October 20, 2021

JF2605: The Impact of Inflation on Multifamily, Investors, and Other Assets with Travis Watts

Travis Watts is joining us today to discuss inflation and how COVID-19 has affected the market. Travis is talking about what might significantly impact real estate markets in the near future, how to mitigate fixed renewal rates for non-residential properties, and three ways real estate investors can make money in this climate. 


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Deal Maker Mentoring

Deal Maker Mentoring


Ash Patel: Hello, Best Ever listeners. Welcome to the Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m with today’s guest, Travis Watts. Travis is Director of Investor Relations at Ashcroft Capital and has been on a number of these interviews before. If you Google Joe Fairless and Travis Watts, you’ll find the previous episodes.

Today, we’re going to do things a little bit differently. We’re going to deep dive into the topic of inflation and how it impacts multifamily real estate investors and other assets. So Travis, let’s just dive right into it. Inflation – it’s a trending topic everywhere. What are your thoughts?

Travis Watts: Yeah, man. When COVID first came out, that was the question on a lot of people’s minds is, “As the government started printing a ton of money, are we going to see inflation in general?” And then some topics as extreme as “Are we going to see hyperinflation?” And it was kind of this, “will we”, or what’s to come, speculation. Well, now it’s here. Now the CPI is showing that we’re 5% to 6% 12-month inflation, and then the PPI, the Producer Price Index, which a lot of people don’t really talk about is even higher than that, 7% to 8%. So that’s the cost to produce something, that would be for example, the fact that a single-family home now costs $35,000 more this year to build than it did a year ago. That’s all part of PPI, which gets trickled down into rents and people buying homes, which is the CPI, the Consumer Price Index. So it’s here, that’s my general thought. It’s here, so let’s talk about it.

Ash Patel: So the concern that a lot of people have is, everywhere they read, cash in the bank is really bad, because it’s diminishing in value. And on that topic, a lot of money, I think, is going out of the banks and into real estate at inflated prices. So that’s driving up every asset class in real estate.

Travis Watts: Yeah.

Ash Patel: That can’t be sustainable.

Travis Watts: Absolutely. So that’s one big reason, is it used to be – if you back up 20, 30 or 40 years, you go park your money in the bank in retirement, collect 6%, 7%, 8% or 9% interest, and there’s your little self-made pension. So try doing that today at 0.1%, right? It’s not really a lucrative strategy. So what else do you do? Well, everybody’s chasing yield, everybody’s chasing cash flow, passive income. So yes, a lot of money’s been parked into real estate, and with all the stimulus that came out, these PPP loans, and oh, my gosh, I could go on and on all the different programs that got launched over the last 12 months, my personal suspicion is that some of that money wasn’t necessarily fully needed for business purposes. So maybe some of that went into additional investments, aka real estate, and that’s why we’re seeing such a huge bump up in pricing, both on the commercial and residential space – single-family, multifamily, everything, really; everything’s got a lot of pressure on it right now for new capital coming in.

Ash Patel: Travis, what headwinds do you see that can significantly impact real estate markets?

Travis Watts: Well, I think the thing that’s been on people’s minds for the last several years is when are interest rates going to start hiking back up? And then unexpectedly, COVID happens, and the Fed drops interest rates again, even further… So we’re near a 0% environment. There’s still speculation. Do we go negative interest rates? I don’t know, I don’t have a crystal ball. I would suspect not in the United States, but other countries have taken that approach. So naturally, at some point, you kind of have to start normalizing interest rates. So yeah, that’s always a headwind for real estate, as you know.

Ash Patel: And for all of those individuals out there that have cash in the bank, but don’t quite know how to deploy it, when to deploy it, what’s your advice?

Travis Watts: I would say the biggest mistake I ever made with investing was when I put too much capital, that quite frankly I wasn’t comfortable with putting, into an investment that I didn’t understand. It wasn’t even a real estate investment, but it seemed all shiny and it looked good on paper, and the projections were awesome as a private equity deal… And I ended up losing a lot of money in it.

So the best advice is to start with self-study, figure out what asset classes exist, figure out which ones meet your goals and criteria… I’m really big on educating on that. It’s all reverse-engineering, it’s starting with the end in mind. It’s where do you want to be? What lifestyle do you want to have? How much does that cost? Is that a passive income kind of outcome, or is that a net worth kind of outcome? Now, which types of investments are going to help you get there? Get good at studying one or two maybe, to kind of specialize in, them and invest in what you know and understand. That’s been my process since day one.

