What’s up folks? This is the December, 2022 monthly market update, and you’ve got a long one for you guys, which is probably why we’ll probably move to break these up as weekly installments into the future. But if you haven’t yet, check up my book, the Journey to Simple Passive Cash Flow. I think we’re a little bit over a hundred reviews at this point.
If you Pick it up or if you guys listen to the book on Audible. You guys can leave us a review or you can check out the free book@simplepasscash.com slash book, which is your little trick. If you guys listen to these episodes and we put these monthly reports up on the website at simple pass cash flow.com/investor letter.
So if you’re listening to this on the podcast and something sound interesting, you wanna look at the graphic later you can go ahead and access all the recordings with the cool visuals and highlights and graphs and charts on there. But before we get going Just see you guys here in about a month for the annual retreat.
If you guys want to jump on board and hang out with us for three days you guys can go to simple passive cash flow.com/ 2023 retreat. I think it’s like we’re calling the Huey five cuz it’s, making it like UFC where we start to number them. So we’re on their kind of our fifth one of these big events, but it’s great opportunity for folks to get to know other real.
Credit investors since most people out there just don’t have a clue about, using passive activity losses to lower the order income to drive their AGI down under 300 or 200, or not pay any taxes, or they still think tendered ones are a good idea and get around other people who aren’t, don’t think you’re crazy for taking money outta your HeLOCK to go make a higher rate of return outside of there.
First teaching part today anchor retail. Investments with fitness centers. Now the term anchor tenant is is very familiar in retail, shopping, malls, centers, stuff like that, where you have a grocery store as your anchor tenant. Now, I personally don’t, not super fond of shopping malls and that type of stuff, but like now they’re saying that the fitness center is the retail.
Anchor tenant for that. So that’s just a little bit of information for you guys to just always be learning, right? I think I personally like a lot of apartments maybe even self storage a little bit not huge of animal mobile home parks. And I like office if you can buy it at that right price, even in this pulse pandemic market.
But I’m not a huge fan of shopping. I think e-commerce. I do the little shopping centers, but I think it’s always good that people keep learning about these types of things. Also in the news, our business online reports, especially this great news for you, hunts investors with us.
As you guys know, we’re just wrapped up and we are starting to lease up our first development 230 unit development out there and we are start going to start to lay the foundation for our second development, which is 300 unit apartment complex in Western part of Huntsville. But the good news keeps happening.
First solar. Announce plants to develop 1.1 billion solar module manufacturing facility in Decatur, which we have three apartments out in Decatur, which is, I call it 20, 30 minutes west of Huntsville. So that’s always good to be investing with a storyline like this. Not only is storyline, but also, the numbers and growth population keeps going up and up.
So let’s talk about FTX and Alameda. And although I don’t invest in this type of stuff, and this is exactly the reason why I’ve been following this story as like how some people watch The Bachelor. Because it’s entertaining to me cuz I don’t really have money in it.
I’m sorry. If you had money with block fi and you were lured by the high staking yields and always scratched your head, how are they making those high yields? And to your dismay, this all happened, but for those of you guys who don’t, aren’t familiar, it’s this this dude’s fault.
Sam Bankman freed SPF is what we’ll refer to him. He’s the shyster involved in this. He created an exchange where people would load up their cryptos or buy cryptos and it’s supposed to act like a bank, right? Or like a, like your Vanguard account or your brokerage. But little did people know that, SPF and his little band of eight to 10 misfits in Bahamas, and the story kind of goes deep.
A lot of it is. A lot of the extra stuff, like the whole polyamorous group of bandits he had and his girl ex-girlfriend who had no experience trading or really no real job prior to this. Running a multi-billion dollar company. A lot of this stuff is makes the story interesting.
I see it as a drama unfold, I’m just gonna report on the facts here, but Fdx. Was one company and their other company was this Alameda Research, which SPF kept arms length transaction, arms length to him. He put his ex-girlfriend in charge there. But obviously everybody knows what’s going on, that he pretty much has direct control over both of these entities.
So Alameda Research is the the high risk trading company, which is really how they got started back in 2000 and s. But what they did was they used the deposits from people putting money into ftx to bankroll the Alameda research bets. And so the way the story unfolded, you know, ftx, I believe was the second or third largest exchange at the time.
