Latest / Real Investor Radio Podcast / Episode 3 | The Institutional Buyers & How To Stay Competitive

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Episode 3 | The Institutional Buyers & How To Stay Competitive · Real Investor Radio Podcast

• Craig 00:00 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 to Real Investor Radio. I'm Craig Fuhr, sitting here with my partner Jack BeVier. This is episode number three. Welcome. We're gonna talk today about sort of what's going on in institutional money in the residential market, where they are right now, how they got into the market, sort of the evolution and what that means to you as a investor today. So Jack, welcome. Jack 00:33 Yeah, looking forward to today's conversation. It's always interesting to see what kinda wall street's up to and, and what that means for, you know, if that's gonna affect our business, what we should do as a result of it. Craig 00:44 We're taking the training wheels off of this thing. We've got the first two in the can, and we're working on number three and four today. Excited. Jack 00:51 Absolutely. Absolutely. And Craig 00:52 We're ready to roll. So let's jump in, Jack. You know, one of the things that we've been talking about offline lately is sort of, you know, the evolution, if you will, of institutional buyers, wall Street, for lack of a better word, into the market. And so, you know, a lot of movement going on over the last year or so with institutional buyers. And so let's talk about that today. But sort of the fundamental idea of this episode is what are the suits in Wall Street doing right now? Right? Yeah. What's their mentality and sort of that evolution of where they've come from. So why don't we talk about that quickly, Jack, like when did these guys get into the market? How did they get into the market and, and how should we, how, how do we play the game with them? Jack 01:39 Yeah. So everyone listening to this knows that single family real estate has been an investible asset class for a very, very long time. But really prior to 2012, wall Street wasn't so sure that that was the case. In the wake of the Great Recession, really around the 2012, 2013 timeframe, a lot of institutional money, you know, New York money got aggregated to take advantage of the very low real estate prices that were available in the market at that time. And they started to becoming a significant factor to the real estate investment space, particularly in certain markets. They were very, very prominent in the Sunbelt, and though they still represent a very small percentage of the overall ownership of single family houses, they were absolutely market moving for the past decade. Yeah. And so, you know, what's really interesting right now is that they've taken a pause and so they've been on this buying spree a 10. Jack 02:32 They were on a 10 year buying spree, gobbling up as many houses as they possibly could. There's now three public REITs that are institutionally owned who only own single family real estate. There's another three very large private equity firms that own, that own a lot of real estate. Kinda when you're, when, when people are talking about this market and what's going on with the institutions, these six entities, American Homes for Rent invitation homes, Tricon, residential, first key homes, progress Residential and Vine Brook Homes are kind of the biggest names in on the single family side. There are others for sure, but those six have been big factors in mostly the Sunbelt, with the exception of Vine Brook. They're more of a tertiary market buyer, kind of, I think Ohio, St. Louis, Tennessee. So they, by and large, the Sunbelt actors though, have really kind of pressed pause recently. And so I find that ex, you know, I found that extremely interesting. It's, it's worth taking note, you know, they, they got in when the getting was good. Right. They, you know, bought like crazy for 10 years and they're pressing pause right now. Yeah. Craig 03:39 Couple resources for today's show, you can find in the show notes. There was a story that I took a look at. Wall Street is running away from the housing market. So talks about some of the facts from the story where, you know, pandemic housing boom, saw a massive flood of institutional home buying. They mentioned Open Door and Blackstone, obviously companies that most investors in on Main Street have have heard about, but those owning over a thousand houses, Jack have bought 90% fewer homes in January and February of this year than they did in the first two months of 2022. Is that what you're saying as well? Jack 04:19 Yeah, yeah, absolutely. Also, just a, just an important distinction just to, to keep everyone's like, you know, brains thinking about this the right way. So there is the institutional ownership of single family real estate for the long term. So those like American Homes for Rent Invitation, which is owned by Black, or sorry, was owned by Blackstone, but is now public Tricon, those guys are long-term holders of real estate versus an open door offer pad. You know, that I buying Mo model, which is really never intended. They, they didn't, they're not trying to own any houses long term. Yeah. Though flipping over the past 18 months has been a little bit of a catching a falling knife for them, but, and they're having issues around just purely home price appreciation. You know, you know, they've been, they were b you know, if you bought in, they were buying very actively at the peak and in volatile markets because that's where they were making money, you