Could your next great investment opportunity be in Orlando, Florida? Travis Watts and guest Stephen Tilton dissect the Orlando market, analyzing its growth potential, demographics, and budding opportunities for both active and passive investors.
Stephen Tilton | Real Estate Background
- Realtor at FLA Real Estate Services, which sources off-market and below market value properties while selling for top market price.
- Say hi to him at:
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Travis Watts: Welcome, Best Ever listeners, to another episode of The Actively Passive Investing Show. I'm your host, Travis Watts. For any of our active listeners to this segment of the show, you know we don't have guests on the show. We're nearly 100 episodes in. It used to be myself and Theo Hicks, my co-host, but we have never had a guest on this show. But today, I have brought a guest on to add value. The reason is that we're doing a market update on Orlando, Florida. I was trying to figure out how I was going to present this information, and the last thing I wanted to do was pull a bunch of data stats and facts and just read off a sheet to you guys. So I thought let me bring on a market expert. That's who we have with us here today. His name is Stephen Tilton. Stephen, welcome to the show.
Stephen Tilton: Hey, Travis, thanks for having me, man. It's a privilege to be here with that kind of introduction.
Travis Watts: Well, you bet. I appreciate you. We've done a lot of deals together, we've bought sold real estate, we've talked a lot about investing over the years, we've attended conferences together, so I think you're a very knowledgeable resource for this particular market. The reason we're covering Orlando is, as you know, there's been a tremendous amount of interest in the Orlando market. You and I live in Orlando and surrounding markets ourselves. Even Ashcroft Capital has been investing in this area, Winter Park in Orlando, for the last two, three, almost four years now. I think it's a worthwhile discussion, a lot has changed since COVID started... Why don't you tell the listeners a little bit about yourself, your background, your journey, and then we'll dive in and get started?
Stephen Tilton: Very good. Well, thank you. I got into real estate originally as a listing agent. I had a little background, because both my parents were agents heading into the 2008 crash, and our lives kind of got turned upside down through that. I took a break, started another business, sold that off, and decided real estate was really the way to go. Along the way, listing properties and becoming an expert at selling, I began to find all of these properties below market value as well in my hunt. I said "Hey, wait a minute. If I can sell them for top dollar and find them at a discount, this is a match made in heaven." But the problem we kept running into was contracting. We couldn't get properties from dilapidated, below market value, to retail-ready. So in 2020, we started a contracting business. I like to keep my finger on the pulse of the market, and I think that's what you and I enjoy is being able to talk about those market dynamics and frankly, why people love Orlando so much.
Travis Watts: I appreciate you sharing. I just want to make this clear, that this is not just a biased episode just because we live in Orlando and we want to promote Orlando. If you just look at the nation-wide stats on where companies and businesses are relocating to, Orlando is top of the charts. Florida in general. But I brought you on because you're the expert in the Central Florida area. So a lot of investor interest, a lot of multifamily interest, a lot of single-family interest; there's just a lot of interest. Let me ask you this, Stephen - you and I both invest individually, our personal capital into this market. But I want to ask you, why do you invest in the Orlando market?
Stephen Tilton: Russell Gray from The Real Estate Guys has been a great influence on me. I want to shout out to him for what they do for the real estate investor community. They have a saying that says "Live where you want to live and invest where the numbers make sense." With Orlando, I think it's really both. I love living in Orlando, I think there are a lot of people who enjoy it. But it also has really strong market performance, which is what's been driving investor sentiment and investor interest.
Mainly we've got strong migration trends, people coming from high equity states like New York and California, where they may not like the policy, the taxes might be higher, and maybe it's colder. So they're coming to Florida for the weather, the lifestyle, relative affordability, and unbelievable market absorption. When we consider what D.R. Horton is doing with 80 plus communities here in the Orlando area, it's a pretty strong commitment that they're making with their land acquisitions and building projects they've got going on.
Travis Watts: There's a lot of migration in general, just to the Sunbelt regions. I've been talking about that on the show for years now, not just on this show but on podcasts for years. It's funny to watch the trickle-down effect, the New York, the New Jersey, to your point, high taxes, the politics, the landlord-tenant laws, trickle-down through the Carolinas and through Georgia, and then of course to Florida. It's funny driving around and I know you know this because you're driving around all the time with clients. But all the out-of-state tags, especially up and down the East Coast, are just phenomenal. I know you helped me buy a property back in, what was it? 2017. Man, things have really changed in this market.
Stephen Tilton: There's been so much construction happening on all fronts, not just residential, but definitely commercial. I'm curious, Travis, what is it that you love so much about Orlando?
Travis Watts: Yeah, it's a good question. I think, for me, generally speaking, I'm a full-time limited partner as you know, I'm a passive investor. What I'm doing is I'm partnering up with firms that are buying multifamily, mostly value-add stuff. There's a lot of research out there we can all look at, Marcus and Millichap, CBRE, and CoStar. They're kind of running their own analysis, where companies, where jobs, where people are moving to, and it just so happens that Orlando is one of the really hot markets. You got markets like Tampa that have exceeded statistically what Orlando's done, Jacksonville's done phenomenal.
