Subscribe
Share
Share
Embed
A bite sized discussion on timely financial news and investment topics, to help you maximize your net worth and wealth for the next generation with Justin Dyer and Mena Hanna of AWM Capital.
Justin Dyer: Hey everyone, welcome back
to another episode of a WM Insights.
This, uh, is the Christmas episode.
Hopefully everyone is enjoying
time away with their family.
Uh, staying warm if you're in a
cold part of the country or maybe
trying to find some, some snow.
If you're in a warm part of the
country, um, your host, Justin Dyer.
Chief Investment Officer joined as
always by Menahan, our portfolio
manager here at a WM Capital.
We're gonna continue talking about
private market assets today, specifically
jumping in and diving into real estate.
I know this is, uh, a topic
most clients, most investors are
really, really interested in.
So hopefully we'll shed some
light, at least on how we.
Think about the asset class, how, how
we take an institutional approach, that
institutional professional approach
to allocating to the asset class.
Uh, and really, I guess without further
ado, Nina, let's jump jump right in.
So, uh, you know, I'll, I'll, I'll ask
you kind of a leading question to tee
up the conversation here, but yeah.
A common.
Uh, real estate approach at times.
And, and I think this ebbs and flows,
and maybe it still is depending on where
you are, but is to go buy a, a single
family rental, or let's go buy a house
and rent it out on Airbnb and, you know,
what is the general downside to, to a
or I shouldn't even say that's leading
the horse, uh, or leading the witness.
What, what would we say to that?
Yeah,
Mena Hanna: and I guess we're gonna
talk financially because doing that is a
tremendous burden on yourself, your time.
A million different things.
Justin Dyer: is not passive income.
Mena Hanna: That is not passive income at
all, even though everyone thinks it is.
And real estate also isn't really an asset
class that only goes up into the right.
My parents bought their home in
2007, and I remember how stressful
of a situation that was, even
though I was like 11 years old.
There are times where you can buy
these real estate assets, especially
if it's, you know, like you're
saying, the house next door where
there's only one tenant and you
could be footing the mortgage bill.
What you're actually paying to the bank
and not having any cash flow come in.
That's, that's one.
Call it sliver and, and potential outcome,
but it's, it's really a broader point.
If you're trying to invest like a pro
and looking at things from a smart
money lens and, and not being the
dumb money, you don't buy one asset
or two, three assets where you have
three tenants and you can lead lose,
you know, 25, 30% of your income any
day because someone loses their job.
Someone wants to move and
it's hard maybe to fill.
Uh, that property with a new tenant,
you want to buy thousands of units
and you want to buy thousands
of units in different markets.
You want to truly be in a position where
these units are producing passive income.
You want professional management, both
people that are dealing with things when
they break, fixing them at reasonable
prices, and also renting these units out.
Whenever you ultimately do have
vacancies, because people will always
move and find other properties unless
they are too cheap, and then you
have another problem on your hands.
So just looking at this from a.
Diverse.
I, I hate to beat a dead horse, but
looking at this with the lens of
diversification, because especially in
real estate, that could be the difference
between having a portfolio that is
successful and unfortunately going under
and losing potentially everything which we
see on the real estate side quite a bit.
Justin Dyer: Yeah, totally.
I mean, don't, don't, don't feel bad
talking about diversification, right.
It's, it's the one free lunch.
I know we, we mention it a lot, but it
truly is, it's there for the taking.
It is institutional best in class.
Investment management, portfolio
management, really regardless of
asset class because of, uh, a lot
of things you're talking about,
at least specific to real estate.
One other aspect, um, again, kind of,
you know, going down the diversification
side of things too, to think about
is it, oh, comparing a single family
asset or a single tenant asset?
Versus multifamily as an example.
There's just a huge step up
in diversification there.
If you owned a, an apartment building
or complex versus, you know, two
rental homes, you are so better
off still in a, in a way, a single
asset, but think about the different.
