The Economic Outlook for Multifamily in 2024 with Travis Watts REIA 470

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's your host, Dr. Allen Lomax.

Hello, enlightened investors. Welcome back to Real Estate Investing Abundance. I'm your host, Dr. Allen. And it is a delight to have you with us again today as we look at money matters and how we can unlock financial freedom with passive investors. And with us today is an expert on that topic. Travis Watts is a full-time investor, passive income advocate, public speaker, and the Director of Investor Development at Ashcroft Capital. He dedicates his time to educating investors who are to be hands-off when it comes to real estate investing. Travis was awarded the Linda's Legacy Industry Impact Award in 2022. And Travis is a veteran of Real Estate Investing Abundance. He was with us about 2 and a half years ago, and you can find his episode at 19. So, he was an early, early guest with us on Real Estate Investing Abundance. So, welcome back, Travis. Delighted you're with us again today. So, let's start off. Let's just talk about the economic outlook for multifamily in 2024.

Hey, Allen, thanks so much for the invite back to the show. Thrilled to be here with you and your audience. Yeah, that's a great topic to start out with. Let's dive in. So a lot's changed. We were just joking before the show. You know, the last 2 and a half years, it's a whole different landscape today. So what I started doing about 2 years ago, when the Fed came in to start lifting rates, is I started every quarter with Ashcroft Capital for our investors, I started pulling sources of data from reputable national sources like CBRE, Marcus& Millichap, Urban Land Institute, US Census Bureau, and many more, so that I could help articulate to our investors what's going on economically, where we're at at this moment, and kind of what the forward-looking forecast is from here on out. That's been extremely helpful, not only for my own knowledge and keeping a pulse on what's going on, but obviously to add value to others. So what's changed, you know, from a high level, and I'm sure you've, you've spoke about this on your show to all your guests, but, you know, as interest rates have gone up, valuations have come down. I'm primarily an investor in multifamily private placements and syndications right now. And for the last, I don't know, 6 to 9 months, we've been seeing roughly 25%, uh, pricing discounts relative to, let's say, 2021 pricing or early '22 pricing. Office has been hit even harder, uh, in some markets and others are actually performing well. It's kind of a mixed bag. And of course, there's many other sectors that we could focus on. But basically, prices are down, rates are up. It's less affordable for the next buyer with a 6% or 7% loan compared to a 3% loan, obviously. So to that point, the Fed's pretty much signaled, you know, they're at near the top basically of this rate hike cycle. And now all the focus is on when are you going to cut rates? How soon? How much? I don't have a crystal ball. No one really knows. But I like to look at— All the sources that are forward-looking. And the good news is pretty much every source out there is forecasting cuts over the next 2 years. Okay. Do they start this year? Do they start in '25? Do we have a recession and they cut even faster and sooner than we expect? I don't have the answer to that. But it's good news for buy the dip. If you're getting into the space right now, into new deals, it could possibly be a better outcome than what we've seen in years prior. So, I jumped in in 2015 as a full-time limited partner across the board with a lot of operators. And, you know, rates were 3% and 4%, kind of up and down up until early '22. And so, you know, a lot of the past performance was, was pretty healthy, you know, I'd say 15% to 25% IRRs and things like that, depending on the deals. And that was with rates being pretty stagnant. And the same. So if you can get a deal at, let's call it a 25% discount today, and it cash flows at, say, a 6% or 7% loan, what happens if rates come down 200 basis points or 2%? You know, you could refinance early, you could increase distributions, you might sell the deal early and not have to finish the whole hold period on it. So I'm very, very bullish in this window of opportunity that we have, which again, I don't have a crystal ball, but let's just call it 2024 in general. And you're already starting to see a lot of these huge institutional players jump back in. The biggest news being Blackstone a couple of weeks ago, putting $10 billion into the multifamily income REIT that they're acquiring. And they've been buying up residential single-family, adding 38,000 homes to their portfolio. You've got JP Morgan doing a joint venture with $1 billion of capital coming into the residential space. You've got Jeff Bezos coming in and backing a real estate company that's also buying residential single-family. So big, big money finally starting to enter the space mostly here in 2024. I think that could be one of the biggest signals for it's time to jump back in. And this dip could be you know, doing away with itself over the next 6 to 9 months. So, that's my opinion based on the data and research I do every quarter.

So, if I understand you correctly, it really is a relatively small window of opportunity. 9 months in the multifamily space is a very, very short period of time, as it not infrequently can take anywhere from 4 to 6 months to close. A deal, right? So, correct. Uh, so that's a really small window, uh, that, uh, that people need to be looking into. Well, are you finding— you said that there's, uh, 25%, uh, price discounts. Are you finding a lot of opportunities, uh, in that range?

