JF2307: Investing During Covid-19 And Getting A Discount With Ian Ippolito #SituationSaturday

We chatted about the investors’ readiness to put money into the real estate market during Covid-19. Tune in to learn about the types of investors and the red flags that Ian has been dealing with lately.

Ian Ippolito Real Estate Background: 

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“People are now looking at the one or two-year delay as an advantage” –  Ian Ippolito.

TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners, and welcome to the best real estate investing advice ever show. I’m Theo Hicks, and today we’ll be speaking with Ian Ippolito. Ian, how are you doing today?

Ian Ippolito: I’m doing great, Theo. How about you?

Theo Hicks: I am doing well, thanks for asking and thanks for joining us again. Ian is gonna be a returning guest; his first episode was episode 1294, which was over 2,5 years from when we’re recording right now, so it might be three years once it actually airs… So a lot has been going on since then, so we’re going to dive into that today.

Today is Saturday, so we’re doing a Situation Saturday, which is usually a sticky situation that the guest is in, but in a sense, this is a sticky situation that a lot of people are in… We’re gonna be talking about – at least at the time of this recording, the current pandemic, and we’re gonna talk about how people react to that, some of the good and bad, in a sense, asset classes as a result of the pandemic, and then talk about some forward-seeking predictions on where things are going.

Before we get into that, a refresher on who Ian is – he is the investor and founder of The Real Estate Crowdfunding Review, as well as the founder of The Private Investor Club, that has over 4,000 members with over 5.7 billion in investable assets. His website is TheRealEstateCrowdfundingReview.com.

Ian, before we dive into the situation, do you mind telling us a little bit more about your background and then what you’ve been up to since we last spoke about 2,5 years ago?

Ian Ippolito: Sure. My background is I was originally a tech entrepreneur… A serial tech entrepreneur, actually. And I built some businesses successfully, some not as successfully, but over time I kind of improved, and I eventually had a very nice exit at the end. That was around 2013.

I sold that company, and then now all of a sudden my job became “How do I invest my money?” The traditional advice was “Oh, you need to go and put this amount into stocks, and put this amount into bonds, and you’ll be ready to go.” And I do have some money, obviously, in these markets, but I wasn’t comfortable with the traditional advice. I had seen people who had gone through some very tough times following that advice…

I wanted to find something where I could reduce my volatility. That brought me to real estate and real estate crowdfunding, which at that time was just starting to come into fruition. The JOBS Act had passed… So it used to be that you would have to know somebody, maybe you would belong to a country club, or something like that where you knew somebody that could bring you the investment. Now all of a sudden you could just be anyone, and the entire public was basically accessing these investments… And it was really cool, because before maybe you needed to have five million dollars or ten million dollars to get into a piece of property, multifamily or industrial or whatever it was. But now all of a sudden you could put in 25k, or 5k, or sometimes even $500.

So it was a very exciting time. That’s kind of where I came into developing, in 2013, when it was all starting… But at that time there wasn’t much available from the investor point of view. Everyone was saying they were so great, and I was like “Well, which one of these do I trust and put my money in?” So I spent a long time, I spent several months and I hired an assistant, and we went through and we interviewed all the platforms, and I went through all their legal documents, and I interviewed investors, and said “Did you like this one, or did they mess up?”, which was really crucial, because they all said that they’re wonderful. So it created kind of this ranking for myself.

And the word got out that “Hey, Ian has created this… You should ask him for it.” So I gave that out a few hundred times, and I got tired of emailing that out to people… So I said “Look, I’ll just put it out on a website.” Then I created this website, called the Real Estate Crowdfunding Review. The whole point was to evaluate all these different investments.

So that kind of grew, and the industry changed, obviously, over time. It went through some ups and downs. There was a period where funding dried up for a lot of these companies, so there were a bunch of [unintelligible [00:07:00].14]  a bunch of them went out of business… So some bad things happened. Now a little bit more of an upturn after funding is coming back in…

And the deals thing, since you question was what I’ve been doing – so since the last time, I now have the Private Investor Club, which I might have talked about briefly the last time, but basically it’s what you talked about, which is a place where I as an investor, and others, can go, where we source deals. It’s so hard to find good deals. So we bring good deals in, and then we hammer on them. We do due diligence on them, and when you have that many people looking at something, you’ll find the problems, and then we will invest.