know, on the runup they were making money in those volatile markets that were having big upside, you know, up big upswings in home price appreciation. Jack 05:20 Sure. But they were, they were there when the knife started falling back down. And so they've, they've had difficulties in over the past 18 months, you know, maintain, well, they have always had a hard time maintaining profitability, but particularly over the past, over the past 18 months. But I think that that's, you know, and, and, and there are certainly lessons that can be taken as a flipper if you're active in the, in markets next to those guys. But for the rental property investors, you know, the long-term landlord looking to build wealth over a long period of time, I think it's worth making, you know, taking note that the institutional buyers have also pressed pause because there's a, I think that there's still a lot of confidence in the long-term value proposition of American real estate, American residential real estate. We are still under building relative to household formation. So if that's the case, and this is a good investment long term, what we wanted to dig in today is, well, why are these guys pausing? Yeah. Why aren't they just continuing to buy in all markets? Craig 06:23 You mentioned Invitation Homes, this story that I referenced talks about them being the largest home, the largest owner of residential homes, at least at the time that that was published, 83,000 homes that they own, and that's single family rental homes. But they've recently became a net seller in the first quarter of 2023. Invitation homes bought 194 homes while it sold off 297 in Q 1 20 23. Then in 2022, same quarter, they purchased 822 homes in first quarter of 22 and sold 147. So talk about more about that, you know, sort of sitting on the sidelines right now, they're sensing the headwinds and so, you know, they're just kind of pulling money back from the table a little bit. Jack 07:14 Yeah, sure. So rewinding to kind of nine, 2018, 19, 20, 21, you know, these, these entities are buying houses, particularly in the Sunbelt like crazy. And there's a lot of wholesalers out there who made a lot of money wholesaling to this, to these folks because frankly, they were paying a hundred percent of value, 110% of value in some cases. And so all the wholesalers are saying like, this is crazy. Like, if I fixed, if I bought that house and I fixed it up and I resold it after closing costs, I'd be losing money. And yet these, you know, the, the, these, all these, you know, sharp young kids are, are willing to pay this. And it was almost a punchline for a couple years there where like, these guys are idiots. Yeah. Like they're, they're just, they're buying it a hundred percent of value. Like I don't understand how they're doing it, but, you know, they must have some long-term view of what's gonna go in the market and they're just placing capital. Jack 08:09 So, and I think it's important to dig into that because it explains, I think a lot of what has changed in their behavior. They were never the dumb money, they were never idiots. Yeah. They had a, an advantage that we as main street real estate investors didn't have, and that was cost of capital. They had access because they were buying so many houses and deploying so much capital. When they go get a loan, it's called doing a securitization and they're doing a $300 million securitization and placing bonds, which is just raising debt. All that means is just raising debt to pension funds and insurance companies who at the time were just flush with cash interest rates were at zero. And so these institutions were buying these houses and then financing them and getting 2%, raising money at 2%, 3% when Main Street was giddy. Right. Over borrowing money at four and 5%. Jack 09:10 Wall Street was uber giddy. Like they're borrowing money at two to three. And so when they quote unquote overpaid for those houses, they were still able to produce a net yield on that rental income. Sure. That once they levered it with two point a half percent money, provided a double digit levered return to the their investors, which is what their mandate was. You know, it's, Hey, I wanna deploy capital into American real estate and I want a double digit, a double digit, you know, i r r on, on that deal. And given how cheap the capital was, they were able to do that. So Craig 09:46 They Jack 09:47 Weren't idiots. They just had a different competitive advantage than we did. Craig 09:51 You said before we turned the mics on today, that their game is different than your game, right? Yeah. The game that they were playing or that they are playing was to find the cheapest money. They were out there raising the cheapest capital possible that was, that was clearly willing to invest. Right. While the average investor on Main Street, their game was always finding the cheapest houses. Right. Right. So talk about that. Jack 10:18 Yeah, so, you know, at the time, the, the, the Wall Street investor was just the best bid because it had the access to the cheapest cost to capital. And so you could make a, and folks were making 30, $40,000 wholesale spreads selling these pretty houses in Jacksonville and Charlotte and Texas and Arizona to, to the, to these Wall Street firms. Now what has changed though is that, that that cheap capital is no longer available. So with the rise of interest rates in 2022, the securitization market, the cost of that capital is now up three or 400 basis points since then. And Craig 10:58 Maybe the pension funds and