I think the first was Binance. So these guys are always competitors and they always went head to head and there was a . Twitter, I don’t know what you call the tabacco or they basically, there were some tweets went back and forth where, finance revealed some holes in fgx and people started to look and basically it made the whole house of cards fall.
And boy did it fall. And this is maybe about a month ago, this all happened and basically it. Everybody found what a kind of a Ponzi scheme it all was. Now the lesson learned or at least for myself, is when you have two entities, like we have an apartment here, we’ve got well over 50, some 50, I’d say 50 live deals.
Right now, we’re not allowed to commingle the funds from one deal to. Even though 49 of ’em are doing really well and one is struggling, you can’t bring over funds to save another. That’s commingling now, unless you state it in your ppm. It’s illegal. What these guys did was obviously legal, but the thing about crypto is like, there’s not a lot of regulation in auditing in this.
These guys never even had any board. There was no really adult supervision in this FTX company. Ftx, you might have heard of ’em. They were signing up all these celebrities as spokespeople, like Tom Brady, his ex-wife super model. They were all not in on it, but they all were all paid off to promote the company.
And I just, came back from a going to Miami and I went to a basketball game and the, it’s still named FTX Arena. I don’t know when they’re gonna take that off, but, I guess the lesson learned there is just because there’s a big charade and marketing push around something for example, crypto.com is owned by, it has her name all over the X Staples center in Los Angeles where the Lakers play.
Not saying that’s a scam or anything like that, like a lot of this is like manufactured celebrity manufactured it may or may not be real and I for one know What I do, what we’ve done at Simple passive cash flow.com where we created this investor group it’s follows the same thing.
We like to, I, I like to put it all on display and be very transparent with investors, which is why we do the events so you guys can come and meet real investors than to just go off of how many Facebook likes or Instagram followers somebody has. That’s, that stuff can be engineer. I’ll be the first one to tell you guys that to me the really, the only way to really know if something’s legit is to know the business and know the people, and maybe most importantly, know the people.
Know the people who’ve invested with the people in the past.
But anyway, I’m sorry if you lost money through this. And, the, it seems to be this kind of fraud is pretty ramped in, in the crypto world. blocky.com, which is another big, I don’t know if the word is exchange or brokerage is the right word, but whatever it is, they were also back to backing FTX in some indirect manner, and they also went bankrupt and a lot of people lost lofts money in there.
They’re still investigating all this stuff. It’s fun. If you didn’t lose money to watch all the SPF videos out there, he’s running his mouth and his driving his lawyers crazy. But this is man, like this just reiterates like, why do we invest in real estate? Because it’s a hard asset at the end of the.
Is worth something. In fact, it’s a com. It’s a working commodity where people live in it, and that need isn’t gonna be really going away anytime soon. Out of everything I can think of, other than throwing away the garbage, I think that real estate, especially workforce housing, real estate is here to stay, whereas crypto is not a concern and nor does it provide any utility.
So I’ve always thought about this esoterically and how do I create a will or trust and make sure my kids aren’t idiots investing in Luna or some kind of fake thing. And other than I put the rules like invest in real stuff where you’re highly collateralized and the thing actually makes, has utility in the world because it’s like the tulip thing again, right?
The tulip thing. I guess there was technical collaterals, a physical object, but what the heck did tulips do? What utility did it do? Take it for what you wants. Just ideas I have. Real estate hits both of those. Plus the taxes, right? Getting the passive losses and being able to legally pay less and less, or even no taxes at all.
I just don’t think you can be real estate. I think the one bad thing about real estate is you can’t trade in and out of it on a whim, which might be a good thing for most people. And the other bad thing is you’re not gonna make huge amounts of money. You’re not gonna make 30, 40, 50% plus a year on it.
And if that’s you, maybe. It’s probably a sign that you don’t have very much money and you have to, you’re lower net worth and you have to take these moonshot. But if you’re an accredited investor, you don’t need to get these high returns. You just need your money to be stable and safe and not lose your money and not have it just drop overnight.
10, 20%. Like the stock market or 80%, a hundred percent like crypto. That’s not any utility in the world.
All that said, I the idea crypto. I like it’s, I like the how it’s circumvent countries, they can’t really control it. There’s a whole conspiracy theory over, maybe the politicians or the people who are really in charge or trying to create this debacle on purpose to create the reason for the regulation.