Here's the issue that we've had ever since rates started going up, and it makes a lot of sense, but sellers being hesitant to discount to the degree of 20%, 25% if they also believe that rates are going to come back down in the next year or 2. You know, if you're in a position to hold and you can do so, then I think that's the game everyone's trying to play. The deals are coming from distressed assets that maybe were overleveraged or mismanaged or, you know, inadequate debt structure, you know, and some are none of those situations at all. They're from institutions that by obligation they need to sell. And, you know, that's how we picked up 2 deals over the last year was they— it was a big institution closing out a big fund of theirs. And they were down to the last 2 deals. And in order to close the fund, they had to sell. And, you know, the way that rates are and the economy is, they had to get real with their pricing and say, okay, you know, if it's a 25% dip, that's what it is. We got to get rid of these. And so, That's where the opportunities are coming from. We've got a lot of this floating rate debt, bridge loans, all this kind of stuff that's, that's coming due for a reset. You know, some, some groups are rebuying their rate caps, and others are trying to do refinances. But those that aren't going to be able to make either of those work are either faced with, you know, pause distribution, capital calls, or forced sales. And the forced sale is where these discounts are arising. So, you know, past deals, it's time to hold and wait for a better, stronger economy. New deals, great opportunity to buy the dip. But to get right to the answer to your question, deal flow is, you know, I read different stats, but it's basically down in layman's terms, 60% to 70% from years prior, meaning there's not that many deals that are transacting. There's more starting to pick up. But in the last 2 years, there's been very, very little. So we've done, as an example, 3 deals over the last, say, year and a half, whereas in 2021, we did 8 deals, and '22, we did 7 deals. And in years prior, it was kind of similar to those metrics. So far less than what we've seen. But hopefully things start to rebound and are just around the corner. You know, Joe Fairless, our GP at Ashcroft, is— I was listening to his keynote speech at his conference last week. It's, you know, we're in the midst of winter, and spring's right around the corner. And, you know, it's the seasonality of how things work. So you can, you can Google, you know, things like 2008 through 2010, and kind of what happened to multifamily. And you'll see, I mean, usually you have this long bull run, you know, call it 10 years on average, that's not an exact science. And then you've got a short-lived bear market that could be 1 or 2 years. And that was certainly the case from the Great Recession. Everybody was affected and values were down and all that, that stuff. But the rebound happened in a little under 2 years from taking a hard hit to bouncing back. So I think that's about where we are right now, if I had to have a crystal ball.

So you basically have been living on passive income for a number of years. So tell us about FIRE. in real estate? And what is FIRE?

Yeah, FIRE is an acronym, Financial Independence, Retire Early. Most people that are part of this, if you want to call it a movement, which got really popular after the Great Recession, are— they're mostly stock investors. And so I'll paint the picture from that angle first, and then I'll shift it over to real estate. So if you're a stock investor, the easy formula, quote unquote, is that you have a a high-paying job. Ideally, you save as much money as you can save. We're talking about a 50% to 70% savings rate if possible. So there's a lot of minimalism within this movement and a lot of frugality and just cutting your expenses and cutting your budget and having roommates and just how do you, how do you cut to the bottom line. And then you stockpile into, let's say, index funds that are, you know, the total stock market index or the S&P or whatever. And you accumulate a nest egg of a portfolio, we'll call it, let's say, $1 million for simple math over time. Say you're in your mid-30s, mid-40s, somewhere in that range. And you say, okay, I'm going to start withdrawing 4% a year from my portfolio to live on. So that gives you $40,000. And the theory behind that is that the stock market on average does, let's call it 8% or 9% annually over the last 100 years of data. So, you're leaving a margin by only pulling 4% for inflation and volatility and down markets. And so, you know, you should statistically be able to sustain yourself on that kind of income for the long haul. So, it's this whole movement about, I'm going to hit it hard when I'm young, retire early, and just kind of live a minimalistic type of lifestyle, right?

Mm-hmm.

So, on the real estate side, I've done some of these things. I'm not an advocate of all of what I just mentioned. I certainly did the, you know, your highest and best earning potential. I worked in oil and gas, I flipped houses, I lived like I was a college student, you know, with roommates and stuff for many years, but not forever, right? That's something important to remember, just a period of time, 5, 10 years maybe. And I was putting that into real estate and other cash flow and passive income producing assets. And that's the difference between the index funds, right?

Mm-hmm.

