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Alright. Good morning, and welcome back to the
money advantage podcast. This is Rachel Marshall and
Bruce Wayne, and we have a repeat guest
with us today. Anna Kelly. We're so excited
to have you talk about real estate today.
Thank you for joining us on this conversation.
You're welcome. I'm so happy to be back
with both of you. Yes. It's been a
long time since you've been on this podcast,
and I really am excited to talk with
you today. I know you've done so much
in the real estate space with s dedication,
your coaching and helping other people to be
able to invest in real estate, and you
have a very keen pulse on exactly what's
going on in the market and the economy
and market cycles and you have a keen
ability to really just know what is needed
in the investing space. And so I think
it was just so valuable. We were having
a conversation earlier about what's going on and
how to respond to that, and we wanted
to have you just come and share
your
perspective, just a voice of reason and how
to navigate the real estate investing
world in today's economy. And so
just thank you so much for being with
us today.
Yeah. It's it's my pleasure. It's something I'm
really passionate about because
you know, just with with my background, I've
seen a lot of highs and lows, and
I've been through cycle changes. I'll be turning
50
this year. And so I've, you know, seen
the dot com crash, and I was pretty
young through the savings and loan crisis, but,
you know, obviously, lived through the G.
And was in the institutional investing world, as
well as real estate. And I learned that
you really do have to understand at least
at a high level what's happening in macroeconomic
economics and really what's happening in in the
economy as a whole, in order to be
able to make any wise investments. And I
think a lot of us,
you know, we may have an expertise in
a certain type of investment, You know, whether
it's in insurance policies, whether it's the stock
market whether it's real estate, They're all just
an option of investing,
but your
performance really does change if there are big
shifts, big secular shifts in
an economic cycle or a real estate cycle
that no matter how good you think you
are at what you do in your particular
niche, if you don't understand where the economy
is heading and the risk that are continuing
to rise, you can make some really poor
timed investment decisions that can completely wipe you
out if you're not very, very careful. And
And I learned that primarily through the G
and then, you know, a lot more learning
through
Covid and those things that nobody thought could
ever really happen.
So it's something I'm excited to share with
people.
That's awesome. I thank so much. God.
I think there's 2 things that, always always
always ent me about these kind of things.
It's the human condition.
That people
they get they get them into a bandwagon
and almost like a mob mentality, and it's
very easy to do with social media now.
And so when social media is telling you,
I'll look what I have to offer you.
What look, look what I have to offer
you. And if you're just sitting on cash,
That's the most ridiculous thing to do. You
gotta get your money moving.
And, you know, my response. Meaning that Bruce
some people say that. We just wanna be
clear that that's not our perspective. That's what
you're saying some people in social media say.
That's exactly right. And
And what I find it interesting about that
is, people
before the last, I would say,
12,
years before the last 2 years where interest
rates went up.
You can make mistakes with your evaluation because
your leverage was so low
that you can you could you can get
into a bad deal. And because your leverage
was so low, you could still
cash flow or maybe even just break. So
then that that was fine. But, you know,
I often say, you know, like a monkey
could have made money in the last... Those
last 12 years.
But now,
if if you don't have a a more
astute eye on the investment,
or if you don't have patience, you can
make some really, really poor decisions.
And the second thing that I wanted to
bring out is, there there should be proof
of concept on this
when Warren Buffett
and Berkshire hathaway is sitting on something like
357000000000
dollars of cash right now.
And so people often consider him the the
greatest investor of all time and yet he's
pulling back and sand. I'm sitting in a
cash position, and I'm gonna wake this out.
And I think, Adam, we've talked about this
before, you know, of the returns and some
of these s indications. These real estate. These
non traded reits, you know, have been really,
really good.
And people... They fall a false sense of
security and don't realize yeah. Maybe you made
25, 30 percent return on your investment all
it takes is 1 bad deal to wipe
out
5 great deals that you've made because you've
lost your capital in that situation. So
I I wanted to get your perspective because
I know, you know, you are a real
estate professional, which is different than a real
estate investor.
And the problem is real estate investors think
their real estate professionals, and they're and they
really aren't.
Yeah. Yeah. So so much good stuff there.