Again, this isn't "Invest in Orlando, it's the only place to be." But I live here so I noticed it, and it's so crazy right now for anybody who is here visiting here, the changes. To answer your question, I go by their analysis, I go by the nationwide stats. Right now, I'm bullish here in Central Florida, but ask me in five years, if things change, something crazy happens, Florida says we're doing a 10% state income tax, people are going to be exiting like crazy, and who knows where they're going to go. That's a little bit about what I look at.
Stephen Tilton: Yeah. I think one of the really interesting things we talk about jobs here in Orlando, is there's a large contingent of people. During the pandemic, we thought maybe everybody, all information work can be done from home. But there's a pretty large contingent now, maybe it's 15% or 20% of the information workforce, but they can move wherever they want to go geographically, and they can simply do their work at home. Suddenly, they are faced with the decision of "Where do I want to live independent of my workplace?" I think a lot of people decide they don't like snow, they don't like high income taxes, they love Disney World and the other world-class attractions.
Break: [00:09:40] - [00:11:36]
Travis Watts: A lot like say in California, there's a lot of dynamic to Florida. As you know, Panama City is nothing like Miami, and Miami is really not a whole lot like the Florida Keys. There's a lot of in-between, Tampa is not Orlando. There are a lot of local places that you can go to, to your point. Whether you're a beach person, the beach is what? Maybe an hour and 15 or something from Central Florida, it's not an incredibly long commute, and of course, Disney and all that kind of stuff. On that note, I just want to add this to the listeners, markets change and markets evolve, and Orlando is one of those markets now.
You and I Stephen, we were out at this real estate conference a year ago or something out in Houston. A lot of investors have this connotation about Houston that it's all oil and gas. When oil and gas are down, Houston's a bust. It's just not true anymore, that was somewhat true at one time in the history of Houston but it is so much more diversified now, it is so much more built out. They have all kinds of industries there from tech to health care to you name it. It's the same thing with Orlando. What I hear most as an objective from investors about Orlando is that it's a tourism city.
While that has some truth to it, of course, we have mega attractions, Disney, Universal, SeaWorld, etc. But there's so much more and they're building microchip factories in the whole tech hub over by Lake Nona as you know. There's just so much more that's happening here. That's something to consider when you look at job diversification. As an investor, I don't want to be in Detroit, Michigan in 2006 and 2007 right before the collapse because you're built on really one industry. When it goes down, we all know what happened in that story.
Stephen Tilton: The job sector and Orlando really is more diversified than people think, to your point, Travis. A lot of people just like Houston where they think it's oil and gas, they think about the 78 million visitors that come here annually and over the $50 billion dollars in economic impact that tourism brings, which is great. I'll tell you, the city of Orlando loves that 10% hotel tax, they build stadiums and all kinds of things with it, it's been really great.
The lesser-known industry that's really larger than the tourism industry, but it's sort of not marketed as much it's a little bit of secrecy, it's military and defense. We actually construct missiles here. The irony is when you're on the Orlando eye, on one side you've got International Drive, and on the other, there's literally a Lockheed Martin missile factory and a research and development center. It's sort of this perfect microcosm of the jobs market here. Not just on the military defense front, we have more military simulations happening here, computer-type simulations than anywhere else in the world. It's the military simulation capital of the world.
Not to mention what we have going on for our medical industry. We have a great place, which is an awesome private-public partnership known as Lake Nona Medical City. They have put a number of medical research hospitals there including Nemours Children's Hospital. When we think about that and the UCF medical research facilities, these are really world-class medical facilities that are attracting top talent, and not just in software, military defense like engineering, but also in the medical industry. Those industries really pay so more than when we consider jobs like hotel cleaning person or somebody like a ride operator, those jobs are making 15 an hour or something like that. You're getting six-figure jobs in some of those other industries.
Lastly, but not least of which is our education industry. We've got incredible technology research facilities here at UCF. It's a phase one university so they're doing all kinds of research in a number of different fields. But engineering is really the specialty. They have a track, if you're living here in Orlando and you've got a kid coming up college-age, they can be local, stay in your home and get an amazing education at UCF, and basically be direct tracked into Lockheed Martin, or Raytheon, or one of these other major defense contractors. It gives people major upward mobility here in the future.
Thinking about Valencia College, I hear Bernie Sanders talk about free education or free college education regardless of your political views on it. In the state of Florida, it's essentially free, they'll pay you if you're a low-income earner to get your associate's degree. At risk of going on too long, basically, if you're a full-time student, you get complete tuition paid for Community College and the federal government will additionally step in with another benefit that's almost three times as large. Meaning, to get your associates, you actually profit if you qualify. It's an incredible place to live and it's an incredible job market.
