Welcome to our latest episode. Today, we’re thrilled to have Paul Moore, author, BiggerPockets expert, and Founder/Managing Partner of Wellings Capital. With an engineering degree and an MBA from Ohio State, Paul co-founded and strategically sold a staffing firm before shifting to real estate in 1999. His journey includes over 85 investments and exits, appearances on HGTV’s House Hunters, and significant roles in property management and development, including a Hyatt hotel and a multifamily project.
In this enlightening discussion, Paul shares his insights on the current economic environment, the impact of high interest rates, and strategies for real estate investment in 2024. He delves into the challenges and opportunities in multifamily housing, the importance of long-term investing, and the value of recession-resistant assets. Additionally, Paul discusses the benefits of mezzanine debt and preferred equity, and the significance of finding intrinsic value in deals.
Tune in now and gain exclusive access to Paul Moore’s expertise and discover how to navigate the complexities of real estate investment in today’s market. Don’t miss out on this insightful episode!
HIGHLIGHTS OF THE EPISODE
00:06 – Guest intro: Paul Moore
01:00 – Life updates and personal anecdotes
02:30 – Economic environment and interest rates
07:00 – Impact on multifamily housing
10:00 – Long-term investment strategies
14:00 – Recession-resistant asset types
17:00 – Shifting place in the capital stack
20:00 – Special situations and tax abated assets
24:00 – Finding intrinsic value in deals
28:00 – How to reach Paul Moore and closing remarks
If you found this episode substantial and want to dig deeper into real estate, or maybe you want to discover better investment opportunities, be sure to check out www.tempofunding.com.
CONNECTING WITH THE GUEST
Website: https://www.wellingscapital.com/
Linkedin: https://www.linkedin.com/in/paul-moore-3255924/
Facebook: https://www.facebook.com/wellingscapital
Instagram: https://www.instagram.com/paulmooreinvest/?hl=en
Full Transcript:
Intro: Welcome to the BigMikeFund Podcast, where you’ll learn about advanced wealth building strategies from real estate investing to creating massive ROI and secure retirement profits. So pour yourself a cup of coffee, grab a notepad, and lean in. Because Big Mike has got the mic, starting now.
Mike Zlotnik: Welcome to the BigMikeFund Podcast.
I’m the Big Mike, Mike Zlotnik, and today it is my pleasure and privilege to welcome back my really good friend, Paul Moore. Hey, Paul.
Paul Moore: Hey, great to see you, Mike. How you been?
Mike Zlotnik: I’m awesome. Thank you for coming. Paul Hales from Wellings Capital. He’s a co-founder and I guess you’re CEO, chairman and president.
I don’t even know your title, but you’re the majority. And they do a lot of great perf equity deals, and we’ll talk about that. Also, Paul does a lot of interesting research out there. So I know you told me right before we started this whole recording, you’re going to talk about the latest and greatest in the market.
Before we do that, any other news for Paul? What’s going on in the life of Paul Moore? Anything new and exciting?
Paul Moore: I got my last one out of high school. So I got a daughter who’s a freshman in college, then three more older kids as well. And we are all together for 10 days this month and you know, it’s not as fun.
It’s not always as fun as you imagine it because you know, once we’re all sitting around the table, dinner table, you know, that fantasy world of happy kids all getting along, like it’s not always exactly that way. So. So I don’t know about you, but, you know, kids are still kids and we’re still adults. And we, we had a good time overall, but, you know the, the kids, two of them are back on the West coast and we’re settling back into mostly empty nest tourism now, I just made up that word.
Mike Zlotnik: Well, that’s a, that’s a wonderful word and you do the best you can to be in touch with your kids, being engaged. I have the same thing. I have four kids too. So,
Paul Moore: yeah,
Mike Zlotnik: the oldest one is in a bad school and the youngest one is in middle school. So I know how it goes. It’s just different needs and you just try to pull them away from the from the cell phone or wireless phone or smart smart phone and get them to do something else.
And I like this. We correct the joke right before this. You said you have an old football injury. You have a headache from that. And I, I have my own joke. I have my old, my, I have my, my headache from an old sports injury too, from chess.
