with us for a while unless we see some sort of greater recession or financial crisis. Jack BeVier (12:13.405) Yeah, I feel like for me it feels for you know, for our business, it feels like a slow strangle, frankly, that like, you know, it took a long time. Yeah, like he said, like, you know, a year ago, when rates started to increase, it was fear, right. But it wasn't actually feeling a whole lot of pain on a day to day basis. It was just fear of pain. And some people reacted to that fear of pain by downsizing immediately. Craig Fuhr (12:22.517) talk about. Jack BeVier (12:40.057) There was a significant transaction volume decrease as a result of that fear. That led to just the immediate shedding of excess capacity in a lot of small businesses. You just took on less projects. We're pickier about projects. But it didn't really hit our wallets, I would say. The increased cost of capital. Craig Fuhr (12:56.972) Mm-hmm. Jack BeVier (13:07.361) from how much we were paying and borrowing. On the short-term side, it took a while, six, eight months for that to price into where we are today, which is probably three or 400 basis points higher of a cost of capital on short-term borrowings today than where we were a year ago. And then on the long-term side, rates have gone up a couple hundred basis points, but you had the banks until... Craig Fuhr (13:22.458) Mm-hmm. Mm. Jack BeVier (13:32.673) 90 days ago, I would say it's gotten much more restrictive from the banking side. And that seems to be a very concerning, you know, what could be a new normal. And I think Logan would agree with that, you know, he doesn't, you know, when he talks about the Fed decreasing rates, he's talking, he said it, he's talking about 50, 75 basis points. And yeah, and max and that, and that just doesn't make great deals, right? 50, 75 basis points are not the problem right now, right? We were talking about, we're buying houses at a seven and a half. We're talking about buying Craig Fuhr (13:51.677) at Max. Jack BeVier (14:01.885) houses at a seven cap and borrowing money at seven and a half right now. If that comes down to 675, that's like barely accretive financing. It's not like that's not good stuff, you know, for growing a rental portfolio for growing a real estate investing business. And so I think that but that's where we are. And as a result, there's less free cash flow for all from all of these activities. And yet, you know, stuff costs would you know, payroll is what it is and the truck payment is what it is. And so, you know, I don't think that we, I don't think that he would say, and I believe this as well, that there is, hey, just around the corner, things are going to get rosy again. So, you know, for me, that feels, it feels like a slow strangle where I'm like, just, you know, wait, you know, hoping that things are going to get better. But at this point, I'm like, we're really running out of like, run it out of ideas in terms of like, Hey, you know, what's the thing that's going to make this better 90 days from now? Why should I continue to hang on? If the business isn't making the money that it used to, or isn't making the money, you know, for it to be sustainable. So anyway, that's how I feel. Craig Fuhr (15:15.95) So yeah, no, man, I totally get it. I was looking at some of the cash positions of the bigger banks. And Warren Buffett just reported yesterday that Berkshire Hathaway has a cash position right now of a trillion dollars. Jamie Dimon has a trillion dollars of cash sitting around. And so why? Why do they have a trillion dollars of cash sitting around Jack? Craig Fuhr (15:51.17) Let me juice the question a little bit further. Let me throw it over the plate just perfectly for you now. So also read that this year there's been over 400 corporate bankruptcies. And I heard, so Jamie Diamond was saying that, why do we have a trillion dollars? Because we think things are going to be on sale. Jack BeVier (16:18.717) Yeah. Craig Fuhr (16:19.966) If you're a guy who you're the main street level and you're waiting for all of this inventory to break. Because that's really what we're talking about Jack is the massive headwinds defining the needle in the haystack. You know it's hard it feels like it's harder than ever to find the needle in the haystack and what I when I see companies. Putting a trillion dollars of cash into cash I feel like they feel the deals are coming. Jack BeVier (16:30.194) Yeah. Jack BeVier (16:49.061) Yeah, I think that's the case. There's lots of very smart people who are like set up, you know, who have set up these opportunistic funds, right, looking for these situations that are going to happen. And I don't think but I don't think a whole lot of that money has been deployed. I don't think very much of that money at all has been deployed yet. It's all like still get ready money. And, you know, they're waiting, what they're waiting for is the pain, right to start affecting decisions for you know, and that's what has to happen, right? Like, that's the Craig Fuhr (17:05.846) No. Jack BeVier (17:19.633) The fat pal has been talking using talking about pain for a year, but I don't think it really started to get felt on the Main Street level until the past quarter. And I do Craig Fuhr (17:31.97) How do you think they're feeling it? Jack BeVier (17:35.069) Uh, that, uh, fewer transaction volumes with the same overhead, trying to amortize overhead over a lower transaction volume, um, that deals are singles. It's so, it's so hard to find a double or a triple right now. Um, very few and far between and that the competition is, and as a, and that's because the competition is also still there. So, um, Craig Fuhr (17:57.278) Yeah, you would think in this environment, Jack, that we would at least see people dropping out in terms of competition. I don't see any of that. Yeah. Jack BeVier (18:03.613) And I think it's about to start. Yeah, but that's the thing is I think it's about to start, right? Like that's the people, people have to get really, you know, they have to feel a lot of pain before they change their behavior. And I feel like the pain is just really kind of like, you know, is really starting to build momentum. And that will start to lead folks to change their behavior. Now, those who have built their businesses and or their balance sheets with a staying power to make it through, you know, seven innings of pain will there will then be the ones who are there to take advantage of the opportunities. But the opportunities don't come until people start, you know, just tapping out. And I feel like, you know, that's just starting to even enter people's minds as to like, hey, maybe I should actually do something different here, because I just don't see this getting better anytime soon. Or, you know, in the medium term, I'm gonna run out of cash before Craig Fuhr (18:46.443) Yes. Jack BeVier (19:01.981) the opportunities really come. Or by the time the opportunities come, I'm going to have spent my cash and not be able to take advantage of them, which I think is something that's a lot of folks is more of the reality is that the trillion dollars that's coming in from insurance companies and pension funds and private equity firms who are trying to be opportunistic, that's coming from... some other place and looking for that waiting for this opportunistic environment. But the folks who were the players on in the, you know, on the field right now, it's hard for them to both stay on the field and stack cash to take advantage of the opportunities as, as they start to present themselves. And I feel like that's the people miscalculate that reality that, you know, by the time it gets that painful, that there's actually opportunities. Craig Fuhr (19:43.213) Yes. Jack BeVier (19:49.921) Oh, you're immune from the pain? How did you pull that off? Because, you know, if you're if you're active on the field right now, you're not immune for the pain. You're you're you do have higher cost of capital, you do have overhead that is not being offset as much as it used to be by deals. See, I think that's more of the reality. Craig Fuhr (20:06.55) Are you see, so where might we be seeing our competition tapping out in the country, you know, in markets around the country, Jack? Where might we see that first around the country? Is it places like Austin, you know, San Francisco, Nashville, Charlotte, you know, where might we be seeing that? already in the market. Jack BeVier (20:37.865) I think that the higher end of the market where you've seen bigger price decreases and where there's still not full stability in terms of housing prices, you don't feel super confident where the market's going to be six months from now, nine months from now when that property actually hits the market. That's the place where I think that folks are, there's a thinner bid for the as is property right now. I'll just use one example, like Washington DC has experienced probably 10, 15 price decreases in the higher per square foot areas of Washington DC as much as 20. And it's also a difficult environment to operate in, right? Like lots of permit issues, lots of local operational nuances that are hard for folks to just jump into. Well, anybody who... Craig Fuhr (21:27.106) That's a I call that having too many people that want to dip their dip their beak into your business. Yes. Good. I'm sorry. Jack BeVier (21:32.281) Yeah, yeah, for sure. So like, in a market like that, the players who know how to operate, I mean, they have deals that they are trying to get off their balance sheet trying to recycle the capital that they're that they are taking hits on right that they are, you know, they didn't make any money on that deal, they lost money on that deal. And so signing up for the next one is not as appealing. So like, the usual cast of characters that were bidding up as his prices are just dealing with their own shit, frankly. and they're not going to be there. And so as a result, you're going to see margins increase in those markets first, I think. Now, if you're, you know, there's like a, hey, you know, there's a timing issue there, right? Like you don't want to be the guy who's coming in too early to pick up the scraps because then you're actually just not getting paid appropriately for the risk. But you know, at some point the market hits a clearing price and people start coming back in. I think that's the first place that you're going to find opportunities. I think that one of the last places to find opportunities are in