The federal funds rate (the rate at which commercial banks borrow and lend reserves) has been raised recently by 75 basis points. How does that actually influence and impact the decisions of what type of real estate or what type of investments you should be placing your capital into? Today, Steven discusses the impact this has had on the Real Estate Market along with the opportunities that are rising because of it.
- We’re seeing sellers starting to change their prices to meet buyers where they need to be in order to create the type of return that equity is looking for.
- From a value-add standpoint, if you’re looking to find an opportunity that is underpriced or an opportunity that you can force appreciation, then you want to find problems because there’s profit in those problems.
- In order to overcome the possibility that better opportunities could come in the future, it’s extremely important to make sure the deals that you’re investing in are truly conservatively underwritten and have the ability to refinance it to get advantage of both short and long term opportunity.
- The best investment opportunity with limited funds is to invest in yourself first, in opportunities that are going to create you more earned income so that you can start investing that in passive income.
Interested in connecting with other like-minded individuals? Then join our VonFinch Private Capital Network. Learn more at http://www.vonfinch.com/invest.
Steven Pesavento 00:05
This is the Investor Mindset podcast and I'm Steven Pesavento. For as long as I can remember, I've been obsessed with understanding how we can think better, how we can be better, and how we can do better. And each episode we explore lessons on motivation and mindset for the most successful real estate investors and entrepreneurs in the nation.
Steven Pesavento 00:27
Welcome back to the Investor Mindset podcast. I'm your host Stephen Pesavento. And each week, we share mindset tips and real estate investing strategies to help you take your business and your investment portfolio to the next level. Today, I'm going to talk a little bit about how to think about buying real estate right now in today's economy. We're at the beginning of November in 2022, the Fed recently raised rates, another 75 basis points. What's amazing about this as they've stayed consistent throughout that time. And so how does that actually influence and impact the decisions of what type of real estate or what type of investments we should be placing our capital into? Well, specifically, when rates go up, the cost of ownership goes up, the cost of new debt goes up. And as a result, currently, because of some of that uncertainty that we're seeing in the market, we're actually seeing that interest rates continue to go up, but loan devalues go down. So we're actually having a double whammy of requiring more capital alongside at a higher cost of that debt. So those two pieces are what we're dealing with in the market.
Steven Pesavento 01:37
On the flip side, what we're finally seeing after six, almost 10 months of interest rates going up by the Fed, we're actually seeing sellers starting to meet buyers where the value is at. So we're finally starting to see sellers starting to change their prices, meet buyers where they need to be in order to create the type of return that equity is looking for. There are trillions of dollars looking for a home right now. So that's one of the very positive things about multifamily. We're still in a very strong rental market. With interest rates going up from a housing perspective that creates an environment where it is harder for a potential buyer to go out and buy a house, they can afford less, and therefore they're forced to go back towards that rental market. On top of that, there still is a huge lack of supply. So that is all that's doing is driving up the need and the demand. So we will still see great growth for 2022 into 2023. From a rental perspective from a rent rate perspective. And we're still expected to continue to see growth in future years now. On the VonFinch side, we're underwriting that extremely conservatively, one to 3% per year, depending on the market or the specific neighborhood within that greater market. However, one of the strategies that I encourage you to look out for is how can you find value today? In other words, how can you find properties or opportunities that require renovation improvement, potentially, they're being mismanaged, potentially, the property manager is dealing with a bunch of issues, there's a number of them that have consolidated up really quickly, and those owners are in distress.
Steven Pesavento 03:26
So as a result, we've been targeting those types of owners in those types of relationships with brokers, managers, lenders, in order to have a view directly into properties that have problems, it goes back to a core belief, a core philosophy of investing. When you're investing. From a value add standpoint, when you're investing from a place of value, and you're looking to find an opportunity that is underpriced or an opportunity that you can force appreciation, then you want to find problems because there's profit in those problems. So the problems that we're seeing right now that we're starting to actually see some phenomenal deals come through, we're seeing a problem of a seller who owns the property, but they were looking to exit they want to continue living off the cash, they do not want to own or manage that property anymore. Yet, they also want to make sure that they have that consistent cash flow coming in every single month. Those kind of owners are phenomenal for a seller financing opportunity, when you can buy a property put conventional debt on it and have a portion of that equity held back by the seller you can bring down your cost of capital and therefore providing a better return for those investors who those passive investors who are investing their capital. So that's one area of course the second area when it comes to seller finance is actually Finding properties where the seller is looking to carry the entire note, I'm super excited as we've got a property right now in our scope that has 100% of that debt portion being carried by the seller at a great rate, while also being able to buy it at a great basis.