Paul Moore: Oh from chess. Well, that must be a head injury as well.
Mike Zlotnik: Yeah, you get to think too much So yeah, right get a headache from that. Anyway, let’s let’s get back to real estate. So let’s start with the economic environment and you’ve done a bunch of research. You have some fresh data would love to hear some of the recent news or developments or research that you’ve done Talk talk to me a little bit about what’s going on out there
Paul Moore: Yeah, well, you know, we’ve, we’ve been hearing about these hopefully, you know, the market had priced in 6 or 7 rate cuts in 2024 based on chairman pal’s comments in November or so.
And now here we are. Almost to the middle of the year with none, of course, we know why with, you know, persistent inflation, but, you know, the higher for longer mantra, you know, some people are joking around about higher forever. And of course, that’s not going to be the case, but in syndicators, you know, who have been saying, talking about survive till 25, some of them are just talking about surviving at all right now.
Of course, we’re talking about syndicators. Who used risky short term floating rate debt and never dreamed that interest rates would spike like they did between March of 2022 and summer of 2023. But anyway, those things are not necessarily subsiding yet, which means people are still paying a pretty penny for, you know, a floating rate.
And refinances. And as some of these deals are coming, you know, hitting the end of their floating rate debt period or, you know, they have to be refinanced. A lot of these, you know, assets have dropped, you know, we’ve heard 12 to 18 and up to 30 percent in value. And it could even, there could even be more destruction ahead.
And what I want to point out, Mike is, and we’ll get into this in a minute, if we have time. It’s not the macro economics of multifamily that’s causing a problem. And it’s not generally the assets themselves that are the problem. It’s the financing on the assets. It’s folks who might’ve overpaid, you know, they might’ve stretched the cap right.
They might’ve you know, gone in for, you know, For, you know, that risky short term debt just to make sure they got the deal done and all those types of financing issues, aggressive underwriting assumptions, unexpected increases in cost, which, of course, include insurance right now these things you know, lower than expected rent growth.
All that stuff’s combining to kill a lot of these deals, but it’s not the assets themselves. There are still very strong occupancy and very strong demand for multi family housing, and it’s actually the research I’ve done has shown that’s much stronger than I even dreamed.
Mike Zlotnik: Thank you for sharing all that and a lot of great nuggets.
So I’ll just add a couple of comments on, on, on, on this front. So everything you said makes sense. We’ve seen data pointing out to very low transaction volume and valuation corrections somewhere in the, let’s call them 16 to 20 percent on average. So I’ve heard some folks talk about as high as 30 percent and in some other markets, it’s down 10 to 15%, but, but higher for longer rates for sure.
Financial challenges on the new acquisition and refinance as a result, valuation softened up as simple as that. Of course, floating rate debt is taking it on the chin with a higher federal funds rate and SOFR and all that stuff. So all that stuff makes a lot of sense. The fundamentals are still very solid, but the financial conditions are very difficult.
So, and then if improperly capitalized deals need more liquidity. This is the kind of the primary challenge today. Survive until 25 statement is gone. Now it’s survive until 26. From what I’ve seen recently, again, this is my view and I don’t know whether I’m right or wrong. Your guess is as good as mine.
I don’t claim to know anything other than there’s some projections of market bottoming out somewhere middle of next year or maybe to middle of 2025 as the absolute floor of 2020. Multifamily, but who knows, right? We don’t know any of this stuff.
Paul Moore: Yeah. Who knows?
Mike Zlotnik: So, but the opportunities are there.
So what are you seeing today? Are you transacting? Are you able to pick up new deals in this environment? Are you able to inject capital in the existing deals? Kind of as a rescue and recovery capital. We’re doing quite a bit of rescue and recovery capital in the form of mass financing. We finding that opportunity to be the best opportunity today.
Because the deals to find a great deep discount new transaction is very hard. It’s crazy as it sounds. So it’s like a low volume, nothing’s happening. What do you deploy cash? Are you seeing new deals at great prices where you can inject preferred equity? Just,
Paul Moore: yeah, if it’s possible, I’m going to answer a few of those comments, you know, comment on a few of your comments along the way, then finally get back to your question.