Travis Watts: There you go, couldn't agree more. There's probably a different program you were just describing, but when I went to college, it was out here in Orlando so many years ago. There was the Bright Future scholarship and it was if you have a certain GPA and some community service, the same kind of concept. I at least had an associate's paid for at a public school. That program, if it's still around, it was funded by the Florida Lottery. Some cool things that they've done structurally.
You mentioned politics which is always a big mistake so let's talk a little bit about politics and dive into that. More importantly, let's talk about the Federal Reserve real quick, as we kind of wrap up, let's look at the macro-level of real estate. We've been bullish, bullish, bullish on this episode. But let's talk a little bit about interest rates. I'd like to get your thoughts on what do you think we might see or what's happening now in that space.
Stephen Tilton: Well, nobody ever knows what's going to happen. The wise man says, "Well, it depends." So, it depends. But I think what is likely to happen is something similar to what we saw in 2018, 2019, when the Federal Reserve begin tapering their asset purchases. They had some favorable tax policy that gave them a little bit of breathing room to begin scaling back those asset purchases, and that's what they did. But as they began doing it, we saw the yield curve flatten and then eventually invert. Especially since 2020, we have a really strong track record. When the bond market yield curve inverts, it precedes a recession every single time since 1971.
We're already seeing a flattening of the yield curve just with the Federal Reserve talking about raising interest rates, and yet, we see inflation roaring. I think it's obviously two sides. We've got a supply chain problem, and as that's alleviated, that should help. But we're also getting the worst kind of inflation, that's where the public becomes psychologically aware of inflation, and they begin demanding more from their employers, which of course, drives the cost of production up, begins this negative feedback cycle. The Federal Reserve is really in a tough spot and I'm curious to see how it's going to pan out. As it pertains to real estate, Travis, I'm curious what your thoughts are on how things will materialize?
Travis Watts: Yeah. Well, like you, no one's got a crystal ball. What I've shared here with the listeners on this podcast before is that there's a lot more that plays into it than just interest rates, that's the short-sighted thinking as well. If interest rates go up, then the real estate crashes. Well, to your point, you have supply chain issues, we have a severe lack of inventory on affordable housing, we've been behind since the year 2000 of providing enough homes for Americans. 2008, '09, '10 slowed that down more, COVID slowed that down more. We're millions of households behind. I shared that a couple of episodes ago, I don't have the stats in front of me.
You've got to factor in all of this. The way I look at it is this, maybe the Feds not going to be able to raise interest rates from, what's a mortgage today? 3% or something, all the way to say 6%. Maybe that's way too aggressive, and the reason you might want to consider that is, one, the amount of national debt that we have, obviously, what that would do to markets, to real estate, to the overall economy. We've already seen, to your point, them stepping back from that. But here's another perspective to think about. I ran the numbers the other day on a $300,000 single-family home purchase at a 3% interest rate today or a potential 4% interest rate next year just in theory. That changes your payment by 150 bucks a month.
Is $150 a month really going to stop somebody who really wants to buy or own a home from purchasing? You can kind of apply that theory to the larger assets as well. Multifamily has primarily driven off net operating income so if you're still buying a stabilized cash flowing piece of property, you still think rents are below market and you can bump them up with inflation that we're seeing right now at 7%, I still think there's a bullish case to be made for real estate in general but also for multifamily. I'm not an expert but that's kind of my take anyway.
Stephen Tilton: Great point, Travis. When we are making our investments, we're sort of beginning with the end in mind and expecting some of these marketplace dynamics to change. For me, when I'm in an uncertain market and I'm purchasing anything with that, I am most focused on cash flow even more specifically, my expense ratio relative to my gross income. For some of the investments we're buying, we've got expense ratio as well under 50%. What we know from studying past downturns is that typically rents don't go down much. If they do, it's something more like 20%. If we feel making those kinds of investments, obviously, much smaller single-family properties where we're able to accomplish some of those kinds of numbers, we feel pretty comfortable regardless of what happens here in the short term with interest rates.
Travis Watts: That's a great point, Stephen. Rents are pretty inflation-sensitive too. As long as we're seeing some form of inflation, they tend to keep up, or actually, they're in excess of that. I've shared that statistic too on the show. They've been 583 basis points above the government inflation since 2012, so just something to think about. Right now, we're seeing a 7% inflation rate. Number one driver to NOI on commercial is the rent bumps, so we'll see what happens. I appreciate your insights, I appreciate your sharing.
Now, Stephen, if anyone's looking in the Orlando market, whether they're looking to buy an investment property or just a home for themselves or whatever, how can listeners reach you?
Stephen Tilton: You can send me an email at email@example.com.
Travis Watts: Well, with that we're going to wrap up. As always, appreciate your time, Stephen. Best Ever listeners, take Stephen up on that offer. Reach out if you have any questions about the Orlando market. Make sure to like, subscribe, and comment. Appreciate you guys, as always. We'll see you next week on another episode of The Actively Passive Investing Show. Have a Best Ever week, everyone.
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