BREAKING: FED cuts rates- Multifamily to surge

Foreign.

What'S up guys? So today we are talking about the Feds cutting interest rates by 25 basis points, 0.25%. And we're going to go through how this has massive implications for the overall economy. But also what does it look like for multifamily and apartments for real estate investors? If you're new to the channel, we help real estate investors, small real estate investors scale their portfolio through apartments, bringing on capital partners, things like that. And today we have Randy here, Larry, and together we have a portfolio over 500 million in assets under management. And so number one goal today is let's just talk about what's happening in the market because to be able to grow your portfolio, you've got to know what is going on in the economy, how do you navigate these issues. So let's just go ahead and kick it off. A lot of you understand your apartments, apartment loans, 10 plus units, you know, larger deals are not necessarily affected by the Fed interest rates, the cuts that they're making right now. But it will have a ripple effect into the bond market. And so let's talk about that. How does the because the 10 year treasury is what stimulates the loans and what determines the interest rates on, on apartment loans and that's often affected by the bond market. So let's talk about the bond market and how this is actually going to play as a part in that situation. And how are we going to see changes in apartments?

Well, yeah, just kind of jumping in here, you know, just to clarify for those folks that are, you know, watching, you got the two different things, the fed funds overnight rate which applies to variable rate loans like bridge loans or you know, line of credit, things of that nature which can be used and are used in commercial real estate. And then you've got the more, you know, longer term Fannie Mae Freddie Mac loans that are driven, as you said, Jonathan, by the, you know, bond market, the ten year Treasury. So again, as they cut rates, you know, on Wednesday, 25 basis points and then give a forward forecast of looking ahead based on the current, you know, interpretation of the economy, there'll be two more rate cuts this year in the next two meetings. You know, that reflects good news to, you know, the variable rate loan scenarios. It also, like we were talking beforehand Larry mentioned, you know, that like your local banks or credit unions, it can affect them as well and how they're proposing in their, you know, rate environment as well. But it, like you just said, doesn't really move the bond market. The bond market's moved more by, you know, supply and demand of investors. And they're looking at what is the expectation of what's going on in the economy. Historically, as the economy would slow down and you have unemployment rising or recession increasing, typically more money rotates out of stocks and equities into bonds because historically that provides a better return during that period of time and it's more safe during time of uncertainty because you're able to lock in. And so ultimately that's that coupled together with the interpretation of inflation is what bond investors are going to be looking at. And you know, so even now interest rates were cut, you know, by a quarter point and then the 10 year treasury went up 10 basis points from the low of 4 to 4, 10, 4, 11 right now, today, within one day. So you can see they cut rates yesterday and the bond on the 10 years up 10 basis points. So it's not one for the other, you know what I mean? And sometimes people misinterpret that and think, oh yeah, rates are going down. Well it's, you know, yes and no would be the answer there.

Right. So the key, the key is there are things that are affected by these cuts, but it doesn't directly affect the treasury rates which affect commercial real estate. And, and the things that do affect commercial realism, the bond market are things like inflation, things like the job growth, all these kind of things. And so, you know, so many are saying that 3% inflation is the new 2%. Right. And so I mean there, there's some speculating that inflation is just going to rise. And if that's the sentiment, that is the, what is happening, they're lowering the, the percent on these interest rates, then that could be because the, you know, the, the treasury rates could rise because the Feds are cutting too soon. Right. And so what happens then is that if the economy is slowing down, we need to print more money. And that is essentially what's happening. So we see an increase in inflation. Right, but that's, that's one theory. Right. There's, there's many other ideas.

Yeah. And you don't want to downplay the short term rates going down and the stimulation that can do to the economy. It definitely affects commercial real estate. I've got a lot more short term rate loans with commerce, with regional local banks than I do agency debt, what Randy was referring to, or as Fannie and Freddie loans. So they're both important and you need those long term loans. But I mean maybe by early next year we're 100 basis points lower is the projection. Right. So that that's significant money on millions of dollars worth of loans and it allows people to, you know, a lot of projects that are purchased with bridge debt, you need those local bank loans and allow someone to go out there and get, you know, cheaper money basically. And I think, you know, that'll also stimulate construction. We've had, you know, projects that aren't feasible with these higher rates over the last two or three years. So it's great news, right?

Overall?

Yeah, exactly. It's big news. And it, and it causes some deals to pencil that otherwise wouldn't and means people are getting back into the game. So that's another plausible idea. Let's talk about how does it affect opportunities in multifamily. Are there now more opportunities in multifamily coming onto the market? Is it easier to purchase now? The sellers are not so crazy. You know, what, what are the things that will be affected by this right now in terms of multi, family, commercial?