the affordable middle of the road, 250 to $600,000 price point areas because those houses do still sell. We haven't seen as much pain experienced by real estate investors. That's more of an issue of, am I getting enough deals to pay for my overhead? Markets like that are like, it's frankly advantageous to be smaller because you don't have that you don't have that weight of payroll to keep up. I think that a bright spot, by the way, given that one of the fundamental core issues here is a low supply of inventory, low transaction volumes because of low inventory, is in the new construction side because you're creating new supply. That's the only place that you can truly create new supply is by... taking farmland and turning it into a residential subdivision, or doing infill lots, right? Infill lot new construction. And we're seeing that work very well right now, because it's creation of new supply. And so I think that builders are in the capur seat right now, frankly. Craig Fuhr (23:32.718) Mm-hmm. Craig Fuhr (23:40.589) Yes. Craig Fuhr (23:49.598) Yeah. Oh, just as a, as a side note, Jack, we're going to be having Franklin Cruz on our next episode. Franklin's building smaller houses was initially doing build for rent, but he's building smaller houses in Lakeland, Florida right now. And it's just killing it. So it's going to be a great conversation for folks to tune in on our next episode. So stay tuned for that. Jack BeVier (24:15.741) Yeah, Lakeland's a super interesting market. That was like one of the ground zeros for the Great Recession because of how much land was there and how many lots got developed but then never built. So you just had just miles and miles and miles of pipe farms. And it's been 15 years and they're still... Craig Fuhr (24:33.356) Yeah. Craig Fuhr (24:38.22) Yep. Jack BeVier (24:41.529) a lot of developed but not built lots there. And now that dynamic has totally shifted, right? Like we went from in 2008, we'd massively overbuilt for the market and we had and now 15 years later, we're massively underbuilt for the market. And so a place like Lakeland with a lot of inventory in the ground, you know, a lot of lot inventory developed lot inventory in the ground is a super interesting place to play. and in a state that's benefited from tremendous in-migration and an economy that's now embraced remote work. Before the hawk against Lakeland was that, yeah, there's no jobs out there. But now if your job is your internet connection, that's just affordable inventory in Florida. That's a $250,000 house in Florida. That's sexy. Craig Fuhr (25:25.166) Mm-hmm. Craig Fuhr (25:30.678) Well, that's... That's, that is the part that I think most excites me because I feel like there's a lot of pipe farms around the country right now. And that's the we talked about melody right a little bit earlier, somebody who I think we might want to have on the show. And she's an analyst in the market that is very, very doom and gloom. In fact, she just put a report out that said the cat five storm of real estate is coming. So anxious to have her on the show. But, but, but the supposition there is that. builders are sitting on a lot of lot inventory. And even though you and I feel like builders are very much in the cat seat right now, the question is how much of that inventory is actually affordable? And I think her supposition from riding around the country and looking at these massive, you know, Jack, my wife and I, when we were thinking about moving to Florida, it was commonplace. to ride into a development in St. Augustine, Florida, or anywhere around there where it was like, hey, this is gonna be a 15,000 house development. This is gonna be a 10,000 house development. This is gonna be a 20,000 house development. We have multiple builders all inside the fence. And I think what we saw back in 2008 was the pipe farms, as you said, the economy sort of went south. We've got mains sticking out of the ground as far as the eyes can see. And then it just became the deal of what how many pennies on the dollar are we going to sell these lots for when to the next builder. And so to your point with regards to affordable in Lakeland. I think it's it is the business model of business models right now to bring on inventory, get your get your land, get your lot pricing right, but then put out houses that are affordable and they appear to be selling like hotcakes. So looking forward to speaking with Franklin. Jack BeVier (27:25.337) Yeah, yeah, I think an offset for like the for what's helpful. The offset to that is that financing those projects has become substantially more expensive and requires substantial substantially more equity, namely because of the banks having pulled back. So right, like, which is, of course, of course, that's what happens, right? Like, as soon as there's an opportunity, and as soon as the builder can say, like, hey, I'm building new, I'm building affordable new construction inventory and this stuff, you know, in a good market where there is absorption, the bank says, Hey, yeah. And well, yeah, by the way, I've got my own shit and I'm decreasing your advance rate by 15% and increasing your cost of capital by 300 basis points. You're going to have to go raise a whole bunch of equity in