And III think in general, you know, I
I really think we
you know, we've done ourselves a disservice in
the last several years and especially, you know,
social media when
everybody just basically post their wins. Like, you
know, we're a rock star. We made this
return. We made that return. We do this
and that.
And everybody's just kind of listening to the
the people that are you know, actively actively
investing in trading and the people that they
see, especially in the real estate,
you know, space, and we have a lot
of conferences
teaching people how to do real estate. And
and I do believe that real estate is
is 1 of the most powerful investments on
the face of the earth to to create
wealth out of nothing and to be able
to continue to grow that wealth in and
sustain wealth, but what you invest in where
you invest in how your your strategy for
investing in real estate and where we are
in the economy
make a huge difference to people, and nobody
really had to think too much about that.
To your point over the last 12 years
or so,
anytime that you have an economic expansion, and
maybe we'll do just like a high level
overview of an economic level or real estate
cycle. Yeah. So... But before you go into
that, I'll kind of set us up. I
wanna hear a little bit about your ground
then, kinda where you see us right now
in the cycle and then really where
people should be thinking about being in real
estate today. So go ahead and finish where
you're at, but that's kind of the layout
that I was thinking for this conversation. Perfect.
Perfect. Yeah. So, I'll I'll do Do a
quick just very high level of my background.
So I did not start out investing in
real estate. I started out with no money.
I actually grew up in section 8 housing.
My parents didn't know anything about money.
I didn't know anybody that had money.
I got my college degree, and then I
got a job, offer with bank of America
in their private banking department. And basically, they
were gonna train us to be financial advisors.
We were financial relationship manager so we got
our 6 and our 63, so we could
talk to people about mutual funds and,
annuities and high level investments, and then we
were the relationship manager. So we we had
a team approach where we sat down with
our clients, We, and and we were assigned
the top 10 percent of the wealthiest clients
of Bank of America. And I was in
Texas, and I learned for the first time
about investments. I mean, of course, we hear
at a high level, you know,
investing your 04:01 k and dollar cost average.
And 1 day, you'll have a million dollars,
and, you know, you'll you'll be wealthy at
that point when you're 65.
That's about all I knew about finances.
But it was interesting. I learned about finances
through my training at Bank of America. And
we sit down with our wealthy clients and
we said, what do you have? Where do
you have it? What are your financial concerns?
And then we had a team approach. So
I would sit with my client, and we
would meet with the stock k. We would
meet with our insurance rep. We would meet
with our trust department to talk about wills
and estates. And so I started really learning
about wealth and how wealthy people thought and
where they put their money and what their
concerns were, but I realized I didn't have
any money of my own, and I wanted
to become wealthy,
But I realized something else. I had 1
of my clients
at me when I I told them we
could offer them a Cd, I think at
the time it was about 7 or 8
percent. And he said, honey, I make way
more than that in my real estate investments.
And I realized as I was seeing people's
financial pictures, a lot of wealthy people had
real estate. So I thought I need to
buy real estate. So I bought a condo
instead of throwing away money for rent, and
then I bought a house to speculate that
I thought was gonna go up and then
I flipped a house. And so I started
kinda dabbling a real estate on the side
because I really didn't have a whole lot
of cash to just put it in the
market. Well, during that time, at... Right after
I left Bank of America, I went to
work for Aig, then I was actually there
for 20 years. And we worked in a
life insurance division that did infinite banking policies
and private placement variable universal life and we
created products for the ultra, high net worth
individuals,
ultra, ultra high net worth. And so
Again, I saw started I was in this
world of understanding investments and understanding what people
do with their money. But I realized
I could only invest a per... Specific percentage
of my, you know, paycheck into my 04:01
k, and I didn't wanna wait till I
was 65 to have wealth. So I decided
to start investing small in real estate. And
especially when I had my first child,
I held him in my arms, and I
was like, I've got this great corporate career
I thought that's 1 what I wanted to
do and then I had a baby, and
I was like, all I wanna do is
be home with them. So
just quick story when I was on bed
rest with him, and he's turning 21 this
year. So this is how long ago this
was,
all the H hgtv shows started coming on
about flip this house. And I thought, wow.
I could flip 2 houses in a year
and replace my 6 figure income at Aig.
Let's try it. So I flipped a house
and we had a 3 month old baby.
