Episode 134: State of the market & our strategy
In today’s show, Pancham interviews Rajan Gupta – a fellow real estate investor in Mesos Capital.
Assets prices are continuously rising and the inflation risks are also getting higher. In this episode, Rajan is on the show once again to share his viewpoint on the current condition of the market.
Rajan will also discuss our current investing strategy and key things to look out for that can help identify good deals and would generate cash yields. Listen until the end of the episode as we will also share what Mesos Income Fund has in store for you!
Listen and enjoy the show!
Tune in to this show and enjoy!
- 1:47 – Pancham welcomes Rajan to the show
- 2:23 – His perspective on inflation in the multifamily market
- 4:55 – How staying invested can help in making yields amidst inflation
- 7:07 – Mesos Capital’s investment criteria to identify good deals
- 12:43 – How shifts in pandemic lifestyle will influence future investments
- 14:31 – Investing opportunities that Mesos Income Fund has in store
3 Key Points:
- The economy of asset classes – especially multifamily assets – has been going higher than ever and is currently at its peak.
- The tenant’s demographics, lifestyle, ability to pay rent, and the geographical location can help decide if an investment is a good deal or not.
- Sticking to your long-term investment goals, diversifying your assets, and staying invested can help generate income and can help plan your investing decisions.
Get in Touch:
- Listen to The Gold Collar Investor Podcast Episode #94 at https://thegoldcollarinvestor.com/tgci-94-high-yield-lower-risk-alternative-in-a-volatile-market/
- Listen to The Gold Collar Investor Podcast Episode #126 at https://thegoldcollarinvestor.com/tgci-126-ask-pancham-6/
- Mesos Income Fund – https://investor.mesoscapital.com/offerings/mesos-income-fund/register
- The Gold Collar Investor Club – https://thegoldcollarinvestor.com/club/
- Pancham Gupta Email – firstname.lastname@example.org
Welcome to The Gold Collar Investor podcast with your host Pancham Gupta. This podcast is dedicated to helping the high-paid professionals to break out of the Wall Street investments and create multiple income streams. Here’s your host, Pancham Gupta.
Hi there, I’m Robert Helms host of The Real Estate Guys radio program and if you want to have better results in your life you gotta put better ideas in your mind. You’re in the right place. You’re at The Gold Collar Investor podcast.
Pancham Gupta: Welcome to another episode of Gold Collar Investor Podcast. This is your host, Pancham. I really appreciate you for tuning in today. I have invited my good friend and partner, Rajan back on the show to discuss the state of the market, especially multifamily market, and our strategy around it. Before, we were only seeing that asset prices were rising but now we are reaching a point where we can visibly see that the things that you use on a daily basis, they are getting expensive, the price of gas, groceries, food at the restaurants, you name it. This also includes flight tickets, hotels Airbnb’s. You know, you can ask me and Rajan, we’ve been traveling to Jacksonville and do our markets, we try to look for flights, it’s always much, much more expensive than what we used to pay. We can never find rental cars there. It’s really expensive and you know, the Airbnb’s and hotels, all of that has gone up. So, the risk of inflation is real and so we’re gonna touch on that subject. And we will also be discussing our strategy given what’s happening in the market. So Rajan, welcome to the show.
Rajan: Hey, Pancham thanks for having me again.
Pancham Gupta: Yeah, always happy to have you back on the podcast. You know, you and I had discussed back in January when we released an episode about some low risk high yielding alternatives like Mesos income fund, and in general, that was the episode number 94. So, listener, if you have not checked that episode out, you can go to thegoldcollarinvestor.com/show94. So, we are recording this on June 8, 2021, Rajan. So, what are your thoughts, given what’s happening in the current state of the market and how do you think that has changed in the last six to eight months?
