2023 Real Estate Predictions - Josh Alexander

TRANSCRIPT

Mike Pine: [00:00:00] Welcome to Hidden Money Podcast. We are super excited to have one of our good friends and clients, Josh Alexander, join us. Josh hails from ALX Land. It's a real estate development firm, and he's a syndicator. A little bit about Josh - he and his wife and two sons and daughter all live in South Lake, Texas.

He graduated from the University of Oklahoma in 2008 with a Bachelor's degree in both marketing and management.

ALX - Josh leads the vision strategy, business development, and equity management. Josh has a pretty good career already. He's a young guy, but he's been incredibly successful in real estate and he also seems to be a fortune teller. He and I had a conversation this past summer and I asked him - What do you think's happened with the economy?

I think we just had our first interest rate hike, and he, to the T, predicted what would happen all the way up through January of 2023, and I am now going to ask him to pick all of my investments going forward. Josh, thank you very much for being here, man.[00:01:00]

Josh Alexander: Yeah. Thanks Mike. Happy to be here.

Kevin Schneider: We're located here, in Texas, and so the market in Texas is always a unique beast. We have a lot of people moving here, so depending on where our listener's in, some of this just may sound shocking, but Josh, kind of what's going on in the Texas market, and what have you been hearing if you got your ear to the ground on real estate, at least in Texas, what are you hearing out there?

Josh Alexander: Still extremely competitive. If you're looking at kind of residential versus multifamily, residential is, I think obviously taking a little bit of a hit. People have seen that across the country with interest rates going up, mortgage rates going up, but here in Texas, we seem to be a little bit more insulated towards those rate hikes.

We still have a lot of people moving in still - read an article today in Dallas Morning News that Texas led the nation in job growth in 2022 - 650,000 jobs or something in Dallas Morning News.

So there's a lot of reasons to be [00:02:00] optimistic and excited about Texas. It's very business friendly.

There's just a lot of opportunity, good schools. I think it's just from the way that the Covid was handled and other things, just the way the state is run, I think people are looking for a place where they can come and still have a lot of opportunity to work and grow, and good place to invest, as far as business growth and job creation.

Property wise, we haven't seen much of a decrease in values or any slowdown in competition. We have seen less properties come to market, and I think you guys know, people I listen to know, that in multifamily we value things based on cap rates primarily.

And so where, cap rates were a year ago, let's say D/FW, multifamily average, the cap rates somewhere in the mid-4s. Now we're seeing those cap rates kind of run out a little bit to low 5s.

So I don't think that has anything to do with other economic factors as far as people moving in, or job availability, but just simply what it costs to own these properties right now.

Mike Pine: So, [00:03:00] my grandfather who grew up during the depression, he did pretty well in real estate, and he used to always say (and I know we've all heard this a lot), but when it comes to real estate investment, location is the number one thing - one of the most important things - what areas.. I know we have talked about Texas, but especially D/FW, maybe in Austin.. but what are some of the greatest areas for potential investing if you're looking to invest in multifamily housing, which geographies?

Josh Alexander: Yeah, and just to add to that, I'd say, the one thing that can cover up mistakes, cover up underwriting mistakes, cover up managing mistakes - the one thing that can do that is - location will typically, the values will typically continue to appreciate depending the properties are all in the right locations, So, it is key. Now, those are obviously more expensive and there's less risk involved. So sometimes the better location, the more expensive the property, the less return that's going to be offered for that particular investment. But yeah, [00:04:00] absolutely, right location can cover up a lot of mistakes.

But in the locations anywhere in Dallas, Fort Worth, Dallas Metro, Fort Worth Metro, Arlington, Bedford, the mid cities area we're we've, got some in Richardson, we've got a property out in Amarillo. So really I don't know of any market in Texas that hasn't grown like crazy over the last couple years.

I don't know of any market that I would say definitely avoid- you get in out west and then you're heavily energy dependent- I'd be a little bit wary there, because you're going to have big swings in occupancy, and in what you can charge and rent, and that's obviously going to really impact the values.

But if you can get where we like to kind of, stay, we love D/FW because it's so economically diverse. I feel if you're going to get into any market where that's going tomost closely match the overall economic picture in the country, it's D/FW. We got a little bit of everything here, and I don't feel like we're too heavy leaning in any one industry.