And I lost a bunch of money, and
my husband said we're never doing that again.
So,
you know, fast forward, we thought well the
way to wealth faster is starting a business.
So we moved from Texas to Pennsylvania. We
started my husband's chiropractic business in 2007
at the height of the economy,
not knowing it was the height of the
economy.
Everybody telling us, it's just gonna keep booming.
You gotta go into debt to start a
business. You'll pay it all off. It's gonna
be amazing,
don't be afraid to do it, and we
started a business with almost 700000
dollars in business start up debt in 2007.
Now part of that was a building, We
bought a building that had his office, and
it had 3 apartments and 4 garages we
could rent out. So I knew it would
kinda cover the most of the mortgage payment.
But all this time, I was still working
for Aig.
And essentially, my husband's business did really well
in o 7,
and then oa 8 things seem to be
doing a little bit better and then suddenly.
I worked for Aig, and I saw on
the news that Aig was going under. That
Lay and brothers was going under that Bear
Stern was going under Washington Mutual, country white
mortgage. I mean, it was just this Domino.
And We relied on my income in order
to make ends meet while my husband was
starting his business. My 04:01 k was almost
decimated. It was about 2 thirds to 3
quarter of a value that was gone and
never coming back.
And it was at that moment that I
realized
That couldn't rely on necessarily a big company
to take care of me. Yeah, I couldn't
rely on a small business.
And my 04:01 k was basically gone and
not coming back. And the only thing that
was going well is I had a few
tenants at that point. We had, at that
0.3 buildings.
We house hack. We lived in a little
or unit apartment while we were building his
business
and had another 4 unit, and I thought,
I did whatever adviser tells you never to
do. I took money for my 04:01 k,
The the 50000 I had left. I borrowed
it. I didn't just withdraw it. I borrowed
it. And I bought another 4 unit. And
I realized that even in a deeper recession,
people needed the place to live, and they
were gonna pay rent. And I I found
that same week I was pregnant with baby
and number 3, and I thought, at least
if I lose my job at Aig, and
they told us we were gonna lose our
jobs most likely to start looking.
I could cover, you know, formula. And if
I needed it, if I could nurse and
I could I could handle, you know, diapers.
And so that was my Aha moment in
really early o 9
when everything really started to, you know, Domino
that real estate was the way that I
was going to to protect our family
until I got laid off from Aig. And
over the next 5, 6 years,
actually, it was 10 total,
I just started buying 4 unit apartment buildings
all over my area. And I slowly accumulated.
It took a decade because Not only did
we have to replace my income, but we
had to pay off all the debt for
my husband's business, pay his employees.
His business was suffering in health care
and it took a decade, but I was
able to replace my 6 figure income, create
a multi dollar network through, you know, small
apartment buildings. And then I actually retired. I
never got laid off because I had a
pretty complex job that was... And it was
in a division hard for Aig to sell
and I walked away and retired, it's been
5 years and 2 months today.
But in that time, since I retired, I
started s syndicated larger apartments. So I accumulated
a hundred units of multi family housing,
mostly in 4 unit build things in that
10 year period post G.
And then I've done about 300000000
dollars in apartment s authentication since then.
So that's kind of my background and how
I... How I learned really
in the G
that you can do all the right things.
You know, we did Dave Ramsey for years.
We lived below our means. We... I I
knew about investing
my division was the ones that did credit
default swaps, and I didn't understand them. But
I learned that
It doesn't matter how smart you are. Doesn't
matter how good your job is, how much
you know about investing, How much you know
in real estate? If you're not really paying
attention to the macro signs that things are
shifting,
you can make some really bad decisions about
debt. And go into it at the wrong
time, and you can make some really bad
decisions about the stock market and anything that
you invest in. And so
that was the moment after o 9 that
I said from now on, I will never
be blindsided about the economy, and I need
to understand and become a student at the
economy as much as I am a student
of
institutional investments in real estate. So I'll stop
a Air in case you've got questions for
me, and then we can keep boeing. Well,
I just wanna make a comment that... I
mean, it was very interesting the
timing
of your investing with what was happening in
the economy that you were learning alongside side
of the economy, but you were buying
in that span right when everything was crashing,
and then you were able to be able
to grow
wealth Yeah. After that time. And so what's
really interesting is you said, let me not
go into debt at the wrong time. Let
me buy it the right time. And maybe
you weren't necessarily deciding that it was the
right time to buy when you were purchasing
real estate, but it ended up working out
well for. Where would you say that you're
knowledge of the economic cycles was when you
were starting that that whole 2008 2009 time
frame.