That’s probably gonna be coming down the pipeline. And, so that the kids are finally regulated with this stuff and are taxed, right? That’s the IRS love the taxes stuff as it, as of revenue source. I, for one, has follow Who follows s e c law Think it’s great. Yeah these guys need, people in crypto need to follow scc.
It’s a security, in my opinion doesn’t really matter. I like to see them follow the same rules that I have to do. But anyway, that’s off my soapbox. If you lost some money with this stuff, I’m sorry. Next time, invest in real estate in cash flowing stuff that is providing real utility in the world.
In fact, create value, right? That’s real. Wealth comes to people who create value. If you’re not creating value, you’re just. And we create value by just slowly and very boring fashion changing out units and increasing the value of the property, which our tenants to pay more on rent for, which makes the price of the property go up.
It’s very boring, although it’s very prudent. Okay, so back to the Real news. JP Morgan is about to spend 1 billion on hundreds of rental homes across the. becoming a mega landlord. So I always say Follow what the smart money is doing. They’re picking up rental problems.
So what they are doing, because they have so much money, a lot of times what they’re doing is they’re building big developments build to rent kind of model. And so that they can scale with this. And this is, I think, where the small landlord has the advantage over these big guys because small landlord can pick up rental property here, and here.
And, they’re willing, small landlords willing to put in a little bit of sweat equity and trade time for money where it’s not really efficient for a large player like JP Morgan to own 2000 units across a five mile ring. It’s all over the place. It’s not scalable, which is exactly why, we in this middle market between, few million dollar transaction to 50, a hundred million dollar transaction like apartments because, some of the big players, they don’t really play in the space too much.
Yet we can get better pricing than the, and better synergies and better efficiencies. Than the average mom and Paul investor, even the mom and Paul investor buying a 20 unit or 40 unit apartment complex. Equity multiple says going beyond narrative market drivers wage growth is still healthy.
5% in the US where the fed’s target is 2% inflation. We haven’t really seen the inflation come down by huge amount. There are talks in the tech sector of some layoffs there, but still, Job growth and unemployment is still pretty dang good, which is a great sign for the economy. I actually would like to see that go down so we can just flush it all out and get back to the lending markets being normal instead of being assaulted with these high interest rates.
But in all due time office loans are hard to come by and this is one. You’re buying office. I think if you can buy it at the right price, it’s a good deal. But the thing that impacts that is your lending. And this is why we’ve pause our normal value add apartment acquisitions.
I would say probably at least for six months until we start to see the interest rates come back to earth a little. No different than you buying your home to live in, right? Like the price might stay the same or even come down, but if interest rates go up, your affordability gets worse and worse.
As we kind of brace for even more interest rates hikes on November 2nd, the interest rate got roll 75 basis points and I suspect maybe one or two next year to be coming. We’re just not seeing a real big dent on the unemployment. It’s like you just take a big stick and like trying to chop a tree down and just take a big whack at it.
Fed just took 75 basis points, which is a big jump, but the tree’s still standing. So you, what do you do? You just keep chopping at it until it breaks or the unemployment starts to go up. So you’re trying to induce the unemployment to. So inflation comes down. Big picture, foreign investors continue to seek stability in the United States.
If you think inflation is high in the United States, look elsewhere it’s climbing and I think the United States, even though we, I don’t know if we or myself or we always have a self doom look at our country. A lot of times, United States is probably one of the more stable places, at least legally, and as far as you’re the best amongst the world.
Fundamentals that they did point out is impacting a US apartment market, including home high prices and rising mortgage rates. So this makes people renting in apartments. Even more of a demand as people can’t afford houses to live in. They have to rent somewhere. And a lot of that is in multi-family apartments.
Another shift. Foreign investors are becoming more accepting of secondary and tertiary markets versus a prior narrow focus on US gateway cities and urban cores. It’s always funny, I’ve talking with some foreign investors and a lot of times they don’t know anything other than Los Angeles, San Francisco, and New York.
And you tell ’em, oh hey, there’s this place called Seattle. And they’re like, no, we’re not interested in that. We never heard of that place. That’s just how it is. We think it’s stupid, but I don’t know what many people can name more than six, five or six China cities. I dare you.
