[00:01 – 07:05] Opening Segment
- We Anthony Vicino and Dan Kreuger introduce themselves
- Starting off with bad investing advice
- Tertiary markets and their volatility
[07:06 – 23:54] 5 Compelling Reasons to Invest in Multifamily
- Anthony and Dan go over each reason
- Reason #1 Positive Cash Flow
- Reason #2 Forced and Organic Appreciation
- Reason #3 Tax Benefits
- Reason #4 Control
- Reason #5 Stability
[23:55 – 27:16] Closing Segment
- Establishing the last thoughts on the core reasons
- Final thoughts
- Dan’s book recommendations:
Tweetable Quotes:
“Because something has a low price in dollars does not mean that it is undervalued or a good deal.” – Dan Kreuger
“if there is no competition, when you’re going in to buy the thing, there’s going to be no competition when you go to sell the thing.” – Anthony Vicino
“Like once you start getting an income stream from an investment, it is really hard to go and invest in something that doesn’t have an income stream.” – Dan Kreuger
“it’s a nice feeling to know that, yeah, I’m working. But, you know, if I got fired tomorrow is does not matter because I’ve got all this other income to support me.” – Dan Kreuger
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5 reasons to invest in multifamily made simple
Anthony Vicino: [00:00:15] Hello and welcome back to Multifamily Investing Made Simple, this is the podcast where we take the complexity out of real estate investments and start taking action. Today, I’m your host, Anthony Masino of Invictus Capital, joined as always by Dan. I’m the only other guy in the room. Kruger, I don’t. Dan,
Dan Kreuger: [00:00:31] How do you keep coming up with these middle names for me?
Anthony Vicino: [00:00:34] Every week you will notice that some of them are a very stream of conscious week. But yeah, you don’t know where they’re going because I don’t know either. So that’s kind of my stick.
Dan Kreuger: [00:00:46] You all right, though? I’m the only other guy in the room and we don’t have a guest today.
Anthony Vicino: [00:00:50] No more gas subsided. If you listen to the last week’s episode where it was just Dan and me during the State of Invictus Union year, you realize we’re talking with guests. We don’t care about them anymore. We just want to sit in a room and talk about real estate together and like, forget the people. No, I’m just kidding. We’re going to camp. We’re going to have some more guests coming back on. We just wanted to talk about one of the things we specifically talk about, five of the reasons that we love multifamily investing in this episode. We actually shot this and recorded the same episode almost a year ago to the day. And that’s kind of the year anniversary of this podcast. So it’s always apropos to come back and revisit this conversation because this might be the first time you’re ever hearing about us. You might be the first time you ever heard about multifamily investing. And we want you to be very clear on what the five compelling reasons to invest in multifamily are.
Dan Kreuger: [00:01:44] And I think we’ve got a lot better at this since we’ve improved.
Anthony Vicino: [00:01:47] Guys, if you listen to those first podcasts, we were great. You know, I’m not going to sell a short we were fantastic, but we could have been better by a lot. And now we’re there where so
Dan Kreuger: [00:02:00] We have arrived.
Anthony Vicino: [00:02:02] This is we have transcended numbers and we haven’t we’re still learning. We’re still growing by a lot. So but let’s get into it before we do. You know, what we got to do first made the bad investing advice of the week. And last week, Dan and I had a competition and we both came with bad investing advice this week. Neither of us is coming with advice. Unless you have something
Dan Kreuger: [00:02:25] I use up on my MLS, we come up with something.
Anthony Vicino: [00:02:29] Ok, what do you got here? I got one I just came up with one, it is very expensive to invest in large metro areas. Thus you should go out into the boondocks, out into the sticks, out into the tertiary markets where your money will go further. Instead of buying a duplex in Minneapolis for like four hundred thousand dollars, you should go buy one in some town nobody’s ever heard of for twenty thousand dollars.
Dan Kreuger: [00:02:57] How can you go wrong?
Anthony Vicino: [00:02:58] Oh, that’s my bad investing advice. Now, you might hear that and think what? That actually sounds like a good idea. Why wouldn’t I do that? A twenty thousand dollar duplex sounds great. Dan, why was that may be problematic?
