EP235: Real Estate in 2024: The Ticking Time Bomb

APPLE PODCASTS | SPOTIFY

Hey there!!

Are you sick of hearing about inflation yet? 

We know. And we get it. 

Inflation has been THE talk of all towns for like, ever. 🙄

But here’s the thing… the market is shifting again, aaaand there are some things you definitely want to stay updated on, for the sake of your real estate investment portfolio! 

We know it seems like there’s ALWAYS a new term to learn in real estate. 

But the truth is that investors who stay in the know are the ones who watch their money grow. 😉

Because knowing what’s up in the market is key to navigating your investment decisions. 

So, we won’t steer you wrong! 

Promise. 

We’re sharing the latest 2024 market news, so you can adapt the real estate investment strategy that will help you secure your future and finance your dreams! ✨

Ready to get started?

Well tune in now!

Here’s to staying in the know so you can watch your returns grow. 🥂

As the clock ticks into 2024, the economic landscape is shifting beneath our feet. From the relentless grip of inflation to the looming shadow of deflation, how do these forces shape our approach to real estate investment in these uncertain times?

Well, it shapes our approach in a lot of ways — and in today’s episode, we’re going to break it down by answering 3 questions:  How did we get here?  How are economics shifting real estate and what impact are they making?  How can YOU profit from it?  Yes, you. Just keep watching.

First, we have to talk about inflation… specifically, the inflation narrative of 2023. No matter who you are, you heard about it… a LOT. you heard about it on the news. You saw it in the Greek yogurt aisle at Whole Foods. You saw it everywhere, and everywhere you looked, prices were climbing.

But now that we’re into 2024, the conversation is beginning to change. Inflation is beginning to stabilize, like you see in these graphs. Rate hikes are on the way out It’s like economist Diane Swonk said: The Fed is done! 

As long as economic data keeps to change and move like it has been, with inflation starting to chill out and the economy, while slowing a little like you’re on a neighborhood street, BUT not poised to crash, the Fed will start cutting, sooner rather than later.

Sounds good, right? Well, just as we get comfortable… a new term starts showing up in financial news: DEFLATION.  And, you might be wondering: what does it mean when the cost of your weekly groceries and your fancy Greek yogurts and your lattes and your gas start to drop?

Is there a term for it? Yes. Well, really, there are 2:  Deflation and Disinflation. They’re kind of similar, but they’re also, well, different.

We’ll start with disinflation: something that started happening last year. This literally means a decrease in the rate of inflation. 

Prices might still be rising, but they’re not rising at the same time as they were. This usually happens as the economy slows down or as banks take action to tighten up their policies. 

You can literally picture two balloons. On one side, say you have a helium machine. The balloon inflates fast when you use the machine, right? Now, say the other balloon isn’t being blown up by helium — it’s being blown up by you. It still inflates, right? Yes… but not as fast as the helium balloon does. Essentially, the helium balloon represents inflation — and you’re representing disinflation.

Or, to put it in real estate terms, we can talk about our apartment complex in Northwest Arkansas. It was leasing at a renewal rate upon purchase at 12% year over year, but right now the rental growth is at 8%. It’s still increasing, but the growth rate has slowed down.

The second term is deflation: it occurs when the inflation rate falls below 0%, and refers to a sustained decrease in the level of prices in the economy. 

A bunch of things can cause this: decreased demand, decreased money supply, tech advancements, you name it…. And it’s a key topic, since it carries with it a potential impact on sectors like, you guessed it… real estate! 

Why? Because anticipation of lower prices can affect rent and property values. With deflation, spending can decrease, investments can slow, consumer confidence can go down, and the economy can stagnate. 

To put it simply: if inflation is the speed at which prices are climbing, disinflation is like easing off the accelerator—prices are still going up, but not as rapidly. For instance, if the annual inflation rate decreases from 5% one year to 3% the next, this reduction in the inflation rate is considered disinflation.

As real estate investors, we’d prefer DISINFLATION to DEFLATION. However, 2024 will likely see some deflation — which is why you want to consider unconventional opportunities that might either hedge against or capitalize on these economic conditions.

It’s why we love talking about diversification, about long-term perspectives, and about staying AWARE.

See, for real estate investors, this new deflationary environment presents a complex puzzle. 

For instance, let’s talk about the impact of a reduction in interest rates, which we’ll definitely see this year. From our perspective, we see this a few ways:

1. Falling interest rates should boost the commercial real estate industry.
2. Lower hedging costs will likely encourage more international capital to flow into U.S. property markets.
3. This could lead to slight cap rate compression and prevent cap rate increases due to lower interest rates.
4. If this is correct, property values could rise with cap rate compression, assuming unchanged net operating income.