So that’s what I’ve been up to. Of course, I didn’t even mention the elephant in the room, which is something big has happened, which obviously is the Covid-19 pandemic…

Theo Hicks: Yes. I’m really looking forward to this, because I’ve talked to people who are active investors, how they’ve reacted to the pandemic, but you’re a passive investor; you get this massive group of passive investors, so you’ve got insight not only from your experiences, but from everyone else that’s in your group’s experience. So let’s dive into this sticky situation…

At the onset, in early 2020, what was the reaction from you and from the passive investors? What was your thought – were you were like “I’m done, I’m not investing anymore. I’m gonna wait” or were you like “Oh, this is not a big deal. Business as usual”, or somewhere in between?

Ian Ippolito: I think the first reaction with almost everyone was just shock, because no one was expecting it… And then maybe when it first started, everyone thought “Well, maybe it’s not gonna be that bad…” And then cases started climbing, we saw what happened in New York and New Jersey, and then all of a sudden we had lockdowns, and businesses were shutting down, and everyone said “Oh, this is for real. This is not gonna be something that [unintelligible [00:08:36].21] five or six other times where there was a virus, and it just never really affected us. So at that point, it was shock. And the majority of people, 99% said “Whoa… Let’s just stop. I’m not investing in anything, if I was thinking of investing in anything… I’m scared about myself. What’s gonna happen to my family, my streams of income? If I have a job, I’m a passive investor with a job, what’s gonna happen there? I might get laid off…” So a big halt was the first thing that happened.

And then on the crowdfunding platforms even, a couple of them were like “We don’t know what’s gonna happen.” They had massive layoffs, and they had been hiring up pretty aggressively, some of them right into it, because business had been so good… They were hiring.

So that was the first thing, which was just “Whoa, this is really dangerous. I’m worried about  myself. I’m not ready to put in any money”, and all the deals that people were looking at were just like “No.” We had a couple of deals that were in progress that people were looking at, and they said “No, no, no.” And those just ended.

Theo Hicks: How long did that period last? Or is it still ongoing for some people?

Ian Ippolito: It’s a good point. For some people it still is, although I think for the majority of people it’s not that way. And it’s because it’s been a very uneven recovery; they call it the K-shaped recovery. Generally, when you are in the upper income, which is the type of person that’s investing passively, most have not been hit very hard. Many of them can work from home if they’re working, or their income is still going good – they’re not affected as badly as some people on the lower-income scale, who’ve been hit very hard.

So at this point in time there’s only very few that are still in that mode, but they’ve kind of switched. So it took about a month, I would say, for people to start processing it. And then you kind of had different camps. We had a group of people that were like “You know what – this seems really terrible, but I think it’s gonna turn around pretty quickly.” So these people were full-steam ahead, probably about a quarter of people, after about a month into it.

Then you had others who were like “I think it’s gonna take longer, but probably in a year or two we’ll be out of it, and these are long-term investments. They could be five years, seven years, ten years… So I’m willing to go into an investment right now, if they have a plan to get across what might be a lean time. Maybe I can get a discount on it; I’m willing to go forward.”

And then you’ve got those that were like “No, it’s too risky. I really can’t see what’s going on; I really can’t understand. How do I underwrite?”

I’ll give you an example – with multifamily, at the beginning when this happened, all we knew is that we had millions more people unemployed. So on one hand, very bad. Normally, horrible for real estate. But then we had all this stimulus happening, where people were getting paychecks, and we had extra-unemployment… But then there were also stories about how that wasn’t getting to the right people, and things like that… So how does all this play out? Really, really complicated stuff. So no wonder everyone had different opinions about it.

Theo Hicks: Sure. So let’s go with the camps of the people who are camp number one, which is like “Full-scale ahead. Let’s go!” and then camp number two, which is like “I don’t really know what’s going on, but it seems like this might be over in a few years, and these investments are 5-10 years, so maybe I can get a discount, or something.” So for those people, what are they choosing to invest in, and then what are they choosing to avoid and not invest in, and then why?

Ian Ippolito: And even there, there’s different tracks people are taking, depending on how much risk they’re willing to take. In any dislocation there’s gonna be distressed opportunities, and then if someone is willing to take the risk of those, it can be very profitable, or it can be a disaster. So you’ve got kind of like the conservative investors, and you’ve got the ones that are more aggressive, in each of those categories.

