Welcome to our latest episode! Today, we’re excited to welcome back Brent Ritchie, the President of EnRitch Investment Group Inc. Brent brings over 18 years of experience in engineering, construction, and project management, and is a seasoned operator in the multifamily and commercial real estate space. With a portfolio that includes 3,400 doors and 2,300 actively managed properties, totaling over $350 million in assets, Brent shares invaluable insights into navigating today’s real estate market.
In this episode, Brent discusses the impact of rising interest rates, challenges with Bridge loans, and the state of key markets like Dallas, Phoenix, and Houston. He also touches on the growing role of lender workouts and the opportunities for investors to capitalize on distressed properties. Brent provides a grounded perspective on where the market stands, what’s next, and how investors can position themselves for success in a rapidly shifting landscape.
If you’re looking to gain insight into current market trends and hear from an expert actively operating in the multifamily and commercial real estate sectors, tune in now to learn from Brent Ritchie’s wealth of experience!
HIGHLIGHTS OF THE EPISODE
00:00 – Welcome to the BigMikeFund Podcast
00:24 – Guest Intro: Brent Ritchie
01:00 – Brent’s background and overview of his current portfolio
05:00 – The challenges posed by rising interest rates and Bridge loans
08:10 – Insights into market corrections in Dallas, Phoenix, and Houston
10:00 – How lenders are handling distressed properties and workouts
15:00 – The impact of insurance costs on properties in Florida and Houston
21:00 – Opportunities for investors in today’s market
28:30 – Lessons learned from past investments and how to mitigate risks
35:00 – Brent’s strategy for helping current property owners manage debt challenges
42:00 – Final thoughts and how to connect with Brent
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://enritchinvestments.com/
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, I’m Mike Zlotnik, and today it is my pleasure and a privilege to welcome back Brent Ritchie. Hey Brent.
Brent Ritchie: Hey Mike, how you doing?
Mike Zlotnik:Great to have you back, but before we dive into the details of what’s going on in real estate, what’s happening in your life, what’s new in the world of Brent Ritchie, family, anything interesting, exciting. Hope everybody’s doing well.
Brent Ritchie: Yeah, no, thank you. Thankfully everybody’s healthy. Kids are doing well in school. So that makes that side of life really good. And then, you know, just kind of on, on on our side, we’re just actively looking and, and searching for kind of the next, next golden opportunities.
So but yeah, kids sports seems to be a balance in a juggle, you know, we’re really actively trying to avoid the whole. Five, six days a week thing. But as we looked at the calendar this week, we’re like, dang, we got six days in a row. So
Mike Zlotnik: with kids, huh? Well, listen, once the kids get in love with sports, sometimes it is an everyday thing. So.
Brent Ritchie: It, it is, you know, and when they’re good at it, it makes it a lot more bearable, but when it’s, when it’s still a learning curve and what, what, what kind of sports? We got, so I got three girls and I love them all. Volleyball, gymnastics, and soccer as we got right now.
Mike Zlotnik: Those are great sports.
And of course, yeah, gotta get better at that those sports and they do take, I’m sure a lot of practice. So that’s great.
Brent Ritchie: They, they do. They do. It’s kind of like Canadians. So I’m Canadian for the listeners that don’t know me. We do hockey really well.
Mike Zlotnik: I was going to say, what’s hockey? If you’re, I know you’re a Canadian.
Brent Ritchie: I know, I know. To my, to my oldest daughter, Chagrin my wife doesn’t want her playing hockey as much. So but Canadians do hockey really well and everything else is like very recreation. We’re now that we moved here in Florida, all sports are full out and I admire the passion. But to get there from a young age is a lot of.You know, practice, training, grit, determination, get in there.
Mike Zlotnik: 10, 10,000 hours. It’s the book outliers, right? You gotta get mastery, you gotta spend 10, 000 hours. And, and, you gotta spend it well and start early. That, that’s how you get good. I go back and I think about it. My, my third girl, Paulina, she’s a she’s a team USA professional figure skater on synchronized figure skating, and she’s been doing it since four, right?
And, and she’s she’s, she’s turning 15. So if you add up all the hours, she, she’s way, way above 10,000 hours. But you gotta get to 10,000 hours. Otherwise, it’s not even, you know, it’s some people get there were earlier, sometimes people school from home and then they spend 30, 40 hours a week training if they really want to get to the, to that level of mastery.