some of the other, you know, really cheap money out there that these guys were using isn't so giddy about the single family residential market anymore, or is that the case or? Jack 11:09 I think it's still the case that Wall Street is generally bullish on American residential real estate, long term, long term. It's just that the economics don't make that much sense. Don't make any sense today, because we haven't seen a decrease in housing prices. So, you know, these guys' game was that, Hey, I'm buying houses at a hundred percent of value, but I can still produce a five cap return and I'm gonna go borrow money at two point a half percent. Well, today if they did that securitization, they'd be raising money above 5%. And, but the housing prices haven't come down and the rents haven't continued to go up enough such that they can produce a seven, they can buy houses at a seven and a half cap or an eight cap, which is where they would need to be buying houses today to make a, you know, solid. Jack 11:51 So that same solid lever levered return. So I think that, you know, the, the simple answer is that that Wall Street has said, Hey, you know, I can't, it's not accretive for me to, to buy houses right now given where my cost of debt is. So I'm just going to sit back, manage my portfolio, they're ending, you know, I'm still open for business sure. But I'm open for business at a seven and a half cap. So they found 189 of those in, in, you know, in the first quarter. And they're gonna continue to call the portfolio because when you buy that many houses, you're gonna make some mistakes or there's gonna be some houses where it makes sense to sell those for whether it's gone up in value a tremendous amount or, or just because you think that the house is a dog and you made a mistake. So they're gonna continue to call the portfolio. They're still technically open for business, but their bids are 30, $40,000 off of where they were before. And so you just don't have the sellers willing to capitulate at that same level. And so their volumes are, are down tremendously. Craig 12:52 I'm interested in, you know, I see a flight to the, to the southern markets, to the, to the Sunbelt markets. Is it just because we're seeing a, a net positive migration to those markets? Is it better tax code or, or you know, their municipalities more willing to, you know, have these so many rentals in neighborhoods, things like have they eased restrictions on land, things like that. Why are so many of these companies so interested in the Sunbelt states? Jack 13:21 Yeah, I think it, it's all those reasons for sure. You're Craig 13:24 A lender nationwide. Dominion Capital is, is a lender nationwide for fix and Flip Bridge loans as well as well as D S C R loans, which we talked about in episode two. You are, you see markets all over the country. Do you prefer to be in, in Sunbelt states or do you have no preference Jack 13:42 On the bridge side? I mean, there's a market everywhere, right? Like the, the bridge business is much more about the investor adding value by buying it well and then doing a renovation that increases the value of the property. And so the hold period is 10 months on average. So not as, don't really care as much frankly, about the 10 year prospects for an area. 'cause it's a 10 month trade. And, and that's fine for on the rental property side of thing. I do think that, that all those factors are drivers for why you see a lot of, a lot of institutional activity in the Sunbelt. Also, just the year built, I think was a big driver, right? Like it's when, when you're trying to deploy very large amounts of capital into very large amounts of capital into real estate, well that the, the operations of that real estate need to be easier, right. You know, if, if you're, if your mandate is to deploy $500 million, well you can do it a whole lot faster buying houses built in 2010 Craig 14:43 Than 1910 Jack 14:44 Yeah. Than 1910 trying to do it on the south side of Chicago or Baltimore or New York or Philly. Hmm. So just the, I think, I think just the ability operationally to scale favors the south in addition to all the reasons that you were talking about from a demographic point of view, where that's where we're seeing population increase over time. So when you're gonna make a 10 plus year bet, that feels like a, a a stronger 10 plus year bet. So Craig 15:09 Let's talk about some of the players that you mentioned. I I think you have a pretty good list here. Jump into that. I was one of couple other factoids I saw in a different story talking about yield street. Yield street. Very large home buyer has slashed, its buying levels 90% as of January. So they're expecting the, the, this is the guy who runs it, Yoshi is his last name. They expect a 10, 10 to 15% decline, which I think we've seen. And then they're looking for from December to December of next year, this guy is predicting a 20, 25% decline in housing prices. Are you feeling that? Yeah, that's a bit heavy. Jack 15:53 That's been something that I, we've been watching like a hawk because we are in on the bridge lending space that would affect us, right? We want our borrowers to be profitable and if they hit a, you know, hit a 20% headwind on real estate values, well they're, you know, where's the money left for them? Right? We haven't seen as much of a decline. We have seen declines on, in particular submarkets, I would say particular submarkets. And it's more driven by affordability than anything else. Hmm. So it's the, the high cost per square foot areas have come