If we take a look at the conservative investors – they’re looking at multifamily and they say “At the beginning we thought it was gonna take a huge hit. All these multifamily things were just going to go down the toilet.” But so far, that hasn’t really happened. At least not on the class A and the class B. Now, class C is a different story. These are dealing with the types of tenants that have very customer-facing jobs, dealing with retail… These people are experiencing heavy job loss, so class C has not been doing good. But B and A  have held up; a lot of the people in the A can work from home, they can do all that sort of stuff… And with those stimulus checks, a lot of the times the rent has continued to come in.

Oh, I’ll add one more little complication here, which is the fact that a lot of the support, this stimulus and the extra unemployment – it’s about to run out. So when we talk about that third category, people that say “I don’t know what’s gonna happen”, they’re taking that into account.

A lot of people don’t realize this, but there are millions of people that are unemployed right now, especially where I am typically, with investors, and kind of living in that K-shaped world, where everything is fine. There are millions unemployed. And these benefits are running out, moratoriums are about to expire in December or January, so they’re estimating maybe 6 million or 7 million people who are behind on that rent and cannot catch up.  You’ve got millions more who are behind on their mortgage payments and cannot catch up. And  that’s the other thing, they’re like 3-4 months behind. One month behind is probably okay. If you’re 3-4 months behind, it can be big trouble. So there’s probably no way for these people to ever catch up.

Now, that expires in January. There’s been this push  in Congress… They would have to pass a law, to have more stimulus, to extend the moratoriums, to add more unemployment… But there’s been no agreement. And every week I’m looking and saying “Did they finally do it? Did they do it?” No. No. And every week, it hasn’t happened yet. So that’s a big unknown, and that’s driving that third category of people, which are like “You know what – it looks okay now in a lot of classes, but I don’t know what’s gonna happen in January.” So they’re holding off.

Back to the other people – so you’ve got others that are… Maybe I should explain further that you’ve kind of got different asset classes that have done well so far, and ones that have not. And there’s opportunities in both.

You’ve got the ones that have done really well, which are like multifamily, self-storage, mobile home parks – all of these have held up; rents have been doing well. And when I say multifamily, I mean A and B, not C. So people who are ready to continue will continue to put money in those. People who are a little bit more cautious, but are looking at the 1-2 year have gone through an interesting strategy where — okay, rather than buying a class B multifamily, they will look at a brand new construction of multifamily, with the idea of “I’m gonna build this, and in 1-2 years when it’s built, I think all this is gonna be gone, and then I won’t have to worry about it.”

Theo Hicks: That’s interesting.

Ian Ippolito: Yeah. In normal times, that would be a riskier strategy, because “Are you gonna build it on time? Are you gonna be able to make a balloon payment at the end of it and lease up, and make the balloon payment on time? Or will you lose a whole bunch of money?” There’s all these steps. But people are now looking at 1-2 years later as an advantage, and a way to play the whole uncertainty, and to kind of get into it. So you’ve got those.

Then you’ve got the people who are even more aggressive, who say “Okay, what are the things that are doing really badly right now?” That’s hotels. A lot of the retail is doing really badly with these restaurants that are shut down.

At first, some of the medical stuff was doing bad, because they shut down all the elective surgeries, and stuff like that… Still, even hospitals and stuff like that are having a difficult time. So there are a lot of distressed assets out there. So for the people that are really aggressive, they look at those and say “Hey, maybe this is buying at the right time. Maybe this is like being in the Great Recession and this is like buying right at the bottom of 2009. I’m gonna just ride this thing up when things turn around.” But there’s a danger there, because we don’t understand this recession. It’s different than anything else that’s ever hit us before, in our lifetimes anyway. The causes of are very different, and every past recession has these after-effects that have been very difficult to predict. And this one especially so. So there’s a little bit more risk than usual in going after some of these… So someone has to be comfortable with that.

Theo Hicks: One thing I wanna dive a little bit deeper into before we get to this next section, which you’ve already kind of hinted at, which is the future – but just really quickly… When you’re looking at these different deals – let’s take multifamily, for example… What are some red flags that you would see that the sponsor is doing, even if it’s a class A or a class B property? You’re like “Whoa, whoa…” It might be a good deal, but something in their underwriting that they did that was a really aggressive assumption that you were just not on board with – what would be a few of those?

