We believe the answer is yes.

So what can you do about it? Frank and Ian talk about how they are handling their businesses, investments, and decision-making while believing this market is deep into bubble territory.

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Watch the episode here

Listen to the podcast here

Are We Living In A Bubble Market?

What’s up?

How are you?

I’m excited to talk a little bit about real estate with you on this episode. We’ve got a lot of topics on the docket. We have seven different episodes that we have been fighting over which ones to do. It could monopolize our entire day or we could get lazy and go for Anita’s Breakfast Burritos. Instead of prepping, we’ve got off on a tangent of how good Anita’s Breakfast Burritos are and that’s all I could think about.

I had breakfast and I asked my wife, “I’ve got a meeting with this guy. He wants to meet me at 8:00 AM.” I’ve got two kids so I usually do not have meetings before 9:00 AM because you never know what’s going to happen. My youngest woke up early. He shit himself twice. He had a blowout up to his ears. She’s like, “Deal with this.” It was photo day for Max. I took his shirt off so he was eating breakfast at the table with no shirt. He had eggs all over him from nipple to navel. It was great but then I had breakfast out. I had sausage links. They had links so I was very excited about that. Like your breakfast burrito, I had a sausage link.

Frankie and I have both been involved pretty heavily in the real estate business for years. From time to time, I see something in The Wall Street Journal. I’m old school. I still read the paper edition so I have to go look it up online to send it to him. I will see something from time to time and usually all I write when I send him a link is, “Uh-oh, look out below.” It’s because I get flashbacks to things that I saw in 2005 or 2006 that we lived through.

Frank and I had very different perspectives back then. We have been through a little more but I saw an article that I flipped over to Frank and it was one of those uh-oh articles. I don’t think a lot of people read it the way I did but I spent a decade underwriting mortgage. I have looked at the way the mortgage market works. What an investor of mortgages who are purchasing a mortgage would care about and what the inherent risks are. This article talked about a theme with Millennials.

First and foremost, since 2014, Millennials are the largest share of homebuyers. I don’t think that’s news but also, people still are in the process of calling Millennials like kids and that’s wrong. The oldest Millennial is 40 years old. Most people get Millennials mixed up with Gen Z, which that’s not who Millennials are. These are adults. They are raising kids, got jobs, and have been in the workplace for years. They are not kids that go into festivals anymore.

What they were talking about with Millennials is a trend where Millennials are buying houses together and not married. These are friends that are purchasing together. From 2014 to 2021, the number of co-buyers with different last names increased by 771%. These are friends who are buying houses together. They are not married and so they are going in on the down payment and 50/50 arrangements. They are getting the mortgage together and both of their names are on the title and the mortgage. A big chunk of this spike even took off after the pandemic.

There’s a guy in this article from Fannie Mae that talks about during the pandemic, people have been renting and they want more space so they looked at maybe, “If I’ve got a roommate and I’m renting, why not get a roommate and go buy a house together?” There are a bunch of Millennials that are quoted throughout this article that is saying, “I can’t afford a house now.” Places like San Francisco, DC and New York that are big cities are getting priced out.

The price Shiller Index is off the charts. What they are saying is, “I couldn’t afford a house if I wanted by myself but I’m shopping with a friend and every time I see a price, it’s simple. I cut it in half. When I see a $500,000 house, I say it’s a $250,000 house.” I’m looking at this from a risk and underwriting perspective. Every mortgage I have always looked at is, “What if you lose your job? What if you move? What if you have kids?” A good underwriter thinks that way.

You need to understand what you need from real estate. Do you need shelter? Do you need a place to live? It's always better to own them than to rent. Click To Tweet

They look at it and say, “You are commuting two hours to work. What happens if gas prices go up? What happens if you get sick of commuting two hours to work? Are you going to walk on my house?” The big issue I see is almost every quote in there is tied to home prices and making it easier to buy but I didn’t see anyone say anything about, “What will I do if we are in a housing bubble and the home price drops from $500,000 to $400,000?”

No one is talking about that. “You are my friend. Neither of us is married and no one has kids but if that price drops $50,000, $75,000, $100,000 like it did in 2005 and 2006 and both of us get married and have kids, what’s happening to that house? Are you so good of a friend that when you lose your job and you don’t have income for two years, am I going to pay your mortgage and get myself in more debt?” Millennials are already chock-full of student debt. When I see it, I see that as a major risk happening in the market.

I don’t see it as this positive of, “Look at all this new demand. Millennials are buying together.” I see it as folks aren’t looking at the downside, which is one of the clear signs that I saw in 2005 and 2006 when people were buying and were not thinking about what if the prices don’t keep going up. The question I’m posing to you is all day long, you buy real estate. Are we in the makings of a real estate bubble? If so, what are the things you look at as someone who goes in purchasing 200 or 300 homes a year? If someone goes and purchases that much residential real estate, what signs are you looking at as an operator?