It was very limited. I really do say
it's by the Grace god that it was
my only option left was to buy real
estate. That made me do it. You know?
I was just like,
I'm not putting more in the market because
I I had already lost so much, and
I didn't know where to invest.
And I I thought, well, I could buy
another 4 unit and it's in my backyard,
and it it'll make me a thousand dollars
a month. So it was just kind of
just kind of going, you know, really praying,
like,
what do we do now? Everything we've done
is for nothing. And I was really
down. I mean, probably the closest. I've ever
been to just being in a depression of
going,
wow. We're gonna lose everything and start over,
and we tried so hard to do it
right and yet know, the economy has has
really blindsided of us. So I didn't really
know a lot about, you know, now, I
know. And now, you know, talking about warren
buffett, he says be greedy when everyone's fearful
and be fearful when everyone's greedy. And what
that means is when you are at the
top of an economic cycle,
everybody wins. It looks like everybody's been winning,
and it looks like you can't lose. Whether
it's the meme stocks or whether it's, you
know, Crypto or whether it's real estate.
Everybody's in. There there's something that's called their
rational exuberance. You know, people are buying Bruce,
it's funny. You mentioned the among a monkey
can make money. People were paying millions of
dollars for N
pictures of monkeys.
And so when you start... You know, when
when my 14 year olds going mom. I
need to create N t's, and he started
creating N t's of monkeys and making money
at 14 on the Internet. I was like,
this is this is like the epitome of
irrational exuberance that people pay crazy money for
anything they think could be an investment. But
typically, what happens is you have these investment
cycles. And at a very high level, you
start out at a trough for a recession
where things have been really, really bad. And
the the government tends to really drastically cut
interest rates to stimulate the economy again and
try to get it being and encourage
investing in the future in the economy.
And then you usually have a recession 10
to 08:18 months long depending on how bad
it it is and how broad it is
and how deep it is.
And then you have a recovery period that
usually takes 2 to 3 years for the
economy just to start
sluggish starting to come back. People get over
their
their psyche and their mindset that it's doom
and gloom, and they start to invest again.
And then you have a period of expansion.
And and that varies, you know, it could
be a couple of years. We actually had
the longest expansion period in history since President,
Abraham Lincoln was in office, which is older
than I am. Right? Where, you know, pre
pandemic, we just had, you know, you know,
12:13
years of expansion
where everybody just saw an economy
that was booming. And the difference this time
is that the Fed kept rates really, really
low almost the entire time. And that creates
asset bubbles. It creates
equity you know, it create whether you're in
the market and almost anything. Everything just continues
to go up in value. Your rents go
up in value.
And so it's really hard to lose
when you have low interest rate debt and
an economy that it's, you know, lifting all
shifts. But eventually, you end up starting to
have things like inflation. Where suddenly, the economy
just can't handle the expansion it starts to
slow. And people think it's just gonna be
this suddenly. It's not. In 2009,
it seemed to me to be a suddenly
because I wasn't watching the signs.
But really there were people warning since at
least early 2006.
We are in an asset bubble. We are
in a a peak. Real estate going to
crash,
not even talking about the Fred default swaps
and mortgage backed security bets that, you know,
really brought the system down, but they were
just saying things are not, you know, gonna
continue. We're we're reaching a peak, but they
were always ignored. Everybody was saying it's different
this time. And that's what it... What's always
said at the peak when there's this fo.
And so everybody goes in,
everybody tells you. I mean, we had consultants
Rachel that told us the economy's is booming.
You'll have no problem. Don't be so afraid
of debt because we had no debt. We
did Dave Ramsey for 7 years. Other than
our house. And then we thought, well, the
going in business, it's different. Right? Because everybody
said it's different this time. So at the
peak is actually the worst time to go
all in or to take a lot of
debt
because you know that that cycle is gonna
correct. And when it does, it starts to
decline, so you have a a contraction
And eventually, if you don't have a soft
landing, you have a recession again. And so
the cycle continues recession, recovery expansion peak,
contraction recession. So
what happens is when everybody is in, and
then it seems to suddenly
crash and you have a recession. Usually, it...
