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SHOW NOTES FOR EPISODE 237: 9TH INNING INVESTMENT STRATEGIES
As we approach an inevitable market correction, our investment strategies and focus need to be on investments that will have both resilience and good long-term returns. Not only has the real estate investing market changed, but so has the global economy. In this episode, physician, entrepreneur, asset manager and podcaster Buck Joffrey shares how his real estate investing strategy has shifted to prepare in the “9th Inning” for the anticipated market shift.
What You Will Learn
- The two key strategies that can prevent the banks from taking away your property in a downturn
- Why real estate is still the dominant asset in his investment portfolio
- What is the biggest risk real estate investors face in an economic downturn
- What borrowing strategy are Buck and his partners banking on to protect their investments in a downturn
- Who are the leading real estate buyers who are paying above-market prices for properties and why are they doing it?
- Why Buck is selling all of his personally owned properties
- What is Buck’s “Ferrari money” and why is he investing in one particular asset class?
About Our Guest
Buck Joffrey
Buck Joffrey is an accomplished Physician, Entrepreneur, Asset Manager and Podcaster. Since finishing his medical training in 2008, he has had tremendous success through his start-up businesses and investments going from being broke to having an 8 figure net worth. In order to help his high paid professional colleagues, he started a financial education website called WealthFormula.com and hosts the popular Wealth Formula Podcast. Buck knows the old mantra of “investing in a diversified portfolio of stocks, bonds, and mutual funds,” is outdated and dangerous for high paid professionals given the volatility and instability of the current global economy. Therefore, he advocates entrepreneurship and/or investing in hard assets that provide a cash flow as a more reliable way of approaching personal finance. Through a strong foundation of financial education and emphasis on cash flow investing, Buck teaches professionals how to take charge of their money and prosper.
More About Buck
Buck Joffrey is no stranger to the Old Dawg’s REI network as he has been a guest twice before:
- 071: Part-Time Real Estate Investing – January 30, 2017
- 151: Strategic Passive Investing – November 6, 2017
Update since last interview:
- Moved from Chicago to Santa Barbara
- Trained as a physician until he was 34, practiced for 5-6 years, slowed down considerably and completely stopped practicing in 2017 at age 43
- Loves his new found freedom
- Focuses on investing and putting together opportunities in podcasting and education
His Current Investment Focus
- He is currently selling all of his personally held properties and is focusing more on sundications
- One building he has owned for three years recently sold at a 100% annualized return
- It’s a good time to sell!
- He is also working with other investors and has purchased 3 apartment buildings recently
Identifying the Dangers of a Downturn
- When looking at any investment, you need to first identify the risks/dangers of a downturn with the biggest risk being
- Losing the property
- Having a capital call from the bank where you have to put in the money or lose the property
- Some people’s perceptions of the dangers
- You’ll be upside down on your rents
- Example:
- If you buy something at a cap rate of 5.5 cap rate, with leverage, you still should maintain positive cash flow, but that’s not always the case
- The biggest challenges
- Appraisal values are going to go down because of cap rate decompression
- And when values go down, people will be over-leveraged and that’s when the bank will start doing capital calls
- There are people who are buying $20-25 million properties, don’t have professional asset management, are at 80% LTV, meaning maximal leverage.
- If they do nothing and it may keep cash flowing but there’s a pretty good chance that they will lose the property
- If you don’t increase rents to decrease leverage, and you have an appraisal (which regularly happens as it does with non-recourse Fannie Mae debt – every 18 months), the bank will call and say we gave you an 80% loan covenant but, with the decreased value, the loan is now 90%, and you need to come up with another 10% of capital or you will lose the building
- Buying under-market is very difficult or impossible in our current sellers’ market
- You have to look at your biggest challenge – not losing the property – so your primary goal should be capital preservation and how you can mitigate the risk of losing the property
- The only answer is to figure out how you can “de-leverage”
- Take a 80% loan and only use 70% to have as a cushion
- Or, start out, day-one, with the goal to drive a ton of equity into the property early on
- This is the type of market where you have to go in and drive up NOI soon, and in the process, you are de-leveraging
- Or, if you are one of the rare groups that qualify, you can get a 100% LTV Fannie or Freddie loan and not use the full amount, so you have a cushion
Buck’s Criteria
- He’s only working with one of the top groups in the country that qualifies for those 100% loans
- Only looking at properties where they can drive a lot of equity upfront
- You may not be able to find “under-market” properties but you can find “under-performing” properties
- One of his recent deals:
- Working with the second biggest multifamily owner in Phoenix
- Mesa, AZ
- 150-units
- Mom & pop owner
- Primary focus for the current owner has been 100% occupancy, but other things have been neglected
- Has not been updated since 1985
- Good growth in the area because many Californians moving in
- You can take immediate action to upgrade and increase rents
- Can even, in some cases, double equity if you buy right
- It’s difficult for most people to find these kinds of deals
- He is only looking at deals where he can do massive value-add deals upfront
- He wants to also stay in primary markets (for example; Dallas, San Antonio, Phoenix, Atlanta)
Who Buys Over-Priced Properties
- The only ones who can buy properties at ord above the asking price are cash-rich entities that can quickly pump in massive amounts of money for upgrades and improvements to create value where there was no value
- Foreign capital is doing this and paying all cash for the properties because, if values go down, they don’t worry about LTV
- If you have $100s of million to invest, why not buy a $25 million dollar building at a 5 cap rate
- Why do they do this?
- For the same reason people invest in gold. Gold is the anti-dollar. It doesn’t create cash flow but it increases in value “over time.” Property, with inflation, goes up in value over time, too
- You also don’t have to worry about debt because you paid in cash
- The third group are the people who don’t know what they are doing, aren’t prepared, just trying to get rich, and they go into the property not thinking they will lose the property. These are the people from whom many investors will find their great deals in the downturn
How Buck Invests
- Still heavy in real estate (80%) – 80% syndications and 20% his personal properties
- As a General Partner – Owner/investor, he is heavily in real estate and diversifies into various asset classes
- Multifamily
- Self-storage
- Medical
- Other (10-15%)
- Insurance products
- Highly speculative investments (his Maserati/Ferrari money) – These are what Buck calls “Asymmetric Risk Plays”
- Block chain/Cryptocurrency (Bitcoin)
- The technology is as big as the internet
- A social movement
- A technology movement
- Driven by computer scientists and libertarians
- $200 billion market cap now, could be $2-3 trillion in 5 years
- Understanding what it is is very important
- He’s so fascinated by this area that he is starting another podcast in September, just focused on block chain and Cryptocurrency technology as an investment
- He sees this technology as rebuilding the Internet
- An Internet that is hack-proof
- Where you can trade with your friends, peer-to-peer, without a third party
- You may have to pay for the service
- Could transform the financial services industry
- Could eliminate the need for third parties in regular business and commerce transactions
How to Reach Buck
- Podcast: Wealth Formula Podcast
- Website: WealthFormula.com
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