I have been hearing for years that we are about to enter into a recession in real estate. Everybody thinks it’s going to come crashing down. What you have to be mindful of is what type of real estate is it? Why are you utilizing it or why do you want it? Where can you speculate smart? There is a lot to unpack in that. What you are talking about is the fundamentals of real estate. Real estate, especially homes, is typically owned by individuals. Wall Street got involved in the market and it’s hard to tell exactly the numbers.

I’m looking on the internet and there’s somewhere between 300,000 owned by Wall Street versus Blackstone or their subsidiary, which is Invitation Homes owns 300 houses but institutional or professional investors own somewhere between 2% and 5% of all the home stock that’s out there so it’s a small segment of the market but most of the people who own homes are individuals.

Years ago, Ian and I were out having a fun time in DC drinking a bunch of beers and talking. We had an epiphany that the two things people spend the last time thinking about and they are emotional about their decision-making is where are they going to work and house purchase. What people do in a lot of instances is they are not strategic about buying a house. They fall in love with it. It’s the reason why the model home is gorgeous. The builder has this beautiful home with furniture that’s way nicer than you are going to be able to afford to put in it.

They speak to a sense of emotion of you could move into this home and live like this. The only way you are going to move into that home and live like that is if you max out your credit cards or you hit the lottery but they don’t tell you that. What they want you to feel is this beautiful sense of arrival so it sparks a sense of emotion. What happened in that article that you quoted is people that were Millennials, they are single, they are living in densely populated areas in apartments and during COVID-19, it’s awful.

You can’t go anywhere, have no space and are confined to X number of square feet. It’s small. I am very fortunate that I live in a 77,000 square foot home but it still felt like a jail cell during COVID-19. If you live in an 800-foot apartment as a single Millennial, it’s like, “Why not buy a house with a friend, have a backyard, live in something that’s mine and have some room?” You are working, sleeping socializing, and doing everything in that house.

That statistic makes a lot of sense to me but what isn’t being talked about is what he said. 3, 5 or 10 years from now, you need to move so is there a flood of inventory that comes to the market? The other thing is builders and Wall Street have tons of build-to-rents. There are all these single-family inventories that if they decide to all liquidate at the same time, there is going to be an oversupply of housing and it’s going to flood the pricing.

We both went on two diatribes to start this off. What I will tell you and this is the most important fundamental is you need to understand what you need from that real estate. Do you need shelter? Do you need a place to live? Number one, it’s always better to own than to rent. Number two, are we in a housing bubble? I don’t know. The only time I’m going to know is after it happens. As we are going to talk about in this episode, one of the things you can do to give yourself some protection and the upper hand so if things do change or something does happen, you have a soft landing or you are in a good position.

 

Something you said is important. One, you’ve got to live somewhere and I agree with you on what is driving people to buy and trying to grab something bigger. I felt the same thing in COVID-19. I have a big house, a big yard and it wasn’t big enough. I wanted twice the yard and I have a huge yard. I don’t even know why I wanted it.

I wanted to be away from people. I wanted more rooms that I could go escape to get away from people so I would get all of that and a lot of that was driving it. COVID-19 also is a big reason that drove a lot of the prices out because you’ve got all kinds of supply issues. You’ve got this demand of people saying, “I want something.”

As prices go up, there’s also the mad dash of, “If I don’t get it, I’m never going to get it,” which a little bit of that is happening in the stock market as well, whether it’s a bubble or not, I’m with you, Frank. Let’s go out on record and say neither of us knows shit. We don’t know, whether it’s a bubble or if anything is going to crash. This could keep going up, flatten for five years or crash in 2022.

How did we get here? I’m going to go back to the Gulf War in 1990. There were a bunch of things that happened negatively. If you want to get into the research, you can look at it. We go into a massive recession, and then in around 1992 or 1993, the Helm building market starts to go up. It’s going up and in about 2001, we are starting to see signs of a recession and when September 11th happens, the government makes money cheap.

When we should have gotten into a recession, what ended up happening is the government made money cheap to keep mentality and consumer confidence up so what happened instead of going into a recession, we rode further for about five more years. Depending on where you were in the market somewhere between 2005 and 2008, home prices continued to go up. 1990 to 2008 is an eighteen-year window, and then what happened instead of there being a soft landing in 2001, September 11th caused a huge spike.

With that huge spike, what ultimately happened is when there was a reset, it was hard and there was a massive pullback. From 2008 to 2010, plus or minus a couple of years depending on where you were in the market and how you wanted to look at it, prices and everything softened tremendously. By 2011 and 2012, what started to happen was the things were cheap. They were similarly priced to what they were like years ago but there had been inflation.