And if you do recreationally kind of every day, a couple of hours, you still can spend, you know, 10 hours a week if you’re really, you know, into any sport. So
Brent Ritchie: that’s it. That’s it. Yeah. So, you know, it’s like no one gets to be a big Mike without having to. Having to get through that 10, 000 hours and having to go the chartered rough course of, of everything that got you to the point, right?
We only see that level 10 success, that Olympic gold medal, those, those you know, kind of things. Stanley Cup champions, you know, but not all the countless hours and everything else that it took to get to that point and rejection and, and you know, all the hardships
Mike Zlotnik: and all the struggles and the failures and the injuries and etc.
Yeah, yeah, exactly. But that’s, that’s, that’s how life operates. You see tip of the iceberg. The 90% of the of the work is below the, the, the performance. So in reality, it’s not 90, it’s like 99%, 1%. You go on ice, if you’re a figure skater for three, four minutes and you, you, you’re practicing countless, countless, countless hours.
Yeah. So anyway, let’s get to real estate. Back to real estate. So recording this mid-September. 24 well, let me ask you this question. So, how deals are doing? We invested into some deals with you. So, obviously, how are those deals are doing? What markets? How are your other deals are doing? And then the second question.
What do you see opportunities now? Everybody’s gearing up for great opportunities. The Fed, the Fed is about to cut. So we’re about to start a easing cycle. So from that perspective, we’ll see some, some tailwind, but everybody’s looking for great opportunities. How do you get them? When, what are you seeing? Give me kind of a lay of the land from your perspective.
Brent Ritchie: Yeah, no, absolutely. So right now, active in we’ve got some, some more development project opportunities in, in Florida, and then everything else is in Texas. We owned in Phoenix, and then managed some other properties in other states with some other partners.
But right now, you know, we’re kind of seeing, I think, Q4, right? We always have, have, hindsight is the best vantage we don’t have. Yeah. You know, so we can look back at that time and I think even give it a year later from today. So mid September 2025, I think we’ll look back at this time and saying, wow, you know, we were able to buy deals in Dallas at a 5. 7 cap on the T3 or a six cap or a five and a half cap. And so I think moving forward, we’ll see this really as a golden time, right? The unknown is what causes pause and it causes to put people on the sidelines. And you know, so I, I think overall overall bridge loans are still causing a problem, even if the fed cuts 25 dips, right.
0. 25 or 0. 5%. My, my wagers 0. 25 for this Wednesday. Then it’ll start to incrementally move the needle, but you also have the treasuries that are moving dramatically in our favor, right? Last year, we almost broached five and now you’re 3. 4, you know, this morning. So, so you’ve seen treasuries already move in the right direction which is largely influences.
Agency debt, Fannie Mae, Freddie Mac and then the Fed as they continue, you know, as they continue to start to cut and then move forward with future cuts, you know, I think it’s a trajectory that we’re all kind of anticipating. I think that’ll just further bolster the market and further make it more attractive.
Putting both agency or maybe even bridge debt. I think we’re still probably got another year horizon before British debt becomes more attractive. But as those things happen now, you, you know, that factor at least gets to speed up the market. And your biggest expense on any of this projects is debt.
And so as you really adjust that expense, that has a huge positive impact on our, our business. So
Mike Zlotnik: that’s the theory. What practical deals are you seeing? So everybody agrees to be with this point by now, while the rates are still high, right before the first start seizing completely agree with you that you can only see the past.
Basically, when we are bought or two quarters or a year from now, we’ll know what really was transpiring in the past. You can’t really see the present. In the present, it’s very hard. At least, directionally, we know, but it was at the bottom of the market. Or not yet. So all this is still unknown, although we are somewhere near, near that.
And, and, and the theory is correct, right? A year from now or two years from now, when the rates are meaningfully lower all the cap rates should be meaningfully lower for multiple reasons. All that is agreed. What specifically are you seeing? Are you seeing any interesting deals in Dallas? What opportunities?
I just want to see kind of like, You’re the real field warrior versus, I’m a little bit more of a theoretician, of course, we invest in deals with you and other folks, but at the same time usually you see deals as a result of what transpired a number of months in the past, you kind of work on all this stuff, I’m just curious, are you seeing Transcribed More motivated sellers because they’re getting squeezed by still higher for longer interest rates and they can’t wait any longer.
Or what are you seeing? I’m just, just, just how do you get these super good deals? Because if you could hold on longer, why would you want to sell now? That’s the whole theory. You only sell out of essentially some degree of desperation. Some kind of liquidity squeeze or, or other pressure that the bank is just not giving you time to wait.
