April 9, 2018

JF1315: Real Estate Economics From An Economy Expert with Danielle DiMartino Booth

Danielle is a global thought leader when it comes to money,finance, and economics. From best selling books, working for the FED, and founding an economic consulting firm, she has deep knowledge of our economy and how different investment and asset classes affect it. We get some amazing real estate advice from Danielle today, as well as higher level economy advice and thoughts. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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Danielle DiMartino Booth Real Estate Background:

  • Founder of Money Strong, LLC, an economic consulting firm
  • Global thought leader on monetary policy and economics
  • Author of FED UP: An Insider’s Take on Why the Federal Reserve is Bad for America
  • FED UP rose to #22 on Amazon’s Best Seller List and garnered #1 in Economic Policy & 6 other categories  
  • Based in Dallas, Texas
  • Say hi to her at http://dimartinobooth.com/
  • Best Ever Book: Lords of Finance

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Joe Fairless: Best Ever listeners, how are you doing?  Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

With us today, Danielle DiMartino Booth. How are you doing, Danielle?

Danielle DiMartino Booth: I’m doing great today, how are you?

Joe Fairless: I’m doing well, and nice to have you on the show. A little bit about Danielle – she is the founder of Money Strong, which is an economic consulting firm. She’s also the author of Fed Up: An Insider’s Take On Why The Federal Reserve Is Bad For America. She is based in Dallas, Texas. She’s a global thought leader on monetary policy and economics. With that being said, Danielle, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Danielle DiMartino Booth: Sure. I made my bones being one of the few hated individuals in the country predicting the housing crisis; that came from my Wall Street background and understanding traders speak, and what a 125% loan to value toxic waste, piece of garbage was. That really did open the door for me kind of to being unhinged in my opinions, which caught the attention of the Federal Reserve.

The gallows humor, when I joined the Fed back in 2006, prior to the crisis hitting, was that they had hired me to shut me up. That was pretty effective, because I went silent for 9 years as an advisor to Richard Fischer, one of the better-known hawks on the Federal Open Market Committee through the crisis years. He retired, I followed him into retirement… The first thing and last thing I can tell you about myself is I am the worst bureaucrat ever known, and since then, I have written a weekly newsletter and it’s become quite the authority on pensions and commercial real estate, and the intersection thereof.

Joe Fairless: So with your newsletter – that’s the weekly newsletter that comes out regularly – as real estate investors, what should we be paying attention to if we were reading the newsletter?

Danielle DiMartino Booth: Really, inflection points is what I would focus most on. Commercial real estate in general has been underpinned in a very strong way by the tremendous foreign flows that have resulted from interest rates here increasing, so from foreigners looking for a better, stabler place to put their money in “hard assets”, and I think going forward, a lot of the focus is going to be on the pronounced downtrend we’ve seen in especially construction lending, as well as how retail shrinking its footprint has the ability to bleed into other sectors of the commercial real estate market.

Joe Fairless: Can you elaborate on that?

Danielle DiMartino Booth: Well, if you think about where class B and class C malls are, many of them are in pristine, great locations. So by the same token, there’s going to be a finite appetite for repurposing these malls. Here in Dallas where I live, for example, they’re in the process of raising a class B property very slowly, but they’re razing it to the ground in order to free up the land that’s underneath it.

Now, if you expand that strategy, if you will, to other markets, that means that you’re going to have prime real estate competing for commercial real estate in the years to come, and that supply of prime real estate is going to be increasing on the heels of what we know to be the most over-valued time for this particular sector. Like it or not, that’s just what the data say.

Joe Fairless: So as real estate investors who are listening to this, what are some things we can do to be ahead of this and take advantage of it?

Danielle DiMartino Booth: Well, it was years ago that Leon Black said – and this is of private equity in general – “I’m selling everything that’s not nailed to the ground”, and I think to be opportunistic sellers in this kind of environment is really wise. I think locking in rent while you can is also really wise, understanding that corporate America and how it operates, and the amount of square footage that it requires is changing as we speak. It is a dynamic dynamic, and we see that all over the place with shadow inventories [unintelligible [00:06:37].08] we’re starting to finally see some stress emanating from the office sector, and I would argue that this is a reflection of a lot of the supply that is coming online in addition to the over-building that we’re beginning to realize has occurred in the multifamily and in the restaurant and in the hotel spaces.

Joe Fairless: So with the quote “I’m selling everything that isn’t nailed to the ground” – you mentioned that because your suggestion is to sell at this point, if you were considering selling?

Danielle DiMartino Booth: I think so. For all of the years that I was now no longer with this firm called Donaldson, Lufkin & Jenrette, I kept on retaping a sticky to my computer screen that said “Pigs get fat, hogs get slaughtered”, and I think one of the most important disciplines that you can have as an investor is that of having a strong sell discipline. If you see that you’ve made a great return, then you should definitely take that money off the table while you can. Be opportunistic, sell into selling opportunities.

