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252: What is the Best Risk-Adjusted Investment Today?

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Buck: Welcome back to the show everyone. Today my guest on Wealth Formula Podcast, well he’s my guest, he’s also one of my business partners, is Dante Andrade. Dante is partners with me in our company Touro which is multi-family down in Dallas and so I thought it would be a good time to get him on the show and talk a little bit about Dallas especially with what’s going on down there right now. Dante welcome back.

Dante: Thank you, Buck, excited to be here and to talk to you and your listeners again about multifamily in Dallas.

Buck: Yes before we start I wanted to kind of get an update for those of us who don’t live in Texas. What the heck happened down there? I mean you know we’re used to hearing about you know some hurricanes in Houston and that kind of thing, but Dallas, what happened?

Dante: Well that’s not that new, it happens about every 10 years and you know we got a deep freeze this week, some historical level for several days straight without getting above freezing and we’re not ready I mean we’re ready for you know the over 100 days in Texas I mean in the summer but not for winter, not for this kind of you know and the power grid just did not sustain and it’s been a mess. So we still have 146,000 people without power since Monday evening. So that number went down from 4 million to 146 thousand so it’s looking much better.

Buck: And part of why we’ve got you on the show today is you and I have been connecting about our property down there but it sounds like overall at least not too much damage going on there.

Dante: Our properties yeah our properties fared well you know one of them Sedona we never lost power so you know and this was really frustrating for most of Texans is that it was not evenly spread. So they said it was gonna be rolling blackouts like you do over there in California and it wasn’t the case. Some people lost power they still don’t have it you know and politicians are blaming each other. There are different reasons behind it but Sedona range never lost power. Tierra Del Sol did lose power on and off and we’ve had as of last night about 15 broken pipes but we’re addressing those in-house. We have an amazing maintenance crew in-house and we’ll be able to address those. Some of my other properties didn’t fare as well. We have issues with boilers and you know tons of units that have been flooded but really you know everybody’s in the same boat. Some of the newer properties, some that I’m invested in had issues with the fire sprinklers bursting down just spreading snow and ice and water everywhere so it’s been to be messy and I think it’s gonna take some time to clean up and I’m afraid there will be some long-term repercussions also because of this.

Buck: What kind of repercussions are you talking about?

Dante: Really with insurance you know a lot of the large commercial properties like we’re not going to be filing claims on ours just you know we’re fixing everything in-house but there is a lot of damage. I just got video today from SMU the Southern Methodist University here with a full dorm, three stories completely flooded water coming out of the windows the stairs look like a waterfall. So lots of insurance claim taxes have already been it’s been challenged to do insurance. In Texas over the past few years given the hurricanes we’ve had in Houston in the gulf coast you know in the past few years and now we have another added you know issues so those whenever we’re about to start getting a break on the insurance prices we got something else that I’m sure it’s not you know it’s going to stay with us and on the pricing of insurance here for the next two or three years.

Buck: Yeah well you know it’s interesting too because one of the things that I actually like about Dallas is it’s not generally a place where we have the you know crazy gulf weather and you know I don’t mean golf like playing golf but like the Gulf of Mexico you know it’s not like the you know like Carolinas or Florida and all that and so this is unusual and you know but hey it can happen anywhere right, I mean listen we pretty much anyone who is you know living you know in the United States or pretty much anywhere you get these occasional wow factor type climate things and I use you know we might be having them potentially a little bit more but I don’t think anybody’s really immune to any kind of stuff like that anymore.

Dante: Well that’s true and I think we’re gonna be better prepared you know I mean everything that’s happening now happened in 2011 and the politics just said changes are going to be made so this will never happen again and unfortunately happen again.

Buck: Well you know Senator Cruz was ready for it because he apparently was on a plane to Cancun so he was ready for it.

Dante: So I wanted to do the same and my plan was to drain my house from any water go to Mexico last weekend but my girlfriend had to be in the office this week which ended up not going so we cannot go but I’m not a politician it’s okay if I leave you know in the middle of a crisis and go somewhere tropical now, not probably the best judgment Senator Cruz had, he did not, I don’t know I guess he didn’t see this coming but I would not wish to be on his shoes.