Dan Kreuger: [00:03:10] I’m guessing the reason is twenty thousand dollars because no one wants it.
Anthony Vicino: [00:03:15] Ding, ding, ding. I mean,
Dan Kreuger: [00:03:16] That kind of poses an issue when you go to try to sell or revive or do something. Um, I think yeah, I think the concept you’re getting out here is. How should I phrase this, the difference between something being priced below its intrinsic value and something that is cheap, cheap,
Anthony Vicino: [00:03:40] Just not being worth much just
Dan Kreuger: [00:03:42] Because something has a low price in dollars does not mean that it is undervalued or a good deal. That duplex in wherever could very well be overpriced at twenty thousand dollars. And that duplex in Minneapolis at four hundred honestly sounds a little bit underpriced if we’re looking at Northeast or something.
Anthony Vicino: [00:03:58] So yeah. And this, this comes up frequently. I was just in bigger pockets having a conversation with a new young investor and he was asking this very question. That’s why I came to the top of my mind because in and some investor’s minds, the lack of competition is a good thing. They’re like, oh, I can go buy this house out in the boondocks for this amount of money because nobody, like, there’s no competition and they get turned off by how competitive the hot markets are like. And that’s true. There’s going to be less competition. But if you think about it on the long horizon, if there is no competition, when you’re going in to buy the thing, there’s going to be no competition when you go to sell the thing. And so you’re going to have a hard time selling it. Most likely you might have a very hard time renting it. And generally speaking, these assets way out in the boondocks. Yes, I don’t want to write them all off and say, like there’s unless you’re in a big metro like you’re wasting your time. That’s not what I’m saying. It’s what I’m trying to get at is that just by moving to a non-competitive market and trying to buy the cheapest thing, that is not necessarily a good deal. Just because you could go buy that, maybe you only have ten thousand dollars. Just because that’s what your money can buy, it doesn’t mean you should go spend it.
Dan Kreuger: [00:05:10] Yeah, yeah, I think it’s important to note as well that, uh. I completely forgot what I was gonna say. That’s OK. I was there was through anyway. Oh, you know, start looking back. It’s important to note that those tertiary markets, those markets that are kind of on the outskirts of things, are the markets that typically get hit the hardest when times are rough. Just so you know, typically it’s not true for everything. But generally speaking, those markets are a little bit farther out, the tertiary ones. A little bit more volatile to the downside when times get rocky, and also it’s worth noting that if you do have the thesis that the lack of competition in an area is a short term thing and that there’s going to be a rebound in the future, that might be a compelling thesis to go out to the boonies. If you respect the fact that is a speculative investment and your thesis might be wrong.
Anthony Vicino: [00:06:12] So, yeah, as we talk about multifamily investing, when we’re looking at a market, two of the key factors to look at is population growth and job growth. If you have the insider information that Amazon’s about to put in a huge facility into this town and bring 20 thousand jobs to a town that only has two thousand people, if you have that knowledge, OK, boom, like your you can ride the Amazon wave and probably do pretty well. But that’s because there’s solid fundamental economics behind that. The population is going to grow. There’s going to be a supply-demand equation that’s in your favor. But short of that, if you’re just going there and you’re thinking, I’m sure this will grow, it will be great, but you don’t have any reason to suspect more jobs are coming in or people are going to find it more desirable for any reason, then you’re just speculating and that’s questionable. All right. So that’s our best investing advice. Let’s get to the five compelling reasons to invest in multifamily starting from the top number one.
Dan Kreuger: [00:07:06] Cash flow, cash flows, money, money,
Anthony Vicino: [00:07:09] Money, money, money. Oh, no, that’s a Donald Trump song thing. It’s not. It’s from The Apprentice. I’m sure it’s also
Dan Kreuger: [00:07:17] Not Donald Trump’s sons. Who is that?
Anthony Vicino: [00:07:22] No, I don’t know. I just know it was the theme song to The Apprentice.
Dan Kreuger: [00:07:26] Well, just pretend like you’re saying Pink Floyd Money.
Anthony Vicino: [00:07:29] I was. Yeah.
