About two years ago, I had a training program for people with
the top of their career in real estate, primarily real estate
professionals, or insecurities itself, who wanted to make the
leap into real estate syndication. So these were your
a level players who wanted to be the a level players in real
estate syndication and real estate funds. So I put together
this video, this is one of our rapid implementation calls,
again, it's about two years ago. But it what it walks you through
is the market analysis that goes through and I'm talking about
the market cycles, not individual markets themselves,
but about some of the thought processes that went on and
what's going on at the macro time. At that point, you'll see
some my predictions were completely true. And
occasionally, they were not didn't come quite as true as I
had thought they would. But certainly, the information is
valid. What's important here is not what that specific
information was at that time. But it's the thought process
that went into how we look at the market cycle and where we're
at at the market cycle. To begin with, when we're making
predictions about the future, which is what we're doing in
securities, when we're doing when we put together an
investment vehicle is we're trying to make a prediction
about what's going to happen in the future. So that there's some
sort of gain for our investors, and ultimately, for us as well.
So this is part of that thought process. So I hope you find this
video useful, because this is how I think about things in
terms of what's important when it comes to money where we're at
in any sort of market cycle. And I know you'll find it useful.
So there are four stages in any market cycle. And they can be
drawn as a circle, or they can be drawn as they can be drawn
linearly like this. For our purposes, though, I'm going to
draw it as a circle, because that's the way I am used to it.
So we have a market cycle. And there are four distinct phases
within that cycle. So we have this period here, which is our
recovery. And so everything here, by the way, is going this
way.
So we're going that way. So recovery. So after the Great
Recession, things were stable for a while, they were pretty
low, and then they slowly slowly rebuilding up. And then we went
into this expansion stage. And then after a point, it expands
and expands and expands. And what happens if you like blow up
a balloon too much. It just can't expand any more. Enter
hyper supply. In the after that that phase of the market, we
finally if I press play, it starts going down, right,
because there's too much and we enter a recession. I'm not going
with the technical definition of a recession. Because if you look
at a technical definition of a recession, we've been in a
recession for a while. So recession is where GDP does not
match inflation, it's negative. And I would argue that by any
reasonable measure of inflation, not the ones currently being
used, we probably have been in recession for a while. And so we
just keep pumping money in so we're in this weird sort of
recessionary, expansionary phase right now, of the market. So
what happens in these in this part of the market? Well, let's
talk about what happens kind of here. And the expansion stage so
we have rents rising. rents go up, and construction levels go
up
just click on this because I can't see. There we go. Alright,
rents go up, construction levels go up. At some point in that
cycle. We start getting this high rent in a tight market.
Sound familiar? Because I said we're in a recession But we're
also in this expansion stage. And I don't think we're quite
into hyper supply yet, but I think many markets are, are are
seeing it. Now new construction takes place everywhere from here
on all the way over to here in general because the cycle of
building takes so long, so the smart developers started
developing early on down here. But then their projects may not
have gotten approved until over here. And so suddenly, now
they're in hyper supply, they still need to deliver that
building. But it's been difficult in this phase, so let
me just back up a little bit
alright, so that's what happens during an expansion period. Now
what happens during the hyper supply period is we start seeing
positive rent growth
but declining
right, so that steeps that's going down now this is all as it
relates to commercial real estate and I'm gonna make an
argument a little bit in just a little bit that this also
applies equally to residential real estate and kind of all
markets as well. What happens in a recession? Oh, we have way
increasing vacancy. Competition goes way up. And by this we mean
it's either a renters market. Actually, let's just renters is
kind of vague. So let's put tenants market or it's a buyers
market
and what happens in a expansion stage is it is definitely a
landlord market
and a seller's market
All right, so after vacancy goes up, competition go is going up.
Finally, we enter this new phase of the recovery. And so finally
we are vacancy reaches its maximum here.
And let's call this max occupancy.
And somewhere in here is probably the point at which its
maximum rent, probably somewhere around here.
And then, in the maximum, you can see this is the lowest
trends.
Alright, during that recovery phase, we have a, we have
increasing big I'm sorry, we have a declining vacancy. No new
construction, right? No new construction is taking place.
They're declining vacancy, but rents stay fairly stable.
I really don't start increasing until that vacancy factor here
drives down to such a level that there's enough demand in the
market in order to create in order to charge higher rents. So
why this is hot on my mind right now is last week on you and I
decided that we it just doesn't make sense at this point to move
to North Carolina. which bothers me greatly. I wish it weren't
true. Because I really really was looking forward to going
number one sec. Okay. So why did we make that decision? Well,
it's because of this it It's because of this market cycle. So
if you look at the market cycle, we are in this really strange
period. And I'm sure you've noticed this, that we're in this
period where there's definitely some recession going on. And
I'll prove that in just a minute. And then there is
definitely this weird kind of expansion. Because where do
those, those two interact? Like, if you looked at a Venn diagram,
it's actually this weird interaction point.