Buck: What a wonderful move by that guy.

Dante: It’s so funny anyway he’s back though he’s back he came back you know he just I’m sure he came back the next day so he’s here.

Buck: Yeah well yeah I don’t want to get political part of this that’s when I get myself in trouble and get mean emails and stuff like that but let’s talk about Dallas again because you know the bottom line is that regardless of what’s going on today and this week everybody in real estate is massively, massively bullish on Dallas and I want you to answer the question why because you know specifically you see this because now everybody and their mother we were talking about this before REITs that were never involved with this space they’re all trying to buy up Dallas tell me why.

Dante: Well it’s you know it has multiple answers but I’ll start with just the business climate so Texas overall has a very pro-business climate has a great airport you know that’s you can get direct flights pretty much anywhere in the us and internationally also so that in ah has as things are changing people are being able to walk from home you know they’re wanting to skip the Minnesota the code that your parents are dealing with right now back in you know up in Minnesota and say hey I can just work from somewhere more warm you know and where the cost of living it’s a fraction so a lot of people migrating here from new york from California from the east coast and the west coast from Oregon from Seattle you know and as those places have trouble dealing you know have more restrictive laws and covenants for business you know Texas and Florida are two places that are welcoming I mean the whole south in general you know having kind of same growth in georgia in florida but just Texas usually we’re not having a lot of weather crisis especially if you come to Dallas it’s pretty isolated you know we don’t have hurricanes go through here just tornado once in a while and and just the the business climate we have a lot of smart people around us a lot of colleges they have been over the you know past two decades making a big push for science and technology and increasing those colleges so we have a lot of people in those scholars coming from overseas also and they just stay once they finish their degrees you know they’re able to land jobs and the biggest one is the job growth. So the federal reserve just published you know research here numbers a couple weeks ago saying that they expect and they’re projecting 4.2 percent employment growth in dollars this act I mean that equals 518,000 jobs so creation of new more than a half a million new jobs being created for for Texas and in 21 in 2021 exactly yeah and you know and if you look what happened last year during covid nationally we lost about 62 percent of the jobs that went away taxes only lost 4.5 percent so we already lost much less than the rest of the country if you compared to the national average and then we’re gaining back at a very fast speed so if you just compare those two numbers we lost four and a half and now we’re going to grow by 4.2 you know we’re pretty much breaking neither here by the end of 2021 and the growth is just gonna continue I mean we have massive I mean I could go on for the rest of the podcast listing the number of corporations they are moving to Texas or they are moving you know a huge piece of you know their business to Texas. And here’s another factor, Texas is willing to play ball with this company. So Walmart you know this was secret for several months now there’s a big operation coming. Now we learned it’s Walmart it’s building a massive massive distribution center in the south part of Dallas near De Soto and it’s going to create 1300 new jobs and it’s a multi-billion dollar investment because it’s all refrigerated but they negotiated they took a long time negotiating with the city and the county on tax abatement so they’re not going to pay property taxes for some good 10 years right and then the city negotiators still you know still going to make a lot of money off of it but at least they don’t pay property taxes for you know I believe at least 10 years and it kind of phases in you know after that so a lot of these big corporations have been able to successfully negotiate with the politicians and the cities they’re fighting with each other to have these companies come here I mean that’s just you know more money in the pocket of the shareholders. So that’s another bit and the cost of living like I said it’s an answer that keeps on going but cost I believe it’s still very affordable it still can come down here of you know of course if you live here you know and that’s something else that we can talk about it if you live here and you’ve been I’ve been here 20 years going on 21 years this year so yeah I’ve seen the prices go up and up and up like my house is now more than double you know what I bought it for about eight years ago now if you’re coming from Chicago or from California everything sounds like it’s free like you don’t care about you know the prices that were 10 years ago and the same is happening multi-family we have all these large operators from the east coast and west coast that just now hey we gotta be in Dallas and they’re looking at the prices the same apartment that we were paying a hundred thousand a unit here you know that same unit in Chicago would cost 180 it would cost 250 in California so we can bring it here there is employment there is job people are paying rent and if they are not paying rent also the laws have me evict them so you know it’s a win-win all around and that’s why we’re having such a big influx of new capital and new investors chasing taxes specifically Dallas Fort Worth.