Break: [05:50] to [07:24]

Ash Patel: I play a lot of devil’s advocate, not just on the podcast, but just in life in general, and I always love challenging the multifamily guys, because I am a commercial investor. And when I say commercial, I mean non-residential. But in this scenario, the multifamily industry has a huge win, because it’s all year over year leases; no one in multifamily signs a five-year lease, right?

Travis Watts: Right. Yeah.

Ash Patel: Well, my problem is – in commercial, I’ve got tenants that will sign a 5-10 year lease, often with built-in renewals. So if the value of money diminishes; they’re locked in 15 years down the road, they know what their renewal rate is going to be, and that’s a huge negative impact for me if inflation hits hard.

Travis Watts: Yeah, absolutely.

Ash Patel: Yeah. Unfortunately, this is one where the multifamily guys have a huge leg up, versus us commercial guys. Any thoughts on that, how to mitigate that, what you think will happen on the non-residential side?

Travis Watts: Well, in the short run, we’ve seen a much higher demand and spike up by percentage to the price of single-family homes versus rents, in most markets; obviously real estate’s local, as you know, and everybody listening probably knows. So I’m just kind of generalizing here.

So I think in the short run, that’s priced a lot of people out of the potential – especially millennials – of being able to purchase a home. So they’re going to be forced to rent. Now, what happens after that? Does it level out? Does the price of single-family come down? I don’t know. But now that we’re in this inflationary period, and wages are rising, and more jobs are coming in, and people just can’t find enough people to work, so it’s the opposite problem of the 2008/2009 scenario, I suspect that not only pricing, but rents are going to come up to meet that as well.

You’ve got to think of it from the investor perspective. Say, I’m an investor, I’m going to go buy a single-family home and I’m going to rent it out. Well, last year, statistically speaking, I could have bought a home for $250,000 and rented it at $1,500 a month or something like that. Well, now it’s going to cost me $300,000 to buy the same property. So what does that mean? Well, I’m not going to eat that bill. I’m going to have to raise my rents now more, so that I can still get a return on investment. So even though there’s a differential between price points and rents, it has to eventually, in my opinion, equalize and catch up there.

But yes, to your point, a lot of leases are 12-month leases, sometimes you’ll see a 15-month lease, things like that. So it’s more of a short thing, versus say self-storage, where people are in and out in two or three months, that kind of thing, but a lot less than a triple net lease or something like that, potentially.

So the reason I’m so gung-ho about multifamily, especially when I got started in it in 2015, is we have a severe lack of affordable housing in America. And everybody’s got to live somewhere, and a lot of people are not only choosing to rent by lifestyle preference – my wife and I’ve done that for years – but are renting out of necessity as well. And to just find a two-bed two-bath nationwide, that’s $1,100 a month, is highly in demand, and I think that will continue to be true as we move forward. So even getting these menial raising of your rent $25 a month, $30 a month, $40 a month is still a much better play than going out and buying a $500,000 house in your local market.

Ash Patel: Historically, the economy’s gone through pretty predictable cycles of ups and downs. Is that the same case with inflation?

Travis Watts: That’s a good question. You should ask Ray Dalio that question. [laughter] I’m not a specialist on the market cycles. I don’t know, to be honest. Obviously, we saw some extremes back in the ’80s, where we had interest rates and stuff at 18% and things like that. And now here we are near zero.

So I think the logical conclusion to that is, if we’re near zero and you don’t believe we’re going to go negative, well, then where else do we go from here? Back up. That’s my conclusion.

Now, how soon and how fast? Well, you’ve got to remember how much debt our country has, and all individuals have. So you can’t just go zero to six overnight, right? You’re going to collapse the system. So I think we trickle back up, kind of post-pandemic, so to speak, and we try to normalize… But hey, I’m not the Fed. So ask Janet Yellen, kind of what her thoughts are.

Ash Patel: Knowing what you know now, what advice would you give your younger, let’s say, 20 year old self, knowing that the economy has this outlook? How would you position yourself?

Travis Watts: More cautiously. A lot of people say, because I got started really in 2009 and beyond, they think, “Oh, What perfect timing.” Man, that was a scary time. 2009 – it was in September, and I’m buying real estate?! I remember asking family and friends, “Do you think I should rent or own?” “Oh, you should definitely rent. We just lost half the value of our home.” “You’re nuts. You’re going to buy real estate right now? You’re crazy!” And luckily, by 2011 and so, it started turning around and up-ticking.