Because if you wait, things are going to get better. So I’m just curious on the buy front, what are you seeing?
Brent Ritchie: Yeah, no, no. Great question. And I think it goes back to 2020, 2021, 2022. Majority of those deals at that time were bridge debt, right? Just agency wasn’t as attractive. And so in order to get leverage, you were almost five years.
Mike Zlotnik: All of them are squeezed, agreed, given that they’re squeezed and they’ve been squeezed for a while. So are you seeing those sellers basically kind of forced to sell because they can’t, they can’t carry that mortgage any longer?
Brent Ritchie: That’s that’s 100 percent net. And so those bridge notes, maybe they had a two year rate cap, maybe a three year interest rate cap. Those caps have came due they were incredibly cheap, and now they’ve went up 40, 50 times in price, right? And so a lot of those costs. The deal just can’t justify or satisfy the debt increases that they’re now experiencing. And so those deals, I think anything on the market that’s typically trading, you know, you’re going to get some bigger players that have been in the market 10 years and this is just the end of their cycle.
And so they bought so long ago that they’re selling and they still making money, but for everybody else, they don’t want to sell. And they are typically struggling, right? And some sometimes they can’t even with, and I laugh because, you know, I’ve been active in the market as well. And so it’s a, it’s a challenge that a lot of us have.
And so anything, if it’s fixed rate debt, you’re typically not as worried about it, but a lot of deals were bridged at. And so those deals that are bridged at your debts significantly higher. And so the deals just can’t even satisfy that debt. And so even what a big challenge of what we’re seeing on the market, and even as we’ve been kind of having lots of conversations with various brokers, various people looking at some off market opportunities.
Sometimes we’re not even able to pencil, we’re not even able to put an offer where their debt is. And so their debt is still above where we can even comfortably buy it. And so that’s where, you know, I think it’s really that, that bridge that’s risen. You know, the costs are still high. Some of these guys are just trying to sell to live another day.
And get through this time. And really those deals, some of them are starting to pencil for agency, but some of them are not. And so they can’t even switch to fix rate debt without having to put more money into the deal. And so we’re seeing a fair amount of that. I think that’s where some of these opportunities are going to come.
You know, we’re looking at data constantly and overall sales, transactional volume data is still very low for 2024. And so you’re not seeing a lot on the market. The only things you’re kind of seeing a little bit of deals seems to be more in that institutional space, you know, 40 to 80 million, maybe in that, that size.
You’re seeing some of those deals, but you’re not seeing a lot of the other deals. And I think a lot of these other deals are trading through the lenders. They’re trading through yeah, just some off market deals and trying to, trying to get some, some workouts for these various groups. And so yeah, until, until we get some significant rate cuts.
I think that sentiment is going to continue and it’s just going to be a function of how long are these lenders going to be willing to work things out with, with their, their borrowers. So, so that’s, I mean, that’s kind of what we’re seeing. We’re seeing cap rates. Houston is, is like you’re saying is falling out of favor a little bit more than Dallas
Mike Zlotnik: markets, different cities. So Houston beaten up, Phoenix beaten up, Austin beaten up parts of Florida beginning to, to get beaten up to for, for many, many factors, Florida is particularly beaten up because of heavy insurance costs, the numbers get really, it’s gotten very much, much harder. Bye. Dallas is holding up more or less, right?
Just curious, just go through kind of market by market listing and what you’ve seen, which markets are, are heavily beaten up and which ones are sort of holding up.
Brent Ritchie: Yeah. You know, thankfully and this is a deal that we, we we’re fortunate to partner with early on in, in Phoenix. So we enjoyed the rise of that market and then
Mike Zlotnik: we exited really good, right?
Brent Ritchie: We exited. Any, you know, those are what you want all your deals to look like. But that one, we kind of exited early 2022 or mid 2022 and we missed the peak.
Mike Zlotnik: You know, you’re not supposed to, you’re not supposed to tie the market, right? If you did good enough and you’re close enough to try to find the market, then you, you know, you can miss the market fast changed.
Brent Ritchie: So it is specially, especially those markets. It’s spike quick. And it dropped really quick. And so, and then you had this huge influx of class a supply coming online or a lot of new construction. And so that really, I think held that market down. And, and so you’re still seeing price falling. So Phoenix definitely taken.
Mike Zlotnik: Just curious Phoenix, how much of the peak, I don’t know. I know it’s a market broad number, but
Brent Ritchie: 30 40 percent.
