Latest / Real Investor Radio Podcast / Ep23 | In The News: Pivots, SFR Rents, Top Appreciating Cities, Interest Rates
Transcript
- craig fuhr (00:05.186) Well, hey, everybody. Welcome to real investor radio. I'm Craig Fuhr joined again by Jack BeVier. Jack, good to see you. Jack BeVier (00:11.047) Absolutely, you too, sir. craig fuhr (00:12.758) We are here for episode 23, and we're just basically having a discussion today of some of the news items that we've seen in terms of the market. Some surprising, Jack, some not so surprising, but we'll talk a little bit on this episode about single-family rents, sort of the price of money right now in terms of Fed policy, and this is an article from Businessweek that we'll be talking about. And then I'd like to jump into our good friend Nick jury. I say good friend, I've never met the guy seems like a good guy though, who runs our event sure, that's a pretty cool piece of software for real estate investors. He listed the 10 best cities in America jack that are still appreciating right now. So we'll go through that and have some fun with that. But man, you mentioned on the last episode about the real investor roundtable. which is a mastermind that you and Fred Lewis, your partner here at Dominion have been running since what about 2016 Jack? Jack BeVier (01:19.135) Yeah, past five or six years, yeah. craig fuhr (01:20.894) Yeah. So I think you mentioned that you guys had just came off of a meeting over the last, the end of last week. And what were your takeaways there, man? That's some of the best investors in the country that you guys have assembled over the years. Really top operators. You know, give me a sense of, you know, what these guys are going through in their markets all over the country, what you were hearing from them and sort of some of your better takeaways. Because I know you always come away with some with better for that meeting. Jack BeVier (01:50.93) Yeah, absolutely. So yeah, like you said, we organized it about five or six years ago. Fred really takes lead on it. And he has put together a group of about 30. We hope we think are high level operators. We run it. It's a mastermind. We get together to compare ideas, compare notes, help each other's businesses. We run it as a nonprofit, because for us, the point was the ideas like we could make much more money off of great ideas that we can off of mastermind dues, though there are other great masterminds out there that run on a for-profit basis, no knock on anybody, just that's just how we've chosen to run it. And our goal has been to gather the best operators and thinkers about their businesses into one place. We get together every four months. We've been doing it in Baltimore for a while. We also used to do some meetings in Dallas to make it easier on the West Coast folks. But the point is, we've gotten to know each and everyone's, everyone gets very close to each other in the room. The culture is sharing ideas, expressing vulnerability. No one's trying to one up each other. Everyone in the room is a killer. So like, you know, who gives a shit? And really just, you know, kind of share ideas and pain points and, you know, and get feedback from other folks who are operating at a high level. And so we've got. Operators in the room there who are flipping multiple, you know, several hundred houses a year that they're just buying either at through foreclosures or direct mail through wholesalers, the courthouse steps. Got a lot of build to rent operators, folks who have pivoted, who have started in and pivoted to new construction to find greater margins. Wholesaling at a very high level to the to the funds when they were buying in earnest over the past, you know five ten years a lot of folks who are lending what's that craig fuhr (03:52.133) Mm hmm. Multi family guys. Multi family guys. Jack BeVier (03:56.338) Yeah, absolutely. Multifamily geysers also a fair amount of folks who have who do residential, but they also do some other stuff in small commercial. And so they're we know, we'll talk about self storage, we'll talk about what's going on in industrial and flex other interesting opportunities yet to come in the office space. Yeah, it's a bunch of real estate entrepreneurs that have put together great businesses. And we're all there to help each other, you know, just do better. craig fuhr (04:17.538) The thing that... The thing that I've attended and the thing that I thought was fascinating was it wasn't just a room full of wholesalers. It wasn't just a room full of guys who have learned how to do fix and flips. It really is guys who may have started off as a wholesaler or a fix and flipper, but real operators who have learned to pivot to take advantage of opportunities in the market and the cycles. Jack BeVier (04:45.022) Yeah, yeah, absolutely. And at different points in time, we've all got our areas of specialty, just based off of what we like to do and also what the opportunities are in our local markets, right, because, you know, California is massively different than Chicago is massively different than Charlotte. Um, and we've got folks, you know, from all those different kinds of places. But, uh, but anyway, so, um, yeah, I started. craig fuhr (05:08.918) Big takeaways. Jack BeVier (05:10.31) Yeah, I started off by, you know, we kicked off the thing just talking about like kind of the macro economy and, you know, seeing kind of all these different potentially conflicting, right? Like signals that we're getting right now. You've got, you know, you got super pessimists to super optimists right now in the world. And we took a survey of the room and the room was, you know, kind of like it had it had the whole spectrum. craig fuhr (05:27.291) Mm-hmm. Mm. Jack BeVier (05:37.858) of differing views on how the next 12 to 18 months were going to go. And you got people who are doing different kinds of pivots based off of those views. And so, you know, some people are going to be right and some people are going to be less right. And it'll be really interesting to see how that plays