Episode 41 – Ask Pancham #4. State of Multifamily and Our Strategy.
Pancham and Rajan answer some interesting questions asked by podcast listeners about real estate investing. Specifically, we talk about the impact of COVID-19 on the multifamily industry as a whole and what is their strategy going forward.
- 00:54 – Pancham welcomes Rajan to the show
- 01:32 – What is the forecast for multi-family investing in 2020 and beyond?
- 04:22 – Can we expect multifamily investing to take a hit once stimulus money stops rolling in?
- 06:35 – Rajan shares his investing strategy in the post-COVID era
- 08:37 – Understanding Class B and Class C in simple terms
- 11:27 – With tourism taking a huge hit, will real estate prices in Orlando see downward movement as well?
3 Key Points:
- Impact of COVID-19 on multi-family investing
- Will the financial stimulus succeed in stabilizing the real estate industry?
- How to factor in additional risk and arrive at reasonable real estate valuations in the wake of the pandemic
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 this is Russell gray co-host of The Real Estate guys radio show and you are listening to the gold collar investor podcast.
Pancham: Hello, hello, hello. Welcome to another episode of the gold collar investor podcast. It’s a bright sunny day here in New York. This is your horse punch him really appreciate for you tuning in today. We have another edition of Ask Pancham episode for you. It’s been a while since I’ve done one Ask Pancham episode but for today’s show, I have invited my friend and partner Rajan Gupta. Rajan, welcome to the show.
Thanks for joining.
Rajan: Thanks for having me.
Pancham: Thanks. for your time today, Rajan. So Rajan was my first guest on episode number three of the podcast where we actually discussed the difference between the Main Street and the Wall Street investments. If you want to check that out, you can go to thegoldcollarinvestor.com/show3. Today we are going to discuss the questions that we have been getting a lot lately and, you know, the two main questions we’ll get into. Those two. The first question that we have been getting quite a bit is that, what do you think about the multifamily industry for the rest of 2020? And in the near future? Is it still a good investment?
Rajan: Yes, that’s like the number one question that you get from investors these days, like primarily along the asset class. So yes, so the data coming in so far suggests that multifamily is doing okay. The stimulus checks the government has given the extended unemployment benefits. And the bonus unemployment has helped, then it’s a lot. It’s yet to be seen when the economy opens, how things would shape up and what the unemployment would be that might have an impact. But so far, like the data collected by an NMHC across like 11 million apartments, such as that we had close to like, like we had a 3% spread between the collections in April 2019 and April 2020. That number went down to one and a half percent in May, overall, the numbers so far in terms of collections, if you look at the performance of the property measured by revenue, it seems like solid so far, like, again, like we believe that housing is a need that people need to have. This is not a discretionary thing. Everybody needs a nice place to live. And I think the stimulus money and all the economic support the government has given has so far helped the industry and the asset class.
Pancham: So to just clarify on collections, what you really mean is that the amount of rent that was collected in the April of 2019, and the May of 2019. versus the April and May of 2020. There is a 3% difference in the month of April, you know, between the two years and it’s about one and a half percent for the month of May. So there is an impact, but not a lot of impact.
Rajan: Yes. Okay, that isn’t bad, but we will call this impact like medieval at this point is less than like 3% let’s say and this is a large sample set, like collect data collected across like 11 million apartments across the country.
Pancham: Right. Okay. Okay. And the second point that you were saying was on the stimulus money, which, you know, people have gotten in a one-time payment, you know, for people making less than 1.50,000 as a family or, you know, $75,000 per person. They got a lot, you know, checks as one-time tax-free money and also their unemployment benefits were added. They got multiple benefits on the unemployment side, right, they got $600 per week additional on top of what they would get otherwise. And that’s $2,400 addition. So overall, they made a lot of money made, as in they were supported by the government, with all these stimuluses and that actually helped in all these collections. Yes. Okay. What do you think like after this is over? I mean, the stimulus money stops coming in. Do you see any impact?
Rajan Oh, yet to be seen. We saw the job numbers that came out late last week. They were very promising. So yet to be seen, like when the economy does reopen up like most of our exposure is in the southeast where business has started opening up. We are seeing people going back to work. So I think I think the months of July and August are going to be very critical. The key data point here would be unemployment, like how many people who have been temporarily put at stay a stay at home or have been fired will get rehired. But we do believe that like once the economy reopens if these people lose their job, and unemployment, real estate is like at elevated levels, we will definitely see some impact
Pancham: Right. And that impact will start with these people losing their job permanently or, you know, for a long period of time and not being able to make the payments and either getting evicted or regardless of that you would have that impact the collection number that you were talking about that will go much, much higher. And that, in fact, the valuations overall.
Rajan: Yes. I mean, I mean, valuations are a different, different animal. We can talk about it later, but let’s stick to collections and for property performances. So yes, that we would say are tied back directly to the ability of the tenants to pay range, and I don’t want money either from the stimulus or from the organic employment, they will have a tough time and we will have a tough time on those properties
Pancham: So overall, you would say that these two months or three months, like the whole next quarter, is extremely crucial to see how things shape up, at least for the multifamily industry.
Rajan: Yes, depending on the market. Like most of the most of our exposure is in the southeast Florida, Carolinas, things have started opening up. So yeah, so I would say like the next three months, we will see July, August, September, how things would shape up?