I mean, it could take a year 2,
3 years to actually hit that bottom, and
people keep saying it's different this time. Gonna
be okay. We haven't hit the crash. So
don't worry. Just keep what you're doing, and
we're gonna keep having
appreciation, and we're gonna keep having rent growth,
and we're gonna keep having the stock market,
go crazy like it as the share, and
they don't understand that these cycles always end
eventually. And they make bad deaths. But when
you're at the bottom, and I didn't know
this before, but I know it now. At
the moment that there is
absolute
panic and
you know, everybody's afraid. That is the maximum
point of opportunity. So the maximum point of
of everybody's excited is your maximum point of
risk or when investing, and your maximum pain
in a recession is your maximum point of
opportunity.
Because all the investors leave, you have much
less
competition people are very afraid. They make stupid
decisions, and that creates opportunities for us, and
I I wanna really stress this to be
a good person when you're doing it. But
work out win wins to help people out
of a difficult
situation, but also then buy your assets while
nobody else is.
Also, when there's a bottom, the Fed typically
drastically cuts rates again. So when you're in
the recession, you have really cheap money
not enough people are taking it, then you've
got great opportunity to use leverage at that
point at low interest rates to buy stuff
cheap.
And then write it over the long term
through that recession through the recovery and through
an expansion before you decide to sell. And
really for me, it took a decade to
hit that peak again to be able to
really create massive wealth. But I'm excited
because I believe we're heading toward the same
kind of bottom
that's gonna create massive
opportunity.
I just think until we're officially there
you've gotta be really smart with what you're
doing and not just assume that that after
we have a recession, it's just gonna be
back to the way it was, you know,
3 years ago because it's it's not going
to be.
Yeah. Bruce Yeah. I believe that,
you know, it's I, I'm off in cynical,
but I'm off also optimistic. I I guess
like when Reagan's go Gerber off. You know,
we're gonna trust but verify.
You know, I don't believe... At least, I
don't
I hope maybe it's a better word that
we will never go back to the sustained
interest rates that were near 0. I mean,
if we haven't learned our lesson
at that time,
then I don't know if we're ever gonna
learn a lesson. So I do believe
you know, in the boom and bust cycle
that you're talking about,
interest rates will be cut again. I mean,
that... Because that's south the Fed re reacts.
Even though they were supposed to be the
lender of last resort, now they're the lender
to to prop up the stock market in
my opinion. Yes. Mh.
But
they will ratchet down, but they won't go
as far down as they did in the
past.
And so what that's going to do is
that's still going to cause some of these
people that have these loans that are turning
over
to still not necessarily get to the place
that they were when they had
the type of cash flow they need it
to make the deal work.
So then people that can come in at
what I would call more normalized rates.
With the amount of cash that they can
actually
make the cash flow work,
then they're gonna be in a tremendous
tremendously great opportunity. For listeners, if you wanna
if you wanna get more
information about these boom and bus off cycles
at on as talking about so eloquently.
You could go to the Mis Institute
website, and they will talk about that are
another great 1 is BFE
me,
dot org,
and they really spell out these boom and
bust cycles very, very well. So let's let's
talk about
what you believe,
the sector of real estate coming out of
the different sectors of real estate coming out
of these recessions
might be the first ones to get into,
you know, going forward. If you if you
have, if you thought about that in your
in your thought process.
Sure. Sure. Let me just say this.
You know, what I've learned over time, and
and I learned it, you know, big time
in 2009, but also in Covid, and and
I'm still learning, You know, as I watch
things because every cycle is a little different.
You know, we have these what, the these
long term trends are called secular trends. But
we've also got these short term little cycles
called secular cycle, cyclical cycles. And so
you know, when we talk about what's happening,
you know, are we gonna have a recession
tomorrow, That's a very short term, You know,
are we changing a a cycle.
That's very different than what do we think
is gonna happen long term And what are
the the macro
conditions that could change
the path that we go on as a
nation. And I think there's different views of
that. And I haven't always gotten that right.
