623: Passive Investing in Today’s Economy

SHOW NOTES FOR EPISODE 623: PASSIVE INVESTING IN TODAY’S ECONOMY

In the wake of 2020 alone, central banks across the globe created more than TEN TRILLION DOLLARS — all out of thin air.  Inflation is here and those who are interested in protecting their wealth MUST be invested to thrive.  This is one of those massive wealth adjustment moments in history.  In today’s podcast, author,  full-time real estate investor, and founder of Asym Capital Hunter Thompson shares how we can profit significantly in today’s economy if we only know what to do to take advantage of this opportunity.

What You Will Learn

• What “recession-resistant” assets are
• How inflation can be a massive benefit to savvy real estate investors
• The three segments of inflation that every real estate investor must know to profit from inflation
• Why Hunter thinks interest rates will go much lower
• How three asset classes are ideal for the economy today and the next five years
• What is destructive purchasing power of borrowed money?
• How you can borrow money at negative interest rates

About Our Guest

Hunter Thompson

Hunter is an author,  full-time real estate investor, and founder of Asym Capital (“AY-SIM).  Since founding Asym, Hunter has helped more than 400 retail investors acquire over $150,000,000 of mobile home parks, self-storage, retail, office, ATM machines, and cryptocurrency assets.  Hunter is also the host of the Cash Flow Connections Real Estate Podcast which has received over 1,000,000 downloads.  He also wrote Raising Capital for Real Estate which hit #1 on Amazon in Real Estate Sales and Selling.

Previous Old Dawg Podcasts Featuring Hunter:

• 133: Investing in Self Storage Facilities Sept 4, 2017
• 225: How to be a Successful Syndication Passive Investor July 23, 2018
• 363: Attracting Mentors & Raising Capital from High Net Worth Investors  Nov 18, 2019

More About Hunter

• His company has seen significant growth since his last appearance on the Old Dawg’s REI Network Podcast in Nov of 2019
• His investment thesis has remained the same – slow and steady “recession resistant” assets
  • He is looking at assets with very predictable cash flow, based on supply and demand
• He has expanded a little bit into new areas with a Bitcoin mining fund but otherwise they have remained the same – mobile home parks, self-storage and multifamily apartments making 90% of their address
• His company got into self storage very early on
  • Green Street Advisors did a study of NOI growth across all the popular real estate assets
    • They found that mobile home parks and self storage crush all other real estate assets in terms of NOI growth
    • Cap rate compression was also included in the study where multifamily did especially well

Hunter’s Business

• He is a Registered Representative under FINRA
  • “Registered representative” is a term that describes someone who is licensed to buy and sell securities for clients and is sponsored by a firm registered with the Financial Industry Regulatory Authority (FINRA). Registered representatives are more commonly referred to as stockbrokers.
• He raises capital professionally
• His company is one step removed from the specific operations of the various assets they raise funds for
• That’s why he is able to participate in a diverse group of property types because he is not niched down like you could be if you are an operator
• His company is focused on finding great deals for their investors

Inflation in Real Estate

• A lot of people think that real estate is a hedge against inflation, which would imply that it’s a wash
  • That’s not the case
    • Inflation is a massive benefit to real estate investors/owners of particular asset classes:
      • Multifamily apartments
      • Mobile home parts
      • Self-storage
      • Mobile home parks and self-storage, especially, are “re-priced” on a monthly basis
      • Multifamily is re-priced on an annual basis
      • Compared to “office assets,” which are re-priced every 5 years
    • You need to look at the numbers
      • Inflation does impact all assets the same
      • If inflation is taking place in your market at, say, 8% per year
        • Then you would anticipate that rental growth would increase at 8% per year
        • And, being conservative, you would expect that expenses would increase at 8% a year as well
        • Looking at those factors, you would expect that there wouldn’t be any impact to NOI – a wash!
          • But, especially, with self-storage or even B and C class multifamily, it is NOT a one-to-one ratio between expenses and income
            • Most operating expense ratios with self-storage is around 35% and multifamily is around 38-42%
            • Taken these ratios into consideration, since the rent growth is so much more for these assets, in comparison to expenses, the NOI increases significantly
              • Therefore, the higher the rate of inflation, the higher the NOI you create
• But there are three segments of inflation that make it really compelling for real estate investors
  • Asset price inflation
    • Is when, as the money supply increases, asset prices (the multiple on which these assets are traded) increases
      • So the value increases, even if the NOI does not increase
  • Rental price inflation
    • What takes place at NOI
      • This is especially true of assets that have very low operating expense ratios like self storage
    • Looking at those factors, you would expect that there wouldn’t be any impact to NOI – a wash!
      • But, especially, with self-storage or even B and C class multifamily, it is NOT a one-to-one ratio between expenses and income
        • Most operating expense ratios with self-storage is around 35% and multifamily is around 38-42%
        • Taken these ratios into consideration, since the rent growth is so much more for these assets, in comparison to expenses, the NOI increases significantly
          • Therefore, the higher the rate of inflation, the higher the NOI you create
  • The destructive purchasing power of the borrowed money
    • When you, for example, buy a $15 million piece of property…
      • You put down $5 million
      • You get a $10 million loan
        • In today’s money, that $10 million is worth $10 million
        • But what inflation does to the borrowed dollars is it erodes the purchasing power to the rate of inflation
          • Therefore, if we are looking at 8% inflation for 10 years, or even 7 or 8 years, the purchasing power of that $10 million is cut in half, over that time period
          • Meaning that, I still have to pay them the $10 million back but the value of that $10 million is cut down to $5 million in today’s dollars
          • This is INSANELY BENEFICIAL to real estate owners who have borrowed money at relatively inexpensive interest rates!
  • You have the trifecta of awesome opportunity as a real estate entrepreneur
• We have to take all of these things into account when we are thinking about when inflation takes place
• Especially, when there’s political pressure, the Central Banks tend to increase interest rates