This is a good thing, pals. At least, it definitely can be. For instance, falling interest rates means that financing = lower, making it more affordable to invest in big properties and development projects. 

It can also lead to an increase in cash flow by lowering mortgage payments, giving you a higher net operating income and the opportunity for property improvements and even investor distribution. 

Plus, as investors like us, and like you, start to lean on these lower rates, property values themselves start to rise. Take that, combine it with stimulated economic activity that falling interest rates can spark, and you have a high demand in the commercial space.  Boom.

So, you might be watching this and thinking…. How do I navigate this terrain as an investor? Should I be expecting lower purchase prices? Is this the opportunity of a lifetime? What should I do?

Well it’s all about strategic investment in 2024.

Just imagine… a large multifamily apartment complex. A gem, hidden in PLAIN SIGHT. Now, imagine it priced far below its worth due to a liquidity crisis of the owner. Just picture it in your brain: a hundred units, probably even more. A building full of tenants. The possibility of unlimited, remarkable returns.

Sounds like the best, huh? Yes, it does… and that’s a real possibility. 

Let’s paint the picture. First, take that urgent need for liquidity, and use it as a favorable entry point for investing. You do this by conducting your due diligence (you can hire a 3rd-party to do that), assessing the condition of the property, choosing places for improvement, and ideally purchasing the property at a discount. 

We can almost guarantee you that the bones of this incredible multifamily apartment can give you some BIG value.

Once you acquire the property, you can make big moves to restructure and make big money. This might mean renegotiating existing terms, securing more financing (hello, investment) or implementing cost-saving measures, too. Then, as a multifamily apartment investor, you and your team can enhance that value-waiting property with things that make it more attractive to tenants. That might look like upgrading amenities, renovating units, and, in turn, raising rent. 

Guess what happens when you do that? You’ve invested in LIMITLESS possibility, and then you’ve improved the tenant experience *and* made it easy (and very, very worth it) to raise that rent… driving occupancy rates, increasing net occupancy income, and increasing property value AND perceived value. 

And then, when you’re in this position, you can adapt to disinflations by implementing different lease terms, offering incentives, and keeping expenses down. There are SO many options here… and the possibilities are truly endless when you’re keeping that long-term, strategic investment perspective in mind.

We KNOW it is, because we’ve done it.  A lot.

Right out of the gate, we faced a colossal challenge: drumming up capital. Picture this – we’re fresh faces in the multifamily apartment scene, and back then, Phoenix was far from the real estate Mecca it’s hailed as today. Convincing investors, accustomed to the golden grounds of Dallas, to bet on us was like selling ice to Eskimos.

Nan – Everything was smooth sailing post-acquisition, until February 2020 hit us like a freight train. Our master plan had us rolling up our sleeves for interior revamps to increase rents, but then the global pandemic crashed the party.

Our grand construction plans? Frozen in time. Access to units? A pipe dream, thanks to the pandemic’s infancy stage.

With our strategy in limbo, we didn’t sit back. We shifted gears towards squeezing out organic rent growth. Call it serendipity or strategy, but rents soared, renovation plans or not. It was a tightrope walk, to say the least.

Looking back, if market winds hadn’t been in our favor, our bet on a C-class property in Phoenix could’ve spelled disaster. But hey, the stars aligned, and 27 months later, we closed that chapter with a whopping 3.11X equity multiple in profits.

A testament to the age-old saying, “All’s well that ends well.”

Now, don’t get us wrong… we’re not recommending that you necessarily invest in these physically neglected properties.

In fact, we rarely do that. Instead, we focus on the properties who were neglected financially. For instance, those which had unfavorable loan terms that were secured upon purchase, typically on floating or variable rate loans with a short loan term. 

While the operations, collections, occupancy, and total net operating income of these properties are usually fine, the seller probably has extenuating reasons they need to sell: loan maturity looming, depleted CAPEX budget, rate cap premium renewal, you name it.

Here’s the thing: real estate in 2024 doesn’t have to be a ticking time bomb, ruined by terms like disinflation and deflation and blah, blah, blah. Instead, it can be one fully of CRAZY good possibilities… and possibilities you can really, really profit from.

That’s where the rewards lie, friends — just take a look at the multifamily apartment sector. 

No matter what the economy is doing, you have stable rental income, a reduced risk (people always need to live somewhere!), a need for affordable, nice housing, and the potential for appreciating value… AKA, money, honey.

Despite the challenges of the economy at any given time, multifamily and commercial real estate gives you the opportunity to rise above. 

So, what are you waiting for? Check out this video to learn how you can start beating these challenges now.