What I've learned is that the more you
think it's gonna be the same and you
have it figured out. The more things happen
that could totally change
what you think is gonna happen. And so
you have to start getting to the point
where you do remain somewhat cynical on you
know, any promise...
We're never supposed to promise returns. But in
real estate and s and other private placements,
we at least see something like a preferred
return. So they're not guaranteed. But if we
can make the return, it's the closest thing
to a guarantee you have, You know, we're
gonna try to pay you a 7 percent
per year at least or an 8 percent
per your at least.
You've you've gotta be somewhat cynical about any
kind of projections you have in any real
estate knowing that anything can happen to the
economy to change that. And so you've gotta
be prepared
with what you believe your thesis to be
about the future but also be prepared if
it doesn't work out that way. And in
the... You know, we we tend to be...
We tend to kind of,
look for data that
confirms our bias to where things are gonna
go, when we listen to those people, and
then we drown everybody else out. And I
think that that's a mistake. And so, you
know, I'm I'm gonna tell you where I
kinda think are we're headed, but I will
say that something I've learned that really important
is to listen to the voices that are
older than us that have been through these
things before. And so I listened to a
lot of guys like, you know, I was
listening to Charlie Mu and
and warren buffett. I listened to economist like
Lacy Hunt. Who's been around a really long
time.
I listen to guys,
like Jeremy Grant, you know, big hedge fund
managers, Ray Dal and who have been around
the investing world for a long time. They
have been warning for 3, 4 years
be careful. We're in a big debt cycle.
Not only do we have the secular trends,
but we have a national government and world
governments that are taking on so much debt.
And that impacts interest rates, and it impacts
inflation and our continued
Our continued need for debt means that rates
need to stay lower for sovereign nations to
just pay their own obligations.
But also, if our rates stay lower too
longer, that creates asset bubbles and inflation. And
so we've got this big risk of sovereign
debt out there that is so high that
it requires low interest rates for them to
service it yet they we have more and
more risk of future inflation I believe than
what we've had in the past.
As we've had these wars that have popped
up over the last couple of years
and all the debt that we have,
now essentially, we have to keep keep spending.
We're funding wars. We're funding our our you
know, social security and Medicare that the government
can no longer even afford to fund. And
so we've got big risk that the government
has to keep spending money and keep going
into debt, which creates more inflation in the
future, which will create higher interest rates,
needed to bring down inflation, but yet the
nations need a lower interest rate to cover
their debt. And so I
I listen to them, and I listen to
their warnings, and I say, listen... I need
to prepare myself that, yes, on 1 hand,
I'm I'm getting prepared for a recession. I
believe we're in a recession and we can
go into some data why I believe we
are, even though it hasn't been declared. And
I believe it could be fairly mild, but
it could be very, very deep depending on
the fallout of commercial real estate that's impact
on the banking system, whether we enter some
type of banking crisis where or banks start
to fail.
All those things can play into what happens
in the future in terms of rates and
asset values. But I think personally, I think
we're gonna have a recession.
It's gonna take a couple years to recover
from it. And I think we're gonna have
kind of a flat decade where we're not
gonna have anything that really creates that big
boom and expansion
quickly like we had before. People think it's
gonna be Ai, and there might be some
of that. But I think that with all
the wars and everything going on, there's there's
clearly a move toward d
globalization for national security purposes,
as well as for energy independence.
And so as the United States, for example,
starts to say we need to bring back
more manufacturing here to boom the economy and
to stop these types of bottlenecks we experienced
with. Covid and then through the war with
Russia and and Ukraine.
We res reassure things that costs a lot
of money. And I think that that's gonna
create a lot of inflation again. So I'm
preparing for an immediate
recession,
and how I navigate that in the in
the real estate classes that I think are
good for that is balanced by my belief
that after that recession and recovery,
I think inflation is gonna rear its head
again and the fed's gonna have to keep
rates a little higher again. How low they
go and whether they go back to the
0 bound depends on how bad the recession
is. I think they could go back there,
especially if we have banks start to collapse
But I don't think they stay there as
long. I think they then start to see
inflation, and they say, we gotta come back
higher. So
I think we're gonna have a flat decade
for asset values.
And maybe,
more inflation over the time and and higher
interest rates in the future. And that high
level perspective
is what drives the the answers to your
questions about where I think real estate is
good.
