What is the state of raising funds for real estate syndications? What is the state of the market today? Mike Morawski, a seasoned investor and syndicator, shares his insights.
Tell us a little bit about yourself.
I am based in Southern California and have been involved in the real estate industry for approximately 30 years. I’ve written a couple of books and have a bestseller on the market right now called Multifamily Investment Secrets. I’m an owner-operator of multifamily properties, but I also engage in a lot of capital raising and coaching. Additionally, I have a coaching platform where I work with individuals to help them build their real estate portfolios.
Where is your portfolio? Where do you focus?
We monitor about 40 sub-markets around the country and watch deals in those markets to see what’s happening. Every market is different. They say real estate’s a local business, and it is. Traditionally, I have always built my portfolio from the coach seat of an airplane.
I was in Chicago forever, but didn’t invest in the multifamily side of real estate. And I live in California now and don’t invest in California either. We primarily focus on the Southeast and the lower Midwest. We have a substantial portfolio in Oklahoma, in the Tulsa market today, and we own some assets in Florida and Dallas. If you were to look at a map from Raleigh or Charlotte, North Carolina, down all the way to Dallas, that whole “Southeast smile” of the US is really the market that we like. There are also some markets in the Midwest that we like, such as Oklahoma, northwest Arkansas, and a few markets in Tennessee.
I also love the Southwest. We do have a property in Dallas, and I’m responsible for writing the investor update every quarter. It’s just unbelievable. It feels like every month there’s something new happening in Dallas: some new, huge investments or a major firm moving its HQ there to Yal Street. It’s just a mind-blowing market.
That’s funny about Dallas because it has been in the top 10 for probably the last 20 years, as long as I can remember. For several years, it was among the top three markets to invest in. Every year, the major brokers around the country release annual and quarterly reports outlining their predictions for the market, and Dallas has traditionally been among the top 10, if not the top three.
Let’s start with the state of fundraising today. I did an update on what we have been up to a couple of weeks ago, and I shared our experience with raising funds over the last month. But let’s hear from you.
The current fundraising environment has been interesting, primarily due to the market cycle. There was a time when you could do a webinar or a live presentation. For several years, I would put 20 investors into a conference room twice a week, and people would want to pull out their checkbooks and write checks immediately. Those days are over.
Today, there are many people out there raising capital, and there are many deals for investors to choose from. Additionally, you have investors in deals where distributions have been paused, where there have been capital calls, and where there’s general disarray, which again points to the market cycle. Because of this, I think investors have backed off a little bit and have hit the pause button on their investing over the last couple of years. A lot of what investors say today is:
- “I’m not getting distributions from other assets.”
- “I just went through four or five capital calls.”
- “I’m a little uncertain. I want to wait and see what’s going to happen.”
- And the one I love is, “The interest rates are too high.”
But what does that have to do with you getting a positive yield in an investment opportunity? Currently, it is the time for capital raisers to be nurturing relationships with current, past, and future investors. The market will open up again shortly, and people will want to jump back in and invest.
On October 16, 2008, in the middle of a complete mess in the real estate market and the overall economy, Warren Buffett said, “Buy American. I am.” I agree. I believe that now is a phenomenal time to buy. If you think about the people who are having capital calls, when did they put their money in? They invested when everybody was writing checks, when people were buying at 4% cap rates, and when those deals did not make sense. Don’t go with the flow.
My mentor used to say, “Only dead fish go with the flow.” Just because people are pulling out actually means it is a fantastic time to buy. In my opinion, you can negotiate better terms. You may have a 2% higher interest rate, but the difference in your payment compared to the discount you get is enormous. With that, where are we in the market today?
I always use the fisherman analogy with my coaching clients. If you have one line in the water, you might catch a fish. But if you have multiple lines in the water, you’re going to catch multiple fish. From a capital-raising standpoint, you can’t just do one thing. You can’t just attend networking events, or just run social media, or just run ads. You have to do everything because you’re going to attract more people. It’s an effort to put more people in your funnel today and build more of those relationships. I teach everything from networking and building relationships to social media, webinars, lead magnets, paid advertising, and all the things in between. Just like you and I both have podcasts—they’re out there, people will see them and catch clips, and it’s going to make sense to someone at some point. From a capital-raising standpoint, have multiple systems working for you that will draw people in.
And when the market starts to get better, you’re going to be ready compared to everybody else who may be dropping off or doing something else, changing what they do temporarily.
Think about all the people in your space who are off doing something else today because it’s become too hard. You stayed focused, and I stayed focused, and only the strong survive.
Where are we in the cycle?
I think we’re at the bottom. In fact, I actually think we’re cycling up. I always say there are no geniuses in this business, only market cycles. The markets go up and down in eight- to ten-year cycles, with different quadrants along the way. You can see this if you pay attention to the cycles and look at history.