And if, if I forget your. Question, please remind me, but right now the current tight lending environment, high interest rates cooled off investor base, you know, equity investor base has resulted in a 50 percent drop in multifamily starts. And this 50 percent drop is. Exacerbating an already significant shortfall, the National Multifamily Housing Council reports that there’s about a 600, 000 unit shortfall that’s persisted since the great financial crisis.
We’re talking about multifamily units, even though we’ve had record deliveries in the last. Six months or so, the new starts are very, very low. And so with immigration and the hesitancy of the younger generations to buy, and with this massive Delta now between rental costs and ownership costs, and that Delta being reported as.
Between 787 and 800 a month and up to 1000 a month. And in some markets, 2000 a month difference folks are generally tending to rent versus buy right now. In fact Two REITs, Avalon Bay and Camden on their first quarter earnings calls said that they had a shocking low percentage of move outs in the first quarter of 2024 due to people buying a house.
Camden said 9. 4 percent of their move outs in the first quarter were attributed to residents buying a home. That’s the lowest in their history. Avalon base said only 7 percent of their residents moved out in the first quarter to buy a home. And it’s usually 16 to 17%. So I mean, all this is, you know, again, with these low starts, high demand slowing down supply We’re seeing a tremendous macro, macro economic opportunity.
In fact, it’s reported that by 2035, the U. S. needs to build 4. 3 million more apartment units by 2035 to meet the demand. And honestly, Mike, I just don’t see it happening. So, and especially with home ownership, which could be partly temporary. Being so much more expensive than, than renting. It seems like rents might have more upward pressure on them.
Occupancy might continue to have upward pressure. And you know, if that’s true, you can see why number one, we’re not seeing the screaming deals we saw from the foreclosures and the deals that have fallen out like we did in 20, 2008 to 12 and number two, We’ve got massive hundreds of billions of dollars sitting on the sidelines for two years right now that needs to be deployed.
And you would expect that it’s being deployed. Why isn’t it being deployed? Well, it is. Blackstone has made two large moves, including one at the beginning of April this year, they deployed 10 billion into AIR. Communities, which is a stabilized multifamily community, and they made a specific comment on their rate call.
Excuse me, their 1st quarterly earnings call that they don’t care if interest rates are going to go down in 60 to 90 to 180 days. They said the opportunity with higher interest rates actually as a long term holder. Blackstone said we’re better off buying at a slightly better price right now than holding off until interest rates drop and as a long term holder with long term fixed rate debt and a long holding period, they said, you know, the opportunity to get a better deal.
Is more important to them right now than getting better financing and so Blackstone’s move has, you know, you mentioned the bottom of the cycle being 2025 or 6, you know, Howard marks reminds us, you know, we can’t really predict where a cycle is going to bottom out. And of course, you and I know that. But some people think that Blackstone’s moves this first and second quarter already might be signaling, you know, maybe getting close to the bottom of that cycle, but who knows?
We will see. Wellings Capital has come up with five different ways to invest in this market cycle, but I’ve talked enough. I thought I’d give you a chance to comment on what I just said, and we’ll get back to those five different ways that we’re investing right now.
Mike Zlotnik: Yeah. Thank you, Paul. We’d love to hear those five ways.
And then I’ll just add a couple of quick comments. So I’ve heard this same line of reasoning and thinking. That the high interest rates are absolutely killing construction starts and then they are killing future supply so that we there’s a massive demand today and then this further demand growth in the housing units, but the supply new construction is constrained by the higher or longer rates.
No question about that. So in the future, this this creates a great view on the supply demand. Disbalance as a result further rate of inflation, and by the way, it’s one of the major dilemmas of the Federal Reserve is the fact that these higher interest rates that they’re keeping, they’re actually not really working to fight inflation the way they envision.
And one of the challenges Is exactly which, what you mentioned, what is the cure for the cold, high prices or high anything it’s the high prices and it’s supposed to stimulate new supply, but the new supplies being disincentivized because of the higher rates. So I’ll, I’ll, I’ll just add that, that, that, that comment.