out and who's like the, you know, who the relative winners and losers as a result of those predictions. But something that we saw is a lot of pivoting going on right now. And a lot of it started. People started to think about it a year ago in the first quarter, second quarter of this year, really started to execute some pivots. We've done our own, uh, significant pivoting in both the real estate side of things and on the lending side of things, uh, to set ourselves up for what we think is, what we think is coming over the course of the next 12 to 18 months. And you saw a lot of that in the room. Uh, some folks are completely out, just we're not buying anything right now. I'm just going to stack. craig fuhr (06:32.686) Total pencils down. Jack BeVier (06:34.206) Yeah, pencils down, I'm stacking cash and waiting for opportunities. There's going to be blood. Uh, yeah. Other folks who are, who have pivoted from selling build to rent to institutions. Now they're selling a hundred percent to, uh, to real, to retail, you know, just, uh, you know, to homeowners. Um, so they were, you know, they're doing 300 houses a year and they were, they, that used to be six 50 property packages and now it's 300 individual retail sales, right? Like that's easier said than done. That pivot. Um, craig fuhr (07:03.434) big pivot. Jack BeVier (07:04.938) You got a lot of guys who have slowed down in our, in our lending more, uh, right now as a result, because they think that's just a better risk adjusted return for the capital that they want to deploy. Um, and then we've got some guys who think that, Hey, let you know who, who are like ramping up right now, because they think that everyone's wrong and that everyone's leaning back. It's gotten easier to buy, especially over the course of the next last 60 days. We've seen that a bit. Um, and they're leaning into that and saying, Hey, now's the, craig fuhr (07:31.042) Have you? Jack BeVier (07:34.302) Now, all of you guys are scared and I'm jumping in right now and ramping things up. Yes, it's a difficult cost to capital environment, but I'm such a good operator that it doesn't matter and I'm going to build my platform and take market share from the folks in my market while they're all scared and going skiing. So it was really interesting to see the whole spectrum of opinions. pivots in the room. And so that's what that's what we talked about for two and a half days. It was great. craig fuhr (08:09.166) Can I, so in terms of Dominion, you know, one of the largest buyers and owners of residential real estate, I would think, in Maryland, what are you seeing in terms of competition over the last couple months, Jack? Jack BeVier (08:22.622) Yeah, I would say that I think that last year, uh, our cost of acquisition of a property skyrocketed throughout the course of the year, we probably started the year at four grand to as cost of acquisition of a property, whether that's direct mail or paper click or, uh, or, uh, social media ads or, um, buying from other wholesalers. Um, we were probably like the three, $4,000 range. By the end of the year, we were up to like $12,000, $13,000, which is frankly unsustainable in our price point market. The first quarter of 2023, we saw a real big, I would say a seller driven capitulation where sellers were all of a sudden realized, hey, this isn't going to get better soon. And these rates are going to stay high for a long time. And I didn't want to do anything in the third or fourth quarter of 2022, but you know what? I need to sell mom's house. So yeah, let's let it go. And so we saw a lot of activity in the first and second quarter of the year. And then in the third, when interest rates continue to increase, I think a little bit more fear was felt in the economy or about the economy. And we've really seen that transaction volumes continue to decrease. And so our cost of acquisition started really climbing back up. I would say over the past 60 days, I've seen a little bit of not seller capitulation, but competitor capitulation where there are folks who are now investors who are now, hey, you know what? I'm pencils down and I don't think it's the right time. Maybe they saw the rate on that last DSCR loan and they realized that they're paying all their net income to the lender and they're not keeping anything in their pocket and they're going to wait until rates come down where their bank shut them off. which we've been hearing a ton of that, or they're concerned about what value is gonna be, and they think that real estate values are gonna come down because of this high sustained interest rate environment. And so they don't think it's a good time to flip even, because V may come down 10 points, 10, 15 points. And so I think because of that, everyone's probably in general, investors are buying less per capita. Jack BeVier (10:43.862) And the cumulative effect of that and some people are even pencils down and buying nothing. And so the cumulative effect of that is a bit less competition. Now, great, I can get my rental property for a eight cap instead of a seven cap. Well, I'm still paying eight, eight change to the bank. So like, what good does that do me? I think it's a little bit I see a little bit more optimism on the flipping side of things. One thing that craig fuhr (11:04.843) Right. Jack BeVier (11:12.958) Sorry, I'm running on a little bit here, but I just thought of this. One, one thing that, um, struck me about this story, the narrative of the great recession, the wake of the great recession was that real estate values went crashed as if it happened in a month. Look, but that, and it didn't, it didn't happen every month. It happened over the course of four years. But, but you know, the narrative, a lot of folks is that 2008 killed me. craig fuhr (11:14.858) No, no, go ahead. craig fuhr (11:36.054) Yes, it did. Jack BeVier (11:41.534) 2008 didn't kill you. It was the combination of 2007 and then eight and then nine and then 10 that killed you in succession. But if you were a flipper in the in the wake of the Great