AIPIS 265: Investing in Baton Rouge

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Hey, welcome listeners. I wanted to do a market profile on an area that we have not been selling in for quite a few years, but we are back in it and that is Baton Rouge, Louisiana. Got some good properties there, a very small supply. I hope by the time you hear this interview and this market profile we have more properties in Baton Rouge. But let's just talk about that market and see what's going on there lately. Welcome. How is Baton Rouge doing?

Jason, thanks so much. Baton Rouge is doing very well. Doing very well. We've been doing a couple different projects down there and we got one project that we're very excited to bring to the table. We've been doing some new construction, build to rent properties. So we think it provides an excellent cash flow and feel like it would be a tremendous product.

Yeah, it looks really good. We've got those on our website@jason hartman.com in the properties section. It's amazing to get, you know, brand new builds rent properties for these prices. So let's talk about the properties first. Maybe we'll kind of go in reverse order and then I want to talk about the general market. Why you went there. We used to do a lot of business with you in Atlanta, of course, prices in Atlanta Largely went up too much. And you've got institutional investors you're working with now who aren't quite as picky about getting a good deal. We'll talk about that. But talk to us about the properties in Baton Rouge.

Yes, we basically found some developed lots in Baton Rouge in a little neighborhood. We ended up picking up 12 home sites. And so we're doing a new construction product. Build a room. We made it as tenant proof as you possibly can. The granite, some we got the vinyl plank flooring. It's siding on the outside and then brick in the front. It's a 1400 some odd square foot home, but it's, it's four bedrooms. To be able to maximize the tenant capacity and the rent. And we've had basically got our COs last week and we've already gotten three tenants who are approved in our first five homes. We've got another seven that'll be following it up that are in construction right now.

And a CO is a certificate of occupancy.

Yeah. Correct. Thank you.

Okay.

The tenant profile has been terrific. We've got some people who are laying some pipe for oil and got some fracking tenants. So you're talking about they're not.

Just to be clear, they're not fracking on your property.

That's a good point. No, they're fracking about 30 minutes away.

OK.

But just a really quality profile of tenant that we're seeing on these products. And so we're excited to be able to bring that to the table.

That's great. So you're selling them pre rented then, right?

Yes. These will be turnkey. We've got management in place, We've got everything should be turnkey and ready to go. So if for some reason someone were to purchase them prior to having a tenant, maybe it's buying at the date of the certificate of occupancy comes out or something like that. We could, we could work out a rental situation. But yeah, we are planning on having all these pre leased and so someone will be cash flowing immediately upon purchase.

Fantastic. Okay, so what's the price and how much rent do they bring in?

We're at 155,000 and the first tenants that we've gotten are at 1390.

Not bad at all. Not bad at all. I mean, in this market to get that close to 1% is pretty darn good on brand new construction. This is brand new construction, right?

Correct. Yep.

Now, why did you go to Baton Rouge? I mean, you live in Atlanta. We've done lots of business with you. In Atlanta when the deals looked better years ago. Now they're just too darn expensive most of the time. But why Baton Rouge?

Why'd you pick that market in 2016? We basically came across Baton Rouge because of a horrible flood that happened there. Unfortunately, it was pretty devastating, and so a good percentage of the homes in the Baton Rouge metro area were affected. And so went down there with the crew. Basically ended up flipping somewhere around 50 or 60 properties down there over the course of a year, year and a half, we really got to know the city really well because we bought all over the place. And so we became interested. And then we have been looking for some land ever since just to be able to try to continue to keep a relationship with Baton Rouge and keep ties with it, because we do like the market and what it's bringing to the table, we feel like, because Atlanta, where I'm primarily based out of, is so saturated with investors and hedge funds and things of that nature, the returns down much more compelling. And so when you don't have to deal with that institutional investor, the competition.

When you say down there, you mean Baton Rouge versus Atlanta, right?

Yes, sorry, Correct. Yeah. When you're not having to deal with an institutional buyer who's willing to accept maybe a 5% return.