down more significantly, but the, you know, the $200,000 to $600,000 houses, we haven't seen a whole lot of pressure in that segment from a housing price point of view, those have been pretty flat, maybe down 5%. Whereas if you were in the $500 a foot plus space, you know, parts of California, New York, DC we've, we saw the most significant declines there. Jack 16:50 You know, notably, or, you know, kind of famously Seattle is getting crushed, Idaho is getting crushed because there was a ton of migration there during C O V I. And so people are kind of moving, you know, selling that second house and moving back. So we've seen, you know, 15 sometimes as high as 20% declines in, in those, some of those submarkets. But I think for kinda like the bread and butter housing that, that these institutional investors are buying for the long term, I mean, their average cost basis is in the low two hundreds. Maybe. It's probably probably climbed up a little bit to maybe the high two hundreds at this point is a typical deal that, that an institutional investor is buying. Can Craig 17:27 You break that down a little bit? Like what? Jack 17:29 Just, you know, so a typical deal is they're, they're buying a house for two, you know, I'm making up numbers. Sure. Right. But they're, you know, they're buying a house for 225 grand. They're gonna put $25,000 into it and they're gonna rent it. So they're in for 250 grand and they're gonna rent it for $2,000 a month. Okay. That would be kind of bread and butter institutional, you know, deal in the suburbs of Charlotte. So in that price point, we really haven't seen, you know, affordability is still the driver I think for, or is still a, is still a a, a big concern. A big, a big issue. And so having access to affordable inventory, you know, there's still tremendous demand for affordable inventory in, in the country, really. And so we really haven't seen much, if any, declines in that, really in that affordable segment. Craig 18:17 Okay. Jack 18:17 So that's been a, I think that's been kind of a, you know, there's been a a a a bottom there that's a, that, that keeps, keeps those prices up. So we haven't seen, we haven't seen those kind of declines there. Craig 18:31 All right. So players, you know, did you want to go into that real quick where these guys are right now? I see you've got a, a graph of sorts here on the table. Yeah, yeah. Jack 18:42 I've been, I'm referring to some Zelman investment banking research. Zelman is a phenomenal firm that founded by Ivy Zelman. They have are, they do investment banking, they do research and they, they pub, sorry, they publish a lot of research that you can buy. They give a little bit of, out, a little bit of it out for free as a teaser. And they do a lot of m and a and investment banking work in residential real estate, home building, building products, kind of anything that touches housing. And so they, they've been, I've been following their research for, for over 10 years. The firm was recently acquired by Walker Dunlap, which is a large broker for both real estate and financial products. And so I think it's a nice addition to Walker Dunlap to have zelman as their research arm. So I've been following Zelman Research for like 10 years and they have a, they put out really good stuff on what's going on in kind of the largest single family rental portfolios. So that's the research that I was referencing when I came up with those six names. They've also got kind of like a snapshot report to say like, Hey, what's happened over the past quarter? And I'm sure I saw these, I saw some articles on this as well. But something that I thought was really interesting was a recent announcement that, that Pretium was gonna acquire 4,000 single family houses from d r Horton, which is one of the large national builders. Craig 20:11 Talk about pretium. Yeah. Yeah. Jack 20:13 So PR Pretium is a really inter pretium's, like the biggest name y you never heard. They're behind a lot of the brands that you know, like institutional brands, but they're a, I think they're something like a $50 billion private equity firm. And they own Anchor loans, which is a very prominent fix and flip lender. They bought Anchor in, in late 2021. They own Deep Haven, which is a, a non-qualified mortgage lender. So they, they, and they do a lot of D S C R loans. Okay. So they're a big buyer of D S C R loans. They own Haven Brook, which was a firm that I met when we were buying houses in Atlanta between 2011 and 2015. They were very active down there. They moved to some other markets as well. But Predium bought Haven Brook early, they own progress residential, which is, I think at this point they're right there, neck and neck with invitation homes in terms of having the most properties that they own. And then Celine, Celine Finance, who is I think an insurance company subsidiary that's very active in buying both bridge loans and on the D S C R side. So they're kind of like, they're the money behind the name, the institutional names, they're the money behind a lot of like single family residential activity. Yeah. Craig 21:26 The smart guys who go out and raise great capital to fund all of these companies, right? Yeah. With, Jack 21:31 With a very, and they seem to have, you know, their mandate is they have a very long-term bullish view of American residential real estate. And so they've got their hands really in a lot of different segments of the business. Sort of the Craig 21:41 800 pound gorilla that got in the game early in terms of let's go out and find that, you