Let’s talk about the recession and what’s really going on. The stock market has crashed at numbers that I have not seen before. This is scary. As you all know, CPI data has been released, and we are seeing that inflation is at an all time high at 8.3%. Originally, we were anticipating this number to go down, which would have meant the economy was starting to become more controlled. This is unfortunately not going to be the case anymore.
How does this affect real estate?
These numbers have a big negative impact on real estate and especially on multifamily funds and portfolios. The numbers don’t make sense anymore in this economy. A close friend of mine who has a multifamily fund, and I’m talking about hundreds of millions of dollars of assets under management, texted me to say that he can no longer deploy money in multifamily real estate, just because the numbers aren’t working. “I can’t deploy any more capital in multifamily because the numbers just don’t work. And I would like to invest with you in flex space.”
Give me hard numbers
Jerome Powell, the chair of the federal reserve of the United States is set to raise interest rates by at least one point, which unfortunately means a lot of real estate guys are gonna start tumbling. It’s only a matter of time before we start seeing bankruptcies, and job losses. This unfortunately means that there’s a lot of people that are going to take a huge beating when it comes to their real estate investments and portfolios. I, on the other hand, will be taking this opportunity to jump in and expand my portfolio.
It’s been a rough few years
Think about it, over the past few years, you’ve seen insurance costs go to all time highs, already beating these guys down for income. Now you’re also seeing interest rates go to an all time high with potential and likelihood for even higher numbers. These factors affect the bottom line and income potential.
I feel bad for the people who invested in multifamily last year, because those guys are gonna be belly up or are already belly up and just not disclosing that information. This is the funny thing about running a fund, you don’t really have to disclose information at a public level, but I know that a lot of these people are taking a huge beating internally.
And the worst part is that the amount of effort, operations, and overhead that they need to make this money is extremely high. Multifamily means you have to deal with a lot of tenants. In most cases, a lot of these funds, including Cardone’s, have over 20,000 apartments. Can you imagine what 20,000 apartments means?
20,000 apartments means that you are dealing with 20,000 families, and 20,000 issues that arise during their tenancy. All 20,000 are happening in your apartment complexes.
What about rental income?
Whether your portfolio is 500 or 20,000 apartments, the percentage of tenants who are either late on their rent payments or simply not paying is astounding. With all the economy and covid related job losses, you’re looking at a large percentage of tenants who will not be able to pay their rents. This means you’re spending money on maintaining and upgrading your apartment communities with not enough rental income to cover those costs.
The buzz was that investors were going to buy these properties for cheap, fix them, repair them, and then sell them at higher prices. This is just not a reality anymore. Over the next two years, this is what I anticipate is going to happen:
Let’s get into the specifics of 4 different asset classes: wholesalers, house flippers, multi-family operators, and flex space real estate.
Wholesalers in the US make an average of $50,000 a year. Depending on where you are in your career, this might sound like a good deal. But this $50,000 comes with a ton of work and time and most likely, sporadic deals that make it hard to plan financially. As time progresses, they start to fatigue because the amount of effort they’re exerting into making that $50,000 is overwhelming. This is often the case with, I would say, 99% of wholesalers.
Now, if you are the 1% of wholesalers and you’re making seven figures a year, I congratulate you. I commend you, but I would also tell you that you’re putting way too much time and way too much effort into your business. You could be making twice that amount with the same amount of work in different asset classes in the coming years.
You guys do all the grunt work. I actually feel sorry for home flippers, they get into deals that they don’t know anything about. In most cases home flippers buy properties, site unseen, or if they’ve seen things, they haven’t really done a thorough inspection. And the reason is they need to buy these homes really quickly, putting aggressive offers out there. They’re often dealing with hard money debt, which is extremely high interest. Maybe they’re not putting any money down.
To sum it all up, the barrier of entry is actually not that high, but what they’re walking away with on the other end is a minimal amount of money. This type of model depends on high volume and high operations.