Mike Zlotnik: Okay, that’s that’s more or less in line with what I was expecting. And that’s that’s probably not every asset, of course, but quite a bit of properties drop that much in price. And when you have that much in price and you bought in 21 or 22 and you Lost 30 to 40 percent You are you’re solid upside down the bank.
That is it’s significantly higher than the than the price I guess your opportunity to buy you have to do a purchase through a bank Approval or bank, you know sort of a short sale Maybe the banks are marketing these low these assets or they’re holding on to them. They may they might choose not to Dump the stuff on the market.
This is not going to be a dump the product. It’s more of a wait because everybody knows the rate is going to drop. So it’s either the bank who will wait or the the owner who will wait. Right? So it’s kind of one of these situations.
Brent Ritchie: Yeah. Yeah. So Phoenix, Houston, anything 1980s or older just fell out of favor in Houston.
Insurance kind of went through the roof. A lot of carriers are just either not carrying it or they’re, they’re just. Yeah. So expensive to make it. And so those deals you have seen just get decimated. And that’s a lot of the workforce housing.
Mike Zlotnik: A lot of decimated means also 30, 40%.
Brent Ritchie: Oh yeah. More, maybe more yeah, 30, 40%. So, I mean the flip side to that. Anybody buying in that market for those vintage assets. It’s out of favor. Nobody wants them. And so you get, you know, if you’re able to buy at those prices, it’s some very attractive pricing. However, it’s just, you got a lot of challenges in that, that workforce housing space.
And so that is something to think about. Dallas has, has fared really well and really strong. Certain workforce pockets.
Mike Zlotnik: More specifically on our aviation front as, as Dallas corrected to what degree that’s just, just your, your, your, your, your, your best guess. I know this is all the most difficult part.
It’s you don’t have a lot of data. You have limited data. Transaction volume is low. So a few things are transacting and then becomes, you know, relatively relative to a hypothetical sale at the peak versus now just how much do you think the Dallas has corrected?
Brent Ritchie: I would guess. 20 to 30%. Of course the brokers are gonna wanna tell you there’s not much correction or it’s been 10%.
But I think realistically, if you look at , even Dallas, 2022 to 30%. 20, 30%. Yep. Yeah. Okay. I would say so. And, and if you think of a lot of these deals when you buy them, you might put on, you know, let’s call it 60 to 70% debt, you know, 30, 40% leverage. And so just that loss. In the value, right, often wiped out a lot of the equity and you got to ride through this time out the other side, you know, and I think we’ll see those, those gains made up again.
But yeah, definitely, definitely has, has, has created some challenges. Orlando, you’re seeing a huge amount of inventory and volume come online. Concessions, crazy concessions. We were looking at some projects you were seeing two months, three months off. In some of these areas. Overbuilding, too much supply.
Too much supply. Ton of class A coming online and so. Definitely feeling the pinch and feeling the impact of that.
Mike Zlotnik: I believe It’s an opportunity for new money, right? If you’re a new buyer, it’s the opportunity One person’s distress or challenge is another person’s great opportunity. It’s as classic as it gets, but today that’s what it feels like, right?
Brent Ritchie: Yep, yep. And that’s it, you know? Because now you’re like, okay, the values went down 20, 30, 40 percent. Okay, so that’s a fantastic time to buy. It’s a great time to get in, right? At those assets at that pricing, because now, you know, a rebound back to even just what it was is a fantastic game for your for your money and then anything above that is is icing on the cake.
So, you know, and I think that’s historically if we look back at the curves, you look back at pricing. You know, often you don’t reset significantly down to previous corrections, right? You kind of go up, you get an adjustment down, and then you’re going back up higher, and then adjustment down, and then you’re going back up higher.
And so, you know, I think we see that moving forward. Of course, a lot of, a lot of wild, wild and crazy things happening, but I mean, we’re seeing that right now. We’re seeing, be able to kind of get in at a really attractive basis. It’s just, you know, making make sense and making sure that kind of everything’s still pencils.
And so we were fortunate to be able to buy an asset class, a asset in Houston in a Houston MSA and get in at a 6. 5 cap on a T three. Got it under contract and then close this April. And so, you know, to, to find those opportunities, you know, you, at that time I know it was. It was, there was a lot of unknown.
There was a lot of like, we don’t know what’s happening with the fed. We don’t know what’s happening with treasuries. And so that created a lot of,
Mike Zlotnik: you broke up for a second there. You said you, you, you purchased a property in Houston, a six and a half cap this, this April, and you got it on the contract when late last year.
Brent Ritchie: Yeah. Late last year, you four last year.