I dare if more than five, but I don’t, I certainly don’t. But that has a bigger population in America, so probably should. . But what the, the light reported that Sunbelt cities, including Austin, Dallas, Fort Worth, along with Charlotte, Denver, Nashville attracted more interest, partially due to lower tax.
Incentive is other areas of interest include Atlanta, Phoenix, and Seattle. More stability, consistent returns and current strength as opposed to property sectors in Europe and. There the US dollar offers a degree of stability international currency fluctuations.
It’s commercial property Executive. That’s a article here on the pros and cons of zero cash flow deals. There are times when such deals can be advantageous when they come with a warning label while zero cash flow de. Assets do have a place, especially when it comes to single tenant lease properties.
They’re certainly not for everyone. So here’s my take on this. We always preach cash flow and cash flow is there just in case of hard times. But what do you do? Say you are in tough times and the. The cash flow isn’t there because hey, interest rates went up and which they have.
Are you willing to take a hit on your cash flow to go into a deal, purchase a deal? To some extent, if, I think the second thing to look at is if you’re picking up a property in this environment where the price is lower because. The seller needs to sell it. And they know that it’s a softer market out there, meaning there’s not that many buyers who can qualify or get financing to make the deal work.
So they have to drop the price. And that’s exactly what’s happening. Now we’re in this kind of price discovery land where, buyers still think their price is worth what it was, maybe a year ago. They understand that the new buyers just aren’t able to qualify for as much affordability and they’re holding costs and their debt service is gonna be a lot more, and therefore the demand is less and the prices should come down.
Right now the sides are very separate. And this is this again called price discovery land. Now, I don’t know when the, when it’s gonna stabilize more, but you. We always in these reports talk about things in generalities, good investors should be picking out the outliers, right?
When somebody is really desperate to sell, pick it up at a good price, even though your interest rate is high and potentially maybe even more even. if there is zero or negative cash flow, maybe you guys are gasping out there, right? No, I’m not saying that you should buy something with zero cash flow, but it may make sense if your property capitalize.
Maybe you have 1, 2, 3, 4, 5 years of cash reserves to paid to debt service if you know that you have the collateral there. So a point would be like if you buy, if a property’s normally a hundred dollars and now the price is 75. And you’re gonna suck away a dollar every year on the debt service because you’re negative cashflow.
I might take that deal because I’m like I mean it’s 25 years for me to get to a point where I’m just not going to I’m gonna be underwater now. That’s a very rudimentary example, but it just proves my point that is one way I would say it. And so it’s not, this is what I think.
You just stay semi-hard or it takes a business mind to say in everything that there is risk, you’re going into an asset. In that example for severe discount, how long can you hold onto your breath till things get back to normal and things get back up to where it should be.
And then you know the people who took a bit of a risk or gamble. And that’s not saying that it’s a good or bad thing. Can capitalize on that. Buying something for 75 cents on the dollar like that October. CPI suggests inflation may be slowing as housing demands continue to weekend. This is something I’m looking at closely, and this is from Fannie Mae. Say shelter costs continue to grow at a robust rate, however arising at 0.8% over the month and 6.9% over the year. New cyclical highs.
So owner’s equivalent rents slow to a 0.6 month of or month gain. You’re starting to see the signs of inflation cooling off. I don’t think it hasn’t hit. If you Google CPI or like the big numbers that your layperson will be looking at. But I think these are good signs that you’re seeing things start to reverse on the inflation.
And then the Fed can just give us a break on those interest rates and get back to business. So still we know that shelter’s a legging indicator and that home prices are beginning to. Decline and private measures of rent increases have slowly have slowed and they outright decline in the coming months.
Although we don’t believe this one report will significantly affect the Fed’s current aggressive tightening stance we do view this as a sign. Inflationary pressures are generally slowed this is from Chandon economics. Differences in rent or home personal inflation rates, reach a record. Personal inflation rates can look much different depending on if somebody rents or owns their home. Adjusted CPI inflation rate for renters was 7.8% in October, 2022. Meanwhile, the adjusted CPI rate for fixed rate homeowners total just 5.6 or the same period.
So I guess, overall what they’re trying to say here is the renter inflation. The difference between the spread, between inflation, between the renters and the homeowners is really big right now. A lot bigger than normal. I don’t know what that really means. Maybe it, maybe it’s just saying that the rich get richer and the poor get poorer again.