So let’s go back to your five cause it’s, it’s your show and I would love to hear your, your thoughts and inputs. So what are your five ways to invest? In this environment and then by the way, one more comment on the bottom of the market. I sincerely hope you’re right and the Blackstone is right that we are approaching the bottom.
But there are different opinions and we don’t know this. Catching dropping knife or trying to find a bottom is incredibly difficult. Hmm. My view on this whole topic is correction has been already big enough that it’s the time to come in into many of these deals today. You don’t need to sit and wait.
You can participate. You just got to participate in the more defensive strategy the way you do it and the way we’re doing it today in the form, instead of doing common equity, do preferred equity or do mass debt or mass participation where the level of risk is lower. That’s my view, how you enter today.
And you don’t wait. The market to show a clear button and a clear recovery.
Paul Moore: Yeah, absolutely. Would you like me to go through these one at a time or just blurt out all through five,
Mike Zlotnik: go through one, one through five. And okay,
Paul Moore: great. So my first thought I’ve already touched on it and that’s invest with a long term horizon in mind.
So. You know, we can look at these multifamily demand and supply numbers. We can look out 11 years. If the NMHC is right that we need, you know, millions of new units increasing immigration, you know, is maybe even driving even more and with this 50 percent recent decrease and multifamily starts with this, all these different factors.
As I mentioned, a long term view is you know, something I recommend a Blackstone is. Has already said that. And in fact, they, they said, you know, that their long term view is driving them to plant seeds of future long term value now by acquiring assets. Now, the long term view also includes, you know, acquiring typically long term, typically fixed rate debt, you know, maybe 7, 10, 12 year debt and that’s, you know, the way we look at things as well.
So we typically don’t use, we typically don’t invest in floating rate debt deals. Although we have some done some, we typically tend more toward the long term. So. Point 1 would be invest with a long term view. Point 2 would be invest in recession resistant asset types. Now, I think multifamily, especially with the macroeconomics we just discussed is 1 of those asset types.
Another type is manufactured housing communities or mobile home parks. Newmark recently reported that the number of affordable units with rents less than a 1000 dollars a month declined by 4. 7Million between 2015 and 2020. and that trend is continuing today. So, we think mobile home parks are a great potential opportunity.
It’s the only asset type Mike that I know of that has decreasing supply and increasing demand every year. And right now, To Blackstone’s point again with, you know, debt and equity sort of cooling off, sitting on the sidelines. It means that sometimes you can get even better deals. Here’s an example. One of our operating partners made an offer on a pair of mobile home parks in Detroit for a 5 million, which was a really low price for, I think it was 300, 400 plus units.
400 plus, yeah in 2023, the owner turned it down as I would have as well, but the owner said, I want to get a better price. He put it on an auction site, an online auction site. Well, by the time he had it on the auction site, the market had cooled even further now into 2024. And remember he had offered 5 million on it was turned down.
He bought it on the auction site for 3. 1 million, 8, 500 per site, which is, you know about a quarter of the going rate for mobile home park sites in general. And so, and, and, and furthermore, once he got in there, he identified one strategy alone. Remember he paid 3. 1 million, one strategy alone to raise the value by 5, 000, 000 without raising rents at all.
And it had to do with utility, poorly managed utilities, water leaks, et cetera. So pretty powerful when you can get, you know, recession resistant assets and even more powerful when you can get them in a time when debt and equity is somewhat on the sidelines. So. My third way of investing right now would be to shift your place in the capital stack, and we’ve talked about that before.
Investing in Mez Debt and preferred equity to me is the place to be right now if you really want superior risk adjusted returns. The last deal we did was last Wednesday. A week ago, we rolled out a six and a half million dollar investment opportunity to investors. We were hoping to raise four and a half to five and a half million in about 10 days.
We had almost 6 million in commitments in less than 24 hours for this preferred equity deal. This deal pays. Net to investors, 6. 5 to 8 percent ongoing yield and 14 to 15 percent total annual return. Of course, there’s no guarantee these type of returns will be achieved. And this is already closed anyway, but that’s, you know and again, with a personal guarantee and a better place in the capital stack, you know, we’re not getting unlimited upside, like common equity, but we are getting a more likely opportunity to get our capital back and achieve the targeted returns.
