Tag: fundamentals

What is an Institutional Asset?

What is an Institutional Operator?

I am going to be doing a shorter podcast this week because I’ll be honest. I’m a little poop from this weekend. About eight hours a day of pure passive investor networking at the bubble. Thank you all for coming. We almost had a hundred folks join us in the plethora of breakout rooms. I think a lot of people made lifelong connections., this week cast, we’re going to be briefly going over. What is it? Institutional grade, they did investment and operator. Before we do that, I want just wanted to catch up people where we are in the economy.

And what are some of my opinions of things four. the fed almost $4 trillion Into the economy in the past six or seven months, you can bet that this is likely the reason why stocks are now at an all time high. Yeah. I don’t know if this is going to continue, but I do know that true wealth comes to those who create value.

And for those of you guys jumping into opportunities that do value, add. AKA rehab the property to create better living conditions for people who in turn pay more money for that product are the ones who are going to have sustainable longterm wealth. Those people who trade money, like you’ve got our Amazon business or eBay business where you just buy things low, sell high.

It’s just easy come easy go. And the same. About, buying crypto Bitcoin or just trading stocks. What value are you adding there? What value are you adding to society? But anyway, all this money is going into the system prop and stocks up. But what about inflation? Shouldn’t inflation come well, I was just watching some of Richard Duncan’s videos , who is an economist that I follow.

And if you guys want to get more information about Richard Dunkin and see the. Past podcasts. He was on go to simple, passive cashflow.com/dunkin. Check out his newsletter there too. I subscribed to it and while you’re there checking on all the other things on civil pass, a castle.com, but you can never checked it out and join our investor club@simplepassivecashflow.com slash investor.

Now what’s going on here? Why is the money supply growing by leaps and bounds yet? Inflation. It’s not happening. Part of this has to do with, we are not backed by gold anymore, and it is decoupled the correlation with modern money that’s out there and inflation.

It’s just another form of credit. And that is being created by the federal

and that’s why money’s still apply, but it doesn’t really matter. Although a lot of people say when is this going to end? This is all going to come down. People say that all the time, but a lot of these people are, what are they selling to you guys? What’s their product of the week.

There’s trying to sell to you gold, which is why they’re trying to claim the doom and gloom thing. Whereas I don’t know if the doom and gloom is going to happen, but I do know people need a place to live at the end of the day, especially. Good value rents between 700 and $1,200 a month.

What we call workforce housing? Richard Dunkin says that the credit supply is not what counts and he outlines four scenarios here. First snares were inflation. Interest rates remain low. This would probably be the best possible scenario for asset prices. And I think we know one thing. In all these scenarios that the government is going to be spending more money.

I mean Biden’s in there and he’s going to be putting more money into the system, which I ultimately think helps investors. Yeah.

Now the fed is likely to be putting more money into the system. This is going to keep things going, Richard Dunkin actually. He made a comment where he thinks that we are nowhere near the end of seeing the last, the stimulus. He says that you might even go two times. So what we see now from about 4 trillion to atrial and dollars.

So there are two that you talked about as higher inflation with higher interest rates. This would be the worst snare for asset prices. The economy would obviously get a boost from the increased government spending. But significantly higher interest rates would probably come. So those of you guys are watching interest rates on your primary residence should probably be wary of this possible scenario.

Gold is seen as a hedge against inflation, but significantly higher interest rates could actually cause the price of gold to fall. Scenario three. Is higher inflation without higher interest rates. I actually think this is where we are heading normally when inflation increases in interest rates move higher to however, as we sit before the fed is adopting a new thing called yield curve control, which is like quantitative easing where holds the interest rates at this unnatural level.

But it is the new natural. It’s whatever the fed desires, for instance, if they want it at 3%, they keep it at 3%, even though the inflation was at five or 6%.

So this new government spending would boost the economy and it would be combined with lots of quantitative easing or your curve control. And this would likely push asset prices up in this case. Sabers are the losers. If you got money in your cash, bonds, savings accounts, or maybe an equity that lazy equity in your homes or your rentals, you won’t be the loser.

And the last scenario is a short-term rise in inflation and interest rates followed by a subsequent client and vote.

either way. I think we’ve had several guests on even Jim Rickard, who you’re going to hear coming up in the coming weeks, but Richard Duncan, John Burns, they’re all pointing towards this bullish sign and we’ll see what happens if it comes great. Cap rates will fall. And our properties will increase in value, but if it doesn’t, Hey, we still cash all heads.

I’m going to be explaining what an institutional asset is. Now. Institutional asset is a little bit different than what we normally go after. When we’re looking for a 50 to 300 unit apartment complex and institutional asset is the higher grade than that. And certainly it’s bigger than your your single family, home, duplex, triplex, or quad.

The institutional asset normally is around, higher than five to $20 million in purchase price. And in these properties,

usually the largest buildings in the skyline, lower cap rates, somewhere in the two to under five cap rate land. And these are usually what the assets that large family offices, hedge funds. Insurance companies or any other institutional operator that is just trying to invest large sums of money. They’re not quite in it to make the best return, but they more want the reliability.