Pancham: So that’s great. You know, let’s move on to the second question that we have been getting a lot as part of our strategy at Mesos capital and how we are changing our strategy in the middle of because of this pandemic. And like, have we really made any decisions on what kind of assets we are going to acquire. So how has this changed our strategy?
So we were already looking…even before COVID like second half of last year that the deep value add projects, the C’s and the D’s, the risk premium was not there. The spread between a B class…property B class tenant, and between a C minus or a D was very little. So we were moving away from those properties. In general, we did sell out to our far-like C-minus, let’s say color, somewhere between a C and a D product last year. In hindsight that looks like good. So that reflects in the offering that we have now. The 132 units in the…it’s a solid B or a B plus neighborhood. The tenant class again I would put around a B and the asset is impeccable. Like brand new roofs and mechanical. Like zero deferred maintenance. So that’s going to be the strategy going forward as well that that we would stick to like these kinds of assets and these kinds of markets. Our work is primarily focused in six markets in Florida, Tampa, Jacksonville, Orlando, and then really in the Charlotte…MSA is in Atlanta. So if you look at like the impact of COVID on population movements we’ve been looking at that the five of our locations. They are like the top destination for people moving from New York, New Jersey…out so that continues you’re going to get…We’re going to get strongly focused on Raleigh, Charlotte, Atlanta primarily and then that two locations in Florida. Jacksonville and Tampa. The financial impact…like again yet to be seen, but we are raising our reserve requirements. We are not underwriting…we are underwriting that we might have a spike in delinquency and vacancy. So we are underwriting higher delinquencies, higher vacancies, along with like lower rent increases, or close to zero rent increases for the next 12 or 18 months. Which means that the projections are a little lower, but they are the safe bet to go. And that also means that we are also raising way more reserves than we usually raise for our other offerings.
Pancham: Right. So a couple of things that you mentioned over there, like if I were to summarize that and also talk about what a Class B and Class C really means. You know, for people who don’t know, Class B and C. There is, you know, multiple definitions of this depending on who you ask. But, you know, the real objective definition that we have come up with in terms of for our strategy is that anything that’s built after 1980 or so, is kind of, can be considered into class B category, but anything before that is Class C, right? They’re not you…as the time goes along, those assets are getting more old and old and you know, the age is becoming much, much higher. So, for us anything which is before 1980 is kind of would need a lot more maintenance going forward. And we call…classify those things as class C, you know, then you have amenity package, whether it has a swimming pool, or it has a gym, whether it has a dog park, whether it’s a car wash and all those things. Yeah, those things matter. But in terms of real, very objective, clean definition of it is that anything before 1980 is kind of class C for us. So what you said was that we are basically looking into more Class B product which is built after 1980 or even 85 and has low deferred maintenance.
Pancham: And on top of that, you said something called delinquency which means that they’re bad debt which means people who are not paying on the property is very…We have focused on that but we are underwriting higher delinquency because of pandemic and based on that, we will come up with the price and if the seller agrees.
So, for now, like to add to that, like when we acquire a property, we are not just acquiring the asset as the building, we are acquiring the location. We are acquiring the tenant, their ability to pay, the growth trajectory of that location. So all that like…when we say Class B, like we mean like a higher quality tenant class, a higher quality location, a higher quality asset, we are financing. It is still going strong. We are willing to compromise a little bit on the return projections to safeguard the downside and acquire things which we’ll write this out.
Pancham: Wait, no, that sounds good. And in terms of the markets, we had six markets. You mentioned two in Carolinas, Raleigh and Charlotte and three in Florida, Tampa, Jacksonville in Orlando, in Atlanta, Georgia. So yeah, we’re very happy to see there is a lot of movement into those markets from the tri state area at least, you know, Florida, people come from all over the place, but Carolinas, mainly. A lot of people moving from the tri-state area, which is New York, New Jersey and Connecticut. What are your thoughts on the Orlando market given which it was a very tourist-based destination? Would you say that we have to wait and see how the things go?
Rajan: Yeah. So I think there is opportunity elsewhere right now. Like Orlando, like as, as we can all see, because of all the…the economy was all based on travel and hospitality, the theme parks and everything and things are not looking that good in Orlando. It’s still yet to be seen how things would like once the parks start opening up and the forest icon opens up, but at this point, like I think our main focus is the Carolinas and Atlanta market along with if you have to look at Florida in Jacksonville.
Pancham: So that’s great, Rajan Anything else you would like to add before we call it a day?
Rajan: Oh, no, I mean, like the only thing like a lot of people are asking us about our investment philosophy or how we see the market. The message is like we do believe in like long term acquisition and holding off solid assets. So we are a buyer. In any market, even the asset and the market falls in our criteria, we have a very strict criteria have a focus and a criterion which they should be chasing. And then we see if things pan out into that criteria, and we get some good opportunities, we’ll continue acquiring. But yes, like we like everybody, should we believe that COVID would have some economic impact, and we are underwriting that appropriately.
Pancham: Great. Well, thank you Rajan for your time and thank you for tuning in today. I really appreciate you if you have questions, email me at p@thegoldcollar investor.com. Until next time, take care. Bye.
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