A 4th way to invest right now would be in special situations. And specifically, I’m talking about tax abated assets like multifamily in Texas and New Jersey, we’ve invested in opportunities that have A tax abatement strategies. One of them the tax abatement allowed an over basically the asset was acquired for 80 million, but it was appraised at 113 million the next day because the taxes were abated for nine, nine years, property taxes and tech taxes.
Accessor high and that create a very nice margin of safety in regard to debt service coverage ratio and the 26, 000, 000 in equity and acquisition now has, you know, theoretically, at least on paper, a very nice appreciation play in day 1 on day 1 and then the last, the 5th way to invest in any economy is based on.
Charlie Munger and Warren Buffett. They said that they never had a significant conversation in 60 years of investing together about the economy. They never talked about the economy when making an investment. They were just looking for durable assets managed by great managers and buying them well below.
The intrinsic value. So the 5th way to invest right now or any time is getting deals with a lot of intrinsic value. I talked about the mobile home park a minute ago. Think about the intrinsic value when you can buy an asset for 3. 1 million, and you can find 1 value add that, you know, potentially achieves a on paper appreciation of 5 million dollars just by By fixing the utilities, that’s pretty powerful.
When you can do that, you can invest well in any market, any economy, this one or any other.
Mike Zlotnik: Thank you, Paul, for sharing these great wisdoms. I certainly agree with many of them, and I’ll just add a couple of comments. And, and so, MassDED, PrefEquity, you’re preaching to the choir. So I certainly love the the strategy.
This is what the what we consider hottest strategy of 24, because you can participate with I use this term, equity like returns without equity like risk. You can participate in these deals, and if you combine that with the fifth point that you mentioned, which is I call deep buy, it’s a, you’re basically buying at a great intrinsic value.
So you’re buying well below what the intrinsic value is, what the fair market value is. Now these are not easy to find. Deep buys In real estate always exist because it is not an efficient market. And one person can get a great deal while the other one cannot, because information doesn’t travel freely.
It’s not a publicly traded private real estate, very inefficient, has a lot of power and you can get into deep buys. So we are completely in agreement that that concept makes a lot of sense. And at the end of the day today in this environment, if you can pick up a deal off the market. With a special circumstances for the seller and then layer that with the great capital stack.
It’s a very different experience versus a few years ago. So we’ve seen, we started the whole episode with the market having corrected from, let’s just call it mid 2022 when the interest rates were very low to where it is today because the rates Went higher for longer and it caused all kinds of issues.
Now it’s the reverse is true. The rates appear to be high on a cyclical basis. Now again, if you have long term horizon, which is your, your point number one, and you combine that with basically Charlie, Charlie Munger and Warren Buffett intrinsic value exercise, you’re not buying for a short time span, you’re buying for a long time span.
So from that perspective, you’re not as concerned with the immediate circumstances. But if you layer that with the high interest rates today. The good old wisdom that I learned many, many years ago, buy when the rates are high and refinance when the rates are low. So if you buy today, as long as you don’t have massive prepayment penalties, you can always refinance when the rates fall.
So from that perspective, you’re creating safety, downside protection with fixed rates. You’re buying with safety in the form of, call it, Great intrinsic value. And then obviously if you’re also participating in these deals in the form of preferred equity or mass financing, you’re taking another layer of safety.
So that’s why today this whole game, which was very hot and attractive couple of years ago. And now a lot of people are shining away because they’re nervous. Because they wrote checks a couple of years ago and they’re not sure what’s going to happen with these investments. But the contrarian thinking needs to kick in today.
Now is a great opportunity versus a couple of years ago. And of course we feel the pain for the checks written a couple of years ago. But today, it’s a very different environment. Even if you only take long term perspective. Because the market has seen a black swan event. We’ve never seen the rates change this fast.
The slope of the change was so dramatic that the market is still shaking through and adjusting, but that’s the point that these rates can’t really go much higher. We already have a pretty high level. And it, and if the Fed doesn’t cut them anytime soon. You call it higher for longer or higher or forever.