This is usually what is invested in large clumpy REITs. They’ll go after these markets, situational assets, because it’s a lot easier for them to manage them. Also. Outside of that, these things spike, you get the reliability. It is lower returns.

What is an institutional operator and institutional operator is an operator that manages apartments, mobile home parks, or office space or commercial veto ins is the operator. We’re talking about. , I consider myself more of a middle-market operator. Where we’ve been around, we’ve done deals. We went full cycle on some properties, but we haven’t been around for decades.

a lot of investors always ask I want to work with the operator that has been around since 2008, And I’ll be honest. especially in the apartment investing world, You’re not going to find them. I’ve tried to look for them. They’re not out there. Because they have been around since 2008, what they’ve been doing slowly is swimming upstream.

So they don’t work with small private equity guys. guys that are million dollars, a few million dollars net worth putting in 50 to $200,000 chunks there we’re swimming upstream. So they can eventually grow into large REITs so that they can extract more fees and better profits split for themselves.

So going back to ourselves. I’m the principal of the company, typically the one making management decisions, interacting with third party property managers, or maybe we have them in house. I don’t have, maybe, luckily one day we’ll have an investor relations staff, but we don’t have all these operational staff.

like a manager of operations, Texas director operations, Alabama, for example, I’m the guy. And I think that’s why a lot of people like investing, cause we’re not small, we’re not new, but we’re not also large. And, big and comfy, the reason why people like to work with middle-market operators and why I as LP, like to invest with middle-market operators, because when you start to go to the institutional operators, they charge very heavy fees, acquisition fees, and typically over.

Three to 4%, which is crazy to me. Remember, you have to add up all loan fees, guarantor fees, all these other fees, they’re all acquisition fees. They’re all just tricky ways to make you think that the acquisition fee is lower than it is. so in addition to the fees you also have where splits for passive investors and not necessarily saying that an 80 20 split is good or bad.

the operator’s going to take more as they become more online institutional and as their cost of capital gets cheaper from their perspective. So as an investor, you want to get a good blend of both, and especially when your network is lower than a few million dollars, you’ve got to grow your money.

You can’t just invest with institutional operators in my again, but. Institutional operators have been around the block, possibly five, 10, 15, 20 years in some cases. And they have large bloated staff, a lot of times, a lot of operators. And you’ll see a lot of these companies where they have to continually do deals just to get acquisition fees, just to get that three, 4% of big money to come into the office so they can pay their office staff and keep the lights on.

I don’t want to run a business like that, where I need to do deals just to do deals, just to pay my staff. But a lot of these companies have created this type of infrastructure where that’s, how they need to do it.

So some of my higher end clients, the guys that are over a few million dollars net worths, I may suggest to go into and work with self institutional operators in certain asset classes. But for, a lot of us that are under that, it may not make sense from a rewards perspective, which you definitely don’t want to be doing is working with a newbie operator.

And you guys know who I’m talking about. We talk about a lot of times, these are the guys who just created a podcast out of the blue cause everybody can name podcasts. He speaks, he just read a little script and in front of the microphone right here, And you got yourself a podcast and not, everybody’s like a syndication expert these days.

I’ll tell you creating a podcast. If you don’t do it efficiently, there’s no way in heck you can be the primary operator. It’s typically the guy on the blank is really the marketing side of the company. But what you’re trying to do is you’re trying to cut through the noise where the people who are actually doing the work and is this operator or that interacting with.

Are they truly more of an institutional operator or have they been around the block or are they complete newbie? tell, tells are guys still working their it job and they do this apartment investing on the side, but they have a great understanding of Upwork and Fiverr.

And how do you get a VA to do a nice little PDF pitch paycheck? And they have great presentation skills and they can put together a very, concise webinar. So don’t be fooled by all this. they could very well be very new just because they can put together a shiny presentation it doesn’t mean that they can operate or they have a track record.

I’m all for people going after their genes, but I don’t want to be putting in my 50 grand to be powering that I want to see people have to be at least in a few deals. Getting their track record going. And that’s why I prefer to work with more middle of the range operators. I’ve said that a lot of times before, the same reason why I don’t work with certain CPAs that charge our clients 10, 20, $30,000, even though they might be fine and they do a really good job.

I just don’t think it’s worth it at the same time. I won’t go to the low end and I won’t work with like H and R block or do triple tax. It’s just not good quality and you’re not getting all the deductions. I work with value operators and value vendors, and that’s just my brand. Is it a little bit more risky?

Yeah, but I think the risks outweigh the reward and you get the better returns in the middle, it’s very hard for passive investors to distinguish between complete newbies who are pretty nifty with making PDFs and presentations. From those operators who have been around the block a little bit.

that’s why I stopped going to real estate meetups and different conferences these days, because I’m in this business, honestly, Gator, I know all the little tricks and games they play. I know when they say something and it’s complete nonsense when they say it during a presentation, I make a list of these things and still I have a really hard time too.