Between the two that that makes us puts us right here in this
weird middle space, and that middles weird middle space is
inflation. Right, because if we look at the pure definition of
recession, not the not the one that I'm using here, but if we
look at the pure definition, where we've got we are in a
recession. Recession if
if GDP is less than quantity of GDP.
I'm sorry, I did read that backwards. If GDP is I totally
botched that if GDP minus recession minus inflation
is greater than a backwards sign is greater than zero. Right. So
why do I think that the inflation is greater than zero
right now? So the Raleigh market kinda capitalizes on it. But
you've noticed it too. One of the main expenditures in most
families between 30% and 50% of their annual income is their
house is their housing right now. Well, rents right now are
extremely high. And new home prices are extremely high.
Right? They're big, big expenses. The cost of goods
right now is really, really high. goods.
Goods costs are really, really high. They're way higher than
they were before. Just a you know, just a silly example. A
candle. A very boring candle was on that was available last year,
that on your bought and liked was was $19. The same candle is
now $29. Does that make sense? On the on the on the cost of a
new home. So a home that that is comparable to what we are
looking at. Wood was going for $174 a square foot in March.
This was when we were last in Raleigh. Right. And it it's sold
in March for $174. Unfortunately, we weren't the
ones that bought it. Because it was a great house and we should
have bought it. But that $174 in March is now completely shot.
And now the market is over $350 a square foot that's a symbol
for square foot $350 a square foot. I mean it's doubled the
cost. Now, when you've got something that looks like a
spike. I mean, you've got this arrow right here makes sense. So
you've got this graph here and here you've got price per square
foot and you're taking into account 2% rent growth annually.
So we're taking In the Account 2%, nothing crazy. Right? If you
look at at the trendline, it looks like boom, it looks like
that. Now, does that make any sense at all? Or does that look
like an unstable market? I would posit that that is such so
irrational, that we have long since left this expansionary
period. Even though we've got high rents still, we're in that
tight market. I think that this kind of right here, that cannot
last. That means that we've got this period where we've got this
declining coming really, really soon. Because there's also this
inflation that's pulling everything down. In there's
nothing that we mortals can do about it. Inflation is pulling
everything down, and the bottom is got to fall out. And now why
is it possible that this can happen? So I don't, as you have
probably noticed, I don't make political comments here. But I
can make a political comment about both parties, both major
parties. And I don't have any problem doing that. Because, as
a side note, my typical, what people when they asked me what
my political affiliation is, I typically say whatever my
clients affiliation, that's, that's, that's typically my
answer. So I keep that private and to myself, but we've got
when you've got this, you've got the Fed, who clearly cannot be
scoffing at the at the value of what inflation currently is.
Right? So they are seeing they've got excellent data
sources, they see this inflation that's happening in this
country, and their mandate isn't neutral unemployment.
The United States neutral unemployment is not relevant to
what the Fed is trying to do. The Fed only job its mandate by
its what how it was called out was to have a stable growth and
decrease with minimal inflation. So instead, what is the Fed
doing the Fed points out the fact well, but we've got this
COVID situation that's going on for some time. And so we really
need to just keep pumping money and money and money into the
system. I mean, the loan on our house right now is 3.5% on a 30
year fixed. A building that that I know of that's owned, is now
at as seven years commercial building, seven years on it, and
its rent is 3.75% which is way below the cost of inflation.
Right, it's below the value of inflation, and it's below the
cost of it's below the predicted growth of our economy. So what's
below that mark? So yet, the bank is the Fed is encouraging
banks to keep pumping money into the economy to keep this rent
low to keep these mortgages low, but it isn't working because
rents are sky high, because the money is low, so landlords drive
them as high as they can. And then home prices are sky high.
Because the Fed keeps pumping money into the system and
keeping prices low, which is driving up inflation. All right.
So it doesn't make any sense where things are at. So when we
had originally thought, okay, perfect, we can go from you
know, a place that I, I'm would rather like to leave called
California, where we've got what's going to be fairly soon a
16% state income tax. And we've got a standard of living that is
less than good. We can talk about that offline if anyone
wants to. So we got a less than great standard of living, we
have. And all for what, and we have earthquakes, all for all
for what? And, but then I look over at. And we have really high
prices, right. So our price per square foot is somewhere around
$750 a square foot right now. And residential. And I'm sorry,
this has turned into a discussion on residential real
estate. But it's what's on my mind right now. And it all
relates to exactly what you're doing. Because you got to find
opportunities. And but if you don't know why the market is,
and aren't paying attention to where the market is, it's going
to be difficult to find opportunities. So and we've got
North Carolina here, which has about a 5% income tax, in some
ways, a better standard of living. Well, but we've got real
estate here. That's two times where it was just six months
ago. Is that right? Six, yeah, six months ago. Versus here
where it's a ridiculous steal 10%, where it was six months
ago? Well, let's think about what's going to happen when the
bottom falls out. This is a lot more stable, because our house
really isn't that much more. It's not two times what we
bought it for, at this point. It's just not. And that's over a
period, we've lived in that house for about six years, maybe
almost seven years. I guess it's about seven years today. So so
this is in seven years, it's gone up a fair amount. But in
six months, this has gone up 2%. So the market kind of adjust
that the fair market value of California real estate right
now. It's not too far off, right? So if you look at it like
a like whether it's stable or not, it kind of looks like this.