I don’t know whether forever is a possibility here. At some point, the U. S. economy can’t really afford these interest rates unless, unless of course inflation gets to be very high. And that is, by the way, it’s one more comment I wanted to add and then I’ll back to you. The best way to fight inflation is not with a monetary policy.
But with the fiscal policy, you can’t fight inflation by printing money like there is no tomorrow and then forcing rates higher to, to fight the inflation that doesn’t really work. Are we seeing it right now? We stick is seeing stick inflation because fiscal policy has to be under control ahead of the monetary policy.
Monetary policy helps, but it’s not the only way to try to fight fiscal irresponsibility. That’s my two cents. Anyway back to you. So,
Paul Moore: no, I agree. And, you know, the I know that you have been a fan of preferred or excuse me, mezzanine debt and you’re seeing a high coupon rates. We’re seeing high coupon rates with preferred equity.
It’s ironic. Mike, that high interest rates are compressing common equity returns that are compressing the amount of debt and equity common equity. They’re available. And they’re increasing the opportunity and the returns for Mez debt and preferred equity. And that’s why we think this is the best risk adjusted seat to be in right now. What do you think?
Mike Zlotnik: I agree. We actually have a presentation we’re working on right now. And we’ll make it available. We pulled a bunch of data. And one of the data we pulled amount of mass financing And that amount has been shrinking over many years since the 2008 crisis. It’s been consistently coming down, down, down.
The need for it was not there, or was small in need. In essence, the banks were lending with very low interest rates, and the LTVs were higher and higher and higher. The loose lending brought situations where the banks were lending 75, 80 percent, in some cases even aggressively, sometimes 85, 90 percent.
So the common equity rate was small and was easy to raise. Who needed math, right? Nobody needed math. The pendulum swung all the way. To other side. So we are seeing banks lending 60%, 55%, incredibly tight, 65% in extreme cases on a very conservative deal. And the equity raise has got way, way harder. So what to do, how do you get these deals closed?
That’s where the profit equity comes in, or mass financing. So the, the increase in volume in mass type of financing has spiked tr tremendously. Over the last year and it’s continuing to grow because of very fast dislocation on the market and the bank’s credit being very tight. Really, the other really interesting fact that we picked up, banks lending.
Fell drastically, almost 50 percent in the last 12 months. It’s a huge drop in bank lending, and a private credit has stepped in. A lot of the private credit, either they’re doing the first, or they’re doing mass, where the banks are only doing a small proportion of the loan. So the opportunity is tremendous, at least from what I see.
How would folks reach out to you? You’ve got some really interesting pref equity deals coming up and you’ll have more in the future. And you’re, you have a great investment philosophy. You and I share, we love Warren Buffett and Charlie Munger. And we’re not perfect. We’re human. We make mistakes too, but we try to learn and we try to get better.
And we’re certainly seeing great opportunity ahead. So how would folks reach out to you and learn a little more?
Paul Moore: Yeah, they can reach out at our website, Wellings Capital, that’s W-E-L-L-I-N-G-S wellings capital.com. If they want a free special report on Mobile home park investing, commercial real estate in general, self-storage and more, they can go to wellings capital.com/resources.
Mike Zlotnik: Thank you, Paul. And final comment very quickly, would you recommend a, a book or a podcast to listen to? Just, just something that comes to mind? Anything?
Paul Moore: Yeah. Fantastic book is called richer, wiser, happier by William Green. Charlie Munger was featured in the last book. Yeah, it’s great. And Charlie said it was one of the greatest investment books ever written.
And Green is just incredibly humble in this book and on his podcast as well. He’s got a pot richer, wiser, happier podcast. That’s also part of the T I P the investors podcast network. I recommend both. And of course I recommend the big Mike podcast.
Mike Zlotnik: Paul, thank you so much, so much wisdom, and your book recommendation is an A plus on my list.
I’ve listened to the book more than once, and I’m going to continue to do it again. Good books are worth listening and reading again and again, so it’s an awesome book.
Paul Moore: Thank you, Paul. Thanks, Mike. Have a great day. You too.
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