Tenant makeup, you lose one tenant
in a multifamily unit, you lose one
out of, you know, whatever, 2030
versus you have two rental units,
you lose one tenant, you're down 50%.
And so there's also an element of that
and there's, there's, there's a reason
why some of the biggest home builders in
the world nowadays, their game plan at
least, is to do these huge developments
where they're building, you know, hundreds
if not potentially thousands of, of.
Units in a, in a given project, right?
That is inherent diversification
in and of itself.
So, um, another really important
piece to, to all of this too, is
the different asset classes, right?
We're, we're talking real estate and
everyone knows what real estate is.
You can go touch it and bang on it,
Mena Hanna: but
Justin Dyer: but each asset class,
sub-asset class within real estate
has different profiles and d
different risk profiles and therefore
different return profiles, right?
Uh.
A lot of people like real
estate, but guess what?
I don't think you would like real estate
if you owned office, an office building
in 2020 and still to this day, right?
That that really hasn't come around.
So, Mina, speak a little bit about,
let's call it sector diversification
and even the quality of the
asset, the class of the asset as
well.
Mena Hanna: Yeah, I think on the
real estate side, we pay the most
attention to the asset classes
that we're actually investing in.
And as you said, the types of properties
we are not going to be going all
in buying, you know, B class B.
Office real estate in North Dakota,
that's not gonna be something we do
because we don't see the tailwinds behind,
behind that to justify the valuations
or potentially growth in the future.
So we really take a cautious
approach thinking what real
estate is going to be in demand?
This ultimately is, is a huge demand game.
A big reason why people invest in
real estate is you can't replicate it.
So you have to look at the demand side,
figure out where demand's actually
moving, and a lot of the demand
we see is on the multifamily side.
There's first of all positive, call
it tailwinds for demand, and we're
also under supplied in multifamily
in general, by millions of units.
Justin Dyer: So
Mena Hanna: When we look at the
market, that immediately sticks
out as a very favorable part of
real estate that we should actually
allocate to the way we allocate to it.
Going back to the diversification pieces.
Across markets.
Now we like to look at asset types,
whether it's Class B, your super
high-end apartments, uh, class
A, excuse me, your super high-end
apartments, class B, a notch down,
and then Class C, kind of your.
Pre 1980s buildings and look at
potentially what makes the most sense.
How different are rental prices
for each of these assets and what
price can we actually buy in at.
So I would say the real estate
side, I know I've been jargoning on
for a while, is one of those asset
classes where you can do a lot of.
Research, you can look at things
in a pretty objective way and
see what direction is the market
actually moving in and what are
the biggest areas of opportunity
that you can take and potentially
and hopefully avoid office in 2020.
Even now, office has actually been
falling for a staggering amount of time.
Ever since like 2007, it's been
on a downward spiral and avoid
that bad part of real estate end.
Capture the returns on the good side.
Justin Dyer: Yeah, totally.
And you know, it's also worth noting
this, this is a comment people
have heard time and time again.
I, I imagine when it comes
to real estate, right?
Real estate is about location,
location, location, location.
And I think that's a, a very.
True statement.
It, it's not just thrown
out there flippantly.
Um, because you can actually,
we we're, we're, we're uh,
really beating down office here.
And that's for good reason.
'cause broadly speaking, it's not
done well and it's been really hurt.
People are underwater.
There's all sorts of reasons, but
every so often there's a specific
location where office makes sense.
There's a unique angle to it.
We've done it.
Uh.
An investment like that in the past,
and we really think about whether or not
someone has an edge when we're kind of
going outside these, let's call it down
the fairway asset classes or where, where
there's a lot of data to support it.
Um, uh, just more broadly speaking.
And we ask ourselves, is there an edge?
What's the business plan?
Is there an edge in access?
Right?
Maybe it's a unique piece of land that
someone owned and we know the owner and
you can get access to that and develop it.
Or maybe there's a, a tenant that is
taking up 80% of the, the property.
Like these are all wonderful
things and really kind of the.
Inside information game.
Uh, not in, in, in any bad way, but Right.