I had cash flow and passive income. So my theory was, I created what's called the 8% rule. And it's that I was averaging about an 8% yield in my portfolio, some deals doing less and some deals doing more, but on average, 8%. I live or I can live on the 8% of distributions without selling the golden goose without tapping into that original investment that's getting preserved in the real estate mostly, or whatever I'm investing in. And so when I have equity happen, so when I invest $100K and it turns into $200K because the property went up in value over a series of years, then I paid my taxes and I catch up on my lifestyle things and upgrades I need to make. I'll, you know, upgrade my car, my clothing, or whatever it is, you know. And I don't— I just don't count on the equity upside personally. It's always been there in my experience, but I just don't project for it and say, I'm going to double money every 5 years. If it happens, awesome. If it doesn't, fine. I'm living on the cash flow. So with all of that, you know, if you think about it, you know, 4% rule versus 8% rule, you can get there twice as fast. So I started thinking about investing like, okay, if I need $100,000 per year to cover my lifestyle, just again, a simple math example. I need $1.25 million invested with an 8% annualized return to generate $100,000 per year to live on. And so, it's a totally different way of thinking. The reason I think a lot of people don't tune into messages like that is that they're maxing out a 401 and an IRA, and they're setting their sights on 65's retirement and Social Security. And I can't touch these accounts till I'm 59 and a half. So there's not a lot of emphasis on the here and now and enhancing lifestyle throughout your working career. It's all about one day, you know, things will be good, hopefully. So that's how I've established it.

Okay. 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. Well, thanks. Thank you for that explanation. Very simple and straightforward, easy to understand. So thank you. I need those kind of things. So, so you have, uh, you were with Best Ever Podcast for quite some time, and you have retired from that, and you, uh, in conjunction with that, you've released a new book. So Why did you retire? And what's the story behind that? And what's with the new book?

Yeah, it's a great question. So this has been one of the biggest ways I've been giving back over the last 5 years is I talked to Joe Fairless, Best Ever Real Estate Investing Advice podcast, longest daily running real estate podcast in the world. And he was at a point where he's getting a little overwhelmed being a general partner and doing a daily running podcast and doing investor relations and all this kind of stuff. So I came on board with him at Ashcroft Capital in 2019 after being an investor as a limited partner for a number of years. And one of the initiatives I wanted to tackle was getting the education out to others about what real estate private placements are and what syndications are and living on passive income and all this kind of stuff. So I created first a segment called the Actively Passive Investing Show. Which was about the active and passive components to investing in real estate. And then the latter episode, the one I just concluded, was called Passive Investor Tips. They're very short, consolidated episodes, 5 to 10 minutes in length. And it was just getting right to the point. Here's the tip, trick, strategy, formula. Here's why it's important. Here's how you can utilize it and how it can help you. I turned that into a book at the conclusion last week, actually, of the podcast. To be an ongoing resource for people, you know, having a physical book they can give to other people. I'm donating all the profits back to the Best Ever brand to help grow and expand that community. And it's just kind of been some charity work that I've done for 5 years. And the reason I'm stepping down from it is because my segments were solo podcasts. So it was just me and sharing insights and knowledge. And so Naturally, you're going to run out of content to provide. I never wanted to run it dry or be repetitive or anything like that. So I just thought this was a good, good time to cap it and kind of let it be. Who knows what the future holds, but I'm staying on board with Ashcroft and Joe. Just the best ever is now concluded with the book.

Well, congratulations on making that move. I know being a podcaster that it is time-consuming and takes a lot of time, effort, And energy. And I rarely do— I rarely do solo episodes because they are tremendously more difficult to do than guest appearances, because on the guest appearances, it's the guest doing the work. And even with that, even with that, it takes a lot of time, effort, and energy. Well, congratulations on that. And—

Thank you.

And look forward to looking into your book there. So Enlightened Investors, we are visiting with Travis Watts of Ashcroft Capital, and you can find Travis at ashcroftcapital.com/travis. Travis, tell us about really LP investments and why they are important for really essentially any investor.