an environment where equity is, you know, trying to be very opportunistic. And you know, as you mentioned, you know, there's a lot of guys sitting on the sideline waiting because they think there's more pain to come. So trying to raise equity right now is challenging because there's a lot of equity. That's like, I don't think we're there yet. You know, like I don't think we're peak pain yet. And, um, and they're probably right. Yeah, exactly. Craig Fuhr (28:29.77) Yeah, like the knife is still falling. So yeah, I mean, the cool part of the discussion that we had with, I don't know who that is, Mary, you apologize. The cool part of the discussion that we had with Logan was really centered around, you know, as you said, the macros, the conversation that we're having now is obviously about credit. So break that down, Jack. Like if I'm a guy and I've got a small development that I'm doing, And it's, I don't know, what's a good number, $20 million, you know, project. You walk into your bank and they're like, these were the terms six months ago. We're, we're forcing you now to have this much more equity in a project. What can you put that in concrete terms for us? Like what, what does a guy looking at? Jack BeVier (29:17.137) Yeah, so before it was 75 to 80% loan to cost on that project. Or you'd have. Craig Fuhr (29:25.698) So you're getting up to like 16 million of debt. Jack BeVier (29:30.521) Yeah, yeah. And, and it would cost you and that money costs 6%. And now that is, you know, they'll give you fit, you know, 60% loan to cost. So you know, down 1520 points in terms of the advance rate. And that money is going to cost you eight and a half percent right now from a bank. And so you're going to have to go find that equity. And there's a lot of there a lot of local and regional builders right now that are experiencing exactly that. They feel that they're in the catbird seed, that they've got opportunities, but their cost of capital has gone up significantly. That's not even the killer, right? Because they're building new inventory. Their margins are 30%, 20%, 30% on that stuff. They can absorb the 400 basis points across the capital. The issue is equity. The issue is I need... I need $5 million for this project and $3 million for this project and $6 million for that project. I don't know that many rich guys. The institutional capital... Craig Fuhr (30:34.282) Yeah, my friend's family and fool's money has kind of run out, right? Jack BeVier (30:38.705) Yeah, and there's a, and there's frankly, there's also like a gap in that equity market where if you're, if you're the institutional equity wants to write checks at minimum 5 million bucks at a time, and really they'd prefer to be writing checks 10 million bucks at a time, which means they're looking at the, they're looking at the $30 million plus projects. But for anything from like a million to 30 million, it's this no man's land, right? Like kind of the same. So the same dynamic exists in commercial real estate where It's not big enough to really attract institutional capital, but it's kind of all the same work, right? Whether you're underwriting 100 lots or you're underwriting 1,000 lots, a lot of the same legwork has to go into the diligence. And so it's a tough place to operate in. But as a result, there's a lot of opportunity there if you do have equity, if you can line up equity to take advantage of those situations. So we've been doing a lot of work. We were just actually at the Build to Rent Conference in Vegas, the IMN Build to Rent Conference. And there was a, it was this dynamic that I'm talking about. Lots of builders there, excited about the projects they can do. Everybody's looking for money and the banks and the conversation was about, hey, I had a bank relationship, but they've backed out. I've been working with this bank for 20 years. And my loan officer came to me and said, hey, we just need to... Craig Fuhr (31:41.686) Yeah, talk about that. Jack BeVier (32:04.373) play these out or I can't do the incremental projects for you, we need to either keep you where you're at or downsize a little bit in terms of our exposure. And so they're kind of like, you know, slowly sauntering backwards, right when the builder really wants them to be more aggressive. And so, you know, there's interesting opportunities in that kind of environment for both from the lending point of view, as well as the equity point of view. Craig Fuhr (32:27.202) What it, so as, as. Yeah, that's what I was going to ask. So, you know, you were there, you're a smart guy. What do you see as the big opportunities for not only, you know, break it down from a lender standpoint, you're a lender, and then break it down for the guy on Main Street who's actually thinking about doing these projects and is in a place where he needs equity. Like, what do you see as the opportunity from both angles, Jack? Jack BeVier (32:55.829) I think that it's a new skill set to learn how to do new construction as an operator. It's not brain surgery, right? But it is very local and understanding and it can change county to county. Like the risk profile of a deal can change county to county. And so that becomes kind of table stakes for getting involved in doing new construction. Jack