know, really competitive capital. Right. That was their competitive advantage for a, a long, long time. Right? Yeah, Jack 21:52 Absolutely. They, they, they have the ability to access insurance company money, large pools of private equity through opportunistic things to do, they have ac you know, they can do securitizations, no problem. And so they're deploying that through a number of different platforms that Main Street investors do interact with on a daily basis. Right. Craig 22:09 And so what are they doing these days? Jack 22:11 Well, this acquisition of 4,000 rental homes in the B two R space in DR at Horton, I think is the largest, largest transaction. Like of its kind. I think it's still, it's definitely a very strong signal that they're not going anywhere. Right. And that they're still very bullish on the, the, you know, the American residential real estate market. Yeah. And so you've never really seen a partnership between such a large partnership between a public builder, like a Dr. Horton and this and this institutional capital. So I, I think it signals, my point is I think it signals that, why, why do we care? Right? I think it signals that just because institutional real estate, sorry, institutional capital has paused in the short term on buying, doesn't mean at all that they are out or that that, that they are just, you know, that they're, Hey, we got our portfolio and we're just gonna manage that and we'll like, you know, see you later, they'll be back. They're still doing deals. They still love the space. It's just not the right time for them to buy one at a time, single family houses. Right. But they're still very interested in exposure to single family real estate. And I, and I think that institutional capital is only gonna get more and more prominent, you know, over the next 20 years. Yeah. Craig 23:20 I, I think I read in some report that by 2030, perhaps it was 2050, that, you know, wall Street firms like Predium and others are looking to own about 40% of the residential market. They'll basically be renting back at that point to average Americans. Right. And so the, the B two R you mentioned, I probably wanna break that down for folks who aren't in the know on that. So it's build to rent and we're gonna talk about that in specifically in an upcoming episode. But briefly, why, why is that such a thing now? Like it was a major topic at I I M M when you were there, you guys just had the, your real estate real investors round table here. And I know it was a topic at that. So explain to folks B two R and how it's becoming quite the thing. Yeah, Jack 24:19 Yeah. So the build the build torent space is just, the idea is that take lot, you know, infill lots or small subdivisions and or large subdivisions and in and build the houses on it. And instead of selling them to individual homeowners, we're just gonna keep those and rent them out, rent the entire community. So the entire community it'ss basically a, a horizontal Craig 24:40 Apartment building. Apartment building. Right. Jack 24:42 And the, the idea is that the landlord can, you know, put putting out a premium product, they can control the environment, perhaps they can get a little bit of a premium rent for it. But the owner, I'm sorry, the occupant rather, has a, a lifestyle that is more akin to raising a family because they've got a yard, they can have a dog, you know, they've got, there's maybe some amenity space and so they don't have to live in an apartment, but they also don't have to buy the house and deal with upkeep. And so perhaps from a, you know, a lifestyle point of view that this, the, the ar the argument, and I think it's a good argument, is that this is more of a trend on a going forward basis. That people are gonna prefer to rent longer to delay their purchase of their, of their single family house. Jack 25:25 And though their lifestyle may be changing to want to desire a detached to single family home, they're just not interested in being a homeowner just yet. And so a lot in the Sunbelt right now is, is, you know, where you can get permits. There's a lot of build to rent activity and there's a lot of institutional capital who wants, you know, who wants to, to buy these houses. It's a way for them to deploy capital very quickly. 'cause you can buy houses, you know, a hundred units at a time as opposed to, to one at a time. Craig 25:55 They're brand new. Yeah, they're Jack 25:57 Brand new. Exactly. Pretty Craig 25:58 Heterogeneous in terms of the stock. Yeah. Jack 26:00 Yeah. It's very, so, you know, I'm sorry, that Craig 26:02 Would be homogeneous. Jack 26:03 Yes. You got a premium product that, that you can offer and you, so you would expect a lower expense ratio as well. So that became, you know, with the cheap money of 2018 to 2021 bill to rent was kind of all the rage at, at the national conferences. It's backed off just because of what the cost of capital has done. But I think, you know, predium, this, this deal between PREDIUM and Dr. Horton shows that that's, that was not a fad. That's, it's a business model and I think we're gonna see a lot more of it. Is Craig 26:34 It a business model that the average investor can compete in? Yeah. Jack 26:39 Great question. So you mentioned the, the ma we wanna mastermind, it's, we run it as a nonprofit. The idea is to get great operators from all across the country together, share ideas in kind of like a, you know, safe space where everyone gets to know each other, like cone Craig 26:54 Of silence. No, nothing leaves the room. Yeah. Jack 26:55 