Dan Kreuger: [00:07:30] I don’t know if that’s what you mean.
Anthony Vicino: [00:07:32] I don’t know. I don’t know music, but cash flow. The number one reason that I love multifamily assets is the cash flow, assuming that is cash flow positive. The reason every month this these properties, if you’ve bought but bought correctly, got bought by bought. Right.
Dan Kreuger: [00:07:51] I mean that’s hard to say.
Anthony Vicino: [00:07:52] If you bought correctly, then these assets are cash flowing every month, which means they’re producing more income than they are in expenses, which means there’s profit, which means cash flow goes back into your pocket. And that is a beautiful thing.
Dan Kreuger: [00:08:09] Yeah. You get a paycheck. I think that’s one of the things that a lot of people don’t realize is the feature of investing in real estate. When people look at potentially investing in real estate, I think a lot of people think about maybe doing a flip, buying something that’s kind of junky fixed and up, and then selling it for more. That’s an appreciation play, albeit for depreciation or the use of the stock market where they put money in and hope that they sell their portfolio at a later date for a higher value. And maybe there’s a little dividend or something that’s minuscule. But really buying a cash-flowing asset is not something that a lot of people have on the radar. And once you get started with that, it’s really hard to get away from it. If you watch Shark Tank, Kevin O’Leary, all he cares about is dividends, cash flow. Like once you start getting an income stream from an investment, it is really hard to go and invest in something that doesn’t have an income stream.
Anthony Vicino: [00:09:07] Mm-hmm. Yeah, cash flow is the lifeblood of a healthy business. If you want to. If you’re an entrepreneur, you’re just thinking about starting your own business, really get it into your head just how important cash flow is. And from an investment perspective, a lot of people just have been indoctrinated, like into investing in the stock market through their 401k or whatever, like they might invest in a dividend stock and get some kickbacks. But it’s not the thing most people have been programmed to think about. But it’s powerful because, for each asset, you pick up each multifamily asset. And this applies whether you’re an active investor or you’re a passive investor. If each asset is generating cash flow, then each month or each quarter as you’re getting that cash flow, that’s a supplemental income stream and you stack enough of those together and suddenly your passive income stream is starting to look awfully similar to your income stream from your W-2. And at a certain point, it might even exceed that, at which point now you don’t really technically need to work anymore. Now you have this income stream coming from somewhere else. So it’s a great diversification. If you ever get fired from your W-2, it’s nice to have these other income streams coming in that you could pay your bills with. And that’s one of the that’s probably the biggest reason I love cash flow.
Dan Kreuger: [00:10:19] Yeah, I think that’s huge. Even if you don’t have the intent to leave your W-2 or your main income source because maybe you actually do like it. We’re not one of those gurus that you find on the Internet that just trash talk a job 24/7 like we get it. There’s a lot of people that actually enjoy what they’re doing and they don’t want to quit. And so if that’s you, that doesn’t mean that this isn’t something you should be looking at because you always want to try to hedge off risk any way that you can. And even though you love what you’re doing, you never know what’s going to happen. If you have one job, all that needs to happen is one person needs to fire you or one company needs to go out of business. You know, if you start stacking up deals, those are all little individual jobs. And so at a certain point, if you’ve got ten, fifteen deals each paying you, you know, a thousand bucks a month, there needs to be something that goes wrong in ten or fifteen different things as opposed to just one income stream. So you’ve got this nice hedge against all sorts of unforeseen black swan events. So maybe you lose your job or maybe you get injured and you can’t work anymore. Or maybe there’s, you know, a problem at one of the properties. Like you have all these different income streams. You’re very much diversified. And it’s a lot it’s a nice feeling to know that, yeah, I’m working. But, you know, if I got fired about as matter because I’ve got all this other income to support me,
Anthony Vicino: [00:11:38] This is the very top of the mind for me right now because I’m one of the other businesses that I participate in. We had an incident where a guy he can’t work for the next couple of months. I don’t know when he is going to be able to come back. It’s not due to him getting hurt on the job or anything like just things have happened in his life. It’s unclear if he can come back and. If you only have that one income stream, if it’s only from that W-2 job, now, suddenly your your your income’s just dried up overnight and that is a horrifyingly risky, stressful, anxiety-inducing place to be. And so even if you love your job, great. Still diversified. Start working on getting alternative income streams going because you just never know what’s going to happen. You can’t predict that tomorrow you’re not going to step into the street and get hit by a bus and be laid up for three months. So that’s cash flow. I love it. You love it. Everybody loves it. Number two, on the list of compelling reasons to invest in multifamily, is appreciation. And you kind of touched on two aspects of it. There’s the forced depreciation and organic depreciation. So let’s break those down in more depth. Just to be very clear about the distinction, because it’s a very important distinction.