The cost of the sticks and the bricks had gone up but the pricing of the house was the same price so there was a major inefficiency in the market. What this means is that people looked at it like me. I was buying houses for $18,000, $20,000 or $22,000 or if I went to Lowe’s and bought all the material, it costs me $75,000 to $100,000 so I’m like, “This is stupid not to buy this house at this price.” What happened is by about 2015, the markets stabilized and the market started to go up but not too dissimilar from 2001.

When Ian and I couldn’t see each other during COVID-19, in March of 2020, we were on the phone talking about capital, mortgages and underwriting. We can get complicated on this but we will stay high level. When we are talking about that, nobody wanted to buy mortgages. For every mortgage buyer out there, there needs to be a capital market that buys securitized mortgages or mortgages disappear. Nobody wanted to buy it so we were like, “We are effed. This market is screwed.”

People were looking at it and saying, “This is what’s going to happen. If you don’t close by March 31st and go into April, we’re no longer going to honor your loan.” These were threats that people were making. While all of this was happening, the government looked at this, and before PPP or anything else with CAREs Act or anything that should happen, what the government did is they started to buy treasuries.

The reason they bought treasuries and they are still doing it is because they needed to add some stability to the market or this would have dried up completely and we could have gone into a catastrophic situation. 2011 and 2020, in both instances something crazy happened from left field, 9/11, COVID-19, and in both instances, the government reacted with cheap money that propped up the home building industry. What Ian is telling you are things that we relate back to from many years ago.

We're in a much stronger economic position today based upon what people have learned in the lending cycle. We're way stronger in 2020 than we were in 2005. Click To Tweet

Here’s where I will disagree with you a little bit on that. There’s nothing unique the government did in 2020 that they haven’t been doing since 2007. The government has been buying treasuries every year since the Great Financial Recession of 2006, 2007 and 2008. When the big crash happened, they have been buying mortgages, treasuries and every financial instrument they could get their hand on and it has driven this huge bull run, which means rates have tumbled and tumbled.

There’s nothing unusual about 2020 other than the fact that they did it during a super-hot market right when COVID-19 hit. There were all these positive things going on in 2020, then COVID-19 hit, which hit maybe 2 or 3 markets hard but a ton of other markets kept flourishing and they flushed even more. All they did was triple down on something they have been doing so I don’t think there’s anything new to what they did.

It’s not new but the amount was incredible. They were buying $25 billion a day in treasuries for 3 or 4 months when that used to be what they would buy for over a month.

They kept doing what they were doing. They did more of it, in my opinion, in a market that didn’t need it. They could have targeted a few industries that were in trouble but some industries were killing it that are getting money and don’t even know what to do with it so they are buying their own stock and doing other things.

With governance comes sometimes an overstep because you are trying to regulate and it’s very hard to be specific because you are shooting a water hose at something that needs a finite amount. What I want to drive at is this. During COVID-19, you couldn’t do shit. You are locked in your house. We are not doing anything. We are watching Netflix and the only thing people could do for a hobby was, go shop for a house.

The house is empty. You can get out and look at it. You can wear a mask, go in there and realize your house is getting too small. What ended up happening was their capital came down and the market was open. The cost of the mortgage dropped and the demand soared, plus it was the only thing you could do from the standpoint of socializing or entertainment.

All these people are going out looking with low mortgage rates and excited. There’s nothing you can’t find. You go to a builder and they have waiting lists because they are burning through all their inventory. They are scared that they are going to run out of lots. That’s the big risk of buying a homebuilder stock. Will they run out of lots?

Everyone knows they can make money on the next five years’ worth of houses but what they are paying for new lots is outrageous. The reason why homebuilder stocks have plateaued is, Wall Street is starting to look at it and say, “Are you going to make money on those lots you bought this year in five years? We think in five years, this market is not going to look quite the same as it does.”

Also, supply chain. Everything is closed. We have a house that we were going to list at $900,000, which is an expensive house in Richmond and it was ready for the market. We didn’t list it because you don’t stick a $900,000 house in the market without a range. We ordered a double and it kept getting delayed. We couldn’t find the double-up. It’s like waiting to go on the market but we don’t have this critical piece of equipment that you can’t go to market without it. Everything is more expensive.

Subcontractors, employment, all of these things are costing more but something did fundamentally change. Inventory was about five months. A healthy market is about 4 or 5 months of inventory. Inventory dropped to a fraction of one month during this huge boom but right before the vaccine came out in full swing of March, April, and May of 2021, if you put a house on the market, you get 25 offers.

 

No shit, 25 offers, escalations, and things are going way over the market but when you could get a vaccine and you could get the world opened up again, people were like, “I have been on eight houses. I haven’t won any of them. I’m tired of this. I’m going to go out, enjoy life and continue to live where I live or rent.” The market has already come down some from this euphoria.