But or maybe if I’m reading into it, saying, The people who are homeowners and locked in at those nice 3%, 4% interest rates. They’re sitting pretty right now, where the renters are still out there in the cold and rain and their rents are being increased on them. I. Wealth management.com says multifamily investment coming back to earth.
They’re starting to see the rents not level off, but it’s not growing at that astronomical rate as it once did in the past year. Which is echos that last article where we’re saying, inflation is seeming to slow down a little bit.
Arbor reports, this is they’re talking about small multifamily investment trends. Consumer price index services increased 8.2% from a year goal from September, 2022. That’s them again, measuring. I know, I’ve heard of this being as high as 9%. I had to bet that things would get around 10%, but hopefully, we’re just gonna level off here and go back down.
The multifamily sector and small assets sub-sector continue to benefit from a unique set of circumstances. While multifamily assets are not refresh recession proof, they are downturn resilient. Even as rent growth decelerates year over year gains still outpaced inflation. The sector’s unique ability to absorb inflationary pressures in a powerful determiner.
Continues to attract new buyer demand liquidity is another factor that has enabled small multifamily subec to maintain its ity. And this folks is the reason why I invest in this type of stuff. It does well in recessions. I don’t know if the word is, recession resistant, recession proof.
I guess nothing is recession proof unless you’re investing in life sediments, which just determines if people are dying or not, but, a lot. I can’t think of any other businesses more recession resistant than multi-family apartments. If there is, let me know. I’d sure to invest in it, but that’s the thing.
You can’t invest in that type of stuff. It’s going to be somebody’s, business that the average person, the passive investor out there who’s looking to diversify in the multiple things is not able to. Obtain, like how it is with multifamily apartments and syndications and private placements.
A also reports that the loans are way down, which is, no secret to everybody and which is why if you’re a mortgage broker right now, things are pretty tough because just, it’s just hard to get deals done when people, saw like some of these interest rates. Half of what, it was not too long.
And I believe that this is in, just like how the lumber prices shut up a year or two ago. I think we’re looking at the same thing, and maybe even on the same timeline, where it goes back down in a year or two.
Refinancing share of multifamily lending. Loans originated for the purpose of refinancing, accounted for 75% of the small multifamily. So not new originations, but refinancing. You know what I’m prob what I’m thinking a lot of that is, is maybe people taking equity off the table and liquidating it to just put the cash reserves or to show up other projects.
And this is very different than what the regular person will be doing out there, right? People like to pay down their debt. They don’t like to liquidate their equity, but I think everybody needs to take note of this because this is what the pros do. If you had a few million dollars of equity in your apartment, it makes sense to take that off the table and just stick it in the bank.
Because in, in times get tougher, it’s harder to get at that equity. It’s not liquid. Which, just this is befuddles me, right? Why is it that everybody’s taught to pay off their houses and throw money in there where it’s inaccessible in tough times.
So CAPA rate spreads. So I’ve shown this. Many times, and it’s always good to come back to it, why do we invest in real estate? Real estate’s great in all, but like we make a good amount of returns when you apply leverage. And the thing is the price that the percent or interest rates that you borrow, the money is, not saying always, but typically lower than what the cap rates or what the returns on the properties.
What you don’t want is, a time like in 2020 when this delta, the spread is low. What you want is a nice, big, healthy spread there. If you recall, 2010 to 2000, I would say 16 was coin the golden age of apartments in multi-family, where the spread was huge. Then things got a little tricky, right?
As things started to really tighten up. Now, one could say that, this spread is a little bit wider now, a lot wider where it’s been in the last couple of years. But this is a time where it takes very the reason why is because the prices in, that you could buy these properties have come down.
But your hoarding costs has gotten way. But that’s where we are in terms of the spread. It’s, I don’t think it’s not possible for you to be like, oh, like the spread is small now I’ll just wait. Or it’s large. Now I’ll, it’s time to buy multifamily. It doesn’t work like that. Because going into deals, it takes a long time to transact, maybe two to four months from first contact to actually close an asset, and then, who knows what’s happening then.
Which is why the whole. Just keep buying good deals is probably the best approach or kind of dollar cost average to this is always, typically the spread between interest rates and CAPA rates go that spread is there and you apply leverage and you, that’s how you make money.