Mike Zlotnik: It’s a six and a half cap on the, as is trailing three. Okay.
Brent Ritchie: Yeah.
Mike Zlotnik: And are they probably still trading around the same, the same?
Brent Ritchie: No, no, no. And that’s the thing. So that’s where I really believe in kind of, we’ve been active pursuing putting offers sometimes winning offers, losing offers.
But we’ve seen, that’s where I really believe Q4 last year was really the bottom of the market. And it was the most uncertainty, the most unknown, the most people pencils down. And so those are the time where pricing drops because no one’s at the table to buy. And so if you’re at the table knocking and saying, Hey, I’ll take it.
That might be, you know, you might get fortunate to be able to buy at those, those pricing. And so
Mike Zlotnik: Wait a minute, let me just make sure I’m hearing you correctly. You said the bottom of the market was already formed. And we are already in the recovery phase. We just don’t know that yet. Is that what you’re saying?
Brent Ritchie: That’s, that’s what I believe. I know BlackRock, Goldman Sachs kind of indicated that as well. Kind of Q4 last year is where they, they believed the bottom of the market was. And so I believe I would agree with that sentiment. And even, even today, these deals, the same deal that we bought at 6. 5 cap.
You’re buying at five, five and a half, sometimes starting with a four handle. So we’re already seeing that, that sentimental shift. And
Mike Zlotnik: the market is fronting fed action. The market is fronting. Well, last let’s call it December last year for the long rates, the 10 year yield was around 5%, right? So 10 year treasury yield was at the highest and the yield has retreated.
And today’s trading at three, five. Four, sorry, three, six, three, three, six, four, right? Somewhere on there. It’s obviously fluctuating and this is, it’s retreated so much from the peak. That you effectively saying there’s already been a recovery because mortgage rates have fallen as a result of those changes in the 10 year treasury yields.
And then the fed, so all this fronted, the fed fed is just starting now that way, way behind the schedule, or maybe they’re on schedule and their own schedule, but the market is a way ahead is way ahead of the fed. And. You’re saying valuations have already started to improve. We just don’t know that yet because you look in the rear view mirror and it takes time to all this stuff to sink in. Is that what you’re saying?
Brent Ritchie: Yeah, yeah, exactly. And often you look at costar data, axiometrics. Those are three months, four months, five months, six months behind, right? By the time you get a property under contract to close, let’s call it three months. And then that stuff’s posted, right? Or maybe not even posted like Texas.
And so you’re looking at data that’s old. And so you’re really not kind of with what’s happening, trading in the, in the market. Like I would love to be able to, you know, Go and buy a six and a half cap in Dallas right now. But unless it’s in the hood, you’re , you’re not, you’re not gonna get it. You’re not or a really 1960s asset, you know, you’re not buying at those pricing anymore.
And so you’re already seeing more people interested, more put people putting offers more at the table. And so yeah, I believe we’re already in the recovery phase and I think as the feds cut, those will just get better and better. And I think even, you know, we’ll look back a year from now at September, 2024 and still say like, wow, that was a really great, great pricing on these assets.
And so let’s call it B value. So B assets. In somewhere in DFW in a solid, solid workforce housing area, you’re probably seeing those things trade around 5. 5 to 5. 75 cap rates. And then if it’s, if it’s a older asset or not a nice area, 6, 6. 5 plus and your A assets or something up to 5. 5, probably today in this, this market.
Mike Zlotnik: Yeah, I hear you. So well, 575, it’s all relative, right? All these numbers, all these cap rates, they’re all relative to what they used to be. Maybe at the peak they were in the 60s, now it sounds like they’re coming down to five and a half, 575 in Dallas, which is, you know, one of the Great growth markets.
And yeah, on a relative basis, these cap rates look attractive. You go back and look to what they were at the peak. But how, how, how fast we turn still will time will show the volume has been super low. And so we were in agreement. So what are you doing to take advantage of these opportunities?
That’s the bottom line. It’s kind of like. Okay, you don’t really know if it’s a market bottom or not, or maybe market bottom has been already established but the credit is super tight right now. Are you able to line up decent financing options? Are you able to get good bids in and what are you doing on the equity front?
Are people writing checks or they’re still ultra nervous and, and cause the, the ecosystem of investors who participate in many of these deals. Have the sour taste from the deals that they wrote checks into 21, 22. And some of those deals are going south of gun south. Right? So it’s kind of like for fresh money, it’d be great opportunity.