Dan Kreuger: [00:12:50] Yes, so let’s start with organic appreciation. If you buy your house you live in and you notice over the next couple of years that the surrounding houses that are comparable to yours start to sell for higher prices because there’s more demand probably due to the fact that there’s a strong job market in your area, in other things that are drawing people in. If there are more people that want to move in then want to move out. Prices will start to come up. And that’s an organic appreciation that this could also just be a product of the Fed’s monetary and fiscal policy, interest rates being low. I mean, the cost to borrow is low, which means people are able to pay higher prices for houses. The Fed is printing money. There are more dollars out looking for somewhere to go and people are more comfortable paying more for things. So organic appreciation is going to be driven by these things. The market improving. Let’s just say that the local market improving, meaning there’s more demand, the macro macroeconomic environment being conducive to higher values, the Fed printing money, all of these things cause organic appreciation in property and or market.
Anthony Vicino: [00:14:01] Yeah, and specifically, when we talk about forced depreciation in multifamily, it’s probably the number one reason why we invest in multifamily. It’s because we have the ability to go in for appreciation, which affects our downstream valuation. And by doing that, having that that control is very empowering. But it also makes it so that it’s less speculative. We we know fairly accurately project fairly accurately what the value of our building is going to be worth if we go in and put in new floors in the kitchen and new appliances and we increase rents by 50 dollars a month, that’s forced depreciation. And it’s incredibly powerful.
Dan Kreuger: [00:14:46] Yeah, I think the really important thing for people to note here is that you don’t have the ability to do that on smaller properties, houses, condos, duplex, triplex, or even quad. You might see people executing this business model, dumping money into a property to improve it so that it’s worth more. But. The valuation technique that’s used on those properties is based on cops, so you don’t necessarily know that you’re going to get paid for those improvements on those smaller assets, anything under five units. You’re hoping that you do, but you don’t know when you get above five units, it’s very black and white. If your income goes up to X, your value will be Y, and so the guesswork is taken out of it. And so Anthony’s point, that’s really the most exciting part. And it takes a lot of risk to the equation because if you happen to execute a value add business model on a duplex at the wrong point in a market cycle, and that duplex actually gets appraised for lower value after you dumped 50 grand into it, that stinks. You won’t see that kind of thing happen on a multifamily property, a large amount of property.
Anthony Vicino: [00:16:06] Yeah, so that’s reason number two, so so far we got cash flow, we have appreciation. Those two, when combined together, create a really powerful duo. It’s hard to go wrong if your cash flows positive and if you’re forcing appreciation like your investment is probably going to work out. But when we add in this third reason, which is the tax benefits, then things kind of start getting absurdly good. So let’s talk about the tax benefits, what they are and why we’re incentivized to buy real estate because at the end of the day, that’s what tax benefits are. It’s the government’s way of saying, hey, we want to incentivize that behavior, which is investing in real estate.