Joe Fairless: So know what your price point is to sell initially, and then when you reach that, then sell, because with that sticky note “Hogs get slaughtered, pigs get fat”, or something like that… I’ve heard it before —

Danielle DiMartino Booth: Pigs get fat, hogs get slaughtered, and to shift gears a little bit, I will never forget staring at that sticky, trying to talk a huge holder of Cisco systems into pairing back their position to their cost basis in 1999, and failing… And then being told, much after the fact, “Gee, I should have listened to you.” And again, in this environment, it is not about maximizing your return, it’s about assuring your return.

Joe Fairless: I’d love to run something by you. I did not invest in 2008, because I didn’t have money to invest. I was saving up my pennies. I’m from Fort Worth, I was living in New York City at the time, I bought my first house in Dallas, Duncanville, and then bought some more in DFW, and now I’ve got a portfolio of apartment communities in DFW and in Houston… And I’ve interviewed 1,300 or so people, every single day, for the last 1,300 days — well, one person a day for the last 1,300 days; 1,300 or so people.

Danielle DiMartino Booth: You’re very busy, I’m quite impressed. That’s prolific.

Joe Fairless: So I mentioned that only because here’s what I’ve learned, and this is what I wanna run by you… So what I’ve learned is that in 2008 when people lost their shirts – I’m only talking real estate investors, because that’s my world; I don’t know stocks, I don’t know bonds, I don’t know other stuff… So real estate investing – the people who lost their money, one of three things (or a combination of three things) happened to them. One is they bought for appreciation, not cashflow. So they weren’t making money every month, therefore when times get tough, now they’re underwater, and they’re losing money every month, so that’s a problem.

The second is they’ve had short-term financing, or they were just unlucky and their loan became due during 2008-2009 when no one was gonna want to put a loan on the property, or the loan terms were terrible and it was just a bad time trying to get financing. That’s the second.

And then the third is they had some unexpected expense occur, and they didn’t have the cash reserves. So those are, from what I’ve found, the only three reasons (or a combination of those three) that people lost money. So with that as my thought process, going to your comment about selling when you have a strong return – I’m with you on that, but my thought is as long as I don’t break any one of those three cardinal rules, I don’t have to sell, I don’t have to try and time the markets. I can simply be a long-term player; that way I’m not worried about what’s going up and down in the markets and I’m not trying to time anything and be perfect about that. What are your thoughts?

Danielle DiMartino Booth: Well, timing never works, and I have officially spoken out of boths sides of my mouth. But again, it all hinges on what your position is. If you’re cashflow-positive and you can see over the horizon and know that you’re going to remain cashflow-positive and not be beholden to refinancing, then you can certainly do the math yourself and hold on, and continue to clip that coupon, so to speak. It really does depend on your starting point and how strong you are in your position, and regardless of which investment we’re talking about, which asset class we’re talking about, if you’re cashflow-positive and you can remain cashflow-positive with some good assurance, then you are absolutely correct, there’s no being forced into selling anything.

I suppose I’m speaking more to the people who are looking for that appreciation in the property, who maybe bought at really high prices and don’t have that same kind of security that you describe.

Joe Fairless: Okay, it makes sense, 100%. I just wanted to run that by you and get your opinion.

Danielle DiMartino Booth: Sure. It’s absolutely intuitive, you’re right.

Joe Fairless: What is the biggest challenge you have on a daily basis with your business?

Danielle DiMartino Booth: On a daily basis with my business, what’s the biggest challenge that I have?

Joe Fairless: Yeah, maybe an interesting problem that you’re solving for, or something that you kind of got a soapbox for, and it’s kind of a thorn in your side… Anything that comes to mind.

Danielle DiMartino Booth: Well, look, you have my mind right now on real estate, and one of the biggest thorns in my side is that I’ve become a close study of pension funds, and for that matter sovereign wealth funds and how they interact with private equity… And my greatest concern is that as we potentially begin to hit a more volatile time in the broad financial markets, that a lot of these pension funds under-appreciate the lack of liquidity in some of the alternative investments that they’ve made – and I will tell you, commercial real estate private equity funds have been the darling of pension funds for the past 18 months or so…

My greatest concern is let’s take a pension from state ABC that has reduced their fee structure by investing passively in the stock market, and tried to up their long-term returns by gaining exposure to commercial real estate – my biggest concern is that as baby boomers retire and [unintelligible [00:13:19].02] and cashflow becomes a concern because they’re actually writing pensioner’s checks, not relying on actuarial accounting gimmickry, that they’re going to run into the perfect storm of not being able to access liquidity because their stocks have declined, while at the same time realizing the very long-term nature that they’ve committed to in plowing their money into illiquid commercial real estate, especially on the private equity side, where you’ve got that 7 to 10-year commitment for your funding.