But how do you get investors who lost money to believe you now? Cause you know, two or three years ago, the story was the same. Things were great, but they were not great. They were terrible. Well, we didn’t know that, but it was a peak of the market. And today when you’re telling them, well, now things are great.
But can they believe the story? And not only can they believe the story, do they have the confidence to write another check?
Brent Ritchie: Yeah, no, that’s I think that’s the million dollar question, right? And it’s, you’re seeing that just challenge for finding equity I think has, has, has played out exactly like that.
You know, you do have, Some current investors that have been in the market for longer and they’ve seen kind of through the ups and the downs and the hits and the losses, right. That it’s still a fantastic play. And overall, I think, you know, anybody that’s been investing in trading, you know, so let’s call it 2015.
And later they’ve seen so many gains that their portfolios are still up, even with the losses. And so we have some investors like that.
Mike Zlotnik: I mean, you’re up heavily. The worst part is if they traded. If they traded, traded up, made profits, and they kept doubling down. That’s the problem. You just kept reinvesting into more and more leveraged deals trying to magnify the returns.
And if it’s the wrong timing, you could have heavy losses on the 21, 22 investments while you made good for many years in the past.
Brent Ritchie: Yeah, yeah. And so you see a little bit of that. I mean, for sure, without a doubt that is a challenge, right? And that is like, there’s some people that probably will never come back into space.
And even though they kind of maybe made some good gains early on, or maybe they started investing in 21, two, three, and, and a lot of those deals kind of struggling, or, Hey, you got to ride through, you know, you’re not going to see the end of the rainbow until, you know, you’re, you’re, you want to, you don’t want to sell right now in this market and you want to be able to hold on a little bit longer.
And so. I think you have a variety of investors, you know, kind of from, from different mentality in places, but you know, that is that is a challenge for sure. Without a doubt. And I think, you know, back I was just in university in 2007 and eight, nine and the great financial crisis, but I know liquidity kind of did the same thing, I believe, and it kind of dried up and, and a lot of equity kind of dried up.
And I know people went different places. Some people like Ken McElroy went to Canada started a fund and so able to get some equity kind of from that market down here to buy a bunch of assets. And so I think, you know, probably moving forward, looking at this time, great time to buy and great time to buy at some really attractive basis.
But yeah, how do you find that equity that’s, that’s willing to also kind of feels the same way about, about the market sentiment buying at a discount and being able to. See the rise.
Mike Zlotnik: Yes. How do you answer this question? So directionally, it looks like now maybe the right time or near the right time to write the first check.
So the big question becomes this. You go to try to get some institutional money or you go back to high net worth individuals. How do you go find? new investors who are not as don’t have recency bias. And you know, why, why you, that’s the question that I ask when, when, when you pitch anything to new investors why, why you, why not?
The next person or the next person because this seems to be a few years ago, there were so many people chasing these deals. Now there are few investors and still a lot of people are telling them exactly the same story. Well, now it’s a phenomenal opportunity. Well, why should I give you the money?
Why, why, why not another operator? So I’m just curious if you thought about these questions. Have you talked to investors? Kind of just how do you handle these, these questions?
Brent Ritchie: Yeah, no, that’s, that’s, those are, those are fantastic questions. You know, we’ve definitely had bumps and bruises along the way and, and you learn a lot, right?
Sometimes you win, sometimes you learn. And and so, you know, I think it’s a continual process of life. As you just. Oh, and understand risks and then how to de risk things more. Right. And how to make sure, you know, bridge loans, hindsight back 20 especially 2020 and 21 to bridge loans, although people were able to make money hand over fist, kind of in that previous up cycle with bridge loans, because you didn’t have these massive prepayment penalties.
Just that risk was so huge, right? And you don’t really understand that risk until you’ve been through it. And to know how to demitigate that risk. Or you just think, okay, that’s a risk factor, but you don’t really take it as seriously as, okay, now you’ve lived through it. And, and you personally had to put a lot more money back into projects to fund projects to make sure they kind of get through this turbulent time and out the other side.
And so. That’s, that is one big element for sure. As you’ve been investing longer, you understand more of the nuances associated with just how to de risk investments and, and how to make sure you’re, you’re protecting equity, you know, and then growing equity second. So that’s a big thing. You know, you, you learn a lot of courses, you manage own and operate, you know, more and more deals and kind of had been through through cycles.
And you know, I think it’s just knowing what you know now and knowing the stage in the market, it’s still a fantastic time to be able to buy, right, if you went through the great financial crisis and you had some bumps and bruises along the way. To know, you know, 10 years later, and to say, okay, this is happening again, and I saw what’s happened, I saw the trend, I saw, you know, kind of how to make good money for everybody.
