Why Invest in Multi-Family Syndications to Hedge Inflation

All right, well, welcome everybody. I'm excited today to talk about why investing in multifamily syndications during inflationary times makes sense. We're going to go through what is inflation? We're going to go through historically, how has inflation looked over the years and what does that really mean from a investing standpoint? So thank you all for joining our meetup. Our meetup is the fourth Monday of each month at 7. So for those that are going to listen to this recording, please join us and if anything, send me your email through our meetup group and that way I can send you the recordings. But a little bit about myself. I'm based in Central Texas. We focus on Austin, San Antonio and Houston on multifamily. And we also have a build a rent 98 home development in Lafayette, Louisiana. So we're expanding out a little bit. But I'm focusing on the Southeast United States. My background has been in commercial real estate over the last 15 years, managing office, retail, industrial and certified property manager through irem. I've got a background with an MBA from the University of North Carolina. We have this meetup that has over 800 members. That's been a really awesome way to learn about investing. I was talking to someone in our breakout groups just prior that he's looking to learn more about real estate investing. And so these meetups is why we're doing it. And then passive investors, several of you and those listening the recording have invested in our deals and those relationships and all started from learning and building relationships. Here I am, a podcast host, the Untold stories of Real Estate Investing. One thing that I feel like a lot happens is people talk about all the good and how great real estate investing is, which is the case in many cases. But there's a lot of the bad and ugly of it as well. So we like to learn along the way from others. So check out that podcast. If you haven't, there is a Facebook group, Texas Multifamily Passive and active investors group, Facebook. So check that out and would love to connect with you all further. So there's a few slides here about inflation. What is inflation? This first slide and I've got here, inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It's typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation of toys. So the reality is the Fed has a target, typically about 2%. So if you think about from a stock standpoint or an investment, say if you're making an average return of 7%. If you take out that 2% of inflation, really your return is about a 5%. So what we'd like to see, or what the Fed likes to see, is a target about 2%. Another frequently asked question is what causes inflation? So inflation, it can be the result of rising consumer demand. It can also be inflation causing the rise and fall. Based on developments that have little to do with economic conditions in today's environment. Limited oil supply, with production both domestically and then what we have, obviously with the Russia and Ukraine and the supply chain problems, we've got this huge demand for oil and products since the pandemic I was reading earlier today, there's been over $5 trillion printed during the pandemic time. There's a lot of money flowing around that's all causing this inflation. It's this perfect circle of supply chain oil and just a lot of money in the system right now. One of the questions we're getting is inflation bad? So it really depends on the circumstances. When inflation is your typical 2% year over year, businesses can plan and people can just adjust their spending or their life depending on what they're doing. But fast increases like what we've been seeing over the last years, we're all feeling it. No matter. I don't care if you're on the richest spectrum or the poorest spectrum. We're all feeling the impacts of, of higher gas, of food rents, et cetera. So inflation is going to hit different groups harder. But if in this slide, fast prices increases spell trouble, but moderate price gains can lead to higher wages and job growth. So there are some good things that happen out of inflation from a wages and job growth. But unfortunately in today's environment and what we'll see historically, and one of these slides is the wages aren't really keeping up with the amount of inflation. So how does it affect households? As I said earlier, we're all being impacted, we're all seeing it. So it's really hard to shoulder for households that spend a bigger chunk of their budgets on food, housing and gas. So even though it hit as much on those that have more money, it's really being felt and hard on the middle and lower class incomes. I always felt like it's really important to talk about historical inflation and see where we're at. They have this data on, in this case it was the minneapolisfed.org website and I just extracted that into an Excel document, just had them do have this Excel do a graph just to help visualize what's really been the annual percent change over all these years. So in 2022, there's an asterisk mark here. First quarter is about 8%. We're hovering around that 9, 8% today. But you see it's almost done much double or close to double what it was in 2021, especially 2020, hovering around that 2%. Remember where the Fed's targeting around that 2, 3%. And