BeVier (33:24.861) Uh, once the land is, is developed and you know, utilities are on site and you pull and you, you dig a hole or you pour a slab, then it's just flipping a house, right? Then it's just a gut rehab, right? So a framing contractor and, um, and, uh, framing contractor and, uh, your usual mechanical guys that you would use to, to rough, to roughen a full gut rehab. So that part of it. Craig Fuhr (33:49.718) The only difference being is that you should actually understand what your costs are in new construction as opposed to doing a hundred-year-old house where you open up a wall and find that you've got $50,000 where the termite damage, right? Jack BeVier (34:01.317) Absolutely. Our experience doing this in Maryland has been that it's been a completely different set of contractors, actually. And oftentimes, they end up being cheaper on the whole, because you get companies that are you're dealing with a company that is more of a production mindset. Then three guys. Yeah, yeah. And so it can actually be operationally easier. Craig Fuhr (34:21.89) rather than, rather than, yeah, chucking a truck, as we call it. Jack BeVier (34:31.245) from that point forward. But it's building a whole new bench and trying to get, and if you don't have, and trying to like line up capacity with those subcontractors, when you don't represent yet, a lot of volume can be a tricky thing. So that's something to consider, something to manage. But anyway, if you go through the learning curve, my point is, if you go through the learning curve of being able to do new construction. I think that there's a lot of in markets where you can get a permit in a reasonable timeframe, you know, big caveat there. But you know, that you can find, but you can find infill lot situations and try and do one on relatively low stakes. And we think that there's interesting can be interesting margin there. You know, buying lots doesn't have the emotional aspect. to it, like the seller is not as invested in their lot as they are in mom's house, right? When you're trying to buy that inventory. And so, and that market is thinner, right? Because of the work, the learning curve that you have to go through to learn how to do the land portion of this. Yes, there's less competition. Craig Fuhr (35:46.954) Less competition. Jack BeVier (35:49.477) So it's a little bit more business to business, right? Like, hey, I'm buying this lot, they know that you're going to build a lot and make money on it. There's not the emotional aspect of, this is mom's house, the lot's worth 20 or 40 or 60 or 100. It is what it is. There's not builders who are paying substantially more than somebody else for a particular set of lot, right? The unit economics are very similar, whatever you're doing. So anyway. I think that if you go through that learning curve and add that tool to your toolbox, that being able to supply new inventory to the market, which generally comes with some premium from a pricing point of view, even versus the flip, that's where we're seeing the people who are having the most success right now on the renovation side are ones who have pivoted slightly, added land to their toolbox and are now looking for debt and or equity. on those projects. And we've started doing both. We've always done debt for new construction. Craig Fuhr (36:51.85) I was just about to ask. I was just about to ask that question. You beat me to it. Jack BeVier (36:55.769) Yeah, we've always done debt for new construction for the building side. We were doing more acquisition development loans and we've actually been approached by, you know, one of the reasons we were out at this conference is looking for equity opportunities because there is that kind of like vacuum in the market right now. And so being able to provide equity to some of these builders, we think is an interesting, an interesting play right now that has been substantially de-risked because of this kind of dynamic in the market. So that's that for me, that's like a bright spot, something that we're working on that we think is interesting that's emerged. But it requires adding some tools to the toolbox though. Craig Fuhr (37:30.315) I love that. Craig Fuhr (37:38.997) Yeah. You stole my thunder in terms of the equity opportunities. But do you see more of that, Jack, because of this massive disparity of equity versus debt that we're now seeing, or that increased amount of money that has to be brought to the table? You believe that there is a real opportunity there for lenders like yourself to jump in, where it used to be. You know, I'm going to the guy who's got 100 grand, the guy who's got 500 grand, we're not going to cobble together. I'm talking about the smaller guys here. We're going to cobble together the money that we need for equity and then go get our debt. Do you see more lenders like yourself coming online for that type of equity for guys like that? Jack BeVier (38:27.637) I'm not sure actually. Because generally, the local private lender, yes, I think absolutely. And I think that that's a really interesting opportunity for local private lenders to follow their customers basically into projects that have margin. Now, big caveat on operational ability to execute, right? So you have to, but that's