Recession, and you Yeah, and you were exactly and you had the discipline to take your lumps and move that house and just get and move on to the next one, even if you didn't make what you thought you were going to make. craig fuhr (11:54.566) I was. Jack BeVier (12:07.038) you were absolutely catching a falling knife and that is incredibly difficult thing to do. But if you look at the case Schiller index for real estate values, um, it's not that we had a 40% drop and so it killed everybody. It's that we had a 10% drop and then another 10% drop and then another 10% drop and then a 10% drop year over year, every year, every year. And cumulatively we had a 40% drop. But if you're flipping margins or 20%, which they should be, right. minimally on an annual basis, you can still make money. Not a lot, right? Or maybe you're just treading water after expenses and everything, but that's not what kills you, right? Like if you're disciplined about flipping, if you're disciplined about operating a 20% margin flipping business, even in the wake of the Great Recession, we never saw a year where prices dropped by more than 10% or by more than 15%. And so that didn't kill you. It's the lack of discipline to not just... sell the house where the market clears. Or if you screwed up as an operator and you didn't put out a quality product, that could kill you where the house, just no one wants it because it's not a nice flip. But if you put out a quality flip, even in a down market, you can operate. You can recycle your capital and go buy the next one better and then go buy the next one better and go buy the next one better. I know that's a lot easier said than done, but I'm trying to frame that because craig fuhr (13:08.545) Mm. Jack BeVier (13:34.998) People think that a down or a soft real estate market is an existential threat for flippers and I don't see it that way. I think that you have to put out a great product and you have to be disciplined about not trailing the market down. Take the price drops to just get your cash back and then go back into the as is market and buy something cheap, buy it better next time. But I think that that's still a way to get through. craig fuhr (13:58.399) Yeah. Jack BeVier (14:01.734) softer times like this. And so that's the reason that we're still buying is we're, we're just flipping a lot more than keeping rental. craig fuhr (14:07.022) You know, I think an interesting, that's a great point. And I think I've made it on the show before. It would be really great to go back and sort of look at how wholesale prices of houses, for lack of a better term, sort of decreased significantly over those four years. And so what I found was we could put out a quality product, put it on the market. just like the house next door that had not been rehabbed at all. And houses were still moving very quickly, mainly as a result of a fair lending environment, lots of government incentives. You know, I didn't personally, Jack, I didn't really see any significant downturn in demand during that period. We put out a great product. It was priced right. The thing moved in 14, 21 days. Jack BeVier (14:59.807) Mm-hmm, agree. craig fuhr (15:00.158) every single one of them. And we made phenomenal margins during that 2009 to 2012 time period. It was a, you know, it felt predictable. The environment felt predictable, yet at the same time, you know, every news source, every talking head, every person was telling you how horrible the environment was. That's not what I saw on the ground back then. Certainly not in the Maryland area, in the DMV area, which again, admittedly, we were, you know, We weren't hit nearly as bad as other areas. Baltimore City, yes, but maybe not Maryland at large. So, yeah, exactly. So yeah, I think you make a really great point there. Better operators, buying better, you can overcome the capital constraints at that point. Jack BeVier (15:33.076) Yeah. Jack BeVier (15:37.414) We weren't Phoenix, we weren't, yeah. Jack BeVier (15:51.838) was with I had dinner last night with a group of folks who were active. And one of them is a one of the probably the biggest auctioneer in Maryland of as his properties. And his commentary was that was that as his pricing over the past six months has come down like materially, you know, like a house that was you know, if a shell craig fuhr (16:04.707) Mm. craig fuhr (16:14.327) Oh. Jack BeVier (16:18.198) A shell on the city was going to, you know, sold for 60 grand six months ago. Today it's 30. Um, and that, you know, there's, and at the same time we are seeing some softness in certain price points, uh, and neighborhoods in, in Baltimore. And so there is still some concern, right? Like if you, if you buy a shell and then it takes you, you know, six, nine months to, to get that on the market, you're taking that's, you know, that's a long six months right now, six, nine months right now. Um, so maybe there's just, yeah, exactly. So, um, you know, maybe that's a, just a segment of the market that has that, well, it is particularly high risk. Um, and so that's a function or that's, that's a cause of that significantly decreased as is pricing, but, but that's definitely happening right now. And, um, so folks who bought, you know, if you, if you, if you bought a piece of real estate and you haven't done anything with it yet, you bought it a year ago and you haven't done anything with it yet. craig fuhr (16:48.034) a lot of crystal ball to look into there. Jack BeVier (17:16.682) It hasn't been a good year for as is pricing. I think it's starting to come down and with competitors, I think continuing to get weeded out over the course of the next year, it's gonna be a thinning of the herd, which should though be good for margins for those who are the market's best operators. craig fuhr (17:36.238) agreed. Totally agreed. Hey, let's jump into this quick report here from our buddy, Bill McBride. Bill, we'd love to have you on the show. This was a just a very small piece that he put out called Single Family Rent Results. This was basically it was a little