So I'd say anywhere in D/FW is good. Now when I say that we all know that certain pockets in any market, in any city are not going to do as well as [00:05:00] others, so you just be mindful of - Yeah, D/FW okay. That checks a big box. Yes. That's good. Now it's like hone in and see a little, get a little bit more information on exactly where

in the neighborhood, in the city. And what's the plan? What does it look like on a more granular level in that particular market, and how does that property in that market compare to other properties in that market? So there's certainly other considerations - not to just say - Hey, D/FW, yeah, let's go for it no matter what.

But we like D/FW, Austin. Austin is obviously a great market in Texas, but we've seen that's really been overly saturated, I think the last couple years. It's super expensive. San Antonio and Houston are great places to invest. Any of the primary markets in Texas, I think you're, in good shape as long as you're in the right property, in the right situation.

But there's a lot of properties and all those markets that fit that - they're in good locations, they're doing well. There's a lot to go after in all the majors and all the primaries, and then we can get into secondary and tertiary stuff too, but the get is, you're going to do pretty well.

I think, if you're in a good spot within one of those primary markets in Texas.

Mike Pine: [00:06:00] So I'd like to further get your thoughts how it is that you focus and find a property, underwrite it and feel confident enough that you're going to make money. , and I've seen the way you model stuff, it's pretty conservative, but how do you go through that process and get comfortable enough before you can take it to potential people and say, 'Hey, I want to invest your money and this is why I think it's a good thing.' Walk us through that process a little bit more, if you wouldn't mind.

Josh Alexander: Yeah. At some point you do the best you can. You see where it's been. There's different pieces to that. You look back and you get historical financials from the previous owner. Typically, they'll give you 12 months to two years to just show you what the property's been doing.

Then you take that, and then you put it up next to - What's the market like for rents? What are the comparables in the area? Is there any room?Is there room for us at this property to raise rents, to match those other comparables?

And an important part of that is to determinewhat is a comp ? What am I going to have to do to this property to make it look like that one, to [00:07:00] where I can actually compare it and say, yeah, somebody would be willing to pay the same price for that apartment down the street, as they would for this one.

So there's a lot that goes into it - it takes a lot of people with different skillsets. You need to have a property manager that looks at it and says, 'Yeah, I think these historical expenses line up and I think that we can operate in a similar way or better, or know it's going to be more expensive.'

You need to havewhoever you're going to work with to do your construction or, RV car CapEx, but how are you going to improve that property? Whoever's going to be doing that needs to get their eyes on the property, and look over the business plan and approve the budget and make sure that you know those things..

that, we can do that within the allotted money, within the allotted budget, to make the project work too. So there's several people that need to come into play. There's also the due diligence piece where you need to walk the property beforehand to make sure there's nothing that you can't see, right?

There's, in all these properties, there's stuff hidden behind the walls. You've got to get up on the roof. I guess what I'm getting at is, it's a long process. You typically get a 30 day due diligence period to get in and look at these things. , and then you have 30 to [00:08:00] 45 days to close.

Now you get that 30 day due diligence period, but a lot of times it'll cost you something. You're going to have to put up a deposit that oftentimes is non-refundable as soon as you sign that contract, but.. certainly there is a feel to it. - for me, there's a lot of prayer that goes into it.

There's a faith element to it. and then, there's also a team that surrounds me and walks the property and we build this plan, and we build and we bounce it off our third party partners who are going to be working this project with us. And at some point, You've got to say - Okay, we've done everything we can do.

This is what we're set up to do. This is the business we're in, and we've got to take that next step forward and put it out there, and then knowing that, once we close that deal and that business plan goes into place, that we're going to do everything we can to make it successful. Everything within our control we're going to do to hit and exceed the expectations, that we put forth during the underwriting process.

But it's always difficult, and these projects are expensive and they require a lot of money. There's a lot of capital involved, a lot of people involved, so yeah, there's a lot of pressure to make sure that we're underwriting thoroughly, that we're doing a good job, that we've [00:09:00] got, like I said, the right people

that have the right skills, are giving us the right information. So there's a lot that goes into it, but at some point you have enough to where you feel peace about - Yeah, okay, we can. This is a good opportunity and let's move forward, and we think that not only can it be successful for our investors, but we think this is a good idea for the business, can help the business grow.