The part of that enthusiasm that comes down though is prices are up 27% year over year. If I started years ago and I have one price in mind, then I stretched myself a little bit, I’m like, “This is dumb. I’m going to go have fun. Everything is open. I’m going to go spend my money somewhere else.”

You are prudent. Most people are more emotional when they are purchased and you already live in a great house but interest rates have dropped enough where your price shock is pretty similar to what it was like, even though it was 27% different pricing but people got so much fatigue around putting in offers and not winning. You think you are moving to this house and you lose it 8 to 10 times. You are like, “I’m over this.” This is critical.

What you and I see and feel because of our experience and what we have done, by the time The Wall Street Journal writes an article, there is a gap between reality and when they are reporting it. It could be 30 or 150 days but there is a gap between what they are putting out there and what reality is. It’s different. If you do want to be good at something like investing, Wall Street is better than us. There’s no question.

They see patterns, can get that gap, and know-how to exploit that gap but if you want to be good at something, understanding where the market and society are and being able to trade in that small space, is where there is security and certainty. It can give you a huge advantage in real estate stocks and anything else you look at.

Objectively, Data Case-Shiller’s probably the best indicator of where prices are. In January of 2012, the Case-Shiller Index was 134%.

What does a 134% mean?

One hundred and thirty-four percent is an index rating as a standard index. It goes back to 1880.

For people who aren’t familiar with Case-Shiller, I want to give context.

It’s a relative indicator over 100 years that they look at it. Now, that number is 270% so it’s doubled over the years time. If you go look at incomes, which typically drive this, they are nowhere close to double their single digits, almost. Maybe in a lot of industries, it’s less than that.

How do you make sure you protect yourself? Look at the market and take what it gives you. Don't force something on the market. Click To Tweet

For inflation, it’s down but the average is about an 8% increase over that period.

You have lower rates than you had then, which gives you more buying power. A lot of this price index is driven by supply. There are not as many contractors to build houses, not as many builders out doing this kind of work. There are a lot of constraints and a lot that’s going on there but objectively, you’ve got a double in pricing. 2012 was not the 100% bottom of it but it was pretty close. That was after a big drop but even if you go look at the peak of pricing in the housing bubble in 2006, we are still up 60% or 70% from the peak of pricing when things were crazy.

Interest rates drives, I think a ton of it. We can’t keep rates this low forever but they could stay low for longer. It depends on demand but I also look at is it easy to get a mortgage? The truth is it’s not easier to get a mortgage. It’s probably a little bit more difficult before COVID-19 hit because people were having trouble securitizing loans. As soon as COVID-19 hit, all of these people lost their jobs. All of a sudden, all the government loans, people didn’t want those. It’s not like people are out giving away mortgage money the way they were in 2004, 2005 and 2006. It’s very different.

During the housing boom, the average amount of money that people put down on a house was less than 3% and the average credit score was right around 680. Now, the down payment is closer to 25% and the average credit score is over 725. People with 700 credit scores are being drowned out in the last economy or the last boom and bust because of people coming to the table with 500 credits.

If you get into the nuances of this, a 500 credit score is someone who is almost intentionally not paying for things so we are in a much stronger economic position based upon what people have learned in the lending cycle. We are way stronger in 2020 than we were in 2005 and from 2020 to 2021, it’s gotten even harder.

If you look at anything, the price of bacon is up 18%. If you go look at oil, it is skyrocketing. Frankie sent me a link to a record auction on baseball cards. If you go look at the top prices ever paid for baseball cards, the top 50, 45 of them were in the last couple of months. It’s insane what people are paying for baseball cards. Non-fungible tokens, which are pretty much are protected JPEGs in the blockchain. These are brand new works of art that are going for $300,000, $400,000, $500,000, which are literally like PDFs that you can’t get your hands on.

Let’s get into why COVID-19 attacks weakness. If you are physically weak, it killed you. A million-plus people have died in America alone. If you are physically weak as a business, it’s killed you but if you are a college-educated person, if you are someone who had a good job, career, business, you went through some lumps but the government gave tons of money in PPP and CARES Act, you couldn’t go anywhere. You couldn’t spend your money. You are spending money at DoorDash, Amazon and that’s it.

What happened is the amount of money in people’s accounts has skyrocketed. Savings accounts have gone up. Even though we hit almost 20% unemployment for a very short time, savings accounts went way up. There’s all this money sitting on the sidelines and things like bacon, baseball cards, NFTs and real estate. People are like, “Where do I put my money and get yield?”

Ian and I have talked about his commercial deal. He bought that commercial deal at an 8% cap. He sold it at a sub 6% cap, which in English, means the value went up by 25% in a three-year time because people want a return on their money. I would imagine Warren Buffett is probably sitting on a bunch of cash and waiting for some segment of the market to falter and they will poach it but what emotional people or most of us do is we see everybody in our friend group-buying new houses so we run out and want to buy a new house.