surprising because you know if you kind of you know if you're if you're looking from afar, You would think tough economy, rents are probably going down, you know, some maybe significantly. That's not what we're seeing in this report here. And it says below is a table showing the year over year percent changes in three widely follow rent indexes. They are the apartment list rent index, or the ALRI, the Zillow rent index, and the core logic rent index. And basically what they found Jack was that the only one of them, which was the apartment list, rent index, rent indexed, showed a year over year declined. Other the other two showed that rents have been stable if not increasing. Correct? Are you looking at that? Jack BeVier (18:57.938) Yeah, and the I thought that was really interesting. He pulls the public company data from invitation homes and American homes for rent, which, you know, of course, that's they're not active in all markets. They're in the sunbelt, they're in newer construction. They're institutionally operated. They're very focused on pushing rents, right? Because they're running it like a multifamily REIT as opposed to a mom and pop landlord. So they're a different cut of the market. but their rents are up on average 7% year over year, which I thought was, I mean, that's public data like from of their performance of their internal performance. So that's, it's remarkably bullish. And certainly not what you, not what I expected anyway, to, to see. I think that apartment data makes sense that, that it's the softest side of things that we talked about on the previous episode of concern about multifamily over supply. craig fuhr (19:55.147) Mm-hmm. Jack BeVier (19:55.686) And so though that's going to bleed into the single family space because they are directly competitive products, certainly you're going to see it first in the multifamily competition. Um, and just anecdotally, you know, like anecdotally from the mastermind, like I, you know, I heard folks, certain folks saying like, Hey, yeah, and my market rents are down probably 5%. I mean, they were up 30, but now they're down five from the 30. Um, so we're putting back a little bit of room, you know, craig fuhr (20:23.018) Yeah, I think. Yeah, so I think what the takeaway from this report, which I would point everybody to that, to the calculated risk blog run by Bill McBride, it's just always great info, that rents are clearly decelerating, yet they're still up. Which I think was a bit of a surprise to both of us. Jack BeVier (20:47.218) And again, the X factor I think is the consumer still strong, the consumer still able to pay. Courts are back up and running. So rent court is, you know, a thing again. And I think the X factor is recession, you know, it, but we're also not in a recession yet dot yet. And so what factor does a recessionary environment a weaker jobs market have on rents? Do they flatline? Do they decrease? craig fuhr (21:07.412) Right. Jack BeVier (21:17.502) And of course that's going to be a sub market question to Austin's going to be a very different story than, you know, than Indiana. craig fuhr (21:26.194) Agreed. Let's go through this interesting YouTube video put out by Nick Jury from RE Venture. Nick puts out some interesting content and I just thought this was a fun one to go through, Jack. If we listen to kind of get our feelings and we sort of we only get our news from one source, you know, markets are kind of sideways in terms of price in terms of value, if not declining in most places. You know, Nick put out a list of the 10 top appreciating markets in the country. And in typical prices, right? Fashion jack, I'm gonna go 10 to one. So we'll start with the least and then go to the best. And if I ever do it the opposite way, I need you to call me out on that because no one should ever go one to 10. Jack BeVier (22:22.434) But it's still the top 10, right? Like still the top 10. Okay, so they're all great. Yeah. craig fuhr (22:24.398) Top 10, yes, Jack. It is the top 10. Exactly, so all right, number 10, Knoxville, Tennessee, Jack. Up 1% a month over the past few months, over the past several months. The average home price being about $330,000 in Knoxville, which is still overvalued historically by about 37%. So, Knoxville, Tennessee, number 10, Jack. I would think Knoxville would be benefiting from the fairly large influx of people moving there during COVID and sort of, I think Knoxville has actually been increasing over the past several years in terms of its population. Number nine, San Diego. San Diego still appreciating Jack by seven and a half percent year over year with the average home price for a two one being $900,000 currently. but still appreciating. Number eight, do you wanna have a guess at any of these? Do you wanna throw out a guess at a city that might be on the list? Jack BeVier (23:22.657) wild. Jack BeVier (23:29.414) No, you said San Diego was in the top 10. So I immediately discount my ability to guess what the next one is going to be. I have no idea. craig fuhr (23:37.074) Well, this one's going to blow your mind. I would have thought that most of these would be probably some of the northeastern states or some of the northeastern cities. And then the California, I don't know. But Milwaukee, Wisconsin would have not shown up on my radar, Jack. But that's also up about 7.5% year over year, Milwaukee. Number seven, New Haven, Connecticut. were the, by the way, the home of the greatest pizza in the world. We need to get up there. Average home price in New Haven is about $347,000 and their population is fairly stable there. Number six, Trenton, New Jersey, up 9% year over year. Why are we not investing in Trenton, Jeff? craig fuhr (24:28.418) That's crazy. Jack BeVier (24:28.762) I've I'm, uh, I love and hate these lists. Like they're like totally click bait, but like you put like these, you put those five cities on a, on a list and tell me like, Hey, what are these five cities have in common? And it would not, I would not have guessed that they were positive home price