Okay, so let's talk about that for a moment. So Atlanta got crazy several years ago. I mean, you know, we've been in the Atlanta market for, oh, gosh, 10 years plus, maybe. Yeah, oh, definitely over 10 years now. And so, you know, I've done lots of business in Atlanta over the years. That's no shortage of experience there. And when we were coming out of the Great Recession, I'm going to say, you know, that it seemed to really sort of take over in about 2011, 2012. It's like all the institutional investors started just invading these markets. You know, we were selling lots of properties in Phoenix, Atlanta, Denver, and boom, you just couldn't compete anymore because they were willing to, frankly, overpay, and they still are willing to overpay for properties. You said that they're willing to take a 5% return. Now, let's distinguish what you mean by return. You mean cash on cash return, right?

Correct.

Okay, so if The Performa says 5% cash on cash return, which both you and I would think is pretty low, that's nothing to write home about by any means. You know, hopefully you could do a lot better than 5% cash on cash. But they're willing to take that all day long, I guess, huh? Atlanta properties. Right.

And there's a number of hedge funds in Atlanta currently doing it. So, yeah, it brought us to think about other markets and the flood is what initially brought us to Baton Rouge. And so we're still well entrenched there. We own some multifamily and some other stuff, so we're active. But new construction, especially the build to rent, is something that we're very drawn to and we like the model. So we're continuing to look for more and more properties down there to continue this.

Yeah, it's amazing. You know, years ago you never even heard anybody talk about a build to rent model for single family homes. Of course, every apartment complex is a build to rent deal, you know, just by nature of the way it works. But build a neighborhood of single family homes to rent, not to sell. This has really become popular. In fact, we've had John Burns of John Burns Real Estate Consulting on the show many times and he spoke at our last Meet the Masters of Income Property event in Southern California and just got a newsletter from him today, literally this morning that talked about the build to rent phenomena and how that should be part of any multifamily portfolio. You know, there should be some single family. When they say build to rent, they mean single family homes in pretty much all cases, because naturally an apartment complex is built to rent, but single families aren't necessarily. So why do you like that model? In a way, you're doing it a little differently, you're building to rent than selling to individual investors.

Right, right. And we'll eventually like to hold some as well, but you know, to build up capital. This is something that we're doing as a business, but I feel like the expenses are so minimal. If you're dealing with investors who maybe aren't as familiar with construction and things of that nature, it can be advantageous to buy a new construction product just so you don't get fooled or tricked by contractors and things of that nature. So there's a little bit of risk that you're eliminating by doing that. And it's a much easier product to manage. And we like everything about it really, as long as you can get at the right price, of course, which is the hardest part.

Go back to that the institutional investor discussion for a moment, if you would. Why is a hedge fund type of investor or any institutional investor really, it's sort of all the same thought process. Why are they willing to take such a low cash on cash return in the neighborhood of 5%, give or take?

My speculation on that would be that I'm sure they have some type of appreciation built into their model. So they're looking at it as an alternative to bonds, things of that nature, because they have such a huge amount of capital that they're having to invest and allocate that there's only so many higher return products they can find. So my hunch is they feel like it's a safe investment and getting 5% with the potential for appreciation and all the different depreciation aspects that real estate brings to the table is appealing to them. But yes, it's been an interesting transition in Atlanta with all the different hedge funds that have come in in the last five, seven years.

It really is counterintuitive. One would think, or at least I. But I think other people would think this way. If you've got a mountain of cash to invest with that you'd expect a bulk deal, that you'd get a better deal. But. But the opposite is true. You know, they need to deploy the cash so quickly that they're willing to take an inferior deal. That's just always struck me as odd. You know, we've worked with some of these institutional investors over the years and they've purchased properties through us. And it's like, okay, here's a spreadsheet. We'll take these 14 houses. Boom, done. No thinking too much about it. No quibbling, no, you know, it's just like, we just want to buy these. We'll take them. Done.

Yeah. It's one thing that really, I think I mentioned it, but it really drew us to Baton Rouge because you're talking about a very good sized population with a greater Baton Rouge area that really is one of the few cities that I'm aware of that doesn't have any hedge funds or institutional buyers that I'm aware of. I haven't seen any activity down there.

Well, it's not one of the bigger. It's not one of the bigger markets. Right. So they always gravitate toward the. I'll call them the second tier, but still trophy cities, Atlanta being one of them and there are many others, of course, but this is really third tier and this is where the individual investors still have the opportunity because they haven't been crowded out by these institutional investors throwing too much cash around. Right?

