Be fearful when others are greedy and be greedy when others are fearful with Jerry Miller - REIA 479

Welcome to Real Estate Investing Abundance, the show for busy, fulfilled professionals like you to learn how to develop financial independence built on solid passive real estate investments. Now, here is your host, Dr. Allen Lomax.

Hello, enlightened investors. Welcome back to Real Estate Investing Abundance. I'm your host, Dr. Allen. As always, it is a delight to have you with us, and today we are diving into an interesting topic as we are going to be looking at what Warren Buffett has to say about being fearful when others are greedy and being greedy when others are fearful. We are all in on real estate today. And today's guest is a single-family investor, limited partner investor, general partner on several deals for both value-add and ground-up development, and most recently has served as fund manager. He hasn't done it all, but he's done a whole lot and has partnered very well in the areas where he lacks. And with us today is a returning guest. Jerry Miller, and you can find Jerry's previous episode at number 379. So welcome back, Jerry. I'm so glad to have you back with us and to have a moment to share with you about what's been going on with you for the last year and a half, 2 years. So let's just dive into it, Jerry, and tell us, how can we apply Warren Buffett's quote To the current market.

Absolutely. Well, good morning, Alan.

It is great to be back.

So I love Warren Buffett's quote here because it really— it's kind of a contrarian point of view, right?

When you see that the herd is sort of comfortable and greedy, the reason why you should be fearful is because at that point, people no longer are evaluating deals on an individual basis. They just see that a lot of people are moving in one direction. So, hey, that must be good.

And that actually is really the opposite often of finding good deals in real estate. And so I think we're on the flip side of that, which is to be greedy when others are fearful. I think what we're seeing right now is, you know, multifamily is probably one of the dominant investor classes. There are certainly many asset classes, and it's kind of important to dial in which asset class are you talking about, which demographic, you know, which market. There's, you know, You can't just say real estate is doing bad or it's doing good. There's no such animal. It's, it's a property in a particular place of a particular class, you know, with a particular asset strategy. And so I honestly think that the damage was sort of done to multifamily, right? So interest rates had a historic increase. And it's not that they're at 7%.

That's the average for the last 40 years.

It's that they went from, you know, 3% to 7% in such a short amount of time that people's underwriting models didn't have a chance to adjust.

Mm-hmm.

Right.

So deals that we're doing today, they do have a lower cash-on-cash return in the beginning.

That, that's fine. The cost of capital is a factor. It is, you know, reducing net income.

But you're going in with your eyes open.

You're evaluating the deal based on that higher cost of capital.

And so I think many people are still saying, oh, well, interest rates are high, so the market must be bad.

So they're fearful.

But the reality is that I think the fear is sort of behind us.

So I think we're in the stage of the market having decent deals out there, but people are still fearful about them. And so there are opportunities out there.

So can you give us an example, Jerry, of how How we can be greedy when others are fearful?

Well, I think in really 2 ways, right? If you talk about the general partner or you talk about the limited partner, I'm sure most of the folks on your show are probably investing as limited partners. And so an example might be to— so take a step back and sort of dial down the noise on the fearfulness and try and look at the fundamentals. The numbers, you know, have a way of cutting through the, oh, I'm concerned about this, I'm concerned about that. You know, when we're underwriting deals, and we're in both land development now and multifamily, so it's 2 very different asset classes, it's 2 very different types of projects. You know, we do, we really do look at the numbers and we try and dial down the noise of what we hear and see around us because on an individual deal, there's the cost to, you know, let's say develop the land, There's the exits that, you know, where can we make money?

When can we sell? How much can we sell for? That type of thing.

And so looking at a red flag, we always translate what is that going to cost us to overcome, right?

If there's something that's a negative and the cost to overcome it is minimal, but the profit on the other side of it is great, well then we're willing to pull the trigger on that.

And vice versa, if something's only a yellow flag, but it's going to be very expensive to overcome, well, then it actually becomes more of a red flag because it has such an impact on the overriding underwriting model.

So I think what particularly a lot of passive investors are seeing, you had already mentioned that the cash-on-cash returns are lower today than what they probably were 2 years ago. Whereas 2 years ago, it really wasn't uncommon to see a cash-on-cash— a preferred cash-on-cash return of anywhere from 8% to 10%. Today, what I'm seeing is 6% to 7% preferred returns. So from a limited partner's perspective, that's an increase of anywhere from 1% to 2% returns for them. How should they be looking at that from a perspective of really evaluating the deals today and really deciding whether or not real estate investment is still the place for them to be?

Wow. Well, that's a deep question, but we can sort of attack that head-on.

You know, first of all, I think when you look at a syndication, you have to be balanced about— the cash-on-cash is not the only metric.

