BIGGEST RISK with Jonathan Twombly - CREPN Radio
Darrin: [00:00:08] If you could identify and speak to what you see as the biggest risk that investors face. [00:00:13][5.5]
Jonathan: [00:00:15] So I think the biggest risk and this is a big part of why we sold the property is actually, I think the biggest risk that investors face is actually the economy. And that's gonna sound very strange given that we've got you know the best unemployment rate in 50 years and the economy is chugging along pretty quickly. That's precisely the time at which the economy becomes a risk. You know the economy is not a risk after a crash after a crash all the risk is out of the economy. You're going to that's when growth starts right again. So you're you're you're stepping into things as they're on an upswing when you're at the top. The only place to go is down. I think a lot of people are hoping that we're somehow magically going to stay at this, you know at the height of the economy for the indefinite future. And and that kind of hope is getting priced into deals. So people are pricing in, you know high employment. They're pricing in record high occupancies. They're pricing in rent growth that may or may not happen. But it all really depends on continued economic growth at the pace that we have it right now. So people are paying a premium for properties based on economic news, which honestly, if you look at history cannot sustain itself. And it can't sustain itself for very much longer. And you know when for instance, when employment reaches a peak is when it starts going down, like that sort of basic economics. If you follow the economic analysis that that's a lot of people writing right now. I mean that's that's pretty standard. You know a lot of people trying to figure out when this next recession is going to come. They're spending a lot of energy doing it and they're they're bad at predicting it. But I think everybody knows that something is coming. But in multi-family world they feel like a lot of people are are really turning a blind eye to it. Or, they're kind of giving some lip service to the fact that in the kind of you know an economic downturn is going to happen in the not too distant future. But they're not really adequately planning for this risk right. So you know. So I think that is the biggest risk. I think another big risk, and it's related is if you is relates to a big reason why we sold. If you're dealing with C properties. That the tenant class and see properties. This is also often referred to as the renter by necessity class. There are people who know they've they've got jobs they could pay the rent. This is market rent territory but in an economic downturn they will be hurt the worst they always are. You know in the last downturn we had I think 11 percent unemployment at the peak. But if you look at people with a four year college education their unemployment rate peaked at about 3 percent which means that for everybody else it was much higher. The further down and literally you know the charts will show you by education less education somebody had the higher the unemployment rate was. So if you're owning a property or looking at properties that are C class properties you're taking a big big risk that when the recession comes you're going to have a lot higher vacancy right in the hole. There's another mythology around multi-family investing which is that rentals do well in recessions. Right, and that that mythology comes from two things. One is that multi-family does better than other asset classes in recessions. It's more resilient for the reasons we talked about before because people don't go out of business. Right. So it does better. But I mean by better if you look at the last crash, you know multi-family I think fell in value by only 32 percent. It was the best performer of all the asset classes because it fell by only 32 percent in the last crash. Right. So which means others did much worse. Right. So because of that people have conflated that. And then also after the last crash when we had the housing foreclosure crisis then a lot of people moved into multifamily who had been owning before. So occupancy really shot up but they've also conflated that with the recession that didn't happen during the recession to happened after the recession. But times are still bad, so they still think of it as the recession but it wasn't. So when people say multi-family does well in a recession if they're buying based on that assumption they're really making a big mistake because it just emphatically does not do well in a recession. It just does less bad than other asset classes do. [00:00:15][0.0]
BIGGEST RISK with Reed Goossens - CREPN Radio
Darrin: [00:00:08] If you could identify what you see has the BIGGEST RISK you face as a department's syndicator? [00:00:15][7.4]
Reed: [00:00:19] From from an insurance point of view? [00:00:20][1.3]
Darrin: [00:00:21] No if it does not have to be an interesting point of view and I guess I want to make that very clear. If you've got it you can think of it in a way of just. I mean if you if you tie into it and that's fine but I'm really not looking at war conditions. [00:00:32][11.2]