Rising Interest Rates

• Right now, there is a lot of discussion around what increasing interest rates really means to real estate entrepreneurs
• When interest rates rise, it impacts deals
  • He personally knows of a $30 million property that was bounced out of escrow because of the interest rate increase during the escrow period
• However, you can, in effect, borrow money now at negative interest rates
  • If inflation is at 8% and you can borrow money at 4%, interest rates are, in effect,  -4%
  • Interest rates are still negative on a “real inflation adjusted” basis
  • Compound the “trifecta” (mentioned earlier) with the fact that you can borrow money at negative rates
• When people ask what rising interest rates mean for cap rates, those two things to not move in lockstep with each other
  • But they do move more in lockstep with each other on an inflation adjusted basis
• Different operators/sponsors are impacted differently depending on their strategy, who is providing the debt, etc.
  • For example, residential rates increased 150-175 basis points when people were anticipating that maybe they would increase 175 basis points over a 2 year period
    • The same is not true for the bridge loans that are sourced by debt funds, where there has a been a 50 basis point increase in those types of loans
  • A lot of the debt funds that are now being used for multifamily purchases right now are not as deeply impacted by the residential

Various Asset Classes and Covid

• Those that didn’t fair so well:
  • Commercial office properties
  • Retail
• Senior Living
  • Impacted as a result of Covid on senior community
    • Higher risk category
    • Operation expense ratios are higher than other asset classes
  • His company stopped distributions temporarily
  • However, the demand for the product is still so incredibly strong that, once these short-term problems are resolved, the tailwinds will come back strong
    • He bought assets at 9 cap rates and wouldn’t be surprised if they go to sub 6 in 5 or 10 years
• Central banks around the world printed about 10 trillion dollars in just the last 2 years
  • When that happens, there’s a ton of liquidity looking for yield, surging through the economic landscape and U.S. real estate, according to Hunter, is the most favorable risk-adjusted investment vehicle in the world
• But there is this incredible supply and demand aspect imbalance both of assets to demand, but also in terms of investment vehicles to liquidity
• Hunter is very bullish, despite the recent discussions around the inversion of the yield curve, interest rates rising, etc.
• Where he saw a big boost
  • Multifamily properties they have in Phoenix
    • Saw 15% year-over-year rental growth in 2020
    • In June, it went up to 20%
    • In July, it went up to 25%
    • It got up to 33% year-over-year rent growth
  • Self-Storage
    • Was the number one asset class for him of 2020

Projections of What’s Ahead

• Hunter has been very vocal about thinking that interest rates are going down and to the right for quite some time
  • He was in a debate making the argument that the downward trend over the last 40 years would continue
  • He mentioned in the debate that, over the next 24 months, interest rates would continue downward
  • It has been 12 months and they are increasing but he still feels they will go back down and to the right over the long term
  • He thinks that people who think they will continue to climb and climb are mistaken
  • He thinks people should be wondering when they will go negative – most of the developed world has negative interest rates
• The Housing Market
  • There’s a massive shortage of housing in the U.S.
  • Depending on who you ask, the U.S. is short 3 to 5 million units
  • The demand is there
  • If you look at the data as far as U.S. income, net worth, and rental growth, they are all suggesting that turning up and to the right
    • Net worth and income are at all time highs
    • Debt service coverage on a national basis are is at a 40 year low
  • If you compound that with a shortage of supply, he thinks you will see housing prices continue to rise
    • Will they continue to rise at 20% per year?  No. If that cools off at 8-15%, it will still be at historic highs
    • It’s being driven by sound fundamentals – supply and demand