I mean, I think, you know, if rates, you know, you see the rate cuts coming, you know, call it 75 basis points this year. Again, assuming there's not some type of more dire economic, you know, data that comes out, you know, you move into next year and then now you're, you know, as Larry said, maybe tracking for a point down by March, that probably does begin to improve buyer sentiment, meaning more people that were on the sidelines, you know, larger groups, et cetera, et cetera, that like, hey, interest rates are overall going down. Historically, if you own assets and interest rates go down, that's boosting the value of your property because it's increasing the value of the cash flow. And so if a deal was a good deal, you know, in the present numbers, if interest rates are moving down over the next two years, which again, you know, likely would be the case, then you're actually have an ability to get additional appreciation or additional value out of the project. And so that would move people psychologically like, hey, we want to start moving forward more quickly, which I would say would engender more buyers to enter into the market. There's been plenty of capital groups in institutions, people that have been looking, have capital but haven't executed. And so now those folks would be more apt to, you know, be desirous to execute. Now sellers, I mean, a lot of times, you know, you guys know as well, you know, we both talk to off market sellers and the guy's like, oh, I want 7 million. It's like, oh, that was a price from 2021 when interest rates were 4%, you know, I mean, like it's, it's really today's prices, you know, 5.75 million. And so I don't know how quickly there's an assimilation of the sellers, you know, coming to terms and just dropping 75 basis points to a point's not going to close that gap where some of those people exist, but it is going to make more deals, you know, I would say possible here in the near term as we experience 25 basis points won't do it. But, you know, a point, you know, moving from right where we're at now, four, four and a quarter down to, you know, three and a quarter, 350. That's, that's helpful for sure.

So. And you're, you're thinking that's going to happen by March?

Well, it's, I mean, I think again, apart from any of the, if the economic news stays where it's at, you know, they've already forward, you know, kind of forecasted two more cuts, which would be 75 basis points this year. And then, you know, kind of the March meeting again, you got to see what's happening. If inflation's, you know, too sticky, they may hold. It's all going to be depending on the jobs. I mean, you know, no doubt, Powell, he's done in May, right. So he does not want to go down as the guy that crashed and burned into a recession. Like that's the end of his tenure that like, you know, he, he missed the smooth landing. Right. So, you know, as much as Trump has been riding him for like four months, he also wants to preserve his legacy, you know, on some level of, you know, being able to part without the economy being in shambles, you know, so I would think he's going to be motivated now, inflation, you know, you mentioned the 3%. They, in their last meeting had re ascribed their model forecast from probably five years earlier, kind of alluding to the fact that they no longer need to adopt to a 2% model because that was kind of engendered from the previous, you know, whatever decade. And so that gives them a little more flexibility to then save face and you know, all right, it's two and a half, three. Three is not bad. You know what I mean? Given we're in a higher inflation, higher interest rate environment kind of thing.

Right? Yeah, yeah. So, so big thing, guys. You know, we just had a guy on last week on this show, if you, if you're following our videos that just put a deal under contract. There's, there just closed a deal just the other Month. I mean, there's a lot of opportunity out there. But the same issues that may be preventing someone from getting in as an institutional investor are the same things that are coming on the market. Right. Because you're trying to get in there and find problems with these, with these opportunities. In terms of apartments, you know, we typically look for 10 to 100 units, you know, or, or maybe up to 150 units, but those are just still such a sweet spot because there's people that got in and now interest rates are higher and they're, and they're losing money. You know, they're, they're bleeding and they can't rest, refinance, they can't make the payment or make sense of the deal anymore. And so those are the opportunities that are out there. And so, you know, number one thing is getting in there and being in, in now because as we, we continue down this path, there's going to be, you know, it, the treasury may go up, may go down, but right now there is an opportunity to find really good deals. And so it's just about getting in and, and hitting up enough people, Right?

Yeah. And we're all optimists here, but we have reason to be optimistic because with this relaxing of the rates and maybe the, right, the closing the gap between what the sellers have been wanting, what buyers have been wanting is really a perfect time because there are those deals that have been troubled that are going to have to be selling. And you know, it's not, not just because of the volume of estate transactions and loans have been down. You know, brokers, whether loan brokers or, you know, sales brokers or even just bankers, their business has been tremendously down. So I know, you know, they're counting on this spurring some activity, Right?

Yeah, exactly. Yeah. So the things to pay attention to is the job growth. You know, where's the job market that's going to, that's going to influence investor sentiment and influence the bond market. Right. Then your inflation, you know, how is that going? They're printing more money so that, you know, what does that look like? But, you know, there's obviously people who believe treasury rates are going to fall. Right. Because maybe the, the Feds are reacting to an economy that's more stable. Right. And, and the inflation is, is, you know, they're, they're, it's under control. Right. But that, that would obviously cause the cost of debt to be less and, and making more deals to pencil and investors who are on the sidelines can jump back in.

Right?

Yeah.

And we were Just, we just had a, our Mastermind call at 12. I do that every week with our members. We have really good conversations about capital raising and these type of topics like we're talking about here. And you know, I was telling them that I've always just focused on creating my own economics. And you know, you can't control the, the national state of things or the global state of things, but you can always find a deal and, and buy it for X and know that's just going to be worth Y at some point in the future. And that's really how you make money. You got to factor in all these other variables to that. But that's, that's really the most simplistic as you can get that you're, you're buying something for X and it's going to be worth Y and that's how you're creating the, the appreciation and the profit that make the deal make sense, you know, whatever interest rates are. I don't think, you know, we're going to be back. Nobody thinks we're going to be back to a 2008 time period that was a very difficult time recession we had. But then after that following for 10 years, you had the best boom opportunity and my lifetime. So trade a couple of bad years for 15 great ones. And then we've had a rocky one, you know, rocky two years. But a lot of opportunities out there and yeah, if you seize them and know what to look for.