Steven Pesavento 05:18
What does that mean? That means we're buying it below current market value. And we're able to get debt at a lower cost of capital than, say, going out to the traditional market. And then third, we're able to bring less equity to the table, therefore driving up the return for every dollar that we invest into that property. So really excited about seller finance type opportunities, those are huge. And when you can pair those kinds of opportunities with value add where the property is unreleased under market rents, deferred maintenance, or deferred upgrades, or the ability, frankly, to come in and really improve operations. That is where there's huge opportunity. And here is one thing I want to share with you guys. I hear this from a lot of investors, and this is where they're totally wrong. They're totally wrong. Right? You're hearing from investors? Well, I don't know if I should invest now, because there might be a better opportunity in 136 12 months, that's possible. I agree. It's possible that in February or March of next year, that maybe there might be a slightly better opportunity available by a couple of percentage points. Yet, we don't know that is actually going to be better, it's possible that it could be worse, it's possible that we could have to wait longer. And if you're waiting around with that cash not invested, not sitting in bonds, not sitting in real estate, not sitting in equities, not sitting in something that's actually going to create income, you're losing money, because the fact is CPI in real inflation is still extremely high. So that is totally wrong. But in order to overcome the possibility that better opportunities could come in the future, it's extremely important to do two things. First, make sure the deals that you're investing in are truly conservatively underwritten. What does that mean? That means that they are underwriting that property from a place where at worst case scenario, you're gonna make that return that they're projecting. And in best case scenario, it's much, much higher. That's the way we're looking at properties today. The second piece is from a value add standpoint, we're actually renovating property when we're actually repositioning it when we're putting long term debt, but we have the ability to refinance it and put better debt on in the future, then we can be in a situation and take advantage of both the short term as well as the long term opportunity.
Steven Pesavento 07:47
So if we get an opportunity today, that at worst, we believe can make a 14 or 15% return, but at best could make a 20 or 25, or 30% return, that's a home run. Because if the economy gets worse, and we make a 14 in a dying or dropping economy, phenomenal, I'd love to make a 14, while the market is going down every single month, however, I'd also be just as excited to be able to be in a property and the market is going up and maybe be able to do well above that. So that's the way I'm thinking about it. If you're in a position where you have absolutely no money to your name, you can only make one investment in the next 24 months, I recommend that you actually don't make that investment, I recommend you focus in on going out and finding ways to take that money, invest in yourself, invest in education, invest in opportunities that are going to create you more earned income so that you can start investing that in passive income. Now, am I telling you that I don't want you to invest with us? Of course not. But if you truly only you're going to have $50,000 to invest in the next 24 months, you shouldn't be investing, you should be investing in yourself. So you can create the biggest ROI possible, which is actually seeing yourself create a higher income so that you can invest all of those dollars into different types of investment opportunities that create both income today and growth tomorrow.
Steven Pesavento 09:14
So that's what my current view is how the Feds raising rates, actually is showing up in the market, how sellers are starting to come and meet buyers where they're at, and most importantly, how you can go and find opportunities and that opportunity for you might be investing in a passive opportunity with a company like VonFinch. It might be something where you are the active operator because this is what you do. You're an expert at real estate you might be able to go and find those opportunities. But what I will say is the reason we're finding some of these crazy good deals that we're finally starting to see now is because of those relationships, and a long track record of years of investing and being able to show returns and showing brokers that we're actually following through on what we're doing. So with that said, thank you for listening. Thank you for learning. Thank you for investing in yourself. And I'm excited for some new stuff that's going to be coming your way. from an education standpoint, we've got a lot of great content cooking in the pipeline. So whether you're investing in yourself or you're investing in real estate or income producing opportunities, thank you for listening, and we'll see you on the next episode.
Steven Pesavento 10:30
Today's episode is sponsored by VonFinch capital. If you're interested in investing alongside me in the same type of real estate opportunities that I personally invest in, then head over to Vaughn Finch capital and join their private investor network. You can do so at vonfinch.com/invest. Join me on that next deal. I look forward to seeing you on the inside. You're listening to the investor mindset podcast. If you liked what you heard, make sure to rate review, subscribe and share with a friend. Head over to the investor mindset.com to join the insider Club, where we share tools and strategies from the top investors and entrepreneurs and how to take it to the next level.
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The Investor Mindset Podcast & President VonFinch Capital
Steven Pesavento has always been obsessed with understanding how we can think better, how we can be better and how we can do better. He is an active real estate investor who curates Commercial Real Estate Investments for clients.
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