appreciation. craig fuhr (24:32.078) Come on, be the contrarian. craig fuhr (24:49.298) Yeah, well, it only gets better from here. Number five, Savannah, Georgia. Again, Savannah is one of those towns that is constantly increasing in population. Lot of people moving there. There's only 700 houses on the market currently. So incredibly low inventory in Savannah, Georgia. Jack BeVier (25:09.718) How do you explain Trenton? Then how do you explain Trenton? People aren't moving to Trenton. No one's moving to Trenton. craig fuhr (25:13.73) No, they're not. Only the proximity to New York. And I think isn't Princeton there, big college town. A lot of the a lot of in common with this whole list is college towns and military. Big military towns. Yeah, San Diego notwithstanding, right? I'm sorry. So, Savannah, Georgia average price is 317,000, which is still lower than the national average for Jack BeVier (25:24.098) Thank you. Jack BeVier (25:30.568) Okay. craig fuhr (25:42.914) home prices, which makes it a little bit more affordable as well. And I think the wages there are fairly decent. Number four, a town that is much maligned over the past at least 20 years with a lot of companies moving out. Syracuse, New York, up 8.1 percent year over year. And that is one where I'm sorry, inventory historically low with only 700 houses on the market. That was not Savannah. Number three, even more surprising, Rochester, New York. up 8.2% year over year. Rochester. No offense to our friends in Rochester. I don't see it. Number two, Fayetteville, North Carolina, up 9% and up 200% since 2017, but still rising. Jack BeVier (26:17.154) Mm-hmm. Jack BeVier (26:35.678) Oh my God. Wow. craig fuhr (26:42.286) I believe that's home of Fort Bragg, which is now Fort Liberty. And that's about, I think, 60,000 people on that base down there. So no, no shortage of folks that want to live in Fayetteville. And number one, Jack. Any guess? I'll tell you, it's in the northeast. It's north. Jack BeVier (27:03.958) Greatest city in America, Baltimore. Greatest city in America. It it's on the benches. Yeah, it's on the benches. Yeah. craig fuhr (27:09.646) That's what it says on every bench, every park bench. Here we go. Number one, Hartford, Connecticut up 9.2% year over year. Shocking. Jack BeVier (27:22.646) All these Northeast cities, I would have thought that they're definitely not the Northeast cities because the whole conversation for the past 10 years has been about Northeast migration to the South and Southeast. So like Tennessee made sense to me. What's that? craig fuhr (27:28.61) We lost you. Let's take a quick pause. craig fuhr (27:36.578) Jack, start over again with all of these. We lost you. So let's restart where you started to say all of these. Jack BeVier (27:46.506) shoot. All of these are cities that I wouldn't have expected you to say because the past 10 years has been a conversation about home price appreciation driven by domestic migration, right? From the Northeast and blue states down to the South and Southeast. So like Tennessee, sure, like that makes sense to me. North Carolina, that makes sense to me. But you're talking about New Jersey, Connecticut, New York being, you know, having five of the top 10. and San Diego a super high cost per square foot market being on there. That's just, what doesn't fit the narrative that I would have expected you to say. craig fuhr (28:25.802) Well, if you take a town like Milwaukee, Wisconsin, where they've had a net outflow of population for at least 25 years, why would the price of housing be appreciating at seven and a half percent year over year? It's the craziest thing to me. And so I think the... Go ahead. Jack BeVier (28:42.626) Is that, is that just a function of, I mean, maybe it's just a function of like, there's, there's just such little transaction volume happening because everyone in the Northeast refinanced and, and so that no one's putting anything on the market. And while in this six month period, you know, houses, housing prices are up because there is still some demand and just no supply. Is that a trend that is going? Is that a trend or is that just a data point? And if you pull it six months from now, it'll be a completely different list of 10 cities. craig fuhr (29:19.47) I think that's a great question to ask Nick when he comes on the show. Yeah, Nick, is this a blip in the radar? Is this video going to make you cringe six months from now or will it be because it'll be a whole separate set of 10? Or are these actually 10 great cities in America where people, you know, where we could expect more appreciation? I think the, if you listen to the whole video, it's about 16 minutes. Jack BeVier (29:23.506) Awesome. craig fuhr (29:47.902) A lot of this had to do with just a severe lack of inventory in a lot of these towns with still, you know, fair demand. And some of these are actually some of these are still very affordable in terms of, you know, average house price versus wages. So I think that's that makes them a little bit more attractive for folks to be, you know, the influx, right? And then obviously, the proximity to good jobs in terms of military or Yeah, the universities. Jack BeVier (30:21.598) Land constrained environments, land constrained markets too, right? Like they're not handing out permits in anywhere you just said. So I feel like that exacerbates the, the supply, you know, when they're, when there's a favorable slip supply demand dynamic that supports housing price increases, the fact that you can't build any new houses to compete with the existing home sale, the existing home inventory is probably a positive. craig fuhr (30:30.464) I can't think of it. Jack BeVier (30:51.03) uh, factor in, in short-term home price appreciation or long-term home price appreciation. craig fuhr (30:56.97) Yeah, you know, I think too, it kind of speaks to a little bit of what we were saying with regards to the market back during that 2008 through 12 time period where it would be easy to look from afar and say, oh, you know, there's nothing good. There's