Right. Yeah. So we're not just like puffing our chest out at each other the whole time. We're actually trying to share what's working, what's not working. There's several. And so we had, we hosted it in Baltimore this past weekend, and there's a number of guys in the room there that are, that, that are built to rent. Some are billed for sale, like they just do infill new construction with a goal to sell every property. There's an operator in, in Charlotte who has become a very active builder. I think he does maybe 15 or 20 a month finding infill lots in the Charlotte Metro where, I mean, he's buying lots between 20 and 60 grand a lot. And then putting a, you know, putting a very similar, you know, he is got a couple different designs, but putting a very similar, you know, three, two and a half, three, three and a half house on it. And on a current basis, you know, it's, it's similar economics to what I was describing. He's in for two 50, he's renting it for 2000. There's not a tremendous amount of cash flow in the short term. Sure. But he's making a bet on Charlotte in the long term and affordable housing. And I think that those are excellent betts that, that makes a ton of sense. And Craig 27:59 It works because the land price is obviously low enough that he can make some spread there. I, I mean, I would think it's a a, a fairly tough game to be in right now because of the cost of, cost of capital, cost of labor, cost of materials, you know, those types of things I would think would make it fairly difficult for a guy who, if you're doing 20 a month Yeah. You're getting some economies of scale there. Right. But like for the guy who isn't doing 20 a month, how do you, how do you compete with a guy who's doing 20 or with a guy who just with Predium who's just doing 4,000 of them right now. Jack 28:33 Yeah. There's certainly economies of scale to the home building business, period. Hard stop. Right. I think that there are also some economies of scale to, you know, you can make that argument for renovations as well, but my experience has always been that the operator who's on the ground, who's probably GC it himself, right? If he doesn't have volume, then he's got the time to GC it himself, you know, pay, you know, inspect on Friday, pay on Friday, that, you know, as opposed to having net 30 terms with your, with your vendors that you can, there's some cost savings in, in that as well. And then also at the end of the day, the the, it's difficult to operate at scale because you have to find a lot of inventory, right? So you have to, you have to feed that. Once you build that pipeline, you have to feed it, right? Jack 29:13 Right. So you need to buy, you need to buy, you're a little bit more motivated buyer at that point. Whereas I think an operator at smaller scale who's fine doing, you know, 3, 4, 6 deals a year can be pickier about their deal selection and frankly make the money on the buy a little bit better than somebody who says, Hey, I need to buy 200 of these this year. Yeah. Like what you got. Yeah. So we see people who like, who are able to, to, you know, balance the scales at all different levels of scale through, you know, through where you spend your energy. Sure. Craig 29:47 One of the things that you said a few minutes ago with getting back to sort of where the institutional guys are and everyone looking at them over the last, you know, year or so, or really the last several years of, you know, how the hell are these guys buying at a hundred, a hundred, 10%, 115%. And it's this notion of, right now, if you take a look at 'em, now, yes, they're on the sidelines, but lest any of you believe that they've stopped being in the game, they're, they're just sort of letting the, letting the, the, the dust settle, trying to figure out where the market's going to land. But so they haven't stopped. They're absolutely not stopping in the residential space. In fact, I many would argue that it's only gonna heat up a, again, more importantly, the average investor, the main street investor, should not be stopping right now. Their competitive advantage has always been the ability to go out and find great deals, needles in the haystack, as we like to say. Right. And so speak to that Jack, like, you know, what those guys really should be doing right now in, in light of this market. Yeah, Jack 30:50 Certainly. So like, there's definitely a, a higher cost of capital, right? Which means that the institutional buyer isn't there as much. 'cause that was really the game that they did better than we did. Craig 31:00 Right? So you could get fat, dumb and happy selling to those guys. You know, you're ridiculous wholesale, right? Jack 31:05 Yeah. All good. You know, which, which, you know, it's all good power to, you don't hit the player the, I think at a moment in time right now where we've got much lower levels of transaction volume and you don't have that buyer opportunity, that institutional out it means that what we have done always done well, which is buy well is more important than ever. And so the, you know, the average wholesaler or just the guy in the market who figured out what the institutional buy box was and was just backfilling to that. Yeah. He Craig 31:35 Is just taking orders. Jack 31:35 Yeah, exactly. He's just taking orders. That's super hard right now. Super hard right now. But if you built a, an off market deal platform over the past couple years, we're still finding deals that way at lower volumes. But also the competition is, has been falling out for the past six months and I think continues