Dan Kreuger: [00:16:47] Yeah, that’s what it comes down to. I think a lot of people don’t really get that that that logic behind the tax code, the tax code is designed to incentivize certain behaviors. And so what happens is if the government wants people to do something, they will create a tax incentive. There are really there are two main things that the government really loves, and that’s oil and real estate. There’s a lot of things that have incentives attached to them. But these are kind of the two big ones where if you’re in one of those two industries, you’re going to get a get-out-of-jail-free card when it comes tax season. And so what the government does in the real estate space is they use this concept called depreciation, and they treat it like a phantom expense when it comes time to pay your taxes. So it’s very interesting, even while you are buying a property and it’s appreciating in value, going up in value at the exact same time, it is going down in value and depreciating, but only when you go and file your taxes on paper. And it’s a really amazing concept and it’s really one of the biggest bonuses to this type of investment for a lot of individuals who are in a high tax bracket. And that tax bill is something that they cringe about every year. It’s fantastic. So without going into too much detail. What typically happens on a property is the value of the buildings divided up over twenty-seven and a half years, and every year you get to take one twenty seventh and a half of that building value and deducted from whatever money you made on the property. And you only pay tax on what’s leftover in commercial properties above five units. You can take out a lot of that depreciation expense and crammed it into the first part of the whole period so that that negative number gets bigger and bigger and bigger and your tax liability gets smaller and smaller and smaller or even all the way down to zero.
Anthony Vicino: [00:18:44] Yeah, it’s let’s not get too into the weeds on this one.
Dan Kreuger: [00:18:48] Just 30 minutes.
Anthony Vicino: [00:18:51] We already went kind of into the weeds, but that’s a good place to be because, at the end of the day, it is not uncommon. Let’s use the deals that we closed in twenty 20. As an example, we just issued ones to our investors. And despite receiving cash flow distributions throughout the year, our passive investors will show a net loss from their cash ones. So despite making money, they’re going to show that they lost money. And that’s in a very, very simplified nutshell, the crazy benefits of being an investor in real estate. And so let’s move on to reason number four.
Dan Kreuger: [00:19:28] Just to clarify for people, I don’t just because it might to really connect the dots. If somebody shows a loss on their statement for investment, for a period, that means any of those distributions they got are not going to be taxed. I just want to make sure that those dots are connected for people, a loss is actually a good thing because there’s no tax paid on that on those distribution checks that went out to there in their mailbox.
Anthony Vicino: [00:19:52] We want to be losers in this game. And depending on what your primary profession is or your spouse, if your spouse is a real estate professional, there are ways that those losses can be attributed to. Your earned income at your other W-2, and so that’s where things start getting really crazy. Real quickly, where you can start limiting your taxable liability on your W-2 job through owning real estate. So let’s get out of the weeds. Let’s get out of the muck real quick, because we got kind of far into there, but it’s a good place to be. Let’s talk about reason number four to invest in multifamily. It’s the control aspect. And this has never been more poignantly realized than in twenty when overnight the stock market just went off of a cliff or then GameStop happened and like just went through the roof, like all this stuff, you had no control over it. You were just a hapless bystander riding the roller coaster that is the stock market. It’s not the case with multifamily assets as the world went into lockdown and had this eviction moratorium. Yes. That made it harder to play the game. But we were still in control of the assets and how they were operating. We could pivot, make adjustments, we can adapt, and overcome. And that’s exactly what happened in Strew. Twenty-Twenty. Our portfolio performed as expected because we had that control aspect. And so it’s really hard to overstate that one. But for control freaks like us, it’s massive.
Dan Kreuger: [00:21:26] Yeah, I think it really comes down to the valuation, really. It’s if you are investing in the stock market or even if you’re in an arete, which is effectively a real estate investment, albeit a poor one, we’ll get to that in a future episode. But even if you owned REITs, they were going up and down, up and down, up and down, just like the S&P and the Nasdaq. So the benefit to real estate at the benefit. But one of the best parts about it is you can go to bed at night knowing that the value of your portfolio isn’t going to be jumping up and down. It’s kind of just a slow, steady grind up and to the right. And if you’ve bought property correctly, if you didn’t have too much leverage, and if you’ve got adequate cash reserves, which we always do, and we recommend everyone else does, then when things like this happen and there’s a hiccup. If you want to call it a hiccup, call it
Anthony Vicino: [00:22:21] A big hiccup.
Dan Kreuger: [00:22:22] Yeah, a violent hiccup. If there’s some sort of issue like that, you’ve got your reserves to tap into if some people are late paying the rent and things like that. So, you know, if you do these deals properly, they are nice, slow, steady wealth machines, unlike the volatility of the stock market, which can pop up and down when someone sends out a tweet, that really means nothing in the grand scheme of things. Hmm.