no bright spots. You know, if I pick up a paper, I turn on the internet, there's just nothing compelling for me to jump into the market as an investor. When in fact, you know, we're looking at 10 markets across the country right now that, yeah, they might be tough to be buying good deals in, but they're still in appreciating environments. And I think to Nick's credit, he also pointed out, he has this great map on RE Venture where it shows sort of the heat and the cold, you know, the top markets in the bad. They're usually defined by some shade of red or some shade of blue. So the dark blue would be... you know, the better markets, the red would be the tougher markets. And so he did mention, you know, some of the tougher areas in the country right now, the toughest hit states are, believe it or not, all out West, the Utah, Arizona, Nevada, Idaho, and Washington state are all, um, some of the toughest markets in the country right now, uh, you know, in terms of depreciating values or, or stagnant values. Yeah. Um, so I thought that was a fun little, uh, exercise to go through. The last thing I wanted to go over today, Jack, was this brief story that I found in business week. There's a lot of talk, you know, is the price of money going up? Is it saying the same for a while? Or will it be going down? And I'm sure that you guys had a chance to talk about where you thought rates would be heading, what the Fed would do. Any discussion like that during RIR, during the Mastermind Jack? Jack BeVier (32:55.114) Yeah, absolutely. And we actually, we probably do it every time. And we referenced that, I think was a year ago, we took a survey of the room, where you thought the prime rate was going to be the prime bank rate was going to be a year from now. And so fast forward to today, and the and it's it, I think it's an eight and a quarter right now, eight and a half. And that was the top the most craig fuhr (33:17.046) Mm-hmm. Jack BeVier (33:22.518) Kind of like, you know, pessimistic view in the room was that number. So the fed has, you know, outshot all of our expectations on, um, what, you know, in terms of, in terms of increasing rates and, um, there's this, there's this resource that I like to refer to. It's a U S treasury, us treasury yield curve.com super nerdy website, right? And all it is, is this cool little app that shows you. what the yield curve looks like. And you can toggle the date and it'll tell you what the yield curve looked like on that date. And so, you can see when the yield curve, you can look back and see, hey, when did the yield curve invert? When do we really start to, do people really start to get concerned about an upcoming recession? And you look at the, if you're a nerd like me and you play with it and you go back in time, what is... The only thing that is true about it is that we've always been wrong. We have been significant. We have been very wrong. And this is like, you know, this, the yield curve is like the compilation of like the best minds and finance and real estate and the, in the economy. Like if you, you know, if you knew better, you can make it about what the yield curve was going to look like. You can make a pure bet and make a lot of money if you're better than everybody else. And that hasn't happened because everyone's been wrong. like and wrong by a lot for the past five, you know, five years. And so, uh, just the shape, the shape just keeps changing where, you know, where, where they thought five year rates were going to be five years ago or nowhere close to where five year rates are, where rates are today, you know, a year ago, what the one year was is nowhere close to what the one, to what, where rates are today. So we, you know, what we were guessing the rates should be, we're just wrong. Um, and, um, craig fuhr (34:57.251) How so? craig fuhr (35:07.988) I see. Jack BeVier (35:20.422) And, you know, that's a big reason as to why the price of mortgage backed securities has decreased significantly. What got the bank, what got a lot of banks into trouble back in the spring was just not having interest rates hedged appropriately. And the yield curve is kind of the expression of all those cumulative bets. So anyway, I say all that to say that I have no idea what rates are going to do in the future. been a fool's errand to try and guess that. And I'm not aware of anyone who has been consistently right about it. Cause what they should have been doing is making, you know, put their money where their mouth is and they'd have been retired by now. craig fuhr (36:03.766) couple episodes ago, I don't remember the exact conversation. But you talked about sort of like, you didn't see any sort of compelling reason for the Fed to be lowering rates anytime soon. You still feel that way? Jack BeVier (36:21.662) Yeah, I have this like, yeah, kind of two thoughts on that. One is that there's the, in this, in the bullish narrative of the economy, there's this logical connection that people make that I don't understand. They take a leap that I don't understand, which is once it's, you know, at some point in the future, once inflation comes down, the federal drop rates, the federal start dropping rates and once the fed starts, starts dropping rates, dot, dot. And I'm like, Whoa, why would, why would the Fed, why is it a foregone conclusion that the Fed is going to drop rates if we don't, if they don't drive us into a recession, where they need, where they're hitting above target levels of unemployment? We're and we're far from that. You know, they're not going, I don't see any reason why they would want to drop rates. If they drop rates, that's like their own, that's their main tool, right? Like, If they don't, if when, when rates were down at 1%, zero, you know, close to, close to zero, they rent, you know, that's their bullets, right? Like they, they don't have any way to affect the economy when rates are low. And so, you know, they had to, they had to start buying mortgage back securities and treasuries and put them, put them on their balance sheet in order to, to