Buck: Yeah it’s a tricky thing for people to understand right because if you go back to 1990s even early 2000 Dallas for the most part was looked at and was really a tertiary market right I mean it was spoken in the in the same breath as you would say something about like say Oklahoma city or something like that because maybe it was a little bit more advanced than that but it really wasn’t but so what’s happened is is tremendous growth and the tremendous growth as you have you know talked about really relates to jobs because of the great business climate and then people following it and then the increasingly difficult business climate and you know higher cost of living in major cities in you know like in California or like you said in you know New York or Chicago whatever it’s driving people to Texas and you’re seeing that even in the demographic changes right I mean Beto O’Rourke almost beating a Cancun Cruz over there last last round that would never have happened you know 10 years ago. But you’re seeing a lot of people move over there. So the question ends up being well gosh if there’s been so much growth, how long can it go? I mean how much runway is there and this is a really, really important question because people often guess wrong in these situations and for the wrong reasons and they regret it. To give you an example when you know Apple was at five dollars or ten dollars or Amazon was at five or ten dollars and all of a sudden it went to a hundred how many people said gosh that’s at a hundred bucks now I already missed that. Well, I think Dallas has a similar story and perhaps you could shed a little bit of statistics on this for me Dante in that the growth is not leveling off, the growth is massive, and it’s you know statistically you could see that.

Dante: 100% and then you know if you look at the historical average you know rents in dollars and this is going back you know 20 30 years rents have you know have been growing year over year about 1.8 percent this past year the rents were still growing almost one percent zero point nine percent is the exact number average across DFW. Now imagine that most of the country we’re not having rent growth we’re actually not having major issues with collections and we have amazing issues with actually you know concessions and actually we have negative you know rent increases so people are actually keeping the same if they’re renewing or they’re giving concessions so rents are actually decreasing and that’s happening in many areas of the country that’s happening right now in New York in so many aspects not only multi-family but in retail when indoor show and everything else and we still experience you know almost one percent year over year rent growth during the most challenging year since I’ve been in business you know and probably of several decades you know with the exception of the downturn in 2008 but this was a very challenging year but and we still had you know rent growth so I don’t think it’s stopping anytime soon.

Buck: Well to your point here’s the thing when and you mentioned it you know two or three times and I think I’ll say it again. The reason is that you’re selling you’re starting at a metric that’s very low compared to the rest of the country. So your cost of living is still extremely low compared to everywhere else so you can continue to grow you know you can continue to grow you have a lot of runway you know it’s not like Dallas doesn’t have a reason to grow right I mean that’s part of the issue that I think that a lot of tertiary markets have every time there’s a big boom and you know in real estate you and you know you and I talked about this a year or two ago where we were you know you we’d contemplated the idea of Oklahoma City and I was very much against it because my thought was hey you know this market is only interesting because other markets are getting hot right when things kind of cool down a little bit it sort of becomes one of those situations where you know the tide goes down you can actually see who’s swimming naked and Dallas is not swimming naked right Dallas has got all of the components the mass growth and components to make this continue happen.