Reed: [00:00:33] I can give you one on the insurance. So goes back to building construction best practices and in the 80s, assets were built without fire sprinklers. So you'll get to know that things that are built in the 90s and particularly in the early 2000s. Fire sprinklers are everywhere but it was required by code is code changed over the years. But if you go to 1980s asset or earlier they will probably not have fire sprinklers which means your insurance for fire is going to go up and your premiums going to go up. So, having the new crop of construction we talked about the nine foot ceilings, typically with nine foot ceilings, you'll have fire sprinkler heads. In my experience, things that are built in the mid 90s and sooner or later we'll have fire sprinklers and that will help you with insurance hail damage roof insurance all that sort of stuff. You're really going to be on top of when roofs need to be replaced. Depending when you're buying, like in Texas, we have a lot of hail storms. So a lot of companies insurance companies will replace roofs when the hail storm comes through. And we need to really be on top of that, when we look at the due diligence because a roof can cost you three or four hundred thousand bucks. And if you haven't You haven't budgeted for what's taken out of the exterior budget you're leasing office not look as good. So, that's the sort of insurance risk it'll look at as a syndicator. In terms of the BIGGEST RISK, there are so many risks. When you're when you're syndicator. It is obviously finding the right deal. If we stop any funding or deal underwriting it correctly what assumptions have you put into the underwriting to make sure that you protect your investors principle? Because you will we invest in real estate to make money. We don't invest in real estate to lose money. I think in terms of where we are in the market cycle we are looking at new types of assets from a risk point of view and it ties into insurance. We look at new build assets because there's less skeletons in the closet. They're individually metered, right. 1990s or early a built to thousands of individual meters on water on electric. They'll have fire sprinklers. They'll have individual heaters. They'll have individual high spec systems so there's less likely to have issues as you move down the track where ownership. There Is left heavy lifting we have to do. So you can go and buy an asset that was built 2000's at the same cap rate as you can buy an asset is built in the 1990s but there's going to 1980s I should say but that's going to there's gonna be a lot more potential risk items from an insurance point of view and a construction point of view that could come and bite you in the ass later on. So we look at that. We weigh that up and say I want to spend less money on the front end. I still get the same cap rate coming out of the gate. Why would it want would I go buy 1990s asset. The second thing is where are you buying. Core implies value add locations are extremely important. I would not be buying in the Treasury market right now. I'm buying where the population is growing. I'm buying with his multiple income employers. So there's a, people all always have a job. I'm looking I'm really I'm looking for a value add properties proposition. I don't want to buy something that is being touched by someone else because that's not a true value add. There's all these things out in the market right now. You know value add the whole exteriors being touched and you know 30 percent of the units are being touched and interiors and the brokers will sell it to us. I would just come and finish those off. Well one of one things we've seen as I explained before. You don't ever do 100 percent of the units you've got to come in and do 50 percent maybe a silver package you need to do maybe some that are a goal but you need to tend to send a gold and you leave the rest as classic because you want to offer that smorgasbord to people in these markets that you know. Remember we're in the game of affordable housing. We can't you know you can't come in and expect to buy a 1980s asset and increase the rent to two and a half thousand bucks a month like you get in Portland in Los Angeles. You know we're not in those markets. And if you are in those markets you're buying syndicating I bet you my bottom dollar it's not cash flowing because you're buying it at a cap rate of a 2 and 3 percent. So you've got to you've got to look at this somebody from risks from insurance to the top the bill to how where you're buying and where the path of progress is if you are buying in those secondary markets and how is that going to help you be future proof your investment just to make sure that the value is there and that you're going to your investors capital is protected and you've got to make money in the long term. So a number of things there for your listeners. [00:00:33][0.0]
Iintoo is an online real estate investment platform for accredited investors to access premium real estate investments.
Shoshana Winter managing director for iintoo USA, shares the opportunities for passive investors to take advantage of iintoo’s data science to achieve predictable returns.
The success of iintoo, is rooted in its data science. Digging into the numbers and looking for the trends are the key to identifying opportunities. What are the attributes of a particular market? How close is it to an urban center where housing is not affordable. Is the job market healthy? What about demand for housing? Does this market or industry have a cyclical basis?
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Each week I ask my guest, “What is the Biggest Risk Real Estate Investors face?”
BIGGEST RISK: 2008 looms very large for people. All the KPI’s are looking for the positive signs. We know from experience that everything is cyclical. There’s a new administration, or not; a world event, changes in the job market, unemployment, interest rates, etc. All of the factors, we know from experience, have the ability to create a seismic shift in investment markets, across the board.
The book, Irrational Exuberance, that explains how we are in this phase where everything is good, but we are waiting for the other shoe to drop. Because, we’ve seen it happen.
Risk is inherent.
What iintoo does, and tries to do, is to pull apart risk. We ask, what are people most worried about? We use data. We stay actively involved. Our thesis is to stay in these investments for short terms, 3 years.
Most recently, we started providing “Equity Protection” for principals on certain funds of our investments. This provides a second layer of protection. The first layer is a portion of the proceeds go into a retention fund. These pooled funds are available if an investment goes bad. If the first layer gets exhausted, a second layer is available. This 2nd layer is through a reinsurance carrier, through Everest Re. and is available if the 1st layer is exhausted.