to fall out because that is getting tougher. So there's, there's certainly I think, a culling of the herd right now from a real estate investor point of view. And those that, as you pointed out, have always been good at acquisitions. There's always, you know, you know, money's made on the buy Yep. You know, is a, you know, term that we've thrown out, you know, thrown around for years and, and that that remains true. So when you can find a deal and your cost basis is, you know, 70, 80% or less of value, you've made money there already and the cost of capital is a moment in time factor. So you may have more or a little bit less cashflow, but you've, you've found a good deal at that point and should, and can, should continue to buy as many of those as you possibly can. Craig 32:37 My fear, and maybe you could speak to this, my fear is that we've seen a lot of exuberant buying. We've seen a lot of guys and gals who have been really eager to buy and that even though they've set up acquisition machines, those acquisition machines have been able to be a little fat, dumb and happy because they know that they had the out with the institutional guy or, you know, the, the maybe the, the greater fool as we like to say. Right? And so for those who are listening right now in the audience, it's time to be better. It's time to get that acquisition machine really right and tight and not take the marginal deals that you may have taken in the past and really start focusing on the, I guess the, the deals that are gonna be at that 70%. Go ahead. Yeah. Jack 33:31 Yeah, absolutely. A hundred, a hundred percent. I think that the, it's probably a better time now. The easy stuff was, was nice, right? But it's probably a better time now for the talented main street investor for example, where the cheap money is right now is that the seller has an existing mortgage. And so doing, you know, subject to, we're seeing a lot of comeback and subject to right now. Yep. Because those, there's cheap financing there in place. Creative financing deals with sellers who've got a lot of equity where they're willing to take either a first or a second back. Those kind of creative things that frankly, institutional capital just can't do. 'cause they can't really scale it. You can still make a lot of money on the deal, you know, doing deals that way with those tools in your bag that, that the other folks just don't have. Jack 34:19 And so I think there's gonna be, there's kind of a resurgence of kind of more old school creative real estate investing strategies because the cha capital is no longer cheap. That has now, you know, the, the, the, the competition that relied on that is also now just gone. And so having those, you know, being able to look in the whites of the eyes of the seller, figure out what their pain points are, figure out what their problems are, and come up with solutions to solve those problems using all the tools on the table right now is I think having a resurgence. Craig 34:50 Yeah. I think if you have had the, the pleasure of being a real estate investor as long as we've had since 2004, 2005 timeframe, you've sort of seen the cycles, the, the wild economic cycles, right? And so it's, it's always been a game of spreads, you know, are we going to be able to make a spread on capital versus our purchase and, and, and rehab costs. But even more so I think that we've, we saw this wild shift of, you know, early two thousands, there was, you had to look hard for deals. It was mostly, you know, we were all doing our direct mail and, and off market stuff and then, but an abundance of capital. Then 2007, eight there became capital restrictions, capital contractions, but then deals became, you know, flowing in the streets with EOS and short sales and things like that. Don't you feel like we're sort of coming through that cycle again, Jack, where we're, we're getting a pullback in capital guys have to be way better at, at, at acquisition at this point, right? Jack 35:55 Yeah, e exactly. And I think that there's gonna be a calling of the herd as a result of that right there, there hasn't, you know, we had that 10 year period of home, strong home price appreciation and cheaper and cheaper and cheaper capital that just allowed, frankly allowed more and more people to be, to get into this space. Yeah. And now those tailwinds are not there and frankly they've become headwinds. And so I think we're gonna see fewer and fewer operators on a going forward basis until we reach some point of stability in the market. Right. Craig 36:24 How much of that creative sort of financing I, I'm hearing guys talk about it endlessly right now. Yeah, yeah. About how they're, how they're really starting to sharpen their skills in terms of being able to make different offers to sellers. How much are you hearing that? Jack 36:39 Oh, I think a tremendous amount. It's be, it w it went from, that was zero portion of the deals to as much as a quarter to a third of, you know, kind of just bread and butter wholesale deals, or sorry, off market deals. That ends up being the, the difference maker to getting the deal. You know, because of some, some creative thing that they were able to do on the structuring side, they were able to offer a little bit more or solve a problem or offer a solution that somebody else didn't even ask about because they just threw out a cash number. And so, you know, digging deep into the seller's problems and figuring, finding out where there's opportunities to add value to the seller in a creative structuring way. I think, you