I mean, most folks that I work with that are investing in syndications are really looking for that at-exit appreciation.

Right?

Double your money in 4 or 5 years. You know, to my knowledge, there aren't other, you know, ways, other investments that you can do that. You know, the stock market is, I suppose, you know, good for a 20-something that, you know, has got a 401 and, you know, at $100 a month or $200 a month, you know, a 401 is probably a very effective vehicle. I mean, for me personally, when I was approaching 50, I was looking at my 401 realizing I'm not going to get to a comfortable retirement continuing to do what I'm doing. And that's what sort of pushed me to look into other investments that have a higher rate of return.

And that's, that's where I, I really got excited about, uh, real estate. And so to your point, each investor is different in terms of their investment horizon, their, their risk tolerance. So I, I, I, I think the right answer is you have to have an understanding of how the syndication fits into a balanced portfolio. I mean, I would not recommend anybody go all in on any one type of investment or asset class because, you know, I think the rules of diversification do apply that you should balance your portfolio.

And that's probably a deeper conversation with each individual, what is best for them.

But I, but I do think you can't look at any one metric, but you have to look at the sum of all of the metrics and how they fit into your portfolio.

Well, in today's market, where do you see that particularly— we're really focused on limited partners here— where are limited partners going to invest in this particular market?

So I think there are opportunities in land development. I still like multifamily. I know that it's been a little bit dragged through the mud because we've seen a couple of operators struggle with a few deals. You know, a handful of deals have gone back to the bank. You know, I saw a statistic probably about a month ago that, you know, something dramatic about how defaults had doubled.

And I thought, well, that's interesting because they happened to take the metric on defaults. It might have been 2 years ago where the default rate was the lowest it's ever been in the history of ever being recorded. And they said, hey, it doubled.

And I just thought, well, okay, so are we intentionally manipulating the numbers so that we can say doubled? Because the default rate is still at a historic low.

In fact, multifamily, if you look at the worst of the worst recessions, I mean, 2008, it was the worst numbers in terms of drops in default rates.

You know, multifamily still barely got over a 1% default rate. And I think that really is, is really telling.

You know, 1% is 1 in 100, you know, whereas I think single families hit a whopping like 12% at one point in, in 2008.

So I think you just have to have a balanced view when, when you hear somebody quote numbers, lean in a little bit, look for yourself, look for the last 20 years. Right.

I mean, don't look at a month or a single data point, but look at 20 years. I see a lot of manipulation. When you watch numbers on a regular basis, you'll see a lot of manipulation.

You'll see a lot of spin. Hey, we're in a, we're in a presidential year, you're going to see a lot of spin. The one side is going to say it's all good. And the one side is going to say it's all bad. They're both kind of right. They're choosing the metrics that they want to tell a story with.

But if you look at both sets of metrics, you have a much more balanced view of what is really going on.

So I would, I think my advice to your listeners is really, don't take a single data point. We never do that. You know, as underwriters, we certainly look, we try and look at everything, but then we try and weight what's the most important to us. And that's not usually the same.

Even in similar deals, we've looked at buying properties virtually next door, and it's never exactly the same. It's a different market, there's a different goal. It's not just rinse and repeat, I guess I should say.

Absolutely, and you're— and you're talking about data manipulation, it reminds me of an incident that actually really happened in Britain. The news media outlets were reporting on, on a birth control pill, and they reported that with this particular pill, the incident of heart failure because of This particular pill had doubled, and what they failed to report— they were actually telling the truth, and they do this all the time in the media, they tell this little bit of truth— actually, it had doubled, but they were looking at a sample of 100,000 women, and it had gone from 0.1% to 2% rate, and so to a 0.2% rate there. So it doubled, but it was insignificant.

Yep.

And yet it actually caused an increase in birth rates in Britain for a couple of years following the reporting on that. So data is important, And we need to really look at it from the true perspectives of what the data is actually really saying there. So, you've been talking about land development. That entails a whole lot of different perspectives and really different classes and what have you. So, what is it that you are doing in land development?

Sure, Allen. So, we at Largo Group, we have a— we have what we call a debt fund, and basically what that is, is, is we allow investors to, you know, invest into that debt fund and then we turn around and we loan it to land developers. Your listeners may not know that land developers typically pay what we call hard money interest rates. We're talking 14, 16, 18% plus points to develop their land. And, you know, I think some people that are not in the business are like, well, hey, if you're, you know, if you're making all this money in real estate, why don't you just fund your own deals? And the answer is you can't scale like that. I mean, even wealthy individuals are going to be tapped out of their own resources very, very quickly.