kind of table stakes. Yeah, but a lot of the... Craig Fuhr (38:37.633) Mm. Craig Fuhr (38:50.762) Yep. Really understand the operator, right? Jack BeVier (38:56.369) A lot of the national lenders and a lot of the banks don't have their capital structure set up to accommodate new construction lending. It's just they just like, hey, yeah, we just don't lend on new construction. It's not because they don't like new construction as a model, it's because they told their banks that they weren't going to do that and so they just can't. I think that's where the local private lender has an advantage because they have discretion. to do projects that make sense. And in changing market conditions, that's what's required to, you know, that's an important feature to kind of have in your, you know, the discretion to do loans that make sense, not just ones that fit certain guidelines. Craig Fuhr (39:40.246) Yeah, I always like to, when you go to these conferences, we should think about doing a podcast from a conference. That'd be cool, like set up in the conference and then like, you know, do a, yeah, just like, hey, Logan, come on over. Yeah, we're doing our thing, right? What was the sentiment? Like, so we talked with, so if you have, if folks who are listening haven't checked in with the last two episodes that we did with Dennis Esterna, who's, Jack BeVier (39:47.55) I love you, sick. just pull people in. Yeah. Craig Fuhr (40:10.27) a really well established builder, rent guy really understands the real estate market very, very well. Vast experience. If you haven't listened to those episodes, really encourage you to do so. Man, I'd love to know what the sentiment was. Jack, what do you, you know, it, do you see it slowing down? Were they like, Hey, we're everybody's pencils down right now until we figure this thing out. Like talk about like the people who you were meeting and sort of, you know, what their sentiment was. Jack BeVier (40:37.693) Yeah, I think the sentiment was there's opportunity, you know, frankly, excitement over opportunity, but frustration over the capital markets situation, right? Like that they, you know, that they, if, and that, right, like that's, that's like super, that's what happens, right? Like when we were buying houses and Craig Fuhr (40:59.306) If we could just finish, if we could just figure out this capital shit, we could be off to the races is what they're saying. Jack BeVier (41:03.773) Yeah, yeah. And in 2011, when we were buying in Atlanta, like, yeah, we were buying in Atlanta, because there were great opportunities. And there were great opportunities, because you couldn't get capital. And, you know, so those goes, those go hand in hand, right? It's never always everything's working great together, or but for but for a moment of months, right? Like, everything's humming for a couple months, and then the competition comes in, and then the margins get get, you know, get eaten away. So I think that new construction is probably a place where we're seeing wider margins earlier, right? Like, you know, the commercial real estate, we were talking about this with Logan on the last episode, the commercial real estate crisis and the opportunities that are going to come out of that environment, aren't, you know, it's still very feels very early innings there. Maybe this started. Yeah, exactly. And, and probably the, you know, the best deals have not happened. I'm sure that that's the case. The best deals have not happened yet. Craig Fuhr (41:54.294) Very slow moving train. Jack BeVier (42:02.813) Um, and so everyone's just kind of like waiting for those opportunities that they can take advantage of, you know, the fear and pain that, that they think are coming, I think new construction is probably a place where those opportunities have started to emerge because the demand for the product is absolutely there. The question is, can you get units built and, you know, um, in, in the right markets, can you get the, can you get units built and can you, um, put, put inventory out in the affordable price points? Um, And the build to rent, I would say, you know, build to rent as a model, the equity is frustrated, the build to rent equity, the ones who actually want to own the houses, they're frustrated right now because their debt got expensive. But the builders who are doing those projects, and I think as a result, builders have pivoted to doing those projects for retail sale, because affordable homeowner inventory is what is lacking. And there's still pretty strong absorption for affordable new construction inventory. There's excellent absorption for that. The amount of new inventory that's sitting on the market, this new construction is an incredibly low number. So I think that it's that dynamic of, we're trying to figure out if build to rent is the way to go, or should we just go back and sell these? A build to rent community that is now pivoting to sale to homeowner. And but then, you know, but how am I going to fund this thing? They're finding projects, but they're, but they're trying to figure out their capital structure to get the project actually executed. Craig Fuhr (43:38.158) Interesting. So we have a few minutes left here. And one of the things that we touched on briefly in the last episode with Logan was the difference between a financial crisis versus a recession. And if we take a look globally at credit right now, national debt, declining dollar, things like that, You know, you have to ask yourself, are we heading towards a financial crisis while at the same time we might be heading towards a recession? They are two different things. I mentioned in the last episode, 1998 was the financial panic. 