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Transcript:
Chris Bounds 00:00
What are your thoughts on the current state of the market?
K Trevor 00:04
Yeah, so clearly, we went through this, this craziness, I’m going to call it and a lot of people. So interest rates were at an all time low, like insanely low, you know, two 3%, loans were kind of normal, right? Which is insane, right? Because the average is more in, you know, the four or five, six range. So what happened is, in such a short period of time, the shortest period of time in the history of the world or America, you know, we went from here to there, right, we went to 789 percent. And so it just shocked the system dramatically shocked the system. I’m not much of an economist, but unfortunately hasn’t done a lot yet. curb inflation, it’s sort of slowed down, took a bit of the heat off of it.
So that’s been super traumatic. And those those things are going to though, you know, there’s several, there’s several quotes, right, the best time to buy real estate, when there’s blood in the streets, even if it’s your own blood. This is a buying opportunity for those that are ready. But unfortunately, it is also the possibility that some deals just won’t make it. And they won’t make it because they didn’t raise enough money, they didn’t have enough money, they don’t have enough reserves to cover this spread. Right. So the property still profitable, but you don’t have enough money to cover the spread. And that’s what’s really challenging about this.
Chris Bounds 01:29
You mean, by spread as far as the refinancing? That’s correct, right.
K Trevor 01:33
So now all sudden, you know, because the interest rate goes below the NOI line, so you may be operating at a profit. But you know, I’m a passive on a deal right now. And it’s interest rate, payments went from 18,000 to 36. That’s a substantial monthly difference, like substantial, because they, they didn’t do a very good job protecting it with a cap rate and things and makes a big difference. And so now they’re struggling, but they’ll still catch up, right? They’re still above water, they just got to be super careful. Yeah.
Chris Bounds 02:08
Buying rate caps, very, very common, very smart to do with floating rate debt, which a lot of like the whole bridge on, a lot of operators of the last few years have been operating under the kind of like the burr model. It’s just been over a longer period of time, like a three, five year period of time in the markets definitely given a lot of tailwind to that, but buying recaps and not quite stress testing, and how likely is it that mortgage rates are going to triple over a 12 month period?
K Trevor 02:39
Absolutely insane. And, you know, I’m on a couple of deals right now, where they did buy a rate cap, but they didn’t have enough reserves to cover all of it. And you know, the payment difference, and big, big, big shock to the operating system. You know, because again, we kind of bought it and never thought you’d need it. Um, you just bought it. So you had, you know, all we bought it were safe. But, you know, if you didn’t have enough reserves, and again, this crazy, fast things increased in value, made people get less conservative, right. You know, in theory, anybody could make money in real estate during the last so many years, just because it was so hard to beat it up. And so a lot of people did lose their core principles of you know, good cash reserves, you know, good stress test the making sure you’re ready. Because the rise of the market bailed them out every time.
Chris Bounds 03:34
Yeah, yeah. That’s why I’ve been cautious as, as a fund manager, focusing on operator experience. So, I mean, there’s a lot of operators that I know have gotten and they’ve they’ve done pretty well over the last three or five years. But it really if you’ve been in the industry for the last 10 years. By and large, you really don’t know a rainy day. It’s been a strong market. And the last, you know, two to three had been ridiculously strong. So anyone in that they haven’t really been tried through a deep downturn. And I’m not saying what we’re going through is a deep downturn, but it is turbulent. There’s cloudy skies. We don’t know what’s ahead. Yeah. Warren Buffett
K Trevor 04:17
says you you don’t know who’s swimming naked until the tide goes out.
Chris Bounds 04:21
Exactly. So I mean, we we focus on like the first multifamily. We didn’t Daytona Beach, you know, the, the primary operator had 40 years of experience. It was that and a billion assets under management and 1000 units locally. So it was it was a few boxes, check the show and they had the operational experience in any any company that’s been been able to survive 40 years that they’ve it doesn’t mean they’re guaranteed to survive forever. But they’ve definitely seen a few things and they’ve got the experience to navigate. Cloudy skies. So in the same thing we were doing with Class A in San Antonio, very similar situation. 40 years of experience. Also institutional partners like JP Morgan on board just checked a few of those boxes yeah