if you look back a lot of times what I'm hearing in the news, I'm sure those listening and those on this call are seeing is 1981. So 1981 was about a 10%, 10% inflation. So the inflation today has not been higher than December of 1981. It's seen through this graphic here. And then 1980, close to 13, 14% inflation. So the good news is we're not back in 1917, 1918 where it hovered closer to 18%, but just wanted to really visualize of where we really are on historical inflation and what is the Fed doing to try to get this inflation back to manageable, controllable numbers. And the scary thing is if you look at the inflation across the world, we aren't really doing that bad. I mean, it's bad, but it's like there's other countries out there that just have astronomical amount of inflation that we're not seeing yet. So hopefully the Fed and people a lot smaller than myself can get this under control. What we're seeing in the markets. These are some articles over the last couple weeks that we're all seeing. MoneyWatch Dow plunges 900 points s and P Enters Bear Market as inflation fears mount. We're seeing another article here from CNN Business. The Dow falls 880 points as inflation hits 40 year high. I put in here this crypto market plunges. I bought some crypto. I always viewed it as Vegas money. I think it was like seven grand. And I just was like, hey, this is Vegas money. This is right before Elon Musk talked about or went on Saturday Night Live about. Was it Dogecoin And I bought Bitcoin and Ethereum and Doge. It was not a very good investment. But we're still holding onto it because I mean, who knows? But at the end of the day we're seeing markets from the stocks to crypto, et cetera, all around. I mean, it's for those that have a lot more time in their portfolio. Like this isn't as scary. Like I'm viewing this as an opportunity to buy discounted stocks and such. But for those that are like hey, we've got a short term retirement where we're really needing this. This is pretty scary this article here. After seven straight quarters when Americans got richer, household net worth just fell by $500 billion. This is being felt throughout. Now on the commercial real estate side, there's articles that are a little bit more positive and then I'll end one that's not so positive and I'll explain why. But Forbes Business Council comes out with why income generating Real estate is the best hedge has an article Real estate is emerging as a hedge against roaring inflation. Those seeking alternative investments from stocks and bonds may turn to the housing market, but that strategy still presents risk. And I'll talk a bit about that Global Banking and Finance Review why commercial real estate is a safe hedge against inflation and the biggest asset class winners for investors now and then Elon Musk's strategy to hedge against inflation his own physical things rather than USD which he doesn't own any real estate. But I think the point is that don't have all your money in the bank in US dollars. The other piece here that I sort of want to talk about. So is real estate a shelter from inflation? Not always. This is from the Wall Street Journal. Property is typically considered a haven when prices are rising. This time investors should be choosy about where they put their money and I think this is accurate and it goes to that Bloomberg as well. It presents risk investing. No matter where you're investing, there's risk. It still beats alternative of not investing because if you're not investing you're definitely losing at least 8% during inflationary times or more of your purchasing power each year. But from a standpoint of risk, the thing I like about say multifamily investing, we're going to go through all the reasons why I'm very bullish on multifamily is that you have from an office retail standpoint. I've seen the cycles just in my career where times are good, times are good. But when times turn into a recessionary times, layoffs start occurring. You've got office space that becomes vacant, goes more into the sublease market. Retail centers really get hit. They have long term leases so they're not really as flat flexible in changing terms and leasing strategies as quickly. You may have different debt that's put on those properties. So just with anything I just really want to say I may be really rosy about multifamily and especially the asset classes we go after which is typically class B type assets. But there is risk and it Is important to just be a little choosy about where you're putting your money. So this is another slide that I really liked that I found. And it goes into low inflation, medium inflation, high inflation to the left, and how the returns racked up over a real or like a low real GDP growth, a medium real, low GDP growth and a high. And I really just want to go more on the averages here. But on the averages on the low inflation, you're looking at about a 7.2% return. On a medium inflation's 10% and a high inflation, 9.3%. So despite US being in a say in inflationary times, I guess what this is really trying to show, and this is from 1978 to 2020, in private real estate, total returns, you had a better return on when it was a medium and higher inflation compared to that low inflation. And again, if you look around this 2.1%, that's typically again the benchmark of inflation. And