October 2023: Thanksgiving Update

Happy Thanksgiving!

I know what you're thinking. Isn't it a bit late for the October update? Yes, it is. But, instead of delivering this to your inbox at the beginning or even middle of the month, we opted to send it out just in time for Thanksgiving, because what would you rather talk about around the Thanksgiving table than this update?

LATEST NEWS

Just Closed - Cooper Bend - Hanahan, SC (Charleston MSA)

I know we announced this in last month's update, but since closing took place in October, we'd be remiss if we didn't mention it again.

We could not be more thrilled about this project. At only $91k / unit, it is one of the lowest basis sales we've seen in the Charleston MSA in years. Renovations are already underway, and numerous units have already been leased in the first six weeks of our ownership.

Special thank you to all of you who invested in this project.

In The Media

We made another round of appearances in the media. We were featured on the following podcasts and news articles in October:

• International Business Times
• The Real Estate Investing Club

WHAT WE ARE LOOKING FOR

Our focus is now almost entirely on distressed assets or loan assumptions, and there are clear tradeoffs for each asset type.

Seemingly the only way to buy a cash flowing property is to assume the existing loan. Even though cap rates have moved up, they haven't moved up as fast as interest rates. The strong cash flow is why we opted in invest in Summers Run.

On the other hand, we're actively pursuing distressed opportunities like Cooper Bend because they offer a great investment basis. Unfortunately, the acquisition loans for such properties are so expensive that they are all negatively levered, so cash flow is difficult to produce.

MARKET INSIGHTS

Inflation Update

The October inflation numbers are fairly good. They came in at 3.2%, a decline from September's 3.7%. The Fed decided not to raise rates at the last meeting, and the market now believes we won't see any more increases this year (knock on wood).

If the hikes really are done, the next big question is "when are they going to cut"? Over the last 40 years, I believe the longest pause between the last hike and the first cut has been 15 months, so it looks like the Fed is on the clock.

Is The Economy Strong or Not?

We seem to be living through a bit of a paradox. Consumer sentiment is terrible, a lot of people believe the economy is terrible, and yet unemployment is incredibly low, and we just saw GDP grow by 4.9% in Q3.

However, the GDP numbers look like fool's gold. Looking under the hood, a lot of the growth is based on inventories. Other negative signs include Americans' growing reluctance to quit their jobs, showing that when push comes to shove, people don't believe the job market is really that strong.

Though this may seem like a contradiction, I don't expect a recession to start until the Fed's first rate cut. As this graph shows, the Fed started cutting rates prior to the recessions of 1981, 1990, 2001, 2007, and 2020.

Of course, these are small sample sizes, and I don't have a crystal ball, so take it with a grain of salt.

Staying Opportunistic

The headlines remain largely bad. Investment is down 71%, lending is down, and new supply is flooding the market.

However, as we've said before, we believe now is a great time to buy for numerous reasons. Most recently, we've started to see that in order to transact in today's market, you have to be a "goldilocks buyer".

Essentially, you have to have completed enough acquisitions so that lenders will lend to you, investors will invest with you, and brokers will trust you to perform. However, you can't have floating rate debt hanging over your head, which has taken a lot of the most active buyers of the past few years out of the market.

We believe we fall right in this zone, which has allowed us to stay active throughout 2023.

Thank you,

Will Matheson

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