1990 was the recession, but no financial panic. 2008 was both. And it's nice that it was 2008 because a lot of us can remember exactly what that felt like at the time. And so, Jack, one of the things that I. I can't get away from myself is, yeah, I feel like the yield curve, the inverted yield curve speaks to a coming recession. We just don't know how deep it will be. But when I look at the global credit, where China is right now with their economy, Japan is with their economy, much of the EU is with their economy, and where we are with skyrocketing M2. What do you feel about that, man? Do you feel like we have sort of a convergence of two things coming right now? And if so, what's the opportunity? Jack BeVier (45:13.881) Where do you want to be, if not the United States though, right now? Like why, why the week? I feel like the, I think my sense is that the dollar is strengthening and, but for. The concern about war, which is a, you know, which is a considerable and very concerning concern. Uh, yeah. Um, you know, like where's, where, where in the world's doing better right now? Like, you know, what, what economy the. Craig Fuhr (45:19.318) Yeah. Craig Fuhr (45:35.842) Sign up in. Jack BeVier (45:43.529) the American consumer has shown themselves to be remarkably resilient. If there's a technological wave, you know, from, if there's going to be productivity gains as a result of technology, they're going to come out of America. Um, I just, um, I'm struggling with, I'm struggling with how America is going to end up in the, in the, you know, in, in yeah, relative, because, because humanity is relative, right? Economies are relative. Like where, where would you rather be? Craig Fuhr (46:04.75) Scrap heap of history. Jack BeVier (46:13.201) And I and I and then I'm like, ah, no, you know, not to say we don't have issues, but we've got issues and war is an X factor in this. But but I'm just not sure like where else we'd rather be investing where else we'd rather be investing. Craig Fuhr (46:29.09) Yeah, I think when you take the long-term look, that's absolutely true. It's how do you prepare for what might be coming? Do you have less debt on your books? Do you find better sources, better avenues of credit, better avenues? Is this the time to be really preparing for all of that operationally? If you believe some of that, if you believe those two factors might be converging. You know. Jack BeVier (46:57.837) I agree with you. I think it's a very tough short to middle term, like that short to middle term horizon. What are the moves as a result of this? Super. I mean, that's the reason I, you know, one of the reasons that I want to do this podcast and like get on here and like get opinions from guys like Logan to talk about exactly those issues because I don't think that there's a lot of clarity in the short to medium term as to what the move is as a real estate investor right now. Craig Fuhr (47:26.954) Yeah, I agree with you and I agree with Logan that for the long term, you know, there's no place where I'd think I'd rather own real estate frankly, but, um, it's, it's that next 12 to 36 months that I think everybody's trying to get out their best crystal ball on. And that's why I'd love doing this as well, because we get to hear from so many different sources on sort of where they think it's going as well. Um, so yeah. Jack BeVier (47:52.657) Yeah, I mean, the things that are solidifying for me right now, and I would love to hear contrarian views on this, by the way, listeners, if you've seen other folks who are talking in a different way than this, I don't think that mortgage rates, I'm now kind of becoming convinced that I don't think mortgage rates are coming down much soon. And I think that the recession is going to be, you know, if there is one at all, a very little guy. and is not going to be enough of an economic shock for us to get anywhere close to where interest rates were a couple years ago. I don't think there's going to be any... So I don't think cost of capital is coming down. I think the banks are in a bad spot and they're going to be in a bad spot for two to three years on the low end. So like access to capital... access to more traditional sources of capital, I think, is not going to resolve itself in the short term. And supply of inventory and transaction volumes, I think, are going to stay down around where they are right now for quite some time, for years, for two, three plus years. So in the less than three-year period timeframe, I feel like this is a new normal of higher cost. Yeah, it's higher cost, higher cost of capital, low transaction volumes. And that's a squeeze, man. That's just that's that slow strangle that like, yeah, yeah. And I don't think there's going to be like a fallout of investors. I feel like it's just going to be like, you