Rajan: Like you said, like, we have seen a lot of asset price inflation, partly because of the sentiment and mainly because of the money printing and the liquidity in the market. One of the things that hadn’t happened and started happening earlier this year, they started getting translated into like CPI or core inflation, which started going up. Now, the Fed stance is it is transitory, whether it is not -inaudible- , it’s yet to be seen, we did start seeing some like yield increases, we saw the 10 year spiking to about 1.6 and February, March, which was a signal that the market believe that this may not be transitory. So, it was good like to me like the 10 year or the bond yields moving a little bit took a little bit of froth of the market. We had some of the price distortions that had happened in the penny stocks or like some very high, high growth tech sector calmed down a little bit and we had some relaxation seeing there. But the story on other assets like the blue chip, or particularly multifamily in our space to talk about, has been one way. I think bond yields rising, a little bit interest rate rising, a little bit has been hasn’t had any, if at all, any positive impact on the prices of multifamily. Sure, we have seen prices reaching record levels, there’s never been such an appetite for these assets, especially in some of the key markets. And people just want to stay away from cash. That’s what we can explain.
Pancham Gupta: Yeah, absolutely. You know, you were reading an article this morning actually talking about abundance of liquidity, and all that. And this guy Rosenberg, he talks about, we are definitely seeing the economy opening up and the asset classes that especially multifamily is going as like highest as ever, and it has not come down at all. And you know, they are calling this as a global asset class than it was before. So Rajan, going back to your point, I think that is very relative, your bond yields went up, but they went up relatively speaking to what we had during the pandemic, but overall, in a global macro scheme, they are still very, very low when it comes to you know, if you compare it to two years ago, for example, three years ago, they’re still very, very low. So that actually bodes really well for any of these, you know, asset classes especially multifamily. And now that we’ve discussed like, we were discussing this inflation part, right, like What are your thoughts there? Like? What do you think about that? And also, what do you think we can as an individual investor can do to if we have this viewpoint that they are, you know, they’re printing infinite money and where the value of dollar is going down, what can we really do to kind of hedge that?
Rajan: I think we did speak about it, a lot of people are talking about it, the best thing you could do is like stay invested. I think staying in cash above a certain limit is gonna hurt you. Bond yields have gone up, but I still don’t think they are tracking the real fear of inflation. One thing we have spoken about again, and again as large commercial complexes or multifamily real estate is probably one of the best ways to short inflation or short the dollar or write the inflation curve. You have your hard metals gold, silver Bitcoin now, but the problem with them is like they are they are negative yield producing. It takes time, cost to store gold or even like pack your Bitcoins of where you could stake them to save some money. But multifamily or commercial real estate is one place where you’re making yield still at these inflated price levels, and you’re writing the inflation rate. So, I think my advice and that’s what I’m we’re doing for our personal portfolios is, stay invested don’t spend a lot in cash. Yes, you need cash for liquidity and that oxygen, but staying having a long term view and sticking to it is very important.
Pancham Gupta: Absolutely and you know, this is hard to get your head around the fact that actually one of the ways to short the dollar is to buy leveraged real estate, take long term short, like fixed rate debt, and you know, buy cash flowing real estate, but we actually, you know, I actually recorded a podcast on this particular topic as consume episode show number 126. If you want to learn how real estate does that you can go to thegoldcollar investor.com/show126 and learn about like how leveraged real estate can is really good in shorting the dollar and when you add cash flow on top of that, and passive nature of it with these large syndications. It’s just a cherry on the cake. So Rajan now let’s discuss, like our strategy, right, like you just said that the price of multifamily is going up and up and up. It’s not seen bad days at all right, even during COVID. So, given that, right, what kind of strategy our company, Mesos Capital, what kind of product are we looking at and what are we thinking of buying?