Ian Ippolito: Well, what’s interesting is there’s actually a lot of those I’m seeing right now, where they come back and they just don’t look right. A lot more deals that just aren’t passing the sniff test. Personally, I wanna see a Covid-19 discount. I wanna see something that is compensating me for the possible risk that things could get worse. And what’s interesting is when the pandemic first hit, you had the sellers who were way up here, and then the buyers who were down here… And neither side was willing to budge. Buyers were like “I need a discount.” Sellers were like, “No, no, no. Just a month ago I could have gotten the full price.” So nothing happened. And the volumes on all these sales just went down into the basement.

Well, volumes are still pretty low, but starting to come together a little bit closer. So it is possible now to get Covid-19 discounts, which is nice. For me, if I was gonna go forward with something, I wanna see a seller that is willing to come down, so a Covid-19 discount… It might be 10% or 15% now. Not the 30% maybe that some people are wanting… So if that’s what they’re wanting, this is not the time to buy.

And the other thing is because I think a lot of the people are being forced to purchase at a higher price maybe than they want to in order to go forward, they’re having to structure a lot of these deals with — we’ll call it “extra financial engineering.” Structuring a lot of these extra investor classes, where from an investor point of view you’re taking on more risk than in a plain vanilla deal, with a single class. Single class, you’re first in line to the stream of the profits… Versus these, now you’ve got multiple, and you’ve got someone in front of you that’s taking some because there’s a preferred equity portion, and you get the remainder… And again, it depends on the investor, because if they’re looking for a higher return, that can be it. But I’m a conservative investor, so for me, I see those and I’m like “No, that’s a red flag for me. I’m looking for something more basic.”

And like you said, looking at the proforma, I wanna see the most conservative sponsors right now. I’ve seen some of them saying “No rent growth whatsoever for the next two years.” When I see that, I feel pretty comfortable that they’re gonna hit their projections… Versus other ones that are like “Oh, well, we haven’t been hit so far, so let’s just keep projecting up, up, up.” That for me is another red flag.

Theo Hicks: Thank you so much for sharing that. So let’s wrap up by talking about future predictions, where you see things going from your perspective, plus what you’ve gotten from your group. I was gonna ask you this, but you’ve already talked about it – what would be your prediction if the eviction moratorium and the stimulus runs out, versus what would happen if it doesn’t, and it gets renewed longer? Because I guess those are really the two future scenarios. And which one do you think will happen?

Ian Ippolito: Yeah, that’s the million-dollar question, for sure, and it’s like a  huge polar opposite on what will happen. I guess we’ll go with the worst-case scenario – let’s say we come into January, so now the eviction moratoriums are gone, there’s no assistance for any of these people who cannot make up their rental payments and their mortgage payments.

So you’ve got renters that are gonna be evicted, you’ve got homeowners that are gonna be foreclosed, and the amounts are just scary, because they are in excess of what the Great Recession was. So we’re talking millions and millions of people.

And the other side of this is that there’s been no aid also for landlords, even during these moratoriums. There’s been landlords that have gone 6, 7, 8 months without any rent because of the moratoriums, so they’re hurting, too. So a lot of people hurting. Not even just the people that are paying.

And I’ll add one other piece to that, which is the fact that the other thing that expires – there’s been a moratorium on student loan payments, and that’s been trillions of dollars. So if those start going in, now someone who is unemployed – or maybe they were on the bubble – now all of a sudden they’ve gotta make the student loan payments again. That’s gonna hurt as well.

So worst-case scenario, there’s no help in that, and I can kind of walk you through that. Basically, Congress is not able to pass anything in this lame duck session right now. We have a new Congress that’s gonna be coming in in January; very possible it could be a divided government, in which case very little might get done… So in that case, it may not pass. It’s a real risk.

If this happens, a lot of asset classes are gonna get hurt. These multifamily deals – the C has already gotten hurt. Class C is gonna get hit the worst, because class C is typically the lower income. This economy has just been lower-income people — the recession has been lower-income people get hit worst. But the thing is, when that many people get hurt, it has secondary effects. So now it’s no longer just the person that is working in a restaurant; okay, they lose their job. But now when enough of those people lose their jobs, now the accountant who was okay before and had a higher-paying job – now his firm is no longer doing the accounting for that restaurant. So now his job is in danger. And it just goes up the food chain. So when you have a large enough number, it’s dangerous. So I would be very uncomfortable being in even class B… And it definitely could go all the way up to class A, as far as multifamily.

