I had the pleasure of attending the Limitless Financial Freedom Expo in Phoenix, AZ earlier this month. The event was hosted by Ken McElroy and Tarl Yarber and a number of key operators in the real estate industry were there – Robert Kiyosaki, Brandon Turner, David Greene, Thach Nguyen, Mauricio Rauld, Ashley Wilson, to name a few. I was humbled and honored to be able to meet them and speak with most of them briefly. What I appreciated about the conference was the broader topic discussion about wealth building and preservation vehicles (real estate being one of them), the economic outlook, mindset and personal development, and business strategy. It was invaluable to meet, connect, and re-connect with fellow investors and entrepreneurs. Below we will highlight on our key takeaways from a number of sessions, with a focus on passive investors (we invest passively too) and hope you will find those valuable as you continue on your investing and wealth building journey.
Joseph Wang, former Federal Open Markets Committee trader, opened the conference detailing the four global changes that will keep US inflation and interest rates high – US population aging, green transition, fiscal spending, and de-globalization. More specifically, the population aging (unless offset by policies to stimulate birth rate, immigration, and technology) will result in less available workers, which leads to wage inflation. The green transition requires a number of resources, commodities in particular, which would result in increased demand for such. This statement was further affirmed by Chris Mortensen from Peak Prosperity with respect to oil – namely that higher GDP growth is 93% correlated to demand for oil. Unless the US produces more or makes and maintains friendship with oil rich countries, there will be shortage, leading to higher oil prices and higher inflation, due to oil being a key component of inflation measures. We found it interesting to hear that the US oil production has shifted from traditional to fracking. And while that has increased oil creation, fracking wells tend to deplete faster (85% of reserves are depleted within 3 years). At the current rate of depletion, the US will start importing again by 2025. For political and other reasons, fiscal spending is not expected to reduce, leading to larger and ongoing deficits and printing of more money.
The common theme at the state of the union panel moderated by Ken McElroy was that despite the challenges, the US Dollar (USD) remains “the cleanest dirt shirt”, which (at least for now) will help the USD maintain its reserve currency status. Nevertheless, emerging nations are already collaborating and doing more trades in their own currencies (vs. the USD). Irrespective of valuations or reserve currencies, however, real estate and other hard assets do not lose their intrinsic value. Therefore, it is important to position accordingly. They may not grow as rapidly in the beginning; however, their growth is exponential over time.
In addition to the macro factors (interest rates, inflation, unemployment), key challenges that multifamily operators are facing relate to the rising cost of insurance and taxes, regulatory environment in certain counties/states, debt availability (which will lead to the growth of private equity, mezzanine debt in the debt stack and higher capital requirements), lower volume of deals and marginal deals. Overall returns have compressed and the 20% IRR deals are harder to be found. With so many deals that were aggressively underwritten/structured, and the looming bridge debt maturities, distress is on the horizon. One needs to be patient as the next year or two will not be easy. Building liquidity and human capital (relationships) now will position the players with such on the winning side when the turmoil is over. Operators who underwrite similar to the banks (like we do, given our commercial lending background and expertise), dispose of underperforming or non-core assets within their portfolios, build liquidity and reserves (we reserve at least six months of operating expenses and debt service), fix the debt (our debt is usually structured as fixed vs. floating), focus on operations (asset management is key!), and are patient will prevail in the long run.
There was a lot more to cover. The memories and connections we made there are invaluable. We look forward to attending again next year!
Should you have any questions or want to learn more about real estate investing or for an overview of our target markets, please reach out to firstname.lastname@example.org.
Disclaimer: The information presented does not constitute legal, accounting, tax, or individually tailored investment advice. Past results do not represent or guarantee future performance.