But just like anything else though, at some point you've just got take that next step and there's always going to be the little hesitation because there's a lot on the line, there's a lot of money here, but you can put a process in place that gets you far enough along, and you're just like - Hey I feel like we've done our due diligence, we've done our homework, and I've got peace, and let's go.

Kevin Schneider: Managing someone else's money has got to be a heavy burden - it would be for me - from a CPA standpoint, we get to save people money, but it's actually managing it and being responsible for a return, and an expected return - most investors invest expecting it, even though they understand risk, they understand that they could lose it, but the expectation is - I am going to get a return.

So that's [00:10:00] a lot of weight that I would feel on that, and I love how you mentioned that you're going to have a team around you. You have quality people, and that you have certain people doing certain things in their designated space. So how did you find your team, and can you talk a little bit about the importance of your team?

Because we're strong believers of the same being CPAs we, know taxes, but we don't know real estate syndication management, we don't know financial advising, retirement planning and things like this, so we have people like you and other professionals that we kind of lean on, and it's so important to work with someone who understands that.

how'd you find your team and talk a little bit about that, if you don't mind.

Josh Alexander: Yeah,absolutely. So my family's involved, my brother's involved in the business. He handles all of our business management administration, our analyst, our primary underwriter.

We did several development deals before we got into the existing multifamily. He was a banker that we used, his commercial underwriter that we used for years[00:11:00]

and he came aboard. We've got a project manager - he's an engineer, he's got a back background in oil and gas. He worked at a church doing IT, and then he moved into the multifamily space. I met him at church and and we clicked, and he's an incredibly competent guy.

He handles our project management, CapEx. He also doessome general asset management for us. And then Acquisitions person - same way, met him through church. But really, it's for me, looking at character and competency - do you have the right character? Do you fit the culture?

Do you get along? Do you get the vision? Do you see where we're going, and does that excite you? Do you want to be a part of this? And then, do you have the competency? Do you have the God-given skills to fill that role well, and do you have the capacity to grow and learn?

Because obviously we want to continue to grow, and as you grow, things get more complicated, it gets harder, more stressful, there's more pressure - like you said, the more money gets involved, the more investors that put their trust in you, the stakes go up, the pressure goes up.

So we need to constantly be getting better and better. For me, I've been blessed that the team I'm [00:12:00] surrounded with has really come together naturally. I haven't gone out and hired people to do certain things because those relationships were already in place.

And like I said, I think it was a blessing that the right people came at the right time. And a big important for us - we work with a lot of third party contractors. The number one person, in my opinion, of who's going to make that project go, who's going to be most

critical to the success of that project, is going to be the onsite manager, the property manager - t hey put the systems and the processes in place. They're set up to support that onsite staff, make sure they have what they need, they're getting the right reading,

they can interpret the data, they know what to do with what they're looking at, but the person that engages every day with those tenants, and is signing up the leases, and is making sure that the property's running the way that it's supposed to be, is that onsite manager, so that has been a process for us we've used for several managers. We've now narrowed it down to one that we really like. In our journey to this point, the team that's close to me - the, as we call ourselves, the asset management [00:13:00] team, the investment management team,

has been built out in a really special way, I've been able to just bring people in that I've met and formed a relationship with, and they just haven't had the skillset that fits a certain need. , but the third party stuff, we've worked with property managers that we haven't had a great experience with, and third party contractors and things, that it hasn't worked out the way that I'd like,

but just takes time, right? Just takes time, and you have to set expectations, you have to hold people accountable to certain goals and metrics. Those have to be clear. People have to know what you want, know what you need and when you want it, when you need it,

and the why it's important. And I think we've found that now, with the third party contractors that we use.. it's been a trial and error, it's been working with people that. . some that work out, some that don't, and you just narrow it down to - Hey who's the right fit for us?

Nothing against the people that don't work out - it just isn't the right fit. That'll always be the case though, right? We're always going to be dealing with that, and okay, that's fun, and when you find it, when you find that right fit, it's really great.