You’ve got self-storage, which has done very well so far… That one could be okay… Because let’s just say millions of people are losing jobs… In past recessions, sometimes when a person loses their job – let’s say they have to downsize; they lose their house, or maybe they move to a smaller place – they will get a self-storage unit to store their stuff.

Now, if things get bad enough, they will not be able to afford the rents on that; so it’s possible self-storage could do well, but again, hard to say. So probably maybe in that scenario self-storage is looking a little bit better than some of these multifamily deals.

Mobile home parks, which have historically done very well in recessions – unfortunately, the way mobile home parks have done so well is because they’re at the very bottom of the income. The idea is that people can’t afford to move out; there’s no other place to go, so people make their payments. But if this starts  hitting, mobile home parks could for this recession no longer have that special status that they’ve enjoyed.

And then, of course, the ones that are already doing bad – hotels, retail and stuff like that… The more people that lose their jobs, there’s no stimulus payments to pay money… People are not gonna be going to restaurants, people are not gonna be doing that.

So across, real estate I think would be very bad, and in that case probably an investor is gonna wanna be in non-correlated assets, that are non-correlated to the business cycle. There’s things like litigation finance, where it’s based on whether a case wins or loses, and how good you are at picking a case, which has nothing to do with whether the economy is doing well or tanking. That sort of thing is gonna do well no matter what.

Investing in music royalties, which actually ironically in this recession everyone’s at home, and they’re listening to more music. Music has actually improved life settlements, which is this concept of you invest in — I’ll go really quickly, I don’t wanna go over time, but… Basically, you purchase a life settlement policy – someone who wanted to get life insurance and could no longer afford to do it. You purchase their policy, you keep paying it until they pass away, and then you collect. So it’s just a matter of people just dying or not dying. It has nothing to do with the economy, again…

So these are all things that if things go way downhill are still gonna continue to do well. I think there are investors who are positioning themselves right now for that eventuality, where that goes downhill.

Theo Hicks: Let’s end on a positive note, so let’s talk about the other end of the spectrum…

Ian Ippolito: [laughs] Yes, exactly. Because it’s so dire, a lot of people are saying “Look, Congress is going to have to do something about this, no matter what.” So let’s look at that. They’re gonna get together, they’ll pass something… Maybe it’s new stimulus, maybe there’s gonna be a bunch of checks for everybody, we’re gonna have new unemployment benefits for those who don’t have jobs, there’s gonna be an extension of the moratorium, so we don’t have millions of people out on the streets at once… And in that case, things have gone remarkably well so far. So it basically would just be a continuation of the same… Then we have a vaccine – at this point it looks like we’ll probably have two, maybe more; there’s a possibility of a Johnson & Johnson vaccine coming, so there might be three… And maybe this fourth vaccine, the Oxford vaccine… So we’ve got a bunch of vaccines coming, we’ve got some treatments, and things like that… People are expecting things to turn around there maybe in the summer of 2021.

Some of the schedules are getting pushed back. Operation Warp Speed has had some issues with — they didn’t purchase as much of the winning drugs as we would have liked in retrospect, so maybe it’ll get pushed back to fall of 2021… But by then, it might be a complete return to normal, and if we have that protection, a lot of these investments could look at this recession as one of the most mild.  So it really is kind of crazy that there’s just that huge range of possibility.

Theo Hicks: It is, yeah. Well, Ian, thank you so much. This has been very informative. I’ve really enjoyed this conversation; very timely, too… Just to kind of quickly summarize what we’ve talked about – we’ve talked about the initial shock, and then some good and bad investment classes, and then the future predictions.

Is there anything else that you wanted to mention as it relates to what we’ve talked about today, or where we can learn more about you, or where we can learn more about what we’ve talked about today? You are very knowledgeable; I’m sure this is all on your blog, but anything else that you want to mention before we sign off?

Ian Ippolito: Sure. If someone wants to learn more, there’s all sorts of free articles and content on the Real Estate Crowdfunding Review, on real estate cycles, and looking at history, and what tends to happen, and what doesn’t tend to happen… And there’s also the Private Investor Club for those who are interested as well in learning more, and also learning from other people. So I’d recommend someone do those. For contacting me, they can also contact me in those places too, as well.

Theo Hicks: Perfect, Ian. Thank you again so much for joining us today. Best Ever listeners, as always, thank you for listening. Have a best ever day, and we’ll talk to you tomorrow.

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