Yeah. You know, the interesting thing too is in this moment in time, we've had more of a, a business cycle problem than an economic cycle problem. You know what I mean? With the higher interest rates, the crimp that that's put on, you know, commercial real estate in a various fashions and then like the industries that Larry outlined that are tied to it, you know, all that's been affected in this most recent cycle. But the economy has kind of still chugged along because of, you know, the money that came in after Covid, the reopening, kind of all the tax credit, you know, business credit money that flooded in there and the economy stayed fairly resilient. You know, so again, whether we enter into a recession, it's not a clear known path right now at this moment. But again, you know, if that is the case on the, on the forefront, you know, Larry's, you know, accurate in like, hey, there's a cleansing effect that takes place and then there's typically on the other side of that significant, you know, upside opportunity. And even now, you know, there's plenty of Opportunities that are coming into the market from the distress that Larry talked about. And so, you know, those, those are, those are happening now. You know, I talk to brokers all the time. They're getting contacted from servicers that have already taken properties back and they're trying to, you know, get those stimulated for, in a position to sell them. There's other deals that, you know, again, like Larry outlined, can't be refinanced. So, you know, they have to be sold. So, you know, being able to jump in the game and move forward at this moment in time is, is going to present opportunity. I mean, and even on some of the stuff we're working on is, you know, working on refinance, working on programs that, where we can either, you know, renovate the units and move rents another 150 to $200, because that's been the nature of the overall marketplace and add washer dryers that we buy and rent for $50. I mean, that adds millions of dollars worth of value to the project.

Right.

You know, and that's something that you can control. Like, I can't remember which one of the two of you said that, but it's like in life there's just going to be consistency of variables. It was Larry, you can't control. Right. Like, so focus on what you can control and you know, there's plenty of opportunity to move forward, execute. And you know, yeah, we're, we're likely to be in a, in a higher interest rate environment for this decade, I would suggest, because also the government just keeps issuing bond after bond after bond and printing money like crazy. And you know, eventually we're already seeing, you know, we were, you us was downgraded six months ago on their bond issuance. And so the world is eventually going to say, hey man, enough is enough when our, our debt just keeps rising and rising and rising. Like eventually it's like, you know, yeah, we're the, we're the central currency of the world. But like, you can't just run $150 trillion deficits into the future forever and expect that it's going to do good.

You know, Randy, according to what you consider a higher interest rate environment, that's relative, right? Maybe guys that are a little more seasoned than you were excited to see 7% interest rates once upon a time.

I mean, Sam Zell, you know, he's one of the godfathers of the apartment industry. Like his book, you know, am I being subtle? I think that's the title of a great book to read. I'd recommend he was cutting his teeth in the 70s when you know, rates were you know, 10 and 12 and 13%. And he bought deals at fixed rate and saw inflation go up by six points and he's making money because he had a fixed rate loan on a property. So.

Right.

I think that the higher environment to Larry's point is great because that's compared to the last call it decades where interest rates were like in the gutter. You know, your, your neutral rate was probably like a quarter to 50 basis points back then. Meaning it doesn't affect the economy negative or positive. Your probable neutral right now is like 275 is what most people are speculating to on economists.

Yeah, so, so it's high interest rate environment that we're in right now and it's not expected to go much further down if any. Right. But that's in comparison to the past 10 years. So the opportunities for people who were in at record, you know, all time lows and now can't do anything with those properties is, is, is going to remain. Right. So that, that's the big deal.

Not so much the interest rates.

Yeah.

I mean 2008, 2010, they were super low. But nobody could get a loan.

Right?

Nobody wanted a loan.

Yeah, yeah, exactly.

So, so any other loan, I'm sorry, they just couldn't get one.

I think one of my favorite quotes.

From.

One of my favorite quotes from Warren Buffett is he says if I, if you were to guarantee me a recession this time next year, I would still be buying and selling the same securities I am today. And the other thing he said is, is in a recession the two greatest things you can do is number one, invest in yourself and number two, invest in high margin opportunities.

If you don't listen to the three of us, you should definitely listen, listen.

To Warren Buffett, right?

Yeah, I'll just quote him a lot.

Yeah, I mean high margin opportunities. So that's why, you know, the reality is these mom and pop sellers, these opportunities between 10 and 100 units, I mean they, they're out there and it's just, it's just getting in front of them. And so if there's one thing you do, it's just increase the lead flow, increase the, your lead generation when it comes to off market deals and finding opportunities. So. Well, look guys, I appreciate you joining us and didn't have a whole lot of time but hope you enjoyed it. We will be back next week. And look, if you're, if you're someone who's wanting to scale in real estate want to scale in multifamily investing. We have a group called RE Accelerator. It's a faith based investing group and we focus on getting capital partners, networking with people and getting more deal flow. Right. Increasing our deal flow. So if that's something you want to check out, we'll drop a link in the description below. But anyway, thanks for joining. God bless.