That's what, what can happen
in these, in these markets.
And so we start to look for these things.
Uh, is there a, a local tailwind that.
For some reason, they want more
office or they want more multifamily.
Like all of those come into play into the
mix here and are really, really important
to, to, to, uh, to re to remember, right?
You don't just chase these fads or you
we're talking about multifamily, we're
talking about residential real estate.
But there are markets where that's
a terrible investment right now
because it got oversupplied overbuilt.
You know, there's all these Sunbelt
states where prices have actually
declined a little bit in, uh.
In residential real estate, multifamily,
um, part of that's 'cause of what's
happening in interest rates, but a lot
large part of that is the oversupply
that happened in those specific markets.
And so there needs to be a correction.
So all of these things go into the mix.
You really have to think about the
demand side, like you said, but
then what's also going on in the
macro environment, in what's going
on with interest rates, et cetera.
What's going on now with tariffs?
'cause that impacts building costs.
Um, real estate is one of those
asset classes full of jargon.
If you don't know what, you know,
some of these words are that,
that you were just rattling off,
you know, cap rates, et cetera.
Then you, you're, you're probably
not really well equipped to out
be allocating to this asset class.
Not at, certainly at an
institutional level and you're
probably getting, getting taken
Mena Hanna: of.
Yeah, and every property is unique
and every market, I would argue is,
is super unique going back to office.
Office is pretty negative across the
country, but if you look at class A office
in New York City, everyone wants a nice
office in New York City right now at
least, or potentially in San Francisco.
In some areas, you've seen prices for
office buildings skyrocket in these really
niche parts of the market, so you do have
to be very specific and very granular.
Obviously, real estate is.
A specific game.
Every property is different, but also
every sector is different and moves pretty
quickly, and that's why you have to have
a team that's actually looking at these.
Macro movements and is investing
and thinking about investing like
a pro and not just taking haphazard
opportunities as they developed.
You also mentioned Austin.
I think Austin was a
super easy one to see.
There was a tremendous amount
of building that was happening
in Austin at the start of COVID.
Obviously a ton of tailwinds from.
Uh, Texas being a little bit
more COVID positive and allowing
businesses to function more freely
than call it a California, but
the market got ahead of itself.
We didn't allocate at all to real
estate in Austin and a lot of the
managers that we actually talked to.
That's one of our first questions.
Are you guys doing, or
what did you do in 2021?
2022?
Did you buy Austin or did you sell Austin?
And that shows you how sometimes people
can be thoughtful and miss out on these
20, 30% declines because that's actually
what happened in some of those markets.
Call it post COVI and after the correction
kind of happened on the real estate
Justin Dyer: side.
Yeah, totally.
Great.
Great place to end there.
Uh, kind of go, going through
a quick summary, right?
Of course.
Diversification is always
present, always an ever present.
Don't ever forget about it.
It is there.
Take it.
Um, but with respect to real estate.
There's a lot of nuance.
You can ha be diversified
within a specific asset class.
Multifamily, you could be diversified
across asset classes within real estate.
Um, we generally take more of a kind
of top down viewpoint where, what's
going on in the macro, where tailwinds
supporting certain asset classes within
real estate, like multifamily, you,
you gave that example and then really.
Set our strategy for the next
few years according to that.
Um, and so we pull all that together,
create our opportunities, uh, from that,
from that mandate, and, uh, and then
start to deploy capital from there.
So hopefully that's helpful.
Um, we will pause our, our, our, our
private market series and do a little bit
of a yearend review on the next episode
and then, uh, close it all out with.
Private equity, really jumping
into what is that asset class?
How, uh, how do we think about
allocating there versus other
parts of the private market?
What are the dynamics, et cetera.
If there are any specific questions you
all have, please shoot us a text message,
Mena Hanna: 6 2 6 8 6 2 0 3 5 5.
Justin Dyer: and until next
time, have a very happy holiday.
Merry Christmas to all Own your wealth,
make an impact and always be a pro.