In my world, what we do as a business is we acquire real estate and we buy it typically off-market. I don’t go through the MLS. I go directly to a seller. My disposition strategy or how I sell it is usually about 50% fix it and prolong the MLS as a renovated home and 50% we wholesale or sell the contract. Now, it’s 80/20. Eighty percent have signed the contract because there are so many people who are starved for inventory, and are willing to overpay to either flip a house or because they want to put sweat equity in.

 

The market fundamentals have changed so we have changed with the market because the market is giving you a quick sale if you can control the inventory. Buying 25 or 30 houses a month, we can control inventory more than most in our market. Is there a bubble? I don’t know. How do you make sure you protect yourself? Look at the market and take what it gives you. Don’t force something on the market. Take it. Wholesale works, do that now.

You mentioned Warren Buffett. Warren, Charlie with Berkshire Hathaway, that’s a good person to talk about every time the market looks a little bubbly and let’s be real, the stock market. Frank and I went through this before if you track the price that people will pay for a stock, what they will pay for your earnings over the last years. Go look up Shiller PE Ratio. There’s a chart that goes back over 100 years only at one point in the last century has the stock market ever been more expensive.

Have people been more willing to pay what they are paying for earnings and that was the tech bubble and it wasn’t a hell of a lot more expensive but we are already more expensive than prior to the great stock market crash of 1929, 1987, 2006 and 2007 when it crashed? The stock market, could it go higher? Of course. Is it expensive historically based on earnings? Absolutely. There’s only one other time where objectively, you could say the stock market was more expensive but does that mean Warren Buffett is selling everything? He’s not.

Warren and Charlie don’t sell when the market is high. What they don’t do is buy. They are not buying a lot. They sit and they wait. They’ve got this big pile of cash but they are not selling because they are not great at timing in the market. They felt this way years ago. If they would have sold then, they would have left billions of dollars on the table but they do wait and they have enough cash to be able to take advantage when they need to. If they sold, they don’t know what they would go put it into. I’m a little bit the same way.

Let’s say you bought Amazon years ago and you have a windfall and you have a bunch of money, should I sell it? I have a property that’s done well. Should I sell it? The question is, “What are you going to go buy that could do better? Your current investment is continuing to make you money and has good cashflow. What Frank does well is you don’t buy anything that you are not willing to hold for a long time if your assumption is wrong. This gets back to the initial story that I wanted to talk about. The folks that are buying as friends are not thinking 10 years out, 5 years out like, “What if I’m wrong?” They are not thinking that way.

I talked to someone that was like, “I’m buying baseball cards.” I’m like, “How long were you willing to hold that baseball card.” My old man got one of the best baseball card collections in the country and he was buying that shit in the ‘50s and ‘60s and sitting on it for long time. Anyone who’s going out and buying baseball cards, NFTs or real estate and trying to flip real quick, you better be able to buy it the prices Frank can buy in real estate.

You better be able to have a better eye than everyone on Wall Street who can look at stocks to find some value. Everything in investing is about how long are you willing to hold if you are wrong. That’s how I look at everything. “What if I’m wrong? Am I willing to wait it out?” That’s why going back to these Millennials and everyone buying when a married couple buys a house together and they are wrong, they ride it out. They have kids together. They are not forced into selling and into moving out but that’s going to happen with a lot of these friends.

When that happens, when they all want to get married, want to have kids and do different things or a friend loses a job, what’s that going to do to the friendship? What’s that going to do to think it out? When we get into a real estate deal, we are friends but we both also know that we are capitalized well enough to therefore run. We are willing to be partners for a decade if we ought to be. I’m in this long haul with him.

It will be great if our last real estate deal, we flipped that thing in two years and make a ton of money but if I’ve got to ride that out with you until 2030, I’m riding with you. I know that. I’ve got in and everyone who invested with us knows that. You guys are worth riding with and we will stick with you. We are not going to beg for our money and pull it out. We told them, “This can’t be money you need back in twelve months or you can’t invest.” We are going to kick ass on this deal but any deal I do with you, I’m always thinking if it’s got to be a decade, it’s got to be a decade. That’s the way it is. We might be wrong on time.

We bought 75 houses 90 days before COVID-19. We thought we were going to be done in a year. Ultimately, we did it in 13 months but 90 days in, when we told everybody we were like, “We’ve got a major curveball. We are going to slow down a little bit. We are going to see what happens with the market. We are going to keep collecting rents. We are going to do okay. We might not hit the numbers we had thought but we are going to be okay.” What happened is the fundamentals changed. We have different perspectives on what it was. Bond buying was a big part of it. The market stabilized and prices went up, we talked about it and we are like, “This may not last forever so let’s capitalize.”