Yeah, that's a great point. So the way I started the journey was kind of like most people start the journey. It was single-family homes, it was fix and flips, and the, the TV shows that got me interested in the concept. And so I did flips, I did vacation rentals, I had some buy and hold single families, and I just burned out, you know, working oil and gas, 100-hour work weeks, trying to manage all that on the side. It just wasn't sustainable. strategy. So I learned about syndications through 2 gentlemen that had sold their companies in the mid-1990s. And ever since, by the time I met them, they'd been full-time limited partners, which I had no idea what that meant. I didn't know what a syndication was. I didn't know, as just an ordinary individual investor, that I could even invest in commercial real estate. I had no idea that was possible. I just thought it was Wall Street billionaires and Not my world. So I slowly but steady started transitioning my portfolio, selling off the single families and going the passive hands-off route until it, you know, became a reality, you know, having more passive income than I had lifestyle expenses, taking a lot off the plate, being able to actually travel and, you know, meet my wife at the time, my girlfriend, you know, and like have a life again. You know, I was just work, work, work up until that point. And so why, why are they important? Well, the second thing I'll say is when I left oil and gas because of my passive income kind of as a backstop, you know, as a safety net, I went to go work for one of the largest brokerage houses in America. And I got licensed up Series 7, 63. I wanted to learn stocks, bonds, mutual funds, and Wall Street because I thought, well, maybe there's something I'm missing. I had my opinions, but I didn't have the facts. And so I thought, I'm gonna, I'm gonna really pursue this as a work-optional option, right? Like, in other words, I didn't have to do it. It wasn't the golden handcuffs. It wasn't to pay the mortgage. It was just I wanted to learn. So I did that for a while and ended up turning back to real estate because of these reasons. A syndication— what I primarily invest in is a value-add real estate private placement or syndication. I like that I can get monthly cash flow distributions, potential equity upside, and forced appreciation as we make the properties newer and nicer and safer over time, and the tax advantages that go along with it. And it's a hard asset that I can go touch and feel and see and visit. It has a very practical use. Now, what I found with the paper markets, and again, not to bash, you know, stocks or anything, there's a time and place for all this And I've done it all. But, you know, if I go buy a bond, I might have a little bit of passive income, but probably limited on my equity upside. If I go buy a growth company, I might have equity upside, but probably no distributions or passive income. And if I go invest in, let's say, a publicly traded REIT, I might technically be investing in real estate, but I'm missing out on tax advantages potentially. So there's always like a drawback. You know, with annuities and the life insurance stuff. And again, I'm not bashing any of these things. A lot of our investors have a multitude of all of it, you know, they're just diversifying across the board. But for me, what I realized over time, being a full-time professional, is I can actually diversify within commercial real estate in many different asset types, many different sectors, many different business plans. different debt structures, different geographic regions, and really have true diversification. Although from, you know, from a bird's eye perspective, you might argue, well, you're just in one asset class. Well, but not really, you know, and that, that takes a little insight and some time to recognize that. So that's the path I decided to take. Those are some of the reasons I stick with it. And I always joke that I didn't get into real estate for the tax benefits, but I stay in real estate for the tax benefits. And that's been a big game changer to learn over the years.

Well, yes, I find that— I find it very interesting as I talk to a lot of potential passive investors. And like you, many of them have single-family properties. And that's the way I started. I mean, a lot of people, I believe, start that way in real estate investing. And I think one of the reasons is it's It's because it's a known factor. I mean, almost all of us have purchased our own homes, and going out and purchasing a single-family for investment purposes is not that different from our own homes.

Yeah.

And then also, I mean, I enjoyed that finding a property that was in need of renovation and renovating that property and taking a shack and making it into a A mini palace was a fun process. I like that creative process, but over time, I it took me a while to realize that this was just no way to scale the wealth development processes. You know, you can as a limited partner, you can go out and you can invest in a hundred and fifty unit property through a syndication. Just think of what that's going to take to get to a hundred and twenty five units if you're doing that or a hundred. 150 units if you're doing it one unit at a time. It's just— it's like, like you discovered and like I discovered, it's a job. People are doing that, but it, it becomes a massive job. So, uh, Yep. So yes, uh, thank you for explaining that. Certainly the way I encourage people to go is limited partners. And a lot of people say, well, I'm just losing all of the control. Well, it's a wonderful way to learn. And if you, if you really want that control, you can become a general partner. But the way to learn to become a general partner is through limited partnerships. So what are the— I mean, you may have covered this already, but more succinctly, what are the biggest opportunities that you see coming in '24 and '25?