But, so looking at the graph. This lower one is the all multifamily and this is the small multifamily. Your small multifamilies are typically gonna have a larger cap rate because it’s more headache, it’s more pain in the butt and not, and that’s why the cap rates are higher because you know you’re probably gonna have it is just it for a lay invested.
They’re like, oh, let me go after a small multi-family because the cap rates are higher, but, More experienced investors know that it comes with more headaches and shovels and friction costs too, that aren’t really accounted for in it. But been there, done that. I, we started with a lot of Class C.
Smaller units, like 50 units, 70 units, and we graduated to the larger Class B stuff. Now we’re trying to get to a development and being more of a pro equity lending lender source and just give predictable returns to investors in the debt fund and then for larger returns to do the developments.
But, that’s the, our stories, it started with those Class C buildings, which is typically the smaller multi-family stuff. Not saying we chased the returns because a graph like this told us it was higher returns or higher caps, which not entirely all part of the story.
It’s that was all that we could do back then. But I’m, I’ll give first an experience that it’s maybe not worth it. It isn’t worth it in my opinion.
I would say, There’s a nice, sweet spot, with good tenants or no tenants. That’s why we do the developments,
expense ratios. So this is your expenses and expenses has been going up and up. I would probably say that well next quarter will probably see this bar graph jump. Now, expenses are coming from. Higher insurance costs, rising utilities, which is completely inflation inflationary. Other costs like taxes to property taxes, especially when prices have increased the last several years.
And then now the other thing is that is testing all apartment owners today and all real estate and owners today is the the interest rates going up, especially if you had a bridge law. Hopefully you’ve got a rate cap in there, that also increases your debt service, which makes your holding costs go up, which is why you’re starting to see the expense ratios climb across the bar.
But, it’s all, it all works within the system because if the expense ratios get so high where people aren’t making money, , that’s when kind of the prices go down, and that’s when you know the Fed should manipulate interest rates down. It all it, the nice thing about real estate is you can stay in business as long as you have capital stores to last these things, and these things don’t last forever.
As you can see, the loan to values have come way down, which is tied in with, people think when I talk about capital markets tightening and the lending market getting more difficult, that it just means instead of us borrowing money at 5%, it might be 7%. , but it’s also the loan of values go down.
So they’re like, all right, you can have 5%, but we’re only gonna give you 50% loan of value, for example. So those are the two main terms that are being moved around so that the lenders are basically getting a better deal, so that is consistent in this bar graph on this left side. Now average 66%, which, it’s all this is just averages right across the country.
But you can see where it was at the peak. 20 20, 20 19. Average LTVs were up in the 70% range. Now it has come down quite a bit. And we’ll end with this, the top 20 markets for four cast multifamily growth. This is from wealth management.com. Not saying that this is the all inclusive list or correct, this is just a guess.
But 20 Austin, Texas, and we’re working our way down from the top, from the bottom to the top. So Austin, Texas, Chicago, Seattle, Philadelphia, inland Empire, Los Angeles.
Portland, Oregon, Tampa, Florida, orange, Cal County, California. And then we get into the top 10 here, New York, where rents are going up. Raleigh, North Carolina, Boston Actually Boston’s number 10. Raleigh’s nine. Eight is Charlotte. Seven is Nashville. Six is Kansas City, Missouri. Five Dallas. Four is San Jose, California.
Three is Metro Miami. Is Orlando, Florida and one is Indianapolis. And that is the show. Folks, if you guys are interested in interacting with other high net worth investors, check out simple castle.com/journey. Our paid Inner Circle Mastermind. Say we’ve got almost 800 investors with us. We’ve got a hundred investors in the family office group, so not everybody joins.
But to me, if you’re investing more than a quarter million dollars, joining a group like ours is. Not only the only one out there for purely passive accredited investors, but it is, I think it’s insurance for investing with the wrong people and, but I’m big on like building the community where it’s more about the social connections within the group.
And then also check out my book and give us some feedback. We’re gonna be moving around this format a little bit. I’m gonna be breaking it up as today’s call was pretty long. And then if anybody has any feedback on the podcast things you guys like to see, things you’d like to see less of, feel free to email us at team passive cash flow.com.
And if this is the last time I hear you, see you guys have a great holidays. Happen in there, right?