Mike Pine: So, if I'm looking to get into - I'm new in [00:14:00] real estate syndications - and I'm looking to get into one, how strongly can I count on the Pro Formas that come out in those offering memorandums? I've seen a lot of people try to shoot for blue sky in their PPMs when they're trying to raise funds,

and they're not always reasonable at all. So how would you recommend just a normal new investor look at the

.. your predicted financials, your first year financials that you come out with - someone's looking at them, what would your recommendations be?

Josh Alexander: Yeah. You know that's a great question. because a lot of people underwrite so many different ways. Probably when you're looking at a Pro Forma, one thing you need look at is, when you're looking at the comps and the rents, there should be data in there -

what are the comps? What are the properties? What are they asking for? And a lot of times those are asking rents. We're not going to see what the real rents are. Those are their asking rents, because that's all the information that we get, and if you go to apartments.com, you're going to look at the asking rents.

We don't know what those leases are actually signed up for, [00:15:00] but if someone's promising astronomical returns, a good rule of thumb is a 6 - 8% distribution preferred return, and then a 15% on an existing property, plus or minus overall return, annualized return. So those are kind of the market standards and the reason they are is because they're achievable.

They're something that people can typically hit without some type of crazy market rise like we've seen in the last couple years with the cheap money, or without some crazy improvement. You're going into a new development, you're going into a total overhaul of a proper property, we're going to increase value by investing a lot of money into it - that's different, and there's also more risk there, right? So your expectation of the return should go up too. Then you're looking at 20 plus, but as a new 20% annualized return. But if you're a new investor, I would really caution If you're seeing something that looks, is 20% rate of return.. something like that, it doesn't mean it's not there, it doesn't mean it's not achievable,

but certainly go in and read through the whole Pro Forma, the whole deck, and see what the business plan is, how we're going to get there, and just follow those revenues. The [00:16:00] expenses are going to be pretty standard. Your biggest expenses in apartment - they're going to be your payroll for your staff that's operating,

they're going to be your taxes and your insurance. Those things are going to be pretty standard. And then there's some variable expenses in there that typically the historical numbers will be pretty close to. So you can kind of gauge that, but when you're looking at your revenues, you really want to see - where are you getting these numbers, where are you getting these increases?

And hopefully in most decks, a syndicator will also give you some macro economic data, a reason to believe that the market's going to move this way, and some more information specific to that, some microeconomic data for that specific market, even that submarket,  because it's different there too.

So, I think the biggest one is - just look at those revenues. Does it make sense to you based on the comps you're looking? And nowadays, just hop on the internet and type in the name of the apartment that they're using for their comp, and you can get in there and.. pictures will always look better,

that's just marketing is what it is.. but just get online and, see what it looks like, and just see if that makes sense. Yeah. I think if this is run well, it's made as well, then it makes sense to [00:17:00] me that somebody would pay that amount for this apartment. - the same that they pay over here, they'd pay here based on just what I'm seeing -

square footage, amenities, what do the pictures like? So just on the revenues - just track those revenues. And then of course, you can see if we're going to put in a million bucks into an apartment complex, then you've got to have some type of vision for that project,

like - Yeah, putting this money here, let me see the allocation, let me see the budget allocation - That makes sense - you guys are putting this in interiors.. that'll bring that up to that comp. I feel comfortable - that amount of money, it's going to bring it up to that comp,that comp's making this on the leases,

I feel good. Okay. I, see how, you're getting there. That's my advice - a good syndicator, a good sponsor. You'll be happy to talk through why they think that'll get there. if you don't feel good about their explanation as to why it's going to get there, then yeah, that's a red flag, but that's another way to do it. Just watch the revenues, make sure the revenues

make sense.

Kevin Schneider: Yeah, that's a lot of knowledge and wisdom in that past two minutes. I would encourage you to rewind and listen to that again. That is a wealth of knowledge that he just walked through, so that's [00:18:00] awesome, Josh. Thanks for sharing that. As these potential new investors are wanting to dip their toe in these waters, what's the barrier to get into a type of investment like this?

Can anybody get into it? Are there requirements on income? Kind of, walk somebody through that piece as well.

Josh Alexander: Yeah, so we open ours up to accredited investors, and we can talk through the definition of what that is, but there's net worth requirements, income requirements to determine whether or not you qualify as an accredited investor.