But I would just say, I think we talked about this briefly before you and I, but with my nephew, starting with a couple 100 bucks and a brokerage account, just to kind of learn the game, investing in publicly-traded REITs… Just start learning; put a little skin in the game and start slow. And I think that the biggest thing is going to be your education. The last thing you want to do is say, “Hey, I’ve got 500k liquid, let me go put it somewhere. I don’t know, how about this deal?” And then we’re at the top of the top, perhaps. And then you lose half your money. So I would trickle it in. I would diversify. I’m just sharing things I do. I’m not giving anybody advice. But that’s what I do.

Ash Patel: With your investor relations position, do you get that inflation question a lot?

Travis Watts: Yeah. This year especially, because it’s hitting all the headlines. As I said, in 2020, it was speculation, are we going to see inflation? Is this going to happen? And now, my wife and I went to the Carolinas in 2020, we rented a Ford F-150 pickup truck for four days, and we paid $178 for that total rental cost. And you go do that today, in 2021, you’re going to pay like $1,000 or $1,200, or something outrageous like that.

So not everything is created equal. When you get these metrics of CPI and you say, “Oh, it’s 5% or 6%” Not rental cars. There’s some things that have absolutely just been blown out of the water; the price of lumber spiked 300% at one point, things like that. And then you’ve got your consumer goods, let’s say; a loaf of bread went from 3 to 3.25 or something, you know. So anyway, that’s something to think about.

Ash Patel: Yeah. So the moral of the story really is your cash in the bank is being diminished, prices are going up, and that’s not a good solution. So you’ve got to find a way to make your money grow.

Travis Watts: Absolutely.

Break: [14:31] to [17:11]

Ash Patel: Travis, what are the three ways that real estate investors can make money in this climate?

Travis Watts: Well, I think the three opportunities—I was just talking to an investor the other day about this, and he was sharing with me some stuff about the 1980’s… And I said, “Correct me if I’m wrong, in your opinion, but,” I said, “the play in the ’80s would have been when interest rates were 18%, to pay off your home, because real estate prices obviously were a lot lower because of interest rates being that high.” That would have been the play if you could, right? It’s kind of the Dave Ramsey stuff, “pay off your debt.” That made a lot of sense in that era. But in today’s era, here’s the deal. We’re looking at actual CPI, Consumer Price Index, inflation at 5% and 6%, conservatively speaking, depending on whose data you tune into, and you’re able to lock in low-interest rate fixed mortgages and debt at 3%, for 30 years; that’s insane. That’s absolutely insane. So the opportunity in my opinion today is to lock in low-interest fixed debt on real estate, of any type, of your choosing, whatever makes sense to you.

Number two is real estate’s a hard asset and it’s an inflation hedge. Okay? It’s not inflation-proof. It’s an inflation hedge. And what I mean is when the cost of material goes up, like lumber skyrocketing, when the cost of labor goes up, like we’re seeing nationwide, so does the cost of new and pre-existing real estate. So that’s an opportunity to perhaps get that 5% to 6% a year inflation on the price of your property. Now, you’re not really earning five or six, if that really is what inflation is, but you’re at least protecting your capital, versus your point earlier, leaving it in the bank at basically 0%. Then you’re absolutely losing 5% to 6% on the alternative, right?

And the last thing I would say is invest for cash flow. Because think of it like this – to use a single-family example. If I buy a single-family home today at $300,000, the market’s going up 325 now is what it’s worth, now 350, now 375… But if that property is not cash-flowing for me, if I’m buying in like Los Angeles or a low cash flow market, wherever you name the market, San Francisco, whatever, or Manhattan, and then the market softens in a few years, and that price comes back to 300, for example, what am I left with? I didn’t make a freakin’ dollar. So if that same property was pumping out $10,000 a year to me in cash flow, over a five-year period, I’m $50,000 ahead, regardless of the price of the property. So that’s how I’ve always looked at investing, thanks to Robert Kiyosaki and all that Rich Dad Company kind of foundation laid out. But cash flow is king, man. It’s made a tremendous impact in my life, my family’s life, and that’s what I preach to people, is invest for cash flow and passive income.

Ash Patel: I agree with you 100%. And on a personal note, I’ve done cash-out refis on any commercial properties that I’ve had a fair amount of equity in, and literally looking to deploy that and lock in. For me, commercial loans, I get 10 year locks, and that’s as long as they’ll do on non-residential commercial.

Travis Watts: Yeah.

Ash Patel: So yeah, I’m in the same boat as you, trying to get as much debt as possible at those low-interest rates, and trying to deploy as much as possible for cash flow.

So Travis, thank you for clearing up a lot of what’s going on with inflation out there right now, and sharing your knowledge with us. So have a best ever day and thanks for joining us.

Travis Watts: Thanks, Ash. Thanks, everybody.

Ash Patel: Best Ever listeners, thank you for joining us as well, and have a best ever day.

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