Dante: Totally yeah that is correct and then you also have the backing from the politicians and the governments putting the infrastructure in place so it’s not like we’re having this massive growth of course this is a tough week to talk about it now with what happened with the electricity but you know roads highways I mean Dallas has been a construction site from the day I moved here 20 years ago and has not stopped but toll roads highways reaching out to different places of the metroplex and expanding and continues to expand they’re not stopping you know just infrastructures with with schools and parks and streets and highways and everything is in place to accommodate the people you know moving here so I don’t think it’s stopping anytime soon I think we’re gonna have massive growth here 2021 2022 2023 I think towards after 2023 2024 depending just for real estate growth itself not overall depending on how much new construction we do which we’re doing a lot of it right now it may get caught up with us you know the absorption of new units and how many has been delivered last year was I think believe the first year that we had a negative absorption number you know and this is mostly on a class because we’re not building anything affordable it’s all high-end high-rises you know upper class you know kind of very urban walk-in area mix to use a multi-family so we had a very small negative absorption on that but which I think it’s already been taken care of this year and lastly a lot of projects kind of pause on construction so that’s giving a lot of the lending for construction amazing loans and bridge loans went away you know during that covey when everybody was scared so that put you know scratch off a lot of our construction projects off they’re coming back now you know but it takes time you know something that was off the table last year now it’s going to take you know 18 months to get approvals and to get things going if someone decides to build now they cannot break ground until 12 to 18 months from now so that’s what I’m saying 2024 is probably you know and this is something to reassess right I’m just trying to read into the future something to reassess a few years from now but if we continue having the growth of unemployment and you know migration that we’re having here which I strongly believe we will you know just all the time I’m just talking on the phone with clients you know as your lessons and I do a lot of brokerage on the multi-family space on the representing buyers and all the time I have clients from California just spoke with someone yesterday or looking at a property who’s like you know we just made a decision this week me and my family we’re gonna be moving there you know within the next 12 months so this happens almost like a weekly conversation that I hear from people from all over the you know all over the country I don’t think that growth is going to stop I can give you one example schwab you know who just combined with td ameritrade they had about 400 employees in dollars they’re building a massive center last year that’s going to house 7,000 employees so I mean from 400 to 7000 they’re not doing this overnight they’re doing this over the next three years you know and many other corporations are following suit in along that same path.

Buck: So yeah and you know I would just point to that some of these things you’re talking about when it comes to new construction and that kind of thing we have you know at least in terms of what you and I tend to do and what we tend to do in Investor Club in general with multi-family is we’re not really competing with that new construction right where we’re competing is affordable housing and you know we’re not talking about trailer homes we’re talking about you know B, B minus C plus class stuff blue-collar stuff which in fact the demand should continue to go up you know as more and more places become sort of you know increasingly difficult because they become you know urbanized the hipsters start coming in and they become you know harder and less affordable.

Dante: Correct so just to give an example the rent on our properties they’re probably about 1.30 square feet you know that you know overall across all the properties in the different size of the units these new constructions deals that I’m talking about they’re coming to the market at 250 and above 270 sometimes even pushing to get to three dollars a square foot you know if this the really high end high rise so there is a massive gap it’s more than double the price of the rent for the same space and you know you’re completely working with a different demographic altogether.

Buck: Right so totally different demographic totally different market and so that brings us to you know is now a good time to buy and why in Dallas? Well let’s be specific right to buy affordable housing in Dallas because I’m not so sure that you know a construction project from what you’re saying is it makes sense right

Dante: It is but it’s even construction it’s I think it’s still making sense and a lot of colleagues of mine they are in the space only multi you know affordable housing they are getting to the construction space and have several projects going and you know they feel very confident about it because the growth is not going to stop right so everybody is betting that there will be absorption from all of these but going back to the affordable side of the things 100 it’s a great time to be buying it’s not a buyer’s market though and that’s what makes it challenging when I go back I go back and look you know at all the opportunities that I let pass in 2015 16 17 and I know you take joy of remind me of that.

Buck: Well I don’t take joy in it because I’m here I mean I’m your business partner I’m losing you know I lost a lot of money because of those overly conservative you know views on what was happening but you know but hey listen at the end of the day it it also you know it kept everybody safe either way but you know listen I think that the point that I would make is that yeah there’s a lot of buyers right now but this is in my opinion it’s gonna get worse it’s not getting any better any time soon and so the question is on the timing is like you know with with real estate you hit the nail on the head when you talked about 2015 and 2016 wishing you’d bought right right now it’s another situation where I think a lot of people are gonna wish they weren’t sitting on the sideline because all of those predictions you know that people were making about this massive sell-off and you know zombie apocalypse and you know buying buildings in Dallas and the rest of the country for pennies on the dollar didn’t really happen in fact the opposite has happened right?