Anthony Vicino: [00:22:48] Which you’ve actually already addressed. It is reason number five, to invest in multifamily is the stability and which you just touched on was one aspect of the stability. There’s another aspect I want to talk about, but you nailed it on the head. The fact that the valuations don’t fluctuate massively, it’s like an oil tanker. That thing takes a long time to turn around. Right? Like it’s not a fighter jet pilot were and that’s really what the stock market is because it’s so liquid and it’s so easy to get in and get out of it. We can cause these massive fluctuations overnight. You can’t really do that in real estate. It’s a hard, real asset and it’s valued based on fundamentals that don’t shift quickly. And so that’s great. But the other aspect is stability is let’s talk about if you own a duplex or a triplex like that was my very first property. If one tenant moves out now you’re thirty-three percent vacant, right. You only have sixty-six percent occupancy rocket anymore. As you go up into larger and larger assets, you have this inherent stability because if you have a hundred units and five people move out while you’re still ninety-five percent occupied and you’re probably still cash flowing and you’re doing just fine.
Anthony Vicino: [00:23:55] So there’s inherent stability through scale. And then the other aspect of it, which is the most important to me, is that multifamily family is an asset that everybody needs. Everybody needs a place to sleep at night. And so it’s this asset that’s always on the correct side of the supply-demand curve. There is a limited amount of supply because for whatever reason, during 2011, 12, 13, 14, 15, 16, we weren’t building enough. And now we have a huge shortage of housing. And so to go in and actually build comparable housing in the Class B and Class C space, it’s very, very expensive and prohibitive. And so there’s this cap on supply, but there’s this ever-rising demand as more and more baby boomers and millennials decide, I don’t want to own a house, I want to rent. I want to have that flexibility and freedom to move around as I please.
Dan Kreuger: [00:24:46] Yeah. And I guess kind of double down on that concept and really speak to the asset class that we invested in, which is the C plus B minus asset class. We still have those supply constraints and the added bonus to those C plus B minus asset classes is that the cost to build is so high it’s impossible to build something unless it’s like a government-subsidized type of project. It’s impossible to build a new product that can provide an apartment at the rental rates that we’re charging for our types of assets, meaning we don’t have to worry about new supply coming online, negatively impacting the demand for our assets. So we have this fixed limited supply, which is a fantastic thing when you have increasing demand because basic economics says that if demand is going up and supply is fixed, that those prices need to keep coming up to find equilibrium. So that sets us up very nicely, specifically in the B minus C plus asset class space.
Anthony Vicino: [00:25:47] Absolutely. And so those are the five reasons for investing in multifamily, the five reasons that we love, at least we have cash flow, appreciation, control, tax benefits, stability. Yeah, there are countless more, but those are the five core ones. Honestly, it’s hard to go wrong with an asset that hits all five of those. So that’s going to do it. I think we need to do a book review. We need to throw out a book right now, book
Dan Kreuger: [00:26:13] Rayco,
Anthony Vicino: [00:26:14] A recommendation out, a review that we don’t review books. But what’s your you’ve got to book recommendations for this week. Sure. Hit me with it. Oh, you ready? I’m ready right now, you’re stalling, I can tell. OK, well, here it comes.
Dan Kreuger: [00:26:30] You know the most important thing, Howard Marks. There you go. Like I mentioned in last week’s episode, I kept hearing that name pop up. So I want to get both of his books did the most important thing first and then mastering the market cycle next. But they’re both fantastic. They’re both just kind of macro view, really high level, really absorbable content, even for somebody who’s not all that well versed in economics or investing. But the fundamental concepts they talk about there are timeless. And even though he’s mostly speaking about the stock market, those types of investments, the philosophy, the logic is applicable to anything that you might want to be invested in.
Anthony Vicino: [00:27:16] Mm-hmm. I will support that one million thousand percent. It is that good. So that’s going to do it for us guys here at Multifamily Investing made simple. We appreciate you to look forward to seeing you guys next week. And I have no clever, witty thing to sign us up. That’s it. Go home now. And.