Appreciation needs to be the sprinkles or the cherry. Appreciation is not the ice cream or even the whipped cream. It's just the garnish. You need to buy with strong fundamentals. Click To Tweet

I don’t disagree with you that the bond-buying had something to do with it. My whole point is it wasn’t new. They were doing it in a market, in my opinion, that didn’t need to throw kerosene on fire because there were winners and losers in COVID-19. The winners were killing it in COVID-19 and getting money thrown at them cheap and more so it was like this big blaze and real estate was one of those areas that unless you were in retail space or commercial office space, every other segment of real estate was doing great and you threw a bunch of cheap money at people that were already in that space. It bubbled it up fast.

We are in unison. The government did throw money at the problem and they probably threw more than they needed but they were looking at it like, “Are we going to go into a great depression? We don’t want to do that.”

What spaces of real estate can you make money in? If someone is reading, is there anywhere in real estate that I could still make money?

I want to explain something, then I want to give us an overview of a cycle, and then I’m going to ask the questions and wrap this thing up. I want to say this first. The first thing you need to do as an investor is you need to look at what the market is doing and take what the market gives you. It’s an incredibly difficult time to buy at a discount but it’s an incredibly good time to refinance. Why do I bring this up? I built my first house in 2000. My primary first mortgage was 8.5% and my second was 12.5%. I had a 1st and a 2nd.

I’m refinancing at sub 375% interest rates on the investment-grade product. That is ridiculous. It’s 1/3 as expensive to finance a house that’s an investment than it was a primary residence years ago. That is something to capitalize on. The time to find cheap material, cheap houses, cheap baseball cards, and cheap NFTs are over. That’s not the moment. Think about what do you have and how do you capitalize on it.

Some things are happening that are incredible. Prices are high but Trump is a real estate investor. He changed the Tax Law to greatly benefit people that own real estate. Capitalize on this. There are all kinds of good stuff. There is bonus depreciation. There are all these things that if you go and focus on it, you can take bonus depreciation before the Tax Law changes and carry it forward.

Can you find a house at $0.50, $0.60, and $0.70 of the dollar? It’s hard but can you buy something at the market and utilize these advantages? Yes. Will they go away? Most likely. Did they happen in the ‘80s? Yes. Take what the market gives you. If you have anything to say on that, otherwise I want to go into some cycles.

If you are going to get into real estate, I would look hard at cashflow because if you are wrong and the market is not going to go up in the next 1, 2, 3, 4 or 5 years, or if it even goes down, you need some cashflow coming in from that real estate. I wouldn’t be out just buying and hoping I’ve got it the right price and selling. I think the NFTs and baseball cards, that’s a risky thing to do after a huge run in any asset class.

I would still be looking to buy anything that pays me cashflow that if I’m wrong, I’m still making money. I’m still getting a paid check or rent check every month, whether the price goes up or down. Now, I’ve got a windfall. They have all gone way up to higher than I thought they could have but I’m not selling because I’m still getting a check every month and that’s like a salary for me.

When I was taught this, the man who taught this to me said the following, “Appreciation needs to be the sprinkles for the cherry. Appreciation is not the ice cream or even the whipped cream. It’s just the garnish so you need to buy with strong fundamentals.” What I’m talking about with the refi side is capital is very easy to find.

 

I love the refi comment. It’s so smart and easy. You are in and out in 30 days. They are making it easy on you. They are giving away money.

That’s what the market is giving. There are incredible tax and interest rates. Capitalize on those. If you are going to buy, buy with an edge, and think through more than these Millennials who are buying houses with people that they may or may not want to be within ten years. That’s a bad strategy.

You can get a jumbo loan for under 3% now that’s up to $1.5 million. It’s insane.

It’s flipping nuts. If you want to become a nerd on market cycles like us, we will talk about two things. One, there’s a book. It is a New York Times Best Seller and it won a Pulitzer. This Time Is Different: Eight Centuries of Financial Folly is the name of the book. You go and you look at the subtitles, the Eight Centuries Financial Folly part but they go all the way back to the point where they didn’t have monetary units. They use rice or wheat to trade and it goes through cycles and explains the process. What I want to talk about here quickly are the real estate cycles.

There are four major cycles. There’s recession, recovery, expansion and hyper supply. It’s like an ‘80s Atari game where you can go from the right and you will end up on the left. Things like a wheel. It spins. You go from recession to recovery, and then you move your way around to expansion and hyper supply. We are certainly not in recovery and certainly not in recession but we are probably somewhere between expansion and hyper supply. I’m going to read to you what defines hyper supply.