a lot of times it directly goes with the GDP of the country. So I thought it was an interesting slide. Just points out again that commercial real estate, or private real estate in general, hedges inflation better than lower inflation times. So there's a lot on this slide, and I apologize for that. But I want to go through each one of these, and these are really the reasons why I think multifamily is leading the pack in commercial real estate to fight inflation. It's the reason why I'm bullish and going after multifamily each and every day from an investing standpoint. And I'm going to first start with this picture over here. But, you know, in the Southeast, which is the section that are the part of the country that I'm really focused in, you, we've got 1.8 million renters moving into the Southeast during this 2016-2025 timeframe. Homeowners, you've got 1.2 million homeowners during this time frame projected to move in Texas. So majority of our investments are in Texas. We've got 1.1 million renters coming in during that 2016-2025 timeframe, about 800,000 in homeowners. And then it goes into each of these. But just really real estate is location based. And so I really wanted to just point that out where it's supply and demand and inflation, regardless of inflation, people need a place to live. So let's start with the first one. So physical asset with intrinsic value. Thing I love about real estate is you can touch it, you can feel it, you can Go to the property, you can see what other nearby properties, what other business strategies are being had at those properties to increase value. And you increase value through increasing revenues. Doesn't always have to be rents. It could be miscellaneous income and reducing expenses ultimately to drive down that bottom number, the net operating income, right. To increase that number. So fiscal assets compared to stocks and things that you can't really control, you don't have a seat on that board as a stockholder. But with multifamily and commercial real estate in general, you've got that physical asset that has intrinsic value, that if times got really bad, you still have that land that they're just not making more, they're not making more of that dirt. Multifamily is a necessity. People need a place to live and it has been proven even during the pandemic times that it is stable. Now, there are different types of multifamily, right? Class A, B and C. And we could have a completely different discussion of how class A multifamily was impacted during the last recession in 0809, but we'll save that. Ultimately though, at the end of the day, class B properties have proven to be resilient. Class A has done really well during the pandemic times as well. We didn't see a lot of turnover with jobs, et cetera, so we were able to keep a lot of those class A housing. But at the end of the day, if those jobs went away for those supporting class A, like you would naturally look at a class B apartment, right? So it's a necessity. I like that in a real estate or excuse me, in an investment. And so I think that's a big reason why commercial, or excuse me, multifamily in the commercial real estate spectrum leads the pack when it comes to fighting inflation. There higher wages during inflationary time supports increased rents, cash flow. I've got a slide in a few more slide shows is the Houston market in particular. But inflationary times supports increased rents and increased rents is increased cash flow. So we're able to hit our higher returns and have higher value for our investors just by moving with inflation for our rents, chronic shortage of housing. So supply and Demand Economics 101. There's 3.5 million units that are short from Freddie Mac's supply and demand. So I read that it would pretty much over the next 10 to 15 years we would have to put out about 2.1 million homes to even meet the deficit of the shortage supply, which is more than during our last housing boom of houses being built. So supply and demand is huge. Especially when we go back to this picture of the Southeast having this huge growth into these markets. The next one I've got is rising cost of materials and labor, shortage of labor, supply chain issues. It all leads to fewer deliveries of new housing products. As I mentioned, we've got this 3.5 million units that are shortage, approximately about 2.1 million of those would need to be at least built to bridge the gap with the deficit. Just a crazy amount of number. At the end of the day, if you're buying in a strong market, in a strong area, people want to be close to work. They don't want to be driving 60, 90 miles away, especially with gas prices the way they are. So I say stick to good markets that have a diversity and labor force and you'll see again why multifamily hedges against the inflation. So this is a big one, one of our bigger expenses on the multifamily side, just like your mortgage or your homes is the mortgage. And so getting into a position where you're at a fixed rate and not having to worry about market conditions is definitely a great strategy and a way to go. We typically are looking at, I would say properties that are in a good area but need a lot of renovation. So a fixed rate is going to be hard. So for us, I mean we are putting 250,000 or more into rate caps so we're not having to lose sleepover at night