Not too top heavy. Right? But if we look at at rally right now,
it's like this, it's incredibly top heavy. And it just needs
something to try and push that off. So I just am so concerned
if we were to move right now, that that market, what happens
when it goes underwater? So say we bought this house? Where to
go? What if we bought this house at 100 and at $350 a square foot
we bought that house for $350 a square foot and then the market
corrects and let's say it goes down to $250 a square foot well,
then we suddenly got this gap here that we're underwater, not
necessarily underwater by in terms of the loan cost depending
on how much we put down, right. But the you know, we just lost
$100,000 in value of not 100,000 I think we just lost $100 a
square foot, much bigger number in value. So what to do, I think
the only logical thing is hunkered down hold tight on this
kind of real estate. So now where are the opportunities then
given this? So the opportunities are here they're in there in
real estate that is is going to hold its value Still is good
value good properties out there, there's properties below the
replacement costs that are able to get, there are properties
that are have a fairly long, if they have long enough trajectory
that you're planning out, they're going to be fine. But if
you're planning on a quick flip, it's just not going to hold. The
people who are flipping are already getting in trouble,
right? Because the the flippers are right here at the point
where they're paying the maximum number of dollars that they can
pay for a unit. And their margins are so narrow right now,
it's just a little tiny switch. And suddenly, every one of them
is losing money. I mean, a lot of them have been losing money
anyway, we saw this dip that took place, actually, this year
for flippers, where they were where if you looked at, like
time and margin. I mean, they were doing really, really good.
Right, and then it's sunk. It just became terrible, terrible
margins. And a lot of them went out of business and lost a lot
of money. And now it's back up where the margins are back high,
where they can where they can do it. I mean, actually, it's not
that high, because the other thing that drives the flipper
market is their renovation costs. So their expenses have
gone sky high, because not only are they having to buy into the
property very high. But fortunately, growth is making it
so it'll still kind of work. But the value of the labor and the
materials is just killing any sort of long term prospect in
So while I'm still hot on the markets that we talked about
that business.
before, Atlanta fee, Phoenix, Seattle, I'm so hot on those
markets, I wouldn't be going in for a short term, I'd be looking
for something where its price per square foot is relatively is
low compared to the market, that it is something that's going to
be desirable for a very long time. And, and that's what I
would be mostly focused on. So let's go ahead and turn a little
bit to, to financial analysis of the soapbox about the state of
the market right now and how frustrating it. But I think you
all know what that market is, but don't let my my
procrastinations about the market kind of dissuade that. So
again, there are great opportunities out there, it
takes some work I've got, I subscribe to a bunch of other
syndicators and I'm watching every deal they do. I'm seeing
deal after deal after deal come out of these guys. So there are
deals out there. And they're not bad deals. And I've looked at
the numbers, and they all look pretty good. And they look
believable, and they're not making outrageous claims. So
there is great opportunity out there plus, you've got a huge
amount of cash, that still hasn't been put back into the
market yet. So you've got cash sitting on both in the form of
just general like people who set tend to save a lot, have saved a
ton. But there's also regular people have just saved a lot of
money. We've also see Wall Street putting in more and more
money into buying out companies which creates liquid liquidity
events for your investors, which means they've got money to put
invest into your real estate. So there's plenty of opportunity
right now, that said, Would I want to put all of my eggs in
one particular basket? No. But that's why it's indication so
great, because I can not only buy something in California and
Raleigh, I can buy something in Ohio and Atlanta, and Charlotte
and Texas and Florida and around. Right I can, Colorado is
a great market, I can put those that money in to use is that
would be much, much smarter and better. And so there's tons of
upside on syndication. There's a lot of opportunity still to find
great deals, and there's going to always be opportunity.
Because no matter what's going on, there's always I'm just
talking right now about the big picture that Mike the macrocosm,
of what's going on in the economy. But really, real estate
is a micro game, right? So every property is a little bit
different. Some properties do really really well all the time.
Some do great in recession, some do great in and big markets. You
know, it's just finding the right thing, and something that
matches your fit, getting it done and syndicated. So that's
how I look at a general market cycle and where we're at at any
given point. Again, this video is two years old, but the
information is still valid and it's definitely you can see a
very methodical thought process. If I can help you put together
your syndication, whether it's for real estate for your
business, private equity, anything like that, we'd be
happy to help. My name is Tilden Moschetti. I focus exclusively
on Regulation D, Rule 506b and 506c syndications. My again
Tilden Moschetti of the Moschetti Syndication Law Group