Now, the reason we do that is for reporting requirements. If you allow unaccredited investors to come in, it just puts a little bit more of a reporting burden on the entity, but per the SEC rules right now, as long as you are raising underneath a certain threshold, then you certainly need to file with the SEC.

You need to file an exemption, but you don't necessarily need to register as long as you are with within or underneath, a certain level of investors and a certain [00:19:00] level of money that you're raising, and that's obviously a conversation for your attorney, not me, but for us,if you qualify as an accredited investor, then what happens is you fill out a subscription agreement, and you sign onto the company agreement.

So it's a three step process - there's an accredited verification, a credit investor verification, there's a subscription agreement that JSU basically lays out - this is at the level I'd like to participate, I understand the risks, I understand what I'm getting into - just general information,

and then there's a company agreement that governs the investment, right? That lets you know how are the distributions going to go? How are the profit-loss allocations going to go? When we have major decisions, who's going to make those? If we have to have a capital call, how does that work?

That'll walk you through exactly as things come up. How are they going to be handled? What does the manager have the authority to do? Certain things will come up that the manager can't just make an unanimous decision. There's got to be a majority vote that says - Hey, this falls outside of your realm of approved authority.

We need to have a vote, and to decide if we want to move this way or that way. So, those are the three main things for [00:20:00] us is - Are you an accredited investor? Here's the subscription agreement - agreement lays out the risk of the investment, the general information, and the company agreement,

which you have to agree to that says, this is how we all agree that this investment's going to be governed and these are the rules basically that we're going to abide by

Kevin Schneider: Some, yeah, some rules for the game. It helps and make sure everyone's on the same page and agrees and no one's taken by surprise.

Josh Alexander: And I think, yeah, it is really important too that everyone knows the risk going in, right? That's really important to know that while we think this is a great investment, there's risks associated with everything. So just that, make sure everyone's capable because it's one thing about these investments that I'd like to point out is, they're very illiquid, right?

If you put your money into this apartment complex, depending on like the term of the deal, we're going for three to five years, typically, in our investments. Well, within those three to five years, your money's sitting over there in that building. It's not so

Mike Pine: Mm-hmm.

Josh Alexander: out. Now,

hopefully when you do get it out, it'll be much greater than when you put it in, but just to keep that in mind too it's not a liquid investment.[00:21:00]

Kevin Schneider: Yeah, that's great. I think I want to just kind of have you pull out your crystal ball one more time for Mike. He loves it so much.

Josh Alexander: I'll do.

Kevin Schneider: What would you feel, kind of the mid, near future, looking out six months or so, how do you view the market? And I know you're, kind of the expert in the D/FW area, so just speak to that.

What do you anticipate coming up the pipeline and how should people get ready for it?

Josh Alexander: Well, I don't think the Feds are done, right? Everyone is anticipating, or most people anticipating a 25 basis point hike next week. So we're going to see that rate continue to go up, and then where they stop, what their terminal rate is, and how long they keep it there, I don't think they know, right?

I think they're going to be very data dependent and try to stamp out inflation as best they can without overdoing it, and causing a really bad long recession. So I [00:22:00] think though, the sentiment's been , if you listen to some of the commentary coming out from some of the Fed governors, they might be starting to cool a little bit.

You don't hear as much of the - We're going to go up till five and a half or to six no matter what it costs, just because inflation's that bad, and it's that important to us to stamp it out. So I think we're starting to see, as we've gotten, two or three months of positive CPR readings, I think January will continue to come down.

Again, I don't think there's any reason to think that inflation's going to go back up anytime soon. So with inflation coming down, we're starting to see in some of the manufacturing reports and some of the layoffs that we're seeing (higher number of layoffs), we're starting to see, I think the previous hikes really come into, really start to having impact.

So my guess would be moving forward is, the Fed will get up. They're at four and a half, they'll probably get up to 5% is, what I think. And then, they'll pause for a while. I think we'll continue to see layoffs. It'll be a little rough in between now and then. But then I think they'll pause.