I went to a charity fundraiser, which was also an economic event. The economist who spoke focused on the residential market, and I agree that much of our economy is driven by the residential housing market. It drives commercial business, car sales, and the oil industry. The residential real estate market is a key indicator to watch in the cycle. This speaker happened to be someone who, for 30 years, has charted key metrics every year: sales, new construction, new assets coming online, homeownership, and rentership rates. If you watch the trends, there is no doubt we’re at the bottom right now. We’ve gone through a tough time. Remember, we peaked, everything topped out, and then we started to come back down. You saw occupancy drop, new construction begin to halt, unemployment spike, and inflation rates hit new highs.
However, if you look at it today, inflation is relatively stable, unemployment is low, GDP is up, and the stock market is booming. One of the things that could actually help us is for the stock market to crash, but I don’t know that the current administration will let that happen. So much is driven politically, and as much as we don’t want to talk about it, that’s the reality. I think you should take a look at what’s happening right now. You have a president in office who is a huge real estate investor—someone who made his fortune in real estate. He is going to bring this market back.
Bonus depreciation went back to 200% again.
There are many aspects of that bill that are still being reviewed. For example, bonus depreciation is at 100%. Here’s a great thing: if you have an investor who invests through a self-directed IRA, they used to be unable to use their 401 k from their current employer. However, in that bill, it allows them to use their 401 k from a current employer to invest in real estate. There are many things in that bill that are going to help the real estate space.
However, here’s one thing I’ve been saying a lot on my podcast: if you wait for CNN or Fox News to say the market has changed, it will be too late because the change is happening now. Whether you’re an active investor or a passive investor, looking for opportunities to get into, get in now. Have the wind at your back and ride this next cycle. There’s a time in history when I think some of the greatest wealth is going to be remade for people.
Let’s just not wish for the stock market to crash because that’ll make it even harder to raise funds.
What will happen is that people will start to pull out.
I don’t know. We had a deal around that time. I think it was March Raper when he was really down, and people think they can’t sell right now.
It does go both ways.
I agree with you. To give you an example, I’ve been watching the San Francisco office, and I’ve been telling people that, in my personal opinion, it’s a huge opportunity. Now, the rents are starting to go back up. As we know, with real estate, it takes a little while for prices to adjust based on the new rents. But now is the perfect inflection where rents are starting to rise, and you can still put some properties in contract at a very low price. This not only helps you establish a low tax basis, but you can also negotiate better when the next downturn comes. You’ll be able to give more discounts than your neighbor who bought at the peak. There are so many benefits to buying at the bottom. You just have to hold it for a little bit at this point.
All asset classes are like that. Whether it’s office, retail, self-storage, or multifamily, you might find it painful to invest today, but a little bit of short-term pain is going to give you some long-term gain. There are great incentives out there. We have deals that are paying seven to 10% annual cash flow. And IRRs that are close to 20% indicate a huge opportunity out there.
Is there anything else that you think we should cover in today’s market that we haven’t touched on, or anything else related to commercial real estate?
One of the interesting things is that you’re in different asset classes than I am. When you look at the multifamily bucket, there are many different asset classes inside it. When considering investing in general, you have options such as self-storage, senior housing, medical housing, student housing, retail, office, commercial, and industrial manufacturing. There are so many spaces, but when you look at the multifamily bucket, you have self-storage, mobile homes, RV parks, senior housing, and all the different asset classes in that bucket. I tell people, pick something that excites you and get involved. Don’t get in self-storage because you want to be with Stephanie, or don’t get multifamily because you want to be with me, but get in it because that asset class excites you. You believe in the asset class because that’s what’s going to help you create wealth and increase your cash flow as an investor.
It will also help you understand when you do get those investor updates: what’s happening in the market, and they are doing everything that you think they should be doing. Would I diversify? That’s a good question. If I were a passive investor, I might also diversify a bit.
I believe in diversification. For years, they talked about diversification in the stock market. Have an allocation in stocks and an allocation in bonds. I still believe you should have some money in the market, but as for alternative investments, you should have some money in self-storage and multifamily, and gas and oil, in those different asset classes, because every sector is going to perform differently. If you have that diversified investment philosophy, it will help you in the future. There are many investors who have come to me and said, “I want to put $200,000 in this investment.” And I tell people, “I don’t want all your money. Put some money here, put some money in this asset over here, or find another asset class, but don’t give me everything. I don’t want to be the responsible one for everything. If you build over time, great. But get started and put money in other places, too.”
I agree. In my opinion, it is a sign of a great syndicator because we actually care about your money. I’ve heard people say, “I’m going to take money out of something I don’t like” or “I’m going to borrow against my credit card.” Don’t do that.
I’ve had people do that, too. They say, “I’m going to get $20,000 on my credit card.” And I ask, “What’s your interest rate? 21%? Don’t do that. I’m not going to take that kind of money from you.”
Mike Morawski
mike@mikemorawski.com
https://multifamilyunplugged.com/