Now you, you, you know, it’s like, that’s, that’s a much different vantage than just reading about it, or not really understanding kind of the, the challenges. As you go through a different, different down cycle in the market.
Mike Zlotnik: Well, you study the past, right? You study the past to learn valuable lessons and you try to adjust your investing.
Like you said, the book, sometimes you win, sometimes you learn. We all, I love the book. It’s a, it’s a, both it’s a concept and a book. There’s another book I start reading. The book is called What It Takes. By Steve Schwartzman, co founder of Blackstone. And, you know, it kind of comes back to you. One of the most important lessons they’ve implemented is never to lose money.
And if you go back and you think about this, if you implement that, that principle early enough, Into your investment decisions then if you were able to recognize peak of the market, then we, I wouldn’t have invested in 21 and 22, you wouldn’t have invested in 21 and 22, right? Things that have been very, very different.
But I have to say that some of these things become so obvious at some point in time. But. You know, hindsight, looking back the reverse is true. If you went to again, 2008, 2009, great financial crisis, things started to recover. They may not recover as fast as you ideally want. But again, you’re not trying to time the market.
That’s the whole idea today. This is not about timing, timing the market is directionally. You know, you’re close enough on the new deals. You’re getting these prices at a point where it almost is a shame not to buy. The only thing that’s limiting the buying decisions is obviously finding these deals on one side.
You’ve got to have enough of these motivated seller situations. And two, financing them and finding equity in debt. So that whole disbalance is, is a phenomenal opportunity, but, but taking advantage of it is not, it’s not easy for the, for all the reasons we discussed, but it’s pretty clear to me. You have the second person on the podcast who is sort of claiming that we already passed the bottom of the market.
We, we are on the recovery, we just don’t yet see it because it takes time to see the past. So it feels like anecdotally, you’re probably right. So we’ll see. We’ll, we shall see. It’s not just the identifying the market, but it’s also being able to get these deals done. And, and, and raising capital.
Brent Ritchie: Yeah.
Mike Zlotnik: So any other quick, quick thoughts, any other comments to the,
Brent Ritchie: I guess. So, you know, we’re, we’re active. We’re looking for deals. We’re lucky, you know, having a lot of these conversations with the brokers and some on market, some off market. Another big avenue that we’re kind of really looking at right now is, is how do we help existing owners?
You’re an existing owner and you’re struggling and you’re trying to figure out how am I going to get through this time? I got expiring rate caps, your debt costs are roof, and you just it’s not sustainable. And so we’ve been through this and and we want to help other people kind of avoid it. And so, you know, one of the avenues we’re looking at, too, is okay, helping people through the consultancy, right?
And helping people kind of get through this time and create or devise a plan or create some way for them to to live another day, right? And so that’s something that we’re actively looking and pursuing right now as well. And And I think that’s, you know, another, another kind of a branch as, as the market slow and as things are kind of put on hold or sellers don’t want to sell and so activity very low in the market.
And so that, you know, is, is something else that we’re looking to looking to do and, and you know, just really help help owners fight another day.
Mike Zlotnik: Yeah, I appreciate that. So that comment is already, so I don’t want to call it dear to our heart, but we’ve been doing this for sure. You know, call it recovery company capital. The other term was to be, to be used, rescue and recovery capital and consultancy. Yes, you could, you could certainly make money on consulting, but the bottom line is you need capital. These deals that still have sufficient let’s call it enough equity, call them equity, rich, cash, poor. I don’t know how rich they are, but sufficient equity where you can actually justify trying to help them.
But if you, if your deal is solid upside down, there’s not much you can do. In other words, if the debt, Is greater than than an equity, then how can you help these folks? Because you can’t raise additional capital. The bottom line, it becomes this, right? If the deal has enough cushion, you can come in with some additional capital.
Call it, we call it mass, mass debt. And you can step in and offer mass financing. And for new money, it’s a great opportunistic way to participate in these deals. With some real equity behind them, then yes, it’s an attractive opportunity. It can be an attractive opportunity. But if you’re coming in without money, I don’t know what you can do.
Most of these deals, ultimately, they need money. You can come in with, with, with tough terms as a mass lender, but without the capital, I don’t see the path to survive, unless you, somehow the bank will be ultra accommodating, and most of the banks are not. So, if you can’t pay the mortgage if you can’t keep things afloat, then you don’t get to fight another day.