Rajan: Before I jump into that, I think I still like the product. I still like the asset class, the thing that really worries me is at the peak of the market cycle like we have, it’s very hard to distinguish between what is the right product you want to buy. We are seeing these like class T assets, 1960s and 65 belts, in Class F neighborhoods getting priced up crazy, like the spread between the really good product and the junk product has been so tight and I think that’s fair. That’s the thing that worries me a lot. I think if you stick to a good market stick to a good product, we still have room to go from here rent growth, as well as tenants. Good tenants ability to pay rent has been strong. Interest rates being so low has helped. So, I think we are still a buyer in the market, it’s just that like we are very selective, staying away from the product we don’t want to chase. One key thing to note here is collections across the multifamily asset class has been really solid across over the last one year. But any deal that we are underwriting we see 90% collected 95,96% collected, and the story just doesn’t gel in with the mainstream media telling about the hardships and economic difficulties people are having. One key thing that we see and is worth pointing out is it’s very, very important to distinguish tenants organic ability to pay rent, versus all the stimulus and all the benefits that we are getting now, which nobody knows, like one side of me says they appear to be permanent, but we cannot rely on them. So, we are seeing all these like all these inferior screen buildings where tenants are paying to a large degree, but that money is coming from agencies or stimulus or unemployment. And that’s what scares us. I think that money is based on a brain at one point, and you would see a massive wave of delinquencies and followed by evictions. So, we are still buyers, like we discussed earlier. But one of the things that we have done is like we have really tightened our screening criteria and kind of product we are looking at; I think on market deals anything which takes on market always has a certain buyer if it’s over $50 million is this institutional buyer, it’s between the 20 and $40 million, you’re fighting with other syndicators, below $20 million, you have the 1031 buyer who wants to park money in a better asset
Pancham Gupta: So individual buyer Yeah,
Rajan: Yeah individual buyer and group of people with their own money or anything across the spectrum for the product like resource Chase, which is anything between 50 to 60 million, we have a lot of competition. So, anything that goes on market we are seeing prices shot to those levels, that just simply does not work for a passive syndication model. We won’t be able to generate cash means. So, we won’t be able to meet, we are relying more on like capital compressions even though we believe they are here to stay product resource, we have always strongly believed in forced appreciation and buying product which have room for growth by hard labor. So, we have actually moved away a lot from on market deals, we are still underwriting a lot of them. But we have beefed our team, we have an acquisition manager in our key market, which is not Carolina to basically start chasing off market deals, it’s very difficult to find any off market deals, sellers know what you’re sitting on, it’s a perfect time to be a seller, it just you just cannot dream of a better time to be a seller. Fortunately, given the hard work we have put in like we are getting in touch with some of these groups who have presented us with certain off market opportunities and as you know, like we are working on a couple of them that we’ll be presenting to our investors later this month. But the formula is simple, we want to choose a product which has strong bones 85 plus 1985 plus bed and the key criteria, which we have added in the last three, four months is we are very, very concerned about the demographics and the ability of the tenants to pay and how they are paying,
Pancham Gupta: You know organically and you know where they are employed and
Rajan: Exactly so, give you an example one asset we are looking at which we will be going in contract very soon. One of the key questions was like how the delinquency has trended over the last 12 months. And these people commendably have done a very good job of the kind of people they put in. They had zero delinquency and pretty much $0 coming from any kind of government agencies. That’s the right product, which is I think, at this cycle, I think we still have room to go in prices as well as rent growth. But I think we have to stick to good demographics, both in terms of geographies and tenants.
Pancham Gupta: Absolutely, there’s so many things that you said there that I want to unpack with one thing I want to say the analogy that I want to give on what you said the spread between a very good product and good product, which is not in a nice neighborhood or in the product itself is bad has gone down quite a bit. So that is actually similar to what we see in the bond market, right? We have class like we have a junk bonds yielding 3% maybe and then we have apples of the world, right that spread between the junk bond and the corporate double A rating bond has reduced. So similar thing kind of analogy, why speaking it’s happening in this market? So yeah, like you said Rajan, like in terms of our strategy, I absolutely agree with you that we are trying to chase only the good product. And also, one major demographic shift, at least temporarily has happened because of COVID, whether it will stay on average remains to be seen is that people want to find a place which is bigger than where they were living right now, because of whatever reason, because they were working from home, or they you know, they have kids also taking class going to school, you know, virtually, so they needed more space. And what we have seen is that the demand for the townhome product or single family community has gone up like what do you have to say to that?