I’m going to tell you guys a home flipping story from personal experience. I wasted six months of my life. I spent two months looking for a deal, acquiring it, and repairing it. It did end up selling, which took an additional two months which is quite the norm. I ended up walking away with $20,000 on that one deal. Now, if you calculate $20,000 over six months, you’re gonna realize that that’s really not that much money, for the amount of time and effort that you are putting in. To become a millionaire doing this, you’ll need volume.
At the end of the day, you cannot build a legacy, you’re just in it for the flip. You’re not making any REAL money with home flips.
Multi-family and flex space real estate head-to-head
In both scenarios, you are building a legacy. In fact, for the earlier part of my career, I made the bulk of my wealth in multifamily. But what I realized very quickly is that the time and effort I had to dedicate to the success of my multifamily portfolio meant that there was 0 work/life balance. I simply wasn’t getting to spend enough time with my family. I wasn’t getting to spend enough time doing the things that I liked. Looking back I can count on my fingers how many times I took a vacation day, or how many times I took time off to get some much needed rest just because I was dealing with constant fires that I had to put out in my office.
At some point, I had 54 employees managing 1400 units, which was just below 300 million. But the problem was that, at that point, I realized that I wasn’t even working to control the assets.
I was working on keeping people in line, keeping people in check, motivating people, dealing with property management turnover, which is a real thing. You have to exert a lot of your time and energy with what is going on on-site.
My move into flex space real estate
The demand for flex spaces is extremely high, and the best part about it is that flex space real estate is institutional equity. This means that large head funds, private equity individuals, and money managers are looking to move into this asset class. Just look at internet trends, in the past two years, the term flex space has increased tenfold in search volume online.
Everybody wants to move into flex space real estate because the whole business can be automated and the tenant profile is extremely professional. The effort you need to put in multifamily is extremely high; however for flex space real estate– that is not the case. That is where I realized that, if I were to develop more flex spaces over time, I would have this beautiful asset class that is relatively problem free, and I could have one manager deal with $300 million of flex space whereas I needed 50 managers dealing with multi-family.
What does the future of this asset class look like?
If you were to ask me where I see flex space real estate going over the next 10 years? This is what I’m gonna tell you. So I officed out of a traditional building for the past eight years, meaning I had to get to my office on time, fight to find parking with everybody else, get into a crowded elevator. Go to the 21st floor, open a bunch of doors and then finally get to my office. I probably spent 30 minutes between finding parking and physically getting to my office. What a waste of time.
Today I’m actually building a 20,000 square foot flex space building that will function as my future office. This will allow my team and I to park right in front of my office. It will completely remove the parking traffic, struggle to find parking in the first place and all the other useless steps I had to take to get to my office. I will also benefit from having a ton more space for a lot less money. I will office out of a trendy looking flex space and will have complete freedom to customize the interior to suit my team’s needs. This is a winning formula. Now I’m able to integrate flex spaces into my business and bring the entire business full circle.
What are some hidden benefits of flex space?
One thing I’ve loved experiencing with my own flex space tenants is the pride they have in their spaces. What I’m trying to accomplish here is help my tenants build instant credibility. Once their customers walk into their spaces, my tenants feel pride in being presented in a credible manner, meaning they have an office where they can conduct business, where they can simply just open a door and show you what’s under the hood.
And once a client actually gets to see what’s under the hood of their business their chances of closing that business increases. This all plays into the rising importance of transparency in a business and its practices. You’re opening your doors and telling your customer to come in, look around and trust you. You’re inviting them into your business operations, your team, your second home.
The bottom line is that I strongly believe that flex space real estate is the future. This untapped asset class is only going to rise and new innovations will be seen. I’m not only talking about it, I’m doing it. I develop these things, I sell these things, I help people invest in them and I even coach new developers. It’s a 360 show here.
If your interest has peaked, you’re welcome to subscribe to my newsletter, check out past blogs, follow me on social media and watch my lives. I am dedicated to sharing my knowledge and experiences with the world. Want to take it further? Sign up for my annual coaching program FSU.
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