Dante: Exactly yeah cap rates have compressed because interest rates have gone down you’re going to have inflationary pressures as well prices are going to continue to go up so the bottom line is you pick the best market your big quality assets in those markets and you try and then you and then you buy at a fair price that’s what you got to do right now yes and the you know and just going back to what we talked about 15 16 and you know in back then and I feel like that was just the other day right and I’m looking at these numbers like oh man I’m overpaying for this property as a property I bought it for 37,000 a door 1964 build smaller in arlington and then sold you know a few years later for 70,000 a door and now probably it would be worth 90,000 doors so because I’ve been here and I’ve seen all that you know it’s like oh this is the same property you know that was 37 just a few years ago someone coming from the outside does not have that you know preconceived you know mindset of pricing and they just look okay this makes sense now if I remove that if I remove the emotional part of it which is challenging to do sometimes in business and investing but you know successful investors try to leave emotions out of it so if I remove the emotions out of it and thinking oh I cannot pay this much for it now all right have the rents increased yes have the cap rates reduced yeah so the the brands had that property when I sold it was 750 dollars average well now it’s 950 it’s 970 for the same property.

Buck: Right so and that’s very important to remember because this you know the thing is that I think a lot of people think that when they see these values going up that it’s like buying a single-family house and that it’s people just saying hey I would pay more for that now no that’s not what this is. This is growth in net operating income this is not just a matter of looking at places saying hey this is a pretty place and I’ll pay more for it now than somebody else did 10 years ago there is reason for those prices to go up those reasons for prices to go up have to do with rent growth net operating income growth and lower interest rates it is so it’s real?

Dante: Yep it is real and there is really no other place where you can still park your money relatively safe and get the kind of returns that you get in multifamily and that’s another reason that we’re having such an influx of buyers so a lot of people just talking to a broker local broker here yesterday that does a ton of business and they said man I have so many new groups pursuing my properties now a lot of people from hotels retail and when we talked on the podcast last year you know I mentioned that you we’re going to have an influx of hotel operators and investors flooding multi-family and they are here now you know he said I have full hotel groups you know the hotel investment hotel development business is dead right now no one is banking no one is raising money for hotels so they’re all shifting to multi-family people from the office from the retail space also shift into multi-family because that money they’re sitting on money it’s got to go somewhere you know where which asset is still relatively safe actually fared really well during this whole Covid recession and it’s still you know paying dividends and that’s in the multi-family.

Buck: And the reason as you mentioned I mean first of all those hotel operators the funny thing is that if you know the way investing works yeah now would probably be the time to pick up some hotels by I mean they’re getting crushed but I think what you have pointed out is well I think the reality that has hit a lot of real estate investors that were in different niches like you know the hotel and the retail and office spaces that all you know they all got beat up pretty badly but even through you know Covid you know we didn’t do badly at all right talk about that because this is apparently our stress test right this is about as bad as it gets what happened you know with our properties and give us a sense of what happened and in if you could look at it and say well this is basically sort of as bad as it probably gets.

Dante: You know really the the worst that it happened it was just perception back in March thinking that no one was gonna pay rent right in april when everything shut down and then losing several nights of sleep thinking okay well I’m done because no one’s gonna pay rent and you know all my you know I would say eighty percent of my net worth is always multi-family spread across you know the the the south and most of it in Texas so that was the worst of it because that actually never came to fruition and never happened collections have been doing just fine you know and we’ve been collecting well we’ve been cash flowing our properties and we passed distributions just to be on the safe side and to have you know cash you know stole away just in case what we were afraid of actually happened it never happened we’re back to doing distributions with you know a couple of our properties were doing distributions monthly now because everything has been just plain accord to the performer so let’s look at the national level you know if you keep comparing collections in 2019 against 2020 the drop was only about one percent you know through september now after september you know that’s when the biggest unemployment you know cushion ran out and then we can see an increase of delinquency after september october november december that number which was usually a one percent difference between where collections were in 2019 one percent lower for the same month in 2020 now that number is about two percent this past month it’s probably the highest it’s been it’s been about 2.6 percent so if you compare the rents of 2000 2019 with the no january 2020 I’m sorry with trading 21 we’re about 2.6 percent lower now that is a trend that I think it’s gonna change and I and I’m talking on a national perspective right it’s very very different each market specific in Texas we’re actually having DFW actually having rent growth on those numbers now that was before we had 25 billion a federal assistant approved right for utilities in rent so that’s been worked out right now and how it’s going to be distributed you know for most of the the government did not think about the landlords it’s all about protecting the tenants putting some the cdc put in some protection you know so anytime there was a eviction moratorium coming up that was challenging and that was you know scary it never really I mean yeah I affected a few units but most people actually wanted to pay their rent and if they could they did you know very few situations so I feel like that trend is now going to revert because of how much federal money is in place we have a lot of the states are also stepping in and say all right we got to step in here if not you know we’re not going to have housing and I think the current administration is even gonna do more to help on that side so if anything I think we’re gonna have tremendous growth based on that too.