Rajan: Totally, I think both in the kind of the product people want to live in, and the geographies people want to live in have been redefined. And actually, we’re going to see some shirts like now in the post COVID world how that shapes up. But I think like people are moving south, people are moving to places which are more suitable for a better lifestyle from a weather as well as infrastructure point of view, as well as everybody needs bigger places. So, I think I think your key markets like moving away from the core urban areas, which are very, very dense. And the unit sizes remain to be small are going to suffer a little bit in the post pandemic world, yet to be seen, like how the job market and the work from home scenario pans out but all signals are going towards, they are going to move into a more relaxed work from home environment where people can work more remotely. So that’s going to get well for like places which are kind of have a very good infrastructure as well as a product which is kind of newer, bigger unit sizes at good places with good infrastructure.
Pancham Gupta: Yeah, great. So, you know, can you enlighten us on what kind of opportunity that you are alluding to? Can you give us a little bit more detail and what else you know we have in the pipeline?
Rajan: So yeah, so the product we are talking about is in a very good market in the Carolina South Carolina specific. It’s built in the early 2000s. The bones are very strong, townhome product all units above 11-1200 square feet. Some units are three beds which are huge with double balconies. We are getting at a good pace is the tenant classes very, very stable, close to zero deferred maintenance and, and the look and feel of the product is that is the right one. So, I think that’s the kind of the product we’ve been very actively chasing. In fact, our last three acquisitions ,all kind of like bowed in that direction. So that’s opportunity. We are in the PSA right now, I think probably by the end of June, we’ll present it to our investors.
Pancham Gupta: Great. And what else?
Rajan: Other than that, like we have one opportunity brewing up in Florida, it’s again a product built in the late 80s, your typical Class B minus product in a B minus neighborhood. The bones are against strong, I think there is a there is a repositioning element there, we are getting it at an attractive basis. That’s something we are working on and might be able to put through the investors end of June or early July again. Other than that, we have one development opportunity that we have been working on for like about five to six months now. We haven’t…
Pancham Gupta: Don’t say probably long.
Rajan: Yeah, probably like a year now, maybe Yeah, so COVID will not -inaudible- there because we have a parcel of land. And we are trying to acquire another parcel of land and working with the counterparty has been a little challenge given COVID and the missing personal communication aspect. But I think we are very close; we have engaged our architects to give us like drawings and everything. Regardless of whether we get the opportunity to acquire the additional parcel, I think we have a plan to go ahead and build our first multifamily project. So, I believe like sometime around July end or beginning of August, we should be able to give something to our investors to have a look at,
Pancham Gupta: yeah, really excited about all these opportunities that we have, just hoping that you can’t wait to put them in front of the investors. So cool. I guess other than that, I would say we still have the Mesos Income Fund opportunity open. And that fund is going to be investing in all of these deals that Rajan talked about. So, if you want to know more about that fund, I would encourage you to listen to show 94. And we also have our investor portal, you can go to by going to mesosincomefund.com and find out all about the opportunity there. It’s more like low risk high yielding alternative to your bank account. I wouldn’t say bank account like because it’s not immediately available for liquidity if you want, but something that can yield a high like 8% return on your money with very low risk. So Rajan before we wrap up anything you want to add?
Rajan: No, I would just want to thank you to give me this opportunity to remind your listeners and our investors that just stay sticking to their long term investment goals. I think the asset classes diversification is a key. We all love stocks to a certain extent, but we know, we know that turbulence is out there. We just need to know like when it hits us. So, I think again, diversification knowing what your long term strategies and goals are, and then working towards them slow and steady, I think is the key here and do not -inaudible- a lot of cash in bank.
Pancham Gupta: Okay, how much is a lot Rajan? I’m just kidding.
Rajan: I would not keep over 24 months of working capital.
Pancham Gupta: That’s great. Yeah, I would 100% agree there. Cool. So, thank you Rajan for your time here. I hope you learned something from the episode. Thank you for listening. I appreciate you. If you have questions, email me at email@example.com. That’s p as in Paul @thegoldcollarinvestor.com. This is Pancham signing off. Until next time, take care. Thanks, Rajan.
Rajan: Thank you.
Thank you for listening to The Gold Collar Investor Podcast. If you love what you’ve heard and you want more of Pancham Gupta, visit us at www.thegoldcollar investor.com and follow us on Facebook@thegoldcollarinvestor. The information on this podcast are opinions as always, please consult your own financial team before investing.