So that’s a real thorn in my side, and it’s especially prevalent among the weakest states and cities that have been adversely affected by the recent tax reform bill that is going to cause an acceleration of the shrinking tax base that states like Florida, Texas, Nevada will benefit from going forward. That’s going to be a huge [unintelligible [00:14:13].23] for certain states’ real estate market and provide a great floor, but by the same token, it’s going to accelerate the pain for states whose residents are going to continue to flee.

Joe Fairless: What’s the ideal solution?

Danielle DiMartino Booth: Oh, gosh… [laughs] Now you’re asking the big question. The ideal solution… Well, I will tell you that ideal – since we’re speaking ideally – the pension fund system in Great Britain, for example, requires that public pensions cap their rate of return assumption at 3,5%, such that they never can go too far out on a risk limb, endangering their pensioners, endangering retirees. I would like to see some sobriety come out of what I expect will be a lot of pension crises in the years to come, in the form of legislation that requires that in the future, if you’re gonna make public promises to firemen and policemen and teachers, that you have to be realistic in your return assumptions so that you never get into this soup again.

Joe Fairless: There’s not something in place with the realistic projection guideline?

Danielle DiMartino Booth: No, absolutely not. Most return assumptions right now are in the neighborhood of 6,75% to 7,25% per annum. Most pensions have been unable to hit those [unintelligible [00:15:35].29], which means that as a factor of time, they continue to get deeper and deeper and deeper under-funded.

Joe Fairless: If you were in a room full of real estate investors and the following question were posed to you, what would you tell them – what is your best advice ever for real estate investors, based on your unique experience and background and education?

Danielle DiMartino Booth: Well, I think to follow the flows would be my best advice. When you see a herding effect, be afraid, and be conscientious, and try your very best to zig when others are zagging. It’s really difficult to do, because sometimes you want to ride that wave.

Joe Fairless: So you’re a big Bitcoin investor then…

Danielle DiMartino Booth: Ha-ha-ha-ha… [laughter] That would be no. That would be the negativo there. No, absolutely not. No, I chuckle, and it’s not that I don’t — look, I’m a former central banker, I’m a reformed central banker. I completely commiserate, and I have deep empathy for people who are losing faith in our dollar’s ability to retain its value, but by the same token, I don’t have much faith in something that has 1,000% return and people say it’s gonna be a 3,000% return. It doesn’t pass muster. But I would say that to be contrarian-thinking, even in a long-term asset class such as real estate, really does afford the people who are going to be most successful over the long haul.

I listen to investors like Sam Zell, and they’ve never had trouble being early to the party, therefore live to invest another day.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Danielle DiMartino Booth: Oh, gosh, you’re scaring me! Your youth is coming through. Let’s do this!

Joe Fairless: Alright, let’s do it! First, a quick word from our Best Ever partners.

Break: [00:17:36].22] to [00:18:05].15]

Joe Fairless: Okay, best ever book you’ve read?

Danielle DiMartino Booth: Lords of Finance.

Joe Fairless: What’s a mistake you’ve made in business?

Danielle DiMartino Booth: Believing people who sell me something that sounds too good to be true twice.

Joe Fairless: [laughs] The same person twice?

Danielle DiMartino Booth: No, different entities, different selling strategies, same bad results.

Joe Fairless: What’s the best ever way you like to give back?

Danielle DiMartino Booth: I like to give back mainly through financial literacy. That’s the best thing that I feel I can give to other individuals. I’m a supreme translator of jargon and gobbledygook, especially as it pertains to interest rates and monetary policy, and I think that the more I can pull the curtain back on what a lot of central bankers try and confuse us with, the more everyday working people can have a better comprehension of their financial standing and what they should do to be on the safest ground possible.

Joe Fairless: And how can the Best Ever listeners get in touch with you?

Danielle DiMartino Booth: Well, you can follow me on Twitter, which is never boring. I don’t [unintelligible [00:19:13].25] You may have inspired me. But @DiMartinoBooth is my Twitter handle, and you can go to my website, do a trial subscription of my newsletter, which is DiMartinoBooth.com. And the easiest way to access who I am, my philosophy, where my thinking is grounded, what my background is, is to grab a copy of Fed Up, the book that I wrote, that went to 22 on Amazon and continues to sell magnificently, I’m proud to say.

Joe Fairless: And number one in Economic Policy category on Amazon as well. Well, Danielle, thank you so much for being on the show and sharing your expertise. We usually have real estate investors, so this was a different angle than we’re used to, and I love it… I love hearing from you, and based on your background and talking about the – as you said – follow the flows, and be aware of macroeconomics and what’s going on, or listen to people who are aware of that, so there’s a bit of a filter, and then see how that can be applied towards what we’re doing on the ground.

I loved the class B and C model example, where they are raising —

Danielle DiMartino Booth: You are — beautiful articulation. You said it all very, very well.

Joe Fairless: Well, thank you, I’m patting myself on the back right now. Danielle, thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

Danielle DiMartino Booth: Thank you, take care.

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