Buck: Got it well listen I guess the bottom line is that what we’re looking at here is a market that has gone through stress tests a market that’s shown that it can handle you know recessionary times you know took a few took it took a few on the chin but it didn’t you know it didn’t knock out like a lot of the rest of the country. It’s still growing it’s gonna grow like crazy over the next few years and to me when I look at Dallas, one of the things I like about it is Dallas is you know really the kind of market that has a unique element to it which is growth significant growth but there’s a level of stability to it too right you don’t look at Dallas I don’t look at Dallas necessarily like some of the other markets out there that might be growing faster you know even like a Houston which you know Houston’s done well for us for sure but Houston has more risk at play there may be an opportunity to buy something that is you know lower than replacement cost and crank up those rents we’ve seen that over and over again but from a pure stability perspective you know job growth and an incredibly diverse demographic you know you know incredibly diverse workforce and industry force it’s really hard to beat.

Dante: No it really is and you know and like I said in the numbers the projections keep showing that this is not going to stop anytime soon actually there is no projection showing I slowing down you know on the foreseeable future. So I’m very bullish still even though the prices are sometimes hard to deal with and you know and I’m sometimes frustrated being outbid by REITs in you know private equity that never looked in dollars and never looked at c-class 1970s build multi-family property before you know that was the the space that I operated with the clients and now we’re getting bid left and right by those operators so we’re having to look at our business model and shift things to still remain competitive because it’s not like they’re overpaying and they’re failing they’re over you know in our eyes sometimes they’re overpaying no but they’re succeeding you know and they’re being able to rents keeping up with it occupancy is keeping up with it our occupancy average and never really in Dallas Forth Worth never really went below 93 percent if you look across the house for worth you know and I mean that’s we I on the right with 10 percent you know maximum so never you know never less than 10 percent occupancy it during Covid never hit less than 93 if you look at all the properties and as you know most of our properties have been doing you know 98 97 you know and and running like a pro forma.

Buck: Right well listen and bottom line is you know if you are looking at real estate in the next decade and you’re not paying attention to Dallas then you are missing the boat Dante when are we gonna have when are we gonna see some more action from Touro man? People keep asking me about it I keep telling them my acquisition partner is not finding anything yet.

Dante: We’re finding, we’re just getting being outbid you know so you know we take pride in delivering you know you know constant and high returns to our investors and it’s been tough and yeah you know maybe this is something that we need to prepare the investors that probably the expectation of returns are going to be lower than the deals that we have done in the past just because of the amount at least the cash on cash returns correct the cash from cash return. We would not find anything like we’ve done in the past of getting 10 plus you know getting double-digit in DFW but you invest in a very strong market a very stable market like you said that has continued growth in population and employment so you know where else can you go and get seven or eight percent cash from cash on your money there is no other place to do that safely so you know that’s kind of the trend that I see moving forward as we’re looking you know and our business plan and how we operate is just you know the market has changed for the better but has got a little more expensive and you know and that’s the price you pay to stay in the game.

Buck: Yeah but it will keep getting expensive. So anyway Dante, I want to thank you again for being on Wealth Formula Podcast and we’ll have you again probably in the next quarter to check in again.

Dante: Sounds good Buck. Thank you so much for the opportunity. Always great talking to you.

Buck: We’ll be right back.