If you want to manage, you know, multiple projects all at the same time, you have to do it by, by having lines of credit and, and other sources of money. And so having had a number of, of land developer friends, I actually, I, I did my first deal helping a, a land developer just develop a couple of duplexes outta, outta Dallas, you know, and I found an investor for him and, and it was just a single, single deal and, And honestly, I really did it to help a friend.

But then I had another land developer friend that was like, hey, can you do that for me? And we, we looked at it and we were like, hey, he's in, he's in Charlotte.

And I was like, hey, this is, this has an opportunity here for a business opportunity. I can turn around and give my investors a very attractive rate of return in terms of a quarterly payout. And, and their, their, their principal is actually backed by the debt, typically on raw land, but it can be on anything that, that the developer happens to own.

And so it's, it's been a neat model. We, we launched that fund in January of this year. I call it the Goldilocks fund because I really do think it's the perfect balance of risk and reward for the relatively new commercial investor.

And really what I've found is I've found some very sophisticated investors that also like it because it's a little bit like the bonds are sort of a protection against equities in the stock market. It's exactly the same model. If you have significant resources invested in equities, I've got several people that are very interested in the debt side of that, and we can talk briefly about the capital stack, that there are lots of positions that are equity-based that if you are in an equity position and for whatever reason that deal goes sideways, you could literally lose all of your principal.

And I don't think a lot of people fully understood that until it happened.

And then once it happened, people are saying things like, well, how could this ever happen?

Well, it happened because you didn't really slow down.

Let's go back to our quote.

Our quote. You were, you were, you were greedy, you know, and maybe you should have been a little bit more fearful, right?

Because everybody was moving in the same direction.

They weren't slowing down and truly evaluating the what if it is only 1 in 100 chance that you're going to lose your full principal?

Well, the problem is when that number hits, right, it hits and it hits hard. And so, you know, I do encourage folks to diversify in their different asset classes. I do like land development.

I mean, we have Depending, I mean, you could go back to the numbers, depending on how many numbers you look at, we have a significant shortage of housing in this country. That is going to be, you know, that's gonna be a reality, I think, for the near and known future. I don't think I'm going to live long enough to outdo that housing shortage.

And so I think land development is a natural place where you can invest and expect to see a very decent return.

Enlightened Investors, if you haven't done so already, be sure and click that like button and also click that share so others can take advantage of the content. And finally, be sure to subscribe so you don't miss a single one of our upcoming episodes. We are talking today with Jerry Miller, and he is with Largo Group, uh, 2011. You can find Jerry at largogroup2011.com. And Jerry, you have some things for our guests, free ebooks. So tell us about what you have to offer there.

Well, absolutely, Allen. We've actually written a few ebooks over the years. I've had a lot of people ask me, you know, my story. How did I get into real estate? I was a single-family guy. Once I was exposed to commercial, I really haven't gone back.

I still actually own my single-family portfolios, but All of my new activity is in commercial.

And so we went backwards and wrote an ebook on, you know, an overview of syndications.

I've actually got another one on, on what I call The Ultimate Guide to Underwriting. Underwriting is a significant part of understanding how does that asset actually produce a profit. In general, I feel like I try and educate investors before they invest on 2 very important things.

How does the deal make money? And how does it—

and how does the deal lose money? If you understand those 2 sides, then you can evaluate how well does that fit into your, you know, risk-reward profile, and, you know, does this investment fit into your overall strategy?

And I actually really enjoy helping my investors think through because some of my investors, I put them in the gambler category. They think everything is going to hit its target, and I like to remind them, well, That may be true, but you just need to be prepared.

If you're going to swing for the fences, you need to be prepared to strike out and make sure that doesn't cripple, you know, your retirement or your financial plan.

And the other side is true. I have some incredibly conservative folks, and I just ask them, can you really afford that strategy? You know, is a low percent return going to be enough to overcome inflation and actually provide for anything in retirement?

Because usually the answer is no.

You have to have a very large portfolio to live with a low return. And so I'm sorry I didn't answer your question directly. We do have a number of different ebooks.

If you go to my website, I think the one we have up there right now we call Stacking the Benjamins, which is really a breakdown of the capital stack and understanding a little bit more about debt and equity positions. We like our investors to understand that detail, and we actually do have investments on both sides of that spectrum. So really, our goal is to help align to what the investor is looking for. I'm not trying to tell investors what to invest in. I try and lean into what they're looking for, and then we can align them with an investment that we think is going to be, you know, consistent with their investment goals.

Well, you just mentioned, Jerry, the word capital stack. So what is a capital stack, and Why is that important for us as investors?

Great question, Allen. So the capital stack is just the full amount of money that it takes to do any deal.

Let's, you know, we can talk about land development and land development. It's pretty straightforward. You've got to, you got to buy the land, although usually in the commercial side, usually land is bought on an option, meaning that, hey, I'll give you $50,000 to lock up buying this land for, say, 3 years.