The market will [00:23:00] take a breath. Everybody will see, okay, we've got a better idea of where things are going, how things are. We see like, some light in the tunnel. We see some things starting to stabilize. And then hopefully, if inflation continues to come down towards that 2% target that they want it to be, then they'll maybe start cutting at the end of the year this year.

So as soon as they do that though, as soon as they start cutting, typically if they start cutting, we're in a bad place, right? We're in a recession, so money's going to pour into the bond market. It's going to pour into those long treasuries, and in doing so, that's going to bring borrowing rates down for all of us who invest in long-term assets.

So, if that happens, then we'll see a run on I think, multifamily and other commercial.. well, commercial and retail - yet to be seen. That'll be really dependent on where the economy is at that time, but in multifamily, I think we'll see a run on properties, and it'll be a good place to be for the next several years, especially in the right locations like Texas, like we talked about in D/FW.

So I think increase 2 more times, maybe a third time, 50, 75 basis points, and I think there'll be [00:24:00] a pause, and then I thinkthey'll be satisfied. There'll be reason to start cutting. I think we're seeing enough cutting rates. I think we're seeing enough in the inflation reports and some of the economic indicators.

All the leading economic indicators are down. Right? So we're seeing a lot of information that would suggest it's working. The Fed had a mission, they had a job to do and they're doing it, and so hopefully they're almost done. They're starting to see that what they wanted to do is happening

what they've done is working. Hopefully they can take a victory lap here soon. And in doing so, they can start cutting rates, financing becomes more affordable, all of a sudden, activity, and commercial real estate starts to pick up.

Hopefully by the end of this year, it'll be good.

Mike Pine: Awesome. Yes or No - quick. Do you think we can actually achieve a soft landing?

Josh Alexander: I don't know, because the Fed they're, saying they want the unemployment rate to be, what, four and a half? That's over a million jobs lost from where we are now. It depends how resolute the Fed is. If they're willing to allow us to get to that 2%

inflation rate over a longer horizon, I think, maybe they can slow play it a little bit [00:25:00] more. I f they continue to hike regardless of what some of the economic data is showing, then I don't think there's any chance of a soft landing, but,when I say that I don't think that we're looking at a really crazy recession either.

I think maybe like a mild a mild reset. And then, as they start to get softer and softer in policy and money becomes cheaper, I think there'll be a really great recovery. So, I don't think they're going to avoid recession, but I also don't think it's going to be long and deep.

I think it'll be kind of mild and short. It'll be a reset. Hopefully you get all that excess liquidity out of the system, drives inflation down, a nd then we can start to recover, and once we do so, I think it'll be a really strong recovery,both in real estate, and all kinds of investments, equities and everything.

SoI think we're in for a little bit of pain further, but a really strong back half of the year.

Kevin Schneider: Well, that's, it's..

.. a million.

Mike Pine: You've predicted correctly in the past, I'm going to take that to the bank and hold you to it, Josh.

Kevin Schneider: Yeah.

Josh Alexander: Yeah, I don't know. [00:26:00] I don't..

Kevin Schneider: And the worst part is it's, January 23 (Recorded date), so

Josh Alexander: knows.

Right?

Kevin Schneider: We can save this recording and listen to it all and laugh in six months

Josh, thanks so much for being on with us. You're just a wealth of knowledge when it comes to real estate syndications. You even taught me some things with how to vet a property and everything like that. So thank you so much for being on, and if someone wanted to get in touch with you or they had some questions or were interested in just discussing,

potentially investing with you, where do they go? How do they get in contact with you?

Josh Alexander: Thanks Kevin. Yeah, and it's great to be on with you guys. I learn something every time I talk to y'all so much appreciated.Hopefully some of the stuff I said can be helpful to somebody. ALX Real Estate is our company. The best way to get in contact with us is, go to get in contact with is go our website https://alxrealestate.com

We're revamping the website, so it'll have a new look to it here soon , but that's the best way. There's a place on there where you can send a message, and we'll reply. We're on LinkedIn too, [00:27:00] so LinkedIn or the website are the two best places.

I'd be happy to talk to anybody that's interested.

Mike Pine: Those will be in the show notes as well - alxrealestate.com, as well as our LinkedIn profiles.

Well, thank you Josh. I appreciate it.

Josh Alexander: Yeah, no, thank you guys. It was great. It was great.

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