be able to do something to try to spur an economy when they had a low interest rate environment. So for them being in a higher interest rate environment is having a full chamber. you know, our full magazine rather of bullets to if we get driven into a recession, actually do something and call it and be able to pull us out of that. So this idea that the Fed wants to drop rates, I just doesn't make any sense to me. So I don't think it's a foregone conclusion. And they've had such a protracted battle against labor. in terms of labor being the driving force in causing inflation, which has been their battle against inflation. I just think that they're going to get rates down to 2% and then make sure they stay there and a little recession is just fine with them. Let's just change the psychology of American labor. Jack BeVier (38:43.254) put labor back into its place, so to speak, because that's the only way that they can then concede 2% inflation on a consistent basis, which is what you know, Powell wants his legacy to be. So for me, this whole this whole jump to next year, the feds going to start dropping rates, unless you think we're in a hard recession and a way overshoot, like, then I don't understand why you would, you know, should include that statement in the in the next sentence. craig fuhr (38:45.698) Mm-hmm. craig fuhr (39:11.678) Yeah, I the Bloomberg or yeah, it was a Bloomberg Businessweek report. Their, their whole conjecture here is yeah, weak economic growth, a slowdown, a significant slowdown. You'll, you may see the fed react. Um, uh, one of the most important reasons for the drop in the interest rate over the, uh, sixties and seventies was the gross, to max gross, to max domestic product expanded at an average of most, almost 4% of year. Jack BeVier (39:11.999) So that's one thing. craig fuhr (39:40.482) thanks to a combination of the swelling workforce in the early part of the period and rapid productivity gains. But by the early 2000s, those forces were petering out. We were offshoring factories and jobs. And in the wake of a global financial crisis, you know, they were, the GDP growth slumped to around 2%, which appears to be exactly where Powell wants it to be, kind of keeping that GDP at roughly 2%. So that's the real question. You know, where is the, will the economy continue to slow to that 2% rate? Jack BeVier (40:20.77) think he wants inflation to be at 2%. He'd love a strong economy. He'd love a 4% growth GDP growth rate as long as prices stay stable. Transcribed by https://otter.ai craig fuhr (40:29.302) Yes, I'm sorry. Correct. So yeah, I mean, I love your love to talk more jack about this theory of there's no real compelling reason for them to do anything with rates currently. And that is there all of the bullets in the chamber. I think you make a really great, great point there. That that that's there. That's what they have to fight. Jack BeVier (40:55.966) Yeah, that's, yeah, that's what they that's what they have to move the needle. They never had a mandate. I think they're I've heard I was just reading stuff that like, you know, my impression is that they are uncomfortable with the amount of both treasuries and mortgage backed securities that is on that are on their balance sheet, the Fed's balance sheet. That was something that they did in the wake of the Great Recession because it was a housing craig fuhr (40:56.182) this economy with. Jack BeVier (41:24.454) market driven recession. And so that was a tactical thing they could do to try to bolster the housing market, get mortgage rates down. So they bought mortgage backed securities. That was never their mandate. They were never supposed to quote unquote supposed to do that. And now they here we are 15 years later and they haven't been able to get them off their balance sheet. I feel I'm under the impression that a number of the board governor or the number of the governors are the FDIC board governors. FDIC. the Fed board governors are uncomfortable with those balance sheet holdings. And so I think they're just going to let them, I don't think they're coming back into that market. You know, I just, I don't think they're going to be a buyer of mortgages for, I don't know, maybe ever again. And so anyway, that, that doesn't give, you know, that that's a huge, they were a huge player. They were, they were, they were a market moving player in mortgage markets and they're out. and I think they're going to stay out. craig fuhr (42:25.002) agreed. So I was just trying to remember. Oh, let me ask you this. What are you excited about right now? What what excites you as an operator in both, you know, single family, buying, you know, in the in the single family, residential business, as well as a lender in the business, what do you what are you excited about? What do you have to look forward to every day, Jack? Jack BeVier (42:50.91) Yeah. So the two. Yeah. You need something, right? Um, I think that, I think that, uh, competition is getting weaker and that's going to lead to a widening in flipping margins over the course of the next year. You're going to have to balance that against falling values or potentially rather potentially falling values. Uh, so not a riskless thing, but if you're a good flipper, and I think we are a good flipper, we are a good operator. as far as flipping houses goes. Um, then I think that that's a, that business will come back. Um, we had it, I mean we had a ton of fun doing that from 2011 to 2018. By 2019 it had gotten extremely competitive and flipping margins got, you know, dropped down to, you know, a razor's edge unless, and then we had a whole bunch now. that got bailed out because of a whole bunch of home price appreciation in 2020 and 2021, which kind of just bailed everybody out. But by 2019, the flipping business had become very, very competitive. And I think that this higher interest rate environment is going to weed out some competition and get back to that you can be a flipper without home price appreciation bailing you out just as a good operator. I like that business. It's