The reason that this is relevant is if we are going to go into a recession, which happens after hyper-supply, these are the things to look for. Are we going into a recession? At some point but I don’t know when. These are the things that if you said, “What are you looking at?” This is what I look at. First, occupancy rates exceed long-term averages. Second, upward pressure on rentals breeds more development. You start to get to a point where you get an oversupply of units, and then it’s going to start to negatively impact your occupancy rates.

Here’s the first sign of trouble. An increase in unsold inventory. We are not there yet. Vacancy rates raise and rents begin to fall. We are not there yet. Are wise developers started introducing new inventory? I put it in parentheses. This never happens. If you start to see these things, this is where you need humility. In 2020, around March, when everything went to hell in a handbasket, I went into liquidation.

Ultimately, I had a pullback here in 2020 where almost everybody I know went way up but what I did is I was fast and I made big cuts quickly because I did not want to drown. Was I early? It turns out I was. Did I make it through? Yes. If you start to pay attention to these things, you can be ahead of the market and you need to be prudent. You start to see some of these green shoots turn to yellow or red shoots. You need to be adjusting your approach.

Every time I have seen a major market drop, there have been rumblings for years that it’s frothy. There are always people that were a couple of years early on selling everything and say, “It’s a bubble.” It starts to look like a bubble but it normally is just getting going. When you start seeing the charts that are going straight up, it’s normally getting going. You didn’t sell everything. You sold enough where you would have the cash to take advantage of a market and you did take advantage of the market. You were smart about what you sold.

I sold my speculative inventory.

You have to continue to find good assets that will work in any market, whether it's good or positive, you can't buy based on today's reality. Click To Tweet

You kept your cashflowing business. I sold all the stuff with risk. You’ve got rid of your speculative stuff and that’s fine. You bought more cashflowing stuff so that you still have that coming through. I sold one of my industrial properties and I put it immediately back into something else that would give me cashflow with you. I’ve got in and it was a different deal that I had a little more control over and it could give me a little better yield. What is also worth talking about is when the market gets frothy, I don’t think that’s the time to go start looking for cigar butts, to go start looking for real estate deals that are dirt priced and that are crappy that no one else wants.

The time to look for that stuff is way past. If you are going to be buying, I would want to be grabbing anything high-quality in any way. Let’s go back to baseball cards. It’s never a bad time to own a Mickey Mantle rookie card. If you are going to buy that at too high of a price, buy Mickey Mantle. Don’t buy LeBron James a card that was just made a few years ago. You’ve probably got a better chance on something timeless. I would say it’s the same with real estate. Buying growing locations that are going to do great over the next ten years and buying great properties that have solid frames by brick.

Go back to some of your stuff. For me, I’m still buying stocks. I’m buying a lot of Amazon. I have been buying Amazon since March of 2020. Amazon is not going anywhere. I don’t give a shit what the media says. I don’t care what politicians want to do. Amazon is raking cash and they are going to keep raking cash.

To me, if I’m buying stocks at a bad time, at least I’m buying very high-quality names that don’t have too much debt, that have a ton of cash on their balance sheet, and is going to be fine in 5 to 10 years. It’s the same with real estate. If I’ve got to buy this, will I be happy owning this in ten years? I think of real estate and stocks the same way. I don’t buy stocks thinking I want to flip this in six months. I buy names that I would be happy owning in ten years.

I will attack this from a slightly different perspective. Is it a good time to quit your job and become a real estate investor/speculator? No. We are 12, 13 years into a bull run. There are a lot more downside coming than there is an upside. If you asked me for my opinion of like, “Give me your best opinion,” if you are going to quit your job and start something new, start when it’s at its absolute lowest because it’s going to give you the most time to figure it out and have the wind at your back for as long as possible.

However, let’s say you are reading and you own twenty good rental properties that are doing well. You haven’t refinanced them and turned them into an ATM machine. Owning and managing twenty rental houses is a pain in the ass. There’s no other way to slice it but if you were to trade out of those at high numbers, 1031 into an industrial building with a twenty-year lease on it with GE, Gerber or Amazon and you might have slightly less returned but you gave yourself a better opportunity and a better asset class, to me, it is the time to buy stuff that you want to own forever.

You are going to own it for 10 to 30 years and if you overpay a little bit, is it going to matter 30 years down the road? You will be like, “What a good buy 30 years ago.” When Warren Buffett bought Coca-Cola in the 1950s, it looks like a pretty damn good buy many years later because Coca-Cola went from having Coke to 700 different beverage products and their market cap went from something minuscule to something enormous. That’s the time for me to be smart. Take advantage of low-interest rates and trade out of something that’s pain into something great.