know, right now it's probably a quarter to a third of the deals that are happening are, are happening with that and with, with, with, with those structural features in mind. And I expect that to continue Frank or to increase frankly. Craig 37:29 Yeah. Alright, Jack, so what do you say, we tie it all up with Bo here in the last few minutes that we have in, in this episode for the listener. It's clear that we should always be keeping an eye on what Wall Street's doing in the business. They moved markets, they've moved the market that we're in. And it's clear right now that sort of this pullback, this sitting on the sidelines thing is temporary and it's probably more financially driven. So then let's talk about then the why real quick and what the average investors should be focused on in terms of the market over the next 12 months or so. Jack 38:06 Yeah, absolutely. So I, I think that as, as you said, it's important to keep tabs on Wall Street to understand why they're doing what they're doing, but not necessarily to follow them or not necessarily to do what they're doing. Right. Because as we saw, they sometimes, often they're working off of, of different assumptions than we are. Yeah. They were working off two off of a two and a half percent cost to capital and when we were working off of a four and half percent cost to capital, now understanding that that would give you the insight that there's a phenomenal selling opportunity. We can, these guys have a competitive advantage that we don't have. Let's go get them inventory and help them fill that buy box. Sure. And that was like, that was a phenomenal move over the past couple years. Right. Today that's not the case. Jack 38:50 They don't have that, that competitive advantage. That doesn't mean that it's a bad time to invest in American residential real estate. It just means that that out is is not there right now. And so you're gonna have less competition from the institutions in, in the markets where they're very active. That said, also understanding that, that they don't have that access to cheap financing. So our access to cheap financing is also not there and, and frankly even worse. And so a pivot from a strategy point of view to opportunities that aren't reliant upon that more, probably a little bit more flipping because we haven't seen prices come down that much. Craig 39:29 Areas versus buy and hold. Jack 39:30 Yeah. Versus on a relative basis versus buy and hold. So like we've gone into our pipeline and grabbed a couple marginal rental deals and said, Hey, you know what, screw it. Just flip it. Like we'll just take the money and run because we're not gonna make much, if any spread for the first five years. Craig 39:45 This is coming from a rental guy, this guy. Jack 39:47 Yeah. And it pains me, it pains me not to, to not keep every house. But we, we, we, that's exactly something that we've done is to pivot more, a little bit more towards flipping because the, we were gonna have so much money stuck into the refi and the return and the, the net cash flow that we were gonna have on that was much thinner than it was before based off of these, these new assumptions. So maybe on, you know, on a, on a percentage basis, you go a little bit more flip for the next couple years and also look for opportunities that Wall Street can't take advantage of to find interesting ways to structure a deal, maybe find some cheap money from the seller and pull a couple more creative financing strategies outta your toolkit to make deals work. Which gives you a, a competitive advantage over both the institutional bid as well as the other guys in your market who are just not as, you know, as creative with those structures as as you're gonna be. Craig 40:45 Yeah. If you're not down with sub two financing, if you're not well versed in being able to explain to a seller perhaps the capital gains hit that they'll be taking by selling the property all at once to you, rather than maybe doing some owner financing over, over a longer period of time and being able to present that to the seller in a way that makes sense to them. A lot of people have no idea, Jack, I, I was talking to an investor friend the other day in Austin and the people who he meets with generally have no idea until about six, eight months after they sell the house at their, you know, their basis was, you know, $30,000. 'cause they bought it in 1960 and now they're selling it for 600 grand. They have no idea what the tax hit is going to be, be on that game until they meet with their accountant several months later. Craig 41:37 And now it's a big surprise. And so this friend of mine who lives down in, it's actually a guy, a coach who lives down in Austin, he's been great at being able to meet with a seller and explain all of that upfront and it's a real eye-opening experience for many. So I'd highly recommend that that folks get well versed in that and being able to present that to the average seller out there. 'cause you're gonna come across that a lot. Yeah. So great episode. I hope you guys got a lot out of it. As always, you can get the show notes, the link will be in the description, but it's real investor radio.com/notes for all of today's stories that we referenced, graphs, things like that. I'd like to thank everybody for tuning in. Please as always, leave a comment, ask any questions that we might address in an upcoming episode. But Jack, thanks once again. Absolutely pleasure. As always. We'll talk to you guys soon. Take care. (Generated by Podcast Show Notes at podcastshownotes.ai)