Yeah, so deal flow has really dried up over the last 2 years since the Fed came in to raise interest rates, right? So, you know, as we discussed, you know, 3 deals in the last year and a half and stuff like that. So the opportunity is, number one, if we start to see more distress coming this year, which is probable, I don't think it's going to be this big wave like some of the headlines suggest, you know, of wave of foreclosures. It's not going to be 2008, '09, '10, that kind of thing. But that could add to the deal flow. And here's, here's the thing I would articulate, I would put it this way. If you can find a deal where you're buying at truly a 20 to 30% discount relative to previous pricing in '21 or something like that, so you're buying the dip, number one, the deal cash flows on day one with higher interest rate debt. And the forward-looking curve right now is that the Fed cuts rates over the next year or 2. If that happens, we should theoretically be able to outperform the past deals that we've done all the way up till the Fed came in to raise rates because our interest rates were 3% and 4% up and down for years. And now it's going from maybe 6% or 7% down to, who knows, 4% or 5%. I don't know. I don't have a crystal ball, but that would be a fantastic opportunity to refinance and to pump more cash flow into distributions or to sell deals early and things like that. So, it's just, it's harder than ever to identify a property where a seller is willing to get real with the environment right now and say, yeah, I'll sell it at a 25% dip. Because anybody, and this would make logical sense to anybody listening, if you're a holder, of real estate, you've been holding it for years, and you find yourselves in this environment. If you don't have to sell at a discount, then why do it? It's no different than the stock market. And you know, you're a long-term stockholder, and all of a sudden the market drops 30%. Well, don't sell, you know, like, that was the whole thing about the FIRE movement that I never liked about the 4% rule is it suggests that no matter what, every year you're just selling. in order to generate income. Well, what about those down years? You know, I hate the idea of taking a loss like that. So everyone's trying to hold on, obviously, to, you know, for a stronger economy. And all signs point that way. Developers have been pulling out, which is going to get back to the whole supply-demand imbalance over the next 3 to 5 years. And we're going to be undersupplied, and we already are. In fact, I was reading yesterday, there was an article that was mentioning— this is Redfin data. They said in Q4 of '23, 26% of the nation's affordable housing was bought up by investors. You know, so this just tells you, like, you know, we're already limited, and it's already getting squeezed by the Blackstones and the JP Morgans and the Jeff Bezoses and all the institutional players. So get it while you can. I'm super bullish on the long term of real estate. And You know, a lot of people talk about rent versus own and how unaffordable it is. It's like, go look up the data globally, you know, go look at Switzerland, go look at, you know, London real estate, you know, get a broader perspective, because we are nowhere near these levels, you know, and we got a long way to go with it. And I predict it's just gonna— we're gonna turn more and more into a renter nation, as we've turned into a renter nation in every other capacity. You know, you can rent your music, you rent your movies, you can lease your cars. People are renting clothing. I mean, you know, you rent your house. It's just, that's what it's turning into. So that's what I see the future becoming. So why not be an owner of some of that while it's still relatively affordable?

How low do you think the interest rates are going to go? From my understanding, historically, We're really not at high interest rates. I mean, people are screaming about high interest rates, but historically, this is really where they have been averaging for really the last 100 years or so. So, where do you think they're— how far do you think they're going to dip?

Well, here's the dynamic that should be considered when thinking about it. First of all, 100% agree with you. Just go look at where rates have been in the '80s and whatnot and all the way through today and kind of pull that average, we're, we're somewhere in the median or the average. The difference is, we've never in US history had $34 trillion debt, you know, and then stacking interest rates like this on top of it is just not sustainable. I mean, it's just frankly not sustainable. And that's the biggest difference from back when. But I have to back this statement up with data looking at The FOMC, the Fed Open Market Committee, the analyst forecast, numerous economists. First of all, everyone's been very optimistic starting last year about how soon and how fast the Fed is going to cut. There was a lot of talk about we have to go into recession, it's inevitable. Well, now it's questionable if we're going to have a hard landing at all. Maybe it's going to be a soft landing. It's kind of looking that way. So it got pushed back from December cuts to March cuts to June cuts. Now we're looking at some people saying maybe not till September cuts, but the bottom line is inflation's come down in a very meaningful way from what, 9.1% down to 3.5%. You know, that's very, very meaningful. It's not at the 2% target of the Fed, but you know, we'll get there, you know, over time. And by the way, they've, they've come out and said they're not looking for that exact number, like inflation has to hit 2 and then they're going to cut. They're looking for the trajectory that they're going to hit to eventually, and they can start loosening up, you know, in the process. They just don't want to preemptively cut rates right now and re-spike inflation, and then we're back at 9% again, and we got to restart this whole process over, which makes sense. So long way of saying, uh, 2025 is, is my conservative target. It could happen this year. Many people are still predicting this year to have cuts in the mid to latter half of '24. I hope that happens. I really do. If nothing else, it's just going to be a signal of optimism for the market. You know, like 25 basis point rate cut is not going to really help anybody, frankly. But it's going to signal we're on our way down for real this time. And it's just a matter of time from here. So Anyway, that 2025 is, is, uh, that's been the saying now for 2 years, is survive to '25. And I still subscribe to that. And, um, I think that's our turnaround year.

Well, Travis, it's been wonderful having you back with us. Thanks for being on the show today.

Thank you, Alan. Thanks, everybody.

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