BIGGEST RISK with Brian Hennessey - CREPN Radio
Darrin: [00:00:07] The BIGGEST RISKthat either you face for the U.S. investors face regarding investing in commercial real estate. I'm not necessarily looking for an insurance related answer I wanna make sure that that's understood. But I wonder if you could speak to that for a second. [00:00:24][17.8]
Brian: [00:00:27] Sure. And I could put it pretty succinctly. Assume nothing. Don't assume that that seller would not do that to you or it's not that type of property or or that can't possibly be a problem right. If you assume anything, you have to assume there are multiple problems that are waiting to be discovered. That you don't know about yet. Because you could give me a brand new property and I will find some issues. May not be a lot, but I'll find some issues. So that's what the crux of, learning how to do the deep dive due diligence will do for you. It'll minimize that risk. So when it comes time for your earnest money deposit to go nonrefundable, you're comfortable with that decision. [00:00:27][0.0]
BIGGEST RISK with Anna Myers - CREPN Radio
Darrin: [00:00:08] Can you look at what you're doing or perhaps what we've talked about today and identify what you believe to be the BIGGEST RISK? [00:00:15][7.2]
Anna: [00:00:17] Well as a person who studies markets and uses other people's money to invest I think one of the biggest risks is not understanding your market well enough and not going into a market that really supports the rentals you're trying to project and the growth you're trying to project. So the market markets are going to change. The economy will change. Markets will change. We like to go in markets using Data Science where we we can show there are jobs here there are population there. That's going to give you some padding. And we like to have that padding there, because if we make any mistakes as operators of that building or if the economy changes and there is a shift in the market we've got some padding to help. Whereas if you are in a market just for cash flow. And you have no underlying strong fundamentals in the market of jobs and growth, you don't have any padding. So that's a much bigger risk that you're taking because if you make a mistake the markets can't help you out. The market can't help you with that risk. So. So that's what we really like. How we like to mitigate our risk is again by relying on the data science and underlying fundamentals of what makes a strong market. We don't report we can't force appreciation. I mean we do force appreciation but we don't rely on the market to be appreciating. We just go in strong markets. [00:00:17][0.0]
BIGGEST RISK with Larry Goins - CREPN Radio
Darrin: [00:00:08] I'm asking all my guests if they could identify what they see as their BIGGEST RISK. I'm not necessarily looking for an insurance answer but I was hoping you could share with the listeners what you see as the BIGGEST RISK to your investment operation or how you know what you what you see as the BIGGEST RISK? [00:00:26][17.7]
Larry: [00:00:27] Absolutely I'll be more than happy to and I know exactly how to answer this question. A lot of people think real estate is risky. Real estate is not risky. Being uneducated that is what's risky right. Once you get the education it takes the risk out of it. Now you also may need somebody to try to help you. Like you said you can take on that risk yourself or you can transfer that risk right or minimize that risk or transfer it. That's what insurance does. Right. But in real estate, I mean yes you've got to have property insurance. You've got to have liability insurance. You've got to have you know insurance if you're a licensed agent. But, you've also got to have education right. Education takes away the risk if you don't know how to handle something you need to either get educated or or be able to latch onto somebody that does. Like I have a lot of students, a lot of students we have a partner program. It's like a coaching and mentoring program where we help students and partner with them. And a lot of them will run into a situation and they don't know how to handle. They reach out to me. For example, just just a couple of days ago, a student messaged me and he said hey I've got this seller he's got a property. He took the property as payment for something where somebody owed him money but he did it to his son's name right. So. So how much should I offer him Bob. And I said, Well first of all you've got a problem you didn't even think you had. They deeded it to the son. The son is a minor. The son can't sign anything. So the court is going to appoint a guardian ad litem. I think that's what it's called, to to. To oversee that that transaction and make sure the seller, the son's parent, is acting in the best interest. Right. So there's all different kinds of things that you need to be aware of that you may not even know you have a problem yet. Right. So when I advised him about that I told him to talk to his cellar and find out if he knew that that was the case that he's going to have to go through that when he sells the property. [00:02:33][125.4]
Darrin: [00:02:34] So my next question is Larry that sounds like a lesson maybe you learned you learned is that hard. Did you run into that situation? [00:02:42][7.6]
Larry: [00:02:43] Oh, I ran into it years ago when I made a hard money loan in my son's name. And then the property got the property got in default and we had to we had to foreclose to get the property back and then sell it. And we had to do the same thing. We had to do the same thing to to be able to get title clear title to the property to sell it. Because even though I gave my son the money and and made the hard money loan in his name even though we did that we were acting is in his best interest. The court had to appoint an attorney to oversee that transaction to make sure we were still acting in the best interest of my son. [00:02:43][0.0]