worrying about how rate cap or rates are doing today. So we stress test our underwriting and then we purchase these rate caps. So that way we're protected. All this to be said is having a fixed rate or a variable rate that has a rate cap is a big reason on why multifamily can fight inflation. So the other thing I like about multifamily, I've got two more bullet points here is short term leases. When I look at the office retail, a lot of times those are 5, 10, 10, sometimes 15 year leases and they go up maybe 2, 3% year over year, depending on the structure. Sometimes it's based off CPI increase. I see that a lot in government tenants. But for standard office retail, Those are typically 2, 2 and a half, 3% rent bumps. And so that's not really keeping in line with inflation and such. But if you go back to that fixed rate mortgage, I mean your mortgage in theory, say a fixed rate on an office, you still will probably be just fine. But multifamily, it's usually 12 months, sometimes there's a two year in there, but typically not. And that allows us as owners and investors to adjust to the market. And if the market's allowing that $150 rent bumps, then that's what we're able to do pretty quickly without waiting, you know, a lot longer in the lease term. So the last piece is, I mean, there's so much demand for multifamily. There are a lot of, I mean, you see it in the news where these institutions are buying single family homes, right? Everybody around the world is looking for yield. And if they can find yield in real estate and in markets like Texas and the Southeast, they're coming for it. Right? And you're seeing a lot of companies that are moving to Dallas, San Antonio, Houston, Austin, just in Texas in general, in the Southeast. And so with that, there's a lot of investment, a lot of investor capital coming in as well. A lot of people from California, one I was talking to before this particular presentation during our breakout groups. But a lot of people are looking at Texas, right? So there's this huge demand of people wanting great value add opportunities. And with that it supports higher pricing because people are willing to pay for it. We've got a couple more slides here before we go into open discussion, but this is Houston market. We've got a deal that we're under contract in for now. And I'm very bullish on Houston. I love Austin, San Antonio as well. Houston. I feel like for me there's been a lot more opportunities to get some good deals, but I'll start at the top. Right bullet point. But the Houston's gained momentum heading into the second half of the year with demand driving up effective rents 22.3% in the last three months, 14.6% in the last six months with rental projected in 2023 at 4.3. So we're seeing this huge rent growth over the last year and projected over the next six months and 2023, you know, 4.3%. Now that 4.3% could be a lot higher, but I think at the end of the day that's still a really strong return or rent growth. And the market and the economy that we're facing. Pre pandemic peaks, rent drops 1.79% before rebounding 7.2% for net increase of 5.41% growth from March 20 to now. Average occupancy is over 90%, which is about 220 basis points from the start of the year. And effective rents can just continue recovering from the pandemic. Houston in particular, there's just this huge demand for multifamily as we talked about with the rents and the supply and demand of properties. But we're seeing this really in other cities. Dallas is doing extremely well. Austin, San Antonio, look at Arizona, Phoenix, in other markets. So, you know, this is just a snapshot of one market, but it just illustrates the growth that we're seeing on the rental revenue rates. And that directly correlates, I believe, with the inflation that we're seeing. Will things, you know, taper off? Absolutely. Like, it's not, this is, we're not, it's not Sustainable to have 22% rent bumps year over year. Right. If we get down to that 3 to 4%, we're in still a strong market that's beneficial to our investors. But overall during this time where people are pulling out money out of the stock market or you're seeing returns 30% down from where they were earlier this year and then you go into multifamily investing and you're seeing that, hey, your preferred returns, your mailbox money, as I like to call it, is still coming in, or maybe there's no mailbox money because it's a deep value add, but you're still on schedule. To have that 1.8 to 2x multiple over the three years, whatever that may be on that project is incredible. Completely side of inflation. The thing I also love about multifamily is I don't have to worry about somebody tweeting something affecting the markets that day. It's pretty stable asset class. So I'm going to go, I'm going to stop sharing shortly and have this open discussion and I'll turn off the recording so people feel comfortable asking questions and such. But if you haven't already, and if you're listening in, check out our ebook. We have an ebook that goes over the five must know tips for passively investing in multifamily. Craipartners.com ebook. You can just put in your email and such there. So you're on our newsletter list, but then also check out our ebook as well. So with that I'm going to go ahead and stop recording and then we can have open discussion within our meetup.