So, I, I do concur that rescue and recovery capital makes a ton of sense today. Versus brand new acquisitions, because if you can’t get the brand new acquisition, you can deploy rescue recovery capital in the right deal, then you could, you could take advantage of the, of the, of the situation and it’s really intended to be opportunistic.
New checks, right? You’re coming in, your agenda is not charitable work. And I mean this with all due respect, right? You’re trying to help them, but at the same time you’re trying to make a buck. So for the new money, for the new investors, what are you doing? You’re not sitting there, hey, I’m just gonna do a terrible project and help existing investors.
That’s not the case, right? What you’re doing is, hey, is this project worth for me to put in some recovery capital and get a great return on that? And existing investors have to line up behind me. And if they get their money back one day, that’s good for them. But my primary agenda is to deploy fresh capital in this, in this environment, right?
I’m just kind of thinking this thing out, out loud. We’ve done quite a bit of it. And I’m just curious if you’re seeing anything else. Again, rescue and recovery capital, just recovery capital. But it has to be the right deal. If you put the money on the wrong deal, you don’t have enough margin of safety.
Then first you’re working to save the bank’s money, not, not generate return on your money, right? So you got to have enough safety in the deal. Otherwise the math doesn’t work, right?
Brent Ritchie: Yeah. Yeah. You’re seeing some lender workouts. There’s a couple of kind of some different programs out there to help you.
To help mitigate tax impact say in Texas it’s a couple like PFC and HFC structures. That you’re seeing some of those options being being more viable. And then yeah, just lender workouts Like you said is there is your lender willing to work with you? Or not and so that’s obviously kind of a individual lender basis and but there’s lots of creative options With the lenders in that space too, so
Mike Zlotnik: do you think you’re seeing that there may be an opportunity to work out these deals with an upside down a balance sheet where the first thing is always more money on the back end.
Brent Ritchie: You know, I think the sentiment kind of with with a lot of people is okay. The rate cuts starting to happen, you know, as the time this recording is going to be Wednesday rate cuts starting to happen and then kind of the market maybe starting to see a bit of a recovery or continued recovery moving forward.
And so I believe that sentiment to be true, whether your lender believes that to be true or not is a different story. And then is there something right? And I, I, you know, I seen, I’ve seen the stat not too long ago, but there’s, there has been a significant amount of lender workouts. Not all lenders, of course, are willing to, to do that.
But definitely some, some lenders interested in, interested in working out various scenarios with their, their sponsors,
Mike Zlotnik: my guess would be, and I haven’t seen enough of them, but the lender workouts are really only. likely taking place when the property value drops so much that the lender feels There’s no sense for them to take the asset because the asset is worth less than the loan.
So if the owner is still cooperating and still working the asset, maybe it’s better to do a workout with them. If there’s any, let’s just call safety for the lender, their motivation to work something out with you is minimal. So it’s on those deals where it’s so upside down they’d have to recognize a loss, which they don’t want to do probably.
So they may be flexible to do a workout because it’s already upside down. It’s kind of based on how much the property value corrected. What the condition of the property, et cetera, can, can make a difference how motivated the lender is.
Brent Ritchie: Yeah. Yeah. No, I think that’s it. I’ve heard that, I’ve heard that that’s gonna sentiment that some other peoples have expressed as well.
You know, basically, as long as operations are going fine, but maybe it’s a debt challenge, maybe it’s a sub-market challenge. But operationally this operator has done a good job in that specific space. It’s just, it’s not the right time in the market to sell and they believe, you know, 12, 24, 30, it’s going to be a much better time than maybe, like you’re saying, there’s, there’s some give and take there because they don’t want to recognize the loss on their, their specific debt funds. So,
Mike Zlotnik: yeah, that’s, that’s, that’s, that’s kind of what, what I’ve seen and I heard in situations where there’s enough equity, the banks just basically, they, they, they. They press, they actually press for more interest reserves. They, they press for mortgage balance pay down. They’re trying to protect themselves, but if they have margin of safety skill built in, they, they are not motivated to give you a break because.
They, you know, they, they feel that they’re in a good enough position, especially the market is already recovering. So Brent, I appreciate your wisdom. How would folks get ahold of you? What’s the best way to reach out?
Brent Ritchie: Yes. Awesome. Always a pleasure, Mike. Thanks for having me on. I’m honored, honored to be on the show. To reach me: brent@enritchinvestments.com. That’d be the best way to get a hold of me.
Mike Zlotnik: Thank you, Brent. Take care. Bye.
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