fun. We like putting out beautiful product. I like getting deals and I like, we like creating beautiful products. So I'm looking forward to doing more of that business on. Yeah. On the lending side of things. It's really interesting. The market has moved. The market has moved towards balance sheet lenders. So folks lending their own money. You know, first position lenders, craig fuhr (44:27.074) What about as a lender? Jack BeVier (44:44.598) bridge, you know, whether that, you know, bridge lenders or DSCR, if you want to hold paper, if you're able to hold paper for 30 years, no one is right. Like that's just an institutional thing, but they're charging like really high rates. They're getting paid very well to, to lend secured by real estate, which I think is a great bet on the bridge loan side. So it was like a private lender is a, a fix and flip lender. Um, those rates are up back to where they were, you know, seven, eight years ago. And, um, and now what Now, what hasn't favored is if you want to grow your lending business, though, it's really hard to grow your lending business right now, because then you have to use other people's money and other people's money is very expensive right now. So, yeah, I can. There's lots of people who would love to lend us money at nine, 10 percent. But we're not lending at 14 and four or, you know, 13 and three. we're trying to like lend to the best operators who are still in 11 and two, 12 and two market. Um, and some folks lower than that, even still, some competitors lower than that even still. So there's not, you can't make very much money borrowing money from other people at 10% and then lending it out at 11 and two. Um, but if you're just lending your money, I think you can do, um, you know, you can get a very safe 11 and two, 12 and two. Uh, you know, an unlevered, you know, 13, 14% on your money is, is I think very attractive. So lending our own money and I think a pivot towards flipping. That's kind of what we're doing right now. craig fuhr (46:25.39) Hmm. What how much of the talk at the real the real investor roundtable centered around capital finding better sources of capital, things like that. Jack BeVier (46:36.574) Yeah, defining better sources of capital is a toughie right now. I think that there's a, I think that there is a shift back towards private the private lending market. Like, you know, like barring from friends and family and just folks that you'd meet and having private corporate debt, um, secured or unsecured, you know, just depending on your deal. I think that's become a much more interesting and much more important part of real estate investors, balance sheets. If you're not, if you don't have some friends and family or at least just, you know, like rich doctor guy that you met and he likes you money on your balance sheet. I think it's a mistake because it's sticky and it hasn't moved up in price that much. Like two years ago, you borrowed that money at 10%. Today, you borrowed that money at what 11, you know, like interest rates are up 500 basis points, but the cost of private capital is up like a hundred maybe. Um, and so that's, you know, it's, it's very attractive from the borrower's perspective relative to everybody else, you know, like the bank will lend you money, but they're like, the bank might lend you money rather, but they want, they're going to lend you money at eight and a half, 9%. Your private lender makes it a little bit easier, but they're going to charge, you know, 13, 14. Um, but you're, you know, but your rich uncle still charge you 10 and with like very little strings attached, that's, that seems like good money right now. Uh, so I think that people are borrowing more private money and I think that real estate investors should continue to, uh, to look for opportunities to add private lending, uh, to their own balance sheet. And you know, if you, if you're self-respecting real estate investor and you can't deploy capital above a 10 in this world, uh, you know, I don't know what to tell you, you know, I can't help you, but, um, craig fuhr (48:05.899) Yeah. Jack BeVier (48:30.186) I think you can find good loans at 12 and two. So like take the money on it, 10, lend it out at 12 and two. And then if you want to use it for your projects, you know, sell that bridge loan off it, sell that bridge loan to Torac or somebody. And, um, and then you've got that 10% money to do what you want to do with the interesting deals that are going to present themselves over the course of the next 12 months. So I think it's like build up the balance sheet a little bit, and then like be patient with an opportunistic guy. craig fuhr (48:53.326) Do you feel, do you? Jack BeVier (48:58.966) That's kind of, that's us right now. craig fuhr (49:00.83) Yeah, that's the final question would be, do you feel like there's just that that's what a lot of the better guys are out there doing just findings finding as much capital at good prices right now? Jack BeVier (49:10.97) There's definitely a segment, I would say, of the operators. That's a theme, I would say, in the higher volume operators that we were hanging out with. Depending on, though, the caveat to that being, depending on how good or bad you think the next 12 months are gonna be from an economic point of view, people are either doing a lot of that or just a little bit of that. But yeah, that's definitely a theme. craig fuhr (49:37.902) Okay. Well, dude, that's all I've got for today. You have anything else you want to add? Jack BeVier (49:41.086) No, man. Good discussion. Great to see you. Looking forward to, uh, looking forward to the next one. And, uh, as always enjoy the conversation. craig fuhr (49:50.11) Yeah, thanks everybody for tuning in. We love your comments below or anywhere where you can comment. Love to hear from you. I need to start checking out the comments a little bit more for folks that are chiming in. We'd love to hear from you. This has been Real Investor Radio. I'm Craig Fuhr with Jack BeVier. Thanks for tuning in. We'll talk to you again soon.