And in 12 months, I'm going to give you, you know, $3 million, whatever you're asking price might've been. And then within that year, we go off and we get entitlement, which is just all the permits, all the approvals. If there's any land zoning, you, you basically want to fully entitle the land before you're gonna close.

And the reason why is cuz then you can go to a bank and say, hey, Mr.

Bank, I've got this entitled land and now I'd like to borrow money against building on it.

So, you know, typical permitting costs and, and everything to get entitlement.

could be $200,000, $300,000, $400,000 depending on exactly what you're doing. And so that's the capital stack is let's say that $400,000 to get there. And so as an operator, you look at that and you say, well, I can, you know, I can borrow, I've got X dollars of my own resources, I've got this money left over from the last project. Like you're just putting together all of your money and we break that money down into debt sources, which is, you know, notes against land or other assets versus equity, which is people that are giving you money to participate in the return that you're going to create. And so that at a high level, those are the two sides, but there's, there's a hundred flavors in between. There's, there's hybrids that, that, that— well, let's just put it this way, that it's not as black and white as I'm describing it. For any particular deal, we, we do get creative Creative financing is one of the things that I really enjoy about commercial real estate because you can, you can meet the needs of your investors, you can meet the needs of your projects, and it's kind of fun that you're not doing the exact same thing every single time.

Well, this is a big question, but you've alluded to it, but how do we decide what is the right investment for us in this particular market?

Well, I mean, it goes back to the individual investor.

I mean, I can speak to what I'm looking for. I'm always looking for, you know, rates of return are very high on my list. But then I also have to marry that to risk. There are opportunities like in land development where I feel like the risk is much lower because there is so much demand for new housing, you know, and let's get even more specific within land development, we see 2 types of projects that are completely different. And yet, There's sort of 2 different spectrums that we go after.

Right now, we're looking at development of what I would call entry-level housing.

So these are condos and townhouses typically near like downtown, you know, 2, 3, 5 miles outside of downtown environments. So the attraction there is people aren't doing the long commutes. So we call that infill. So you find a 10-acre lot that maybe it's a teardown, maybe we bought something that—

The really big boys are buying malls and tearing them down and building multifamily. Uh, we're not quite there yet.

Uh, I think our last project was, was more like 10 acres.

Mm-hmm.

Um, very close to, uh, Charlotte, uh, North Carolina.

Uh, they, interestingly enough, they call their downtown Uptown.

Uh, so it's very close to Uptown. So we anticipate that for the entry-level buyer, it would be very desirable for them to, you know, live and, and, and work in a, in a fairly close proximity. Uh, Charlotte is still a, a metro area that doesn't do a tremendous amount of remote working that we've seen in other metros. And so close proximity to uptown is of greater importance.

Mm-hmm. The other end of the spectrum is the high-end custom homes. Believe it or not, Allen, the, you know, the $1.5 to $2 million homes, both were in Dallas and Charlotte.

They are flying off the shelves, so to speak. I mean, it was part of a project that was it 19 lots?

Only 4 of the lots could support a basement.

Mm-hmm.

And those 4 lots, they were asking for a $100,000 deposit.

And all 4 sold out the weekend that they went live. Like they, they didn't even have, you know, they had a trailer there with like the architectural renderings of what they thought the houses would be.

Now, granted, that was right in the middle of one of the—

it's, it's, it's in Marvin, North Carolina, which is South Charlotte. It's one of the nicest neighborhoods. It's the best school district.

It's an extremely desirable area.

But the point is, if you build in very desirable areas, there are still people out there, you know, with money that are buying these high-end homes. And so our land development has typically focused—

and there are some one-offs— but typically focused on one of those 2 extremes. And each of those projects looks extremely different. So, I mean, back to your point of, you know, where do people want to invest? Well, Some people like investing in the average, you know, starter homes.

They feel good about that.

Other people love the luxury of the high-end homes. It really— I don't know that there's one place to invest.

I think the important thing is if you invested, you know, in a multifamily, you know, 6 months ago and you've got a little bit of money to invest again, I would encourage folks to look at something other than what they've always done. You know, don't pick the same asset class in the same city with the same operator. That has a way of like if there is something negative in that space, it's going to impact your entire portfolio. But instead look for things that are, that are potentially going to balance each other out. And so that's that, that again, it's a very individual conversation. But I would say that there are deals out there even now with the higher interest rates. And so not to be fearful about a particular metric, i.e., the interest rate.

Well, Enlightened Investors, we have been talking with Jerry Miller today. And so, Jerry, thank you so much for being with us and sharing your experience and your wisdom with us. Enlightened Investors, I look forward to being with you in our next episode.

Thanks, Allen. Great to be here.

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