Absolutely. Yep.

Yeah. It's just a really interesting phenomena, you know, it really is. Go ahead.

Yeah. One other thing I just, I just wanted to clarify. Obviously I went down there, but because of the flood initially, that it was a thousand year flood and so it didn't impact a huge amount of the City. This neighborhood that we're in did not flood at all. So there are some preexisting homes. The developer went under in probably 05 06, something like that. And so those homes did not flood. So we wanted to make sure that we felt good about the area and wanted to minimize our risk in terms of floods. So you got to like your odds if it's a thousand year flood and it didn't flood. We do feel good about that. Just in case anybody wanted clarity on that.

Right, Right. Okay, good. What else should people know? You know, I'd love to just get your take on the market in general. And are you out trying to grow your business and spending more and taking risk now or you reining in your horns and you're concerned about a change in the economy? What's your thinking?

I've never been a big proponent of keeping the cash I have in the bank. So I'm usually trying to put it in one type of real estate or another. But I am all real estate and I am looking for different avenues. I'm actually building some homes in Atlanta as well, looking for multifamily, which is really tough to find deals there. I am pretty bullish still on the overall market. I'm not aggressive. I see it probably as a little bit more of a slow market or a slight decline. But I think there's still deals to be had. You have to look a little bit harder. So I'm still deploying capital and aggressively doing a number of different things. I do find some deals for different funds as well. So I'm pretty active in the market. I feel pretty good about where we're at as long as the interest rates can stay within a reasonable range where they are now.

Well, look, you know, you've got a rental portfolio and a flip portfolio. So if the interest rates, if they go up, then your rents will just get better. I mean, you know, it's. You play one or the other. It's either the capital appreciation game when rates are low and there's just this massive amount of buying activity out there with a shortage of inventory of properties, or you have more plentiful for sale inventory of properties. But people who don't move out of the renter pool or can't qualify anymore because housing affordability declines and then they've just got to stay in the renter pool and they're willing to pay more in rents. It's just supply and demand. Right?

Right.

Yep.

We're still very active. I'm. I enjoy what I do. I'm Thankful.

Yeah. Just one, maybe one last question for you on the Baton Rouge tenant profile. How much of that is assisted housing, if any, you know, section eight type of stuff? Do you have that element there?

It's possible that a Section 8 or subsidized tenant does end up leasing property or two that we have built. But right now it is, it's all market tenants and all good. Wa. And like I said, they were in the fracking industry and then another one was doing pipe. I think it's for, maybe it's for gas, but either way, I mean, energy is huge in Louisiana given its location. So that has been our profile so far.

Okay, so not much in the way of government assisted rental. Mostly just regular free market tenants, right?

Correct.

Yeah. Fantastic. Good stuff. Well, hey, it's been very interesting talking to you again and go get some more inventory because we need more inventory for our clients. It's interesting. You know, if you listen to the news, they'll talk about how the real estate market is slowing down, but that is only in the high flying cyclical markets. We sure haven't seen this and we've been looking for it. The good, solid, linear cash flow markets. Inventory is just tight as a drum still. And you know, anytime we can find good inventory, our clients will just gobble it up. And you know, there's. Sadly, folks, you got to beware because there's a lot of promoters out there selling some really crappy, crappy inventory right now. It's the old lipstick on a pig concept. They make it look good, but it's really just junk in some junky, you know, fourth and fifth tier cities.

It's amazing the kind of junk some people are promoting out there nowadays. But it's easy, right? Because that junk is still plentiful. But you got to get the good, the good product. And did you want to speak to that at all? Because you see it out there, you see a lot of people just promoting this absolute crap.

Yeah, I get probably hundreds of emails a day with different wholesalers bringing me opportunities based on what we do. Yeah, there's definitely. If you're looking for properties, there's a lot of older properties that you've got to be very weary of. You know, 1930s, 40s, 50s, at least in Atlanta. That is, it comes up a lot and it's kind of the attractive thing on the, on the HDTV shows to make them look good, but it's not easy. So if you don't know what you're doing and don't have a trusted source definitely burn you. So yeah, we feel like this is about as low risk as you can get. The new construction market.

Good stuff, good stuff. Well hey thanks for joining us and happy investing.

Thanks so much for having me. Jason.

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