know, everyone's getting slowly, you know, depending on how much air you had in your lungs, you know, you'll die at some point along there. Craig Fuhr (49:21.378) Yeah, we're living it. Craig Fuhr (49:32.034) Tough spreads. Jack BeVier (49:47.625) or figure out how to like, you know, or pivot, pivot to figure out how to make yourself cash flow positive, because I don't think the market. Craig Fuhr (49:54.514) You've been working on your financial analogies. I love it. The slow strangle, you need to put that on a t-shirt. Jack BeVier (49:58.278) Yeah, there you go. Jack BeVier (50:02.333) The, by the way, to that point, I think that like selling, selling rental properties though, is another source of new inventory that hasn't that, um, you know, investors have been net buyer, you know, big net buyers of, of housing, of, of affordable housing, uh, for the past, you know, whatever 10 years, particularly the past couple of years because the low interest rate environment. And I think that, you know, people are going to be forced, investors are going to be forced to tap their equity to pay the bills. Craig Fuhr (50:11.025) Mm. Jack BeVier (50:32.169) And so selling rental properties is a way to do that, right? Like on the turnover, you say, you know, so, you know, a year from now, you have a turnover, cash is getting tight. You've got 80 grand of equity in this property because you bought it back in 2020, 2021, 19 or even earlier. Yeah. And unless you have incredibly cheap long-term debt, which many, many do, Craig Fuhr (50:49.73) You probably never liked it to begin with, you know. Jack BeVier (50:57.629) But if you have a bank loan, that bank loan's coming up for a five-year reset, and your bank wants to reset you to 8%. Dude, why am I going to do that? So unless you've got very long-term, cheap debt on your balance sheet, I think a lot of real estate investors are going to say, hey, at these refi rates, I just can't afford to keep, or it's not worth it for me to afford to keep this property. And you know what? I'm going to turn it over as retail and sell it into the first-time home buyer market. And that'll be a, and, you know, take that cash off the table and pay the bills. Uh, and I think that there's going to be a lot of like harvesting profits that happens to keep people afloat, um, over the next couple of years. And, uh, you know, it's a good thing that they'll have the op, the ability to do that, but I think that, um, I don't think rental portfolios are going to be growing net growing a lot over the next couple of years, I think it could actually go the other direction. And there are fewer investment properties owned. by Main Street real estate investors two years or three years from now than there are today. Craig Fuhr (52:01.646) That's what I, so in just a couple minutes, maybe you just speak to that quickly because we know investors who are focused on finding that small mom and pop who might have 5, 10 properties, 15 properties. You and I have talked about this often, like you get to a point where it's like the wheels are kind of coming off. I'm either going to go to 50 or I'm going to go to 10. I'm either going to go to 100 or I'm going to go back down to 25. And so we know guys who are out there focusing on finding those small mom and pop investors who probably have a problem portfolio or it's becoming a problem and saying, Hey, we'll buy the whole damn thing from you. Do you see that as opportunity? Jack BeVier (52:45.425) Yeah, absolutely. And I've talked to a couple of operators who are doing just that where they they're already doing just that seeking out like you just said, small portfolios that where there's equity in the portfolio, the cash flow is not great. You know, you can buy it at a you know, at a you can give the seller a great price from their perspective from a cash on cash return that they're getting. And then the plan is the play is to just operate it until they turn over, turn them over and sell them retail one at a time over the course of seven years. But this guy is, you know, at the end of his career and he just doesn't, he's like, that's a great idea. Someone should do that. But I don't want to do that. Like, I'm going to go play golf. And like, I'll take this number now and you can go do that long term play where you clip a little bit of a coupon and then harvest the equity, harvest the embedded equity there, the implied equity there over the. over the next seven years, ten years. I think that's definitely a play. Craig Fuhr (53:45.394) Interesting. Well, Jack, it's been a great discussion today. I highly encourage everybody to go back and listen to episode 14 with Logan and then check this episode out. Anything else you want to add? Jack BeVier (53:59.357) No, man, good conversation. It was great to have Logan on. Looking forward to having other very high quality guests so that we can get some new ideas, beat up stuff, challenge each other on where things are going. That's the whole point here. So looking forward to doing more of that. Craig Fuhr (54:13.09) Well, folks, thanks for listening in today. This has been Real Estate. Thanks for listening in today. This has been Real Investor Radio. I'm Craig Fuhr with Jack BeVier. We'll see you guys next time.