I’m going to use stocks again. Warren Buffett has rules that he likes to Ben Graham and he likes to buy things at a serious discount but the truth is, in my lifetime of investing, there hasn’t been a ton of time where they were great buys. The stock market was pretty hot since 1980. It has been straight up. I have missed on a ton of good companies because I have looked at them and said, “That’s pricey.” The truth is it’s pricey for a reason. Microsoft, Amazon, and Apple are priced high. All those big names are priced high but if you go look at the companies, they are raking cash.

They have this war chest of cash and no debt. Their revenue is growing 30% a year. There’s a reason they are expensive and maybe you overpay for them but if you wait on it a few years, they won’t look that pricey anymore. I’m saying this in a lot of different ways. If you were buying now, buy high-quality assets without a lot of risks. Don’t be looking for deals now because when a recession hits and there is a crash, which This Time is Different tells us that happens about every 15 to 17 years when that happens and we don’t know when it’s going to happen, you don’t want to own the cigar butts.

You don’t want to own low-quality stuff that was still cheap when everything else was priced. That’s the stuff that loses 90% of its value. That’s the stuff that goes to zero and goes bankrupt. You want to own high-quality names that may be in a crash. They drop 40% but then they go right back to where they were before. That’s what you want to own. The high-quality stuff will still be in demand after people weighed out the recession.

There’s an incredible quote by Jerry Jones. For those of you who don’t know who Jerry Jones is, he is the Owner of the Dallas Cowboys. He said, “I have never been disappointed for something that I have overpaid for. It’s all the things that I paid I bought at a discount that I realized why they were priced at a discount.” To put this in perspective for you, in 1989, he bought the Dallas Cowboys for under $200 million. It’s worth $6 billion.

 

People said he overpaid for it at the time. When he bought the franchise, there was either 28 or 32 franchise in the NFL. They have expanded a little bit since but the point of the matter is, he overpaid for an incredible asset. He’s owned it for four decades and in the time that it has gone up at an unfathomable factor. It was because he wanted to be in the space, he wanted to own it, he knew it was an incredible brand and he wanted to have participated in it. Like Ian talked about with Amazon stock and like I talk about with my stuff.

I want to be there. I like to be there. I understand it. Will it go up or will it go down? Of course, but I’m in it for the long haul and I’m in there for all the right reasons and because of it, it’s not a speculative play. I have been at this for twenty years, I’m fortunate enough where every decision is to make or break for me. Am I Jerry Jones rich? Of course not, but do I have a little bit of cushion because I have earned it? Yes. I can be slightly wrong and I could be a little bit early but I can still have runway based upon the fact that I have had a good body of work where I’m right a lot more than I’m wrong.

If you are sitting there on a house that’s up a few hundred thousand dollars and you sell it, what are you going to do? Will you go rent? Do you have a family? That comes with its own stresses of having a landlord and not having long-term stability. Are you going to go buy something else? That’s going to be as overpriced as what you sold. There’s not a lot you can do with just your house. If you are in a housing bubble, usually the thing to do is ride it out. Like Warren Buffett and Charlie, they don’t sell. They hold and watch to see what happens and over time they are usually right.

Let’s circle back to the beginning. Ian talked about a statistic where it has gone up by 700% and some odd percent. It was mostly due to Millennials. What I will summarize is this, with every investment you have ever made, you make your money when you buy, not when you sell. More specifically, you make your money when you buy, you realize your profits when you sell. Think long and hard before you buy something. Do I want to be in this for a while? What is the reason I’m getting into it? Am I being emotional? Am I participating with everybody else?

There’s a great saying, “When everyone is greedy, be fearful. When everyone is fearful, be greedy.” The real estate market to me is everyone is looking to be greedy so it seems to be fearful. For people who make their living strictly on real estate, “I need to continue to be in business so I have to be very smart with, what do I purchase? How do I purchase it? What am I doing?”

I have talked to you about how I have offloaded some of my risks by wholesaling. I collect a lot of rents on houses that qualify as shelter and a lot of our marketing dollars go directly to immediate cash. That’s how we have offset this. When the market and inventory start to change, we pivot. Utilize that the way that you see the fit inside of your lives.

It is not the time for Frank to be value-picking and going and finding the diciest neighborhoods possible. The stuff that has been on MLS for 2 or 3 months, if it’s on the MLS that long now, that’s not what you want to own because if the recession does hit, what is that going to be worth if you couldn’t sell in this market?

You have to stay in business, sure, but you have to continue to find good assets that will work in any market, whether it’s good or positive. You can’t buy based on this reality. Good chat. To answer the question from this episode, is this a housing bubble? Hell, if we know. I hope that both of our diatribes have proved that out over time.

Clearly.

I probably used that wrong, too. It was good seeing you.

It’s always a pleasure.

Important Links:

• Article – Fannie Mae chief economist on how millennials changed the housing market last year
• Shiller PE Ratio
• This Time Is Different: Eight Centuries of Financial Folly
• Dallas Cowboys