Other Investment Alternatives

• He is currently in the Bitcoin mining space
  • Many people are adverse to investing in this space because they don’t provide:
    • Don’t provide depreciation
    • Don’t provide cash flow
    • There’s no predictability of outcome
  • Bitcoin mining provides an opportunity for people to get exposure to that space without foregoing significant cash flow or the potential for significant cashflow and depreciation because you’re investing in machinery – miners in this case
    • There’s some predictability of outcome because historically speaking, the distributions from miners are not as volatile as the price of Bitcom – they’re related but not a one-to-one ratio
  • He started doing research in this space and found a sponsor that they’re comfortable with
  • You can find out more at their website: AsymCapital.com

Significant Cash Flowing Assets

• Hunter’s company’s focus on the Bitcoin mining space and ATM machine-related projects hopes to bring great cash flow opportunities for investors
  • Specifically as it relates to opportunities that produce unleveraged significant cash flow
  • Yet, it’s a really good idea to have some exposure to both equity-related assets and also assets that may depreciate not just from a tax standpoint but also from a valuation standpoint
  • With the ATM Business
    • The return profile is with the understanding that the asset itself will be useless in 7 to 9 years
    • But the cash flow is so significant that it makes up for that
      • In fact the cash flow (25%) is higher than the IRR (18%)
        • How is that possible?  You are not selling the asset – it’s going to zero
      • You’re getting your money bank
        • But the cash flow is such that it’s the opportunity to pay off expenses, you’re getting your own money back, potentially, from a risk-adjusted basis or risk-mitigation basis
    • Those are great things to have going within your portfolio
      • Especially, when compared with multifamily apartments that are trading at sub-4 cap rates

This is a Significant Time in History

• This is one of those massive wealth adjustment moments in economic history
• Like the:
  • $10 trillion bomb that the Central Banks set off is going to have massive ripple effects in the economy
  • Both in terms of asset price inflation, consumer price inflation and also the destruction of debt
• How we play this game over the next five years is really important
• Investors need to have the confidence to make the right investments, with the right sponsors, and with a lense in which to view this opportunity, which is an economic lense
• Everyone is playing the same game
  • Some people don’t know it
  • But they’re all playing the game of economics
• If you are really good at what you do but aren’t knowledgeable about the economic side of things, you can get wiped out without paying attention to it and you’ll get blindsided
• The Summit he is hosting looks through that lense – what makes sense right now!

Hunter’s “$100K to Invest Summit”

• Hunter has had the opportunity to work on a lot of cool events – webinars, podcasts, interviews, live events, online events
• But the event he has coming up is his best so far
• It is the answer to a lot of people’s questions right now, subjects like:
  • Inflation – a massive warning to those that are concerned and are sitting on the sidelines
    • Your capital will be eroded
    • Do not be on the losing side of that argument
    • With that said, the economic winds are shifting
      • There are going to be winners
      • There are going to be losers
    • It’s important to navigate these waters with a lot of confidence and knowledge
      • It’s not just a mindset thing
      • You really need to know what you’re doing
• He put together the $100 K Invest Summit to help prepare people for what is coming
  • He recently interviewed 22 experts and he is having a summit that addresses these key issues
    • They will discuss:
      • Rising interest rates
      • Inverted yield curves
      • Recessions and what they mean for real estate entrepreneurs
    • He interviewed people from various niches
      • Mineral rights investing
      • Self-storage
      • Mobile home parks
      • Bitcoin mining
      • RV Parks
      • Discounted non-performing notes
      • Performing notes
      • Development
      • Low income tax strategies
    • There will be detailed discussions of strategies for today’s economy
      • Infinite banking
      • Tax exposure reduction
    • Every single interview is a niche or a strategy
    • Every single interview, from a passive investor’s standpoint, is designed to accomplish one of the three buckets of wealth creation (Protect, Grow and Multiply)
      • Each day, they’ll talk about one of those buckets
  • At the end of the Summit you’ll have a very good understanding of the various experts’ views of investing strategies for today and the days ahead
• You can learn more about that Summit at: $100KtoInvest.com
  • It’s a free virtual event
  • All you have to do is put in your name and email
  • You can watch it at your own convenience

How to Reach Hunter

• Website: AsymCapital.com

Get Hunter’s Book

• Raising Capital for Real Estate by Hunter Thompson

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Additional Episode Sponsor: Meno Studio – menostudio777@gmail.com