What kind of places you should be investing
I might have a different answer for the
short term. In fact, I do than what
I think if you're an investor that's looking
for, you know, something to buy and and
hold for a decade.
Because short term investing, a lot of investors
wanna go and they wanna flip houses. Right?
They wanna do quick investments. They get in,
they get out.
It's very dangerous to flip properties when you're
coming from a contraction, hitting a recession and
gonna have a flat period or a decline
in values
and a slow recovery.
Same thing with s. You know, I made
a lot of money the last you know,
5 years before this last year really because
this last year has been really tough for
a commercial real estate, but it made sense
because we were in an expansion. So I
could rely on... I can buy an apartment
building. I can flip it in 2 to
3 years and I probably am gonna be
able to sell it for a whole lot
more in an economy that's just continuing to
expand. But when an economy contracting and may
bottom out,
your
interest rates
impact your values in commercial real estate,
because investors want to make more than whatever
the Us treasuries is paying, So if the
treasury rate goes up, then the cap rate
goes up. That means the value goes down
of any kind of asset that's interest rate
dependent. But if you have a recession, people
can't pay rent, vacancies go up,
you might still have higher costs.
And that could also put pressure on value.
So s
apartments that you're gonna flip or self storage
buildings or whatever.
Becomes really dangerous in the period that we're
in and going into a recession. If you
have the wherewithal and you think we're already
at the bottom, and you're gonna hold an
asset for 10 years,
then yes, it's a great time to go
in and start buying some really distressed commercial
real estate, but you have to understand it's
gonna be a bumpy ride. And it's gonna
take maybe 8 to 10 years to sell
it for a profit instead of the 2
to 3 years everybody gets used to. So
I know I just said a lot, but
I'll I'll pause there and and let you
ask me questions. Yeah. No. I. This is
really valuable because
Bruce, I may just for a second. I
think,
understanding what is happening in the economy is
1 thing, then there's all the interpretations. And
I guess, I mean, they're there is different
perspectives on where we are and projections for
the future, and I really appreciate that you're
saying
you're listening to people outside of your space
and your sphere. You're listening to people who've
been through things before, but you're listening to
different perspectives because it's allowing you to be
able to form your own judgment about this
and you're you're saying, well, this isn't the
answer. This is my my perspective on this,
but
I I also recognize that you're saying there's
a lot of risk in certain strategies
specifically
if you're planning to flip or you're in
a position where You know your costs are
gonna continue to go up. If you're not
able to keep rents going the same direction.
And if you have things like your interest
rate
that's driving what you're able to fund the
property for. You have all these costs going
up. You're in a position where you're not
being able to make enough on the property
to
I mean, I don't know if that would
be a bad strategy for even holding in
this position
in in where we currently are. So bruce,
I'd like to have your thoughts, but I
I really would like to come back to,
you said that you can speak to why
you think we're headed into a recession. So
that... And then also just the state of
commercial real estate and and where would be
the ideal strategy
for now and sure. And after the recession
bruce
wanted to hear you. No. Let's just stay
let's just stay with that thought process. That's
fine. Okay. Great. Yeah. You know, I think,
generally speaking,
if we talk about just just the current
economy.
I...
Again, I listen to a lot of economists
that have different views. And so
I I realized that none of us have
it figured out, and it's really hard to
determine timing. You can see
in these secular trends, they play out over
a long period of time. And because different
things spark different recessions, you don't necessarily know
how deep a recession might get,
meaning how bad it is. Right? Like, G
really bad. But how diffuse that is, which
means how broad it is across how many
sectors does it impact? Because that makes a
big difference as to how bad they are
and how big you about bounce off as
well. And then how bad and how broad
they are can make them last a much
longer time. But essentially,
this recession is behaving very differently than than
what some have in the past because it's
preceded by so much unprecedented money.
Helicopter money dumped into the economy as a
response to Covid.
So
not only did did households get checks, small
businesses got checked. Yeah. Big businesses got checked.
Checks. We had so much money dumped into
the financial system.
That I believe it's kept a recession from
happening sooner. I thought it would happen 2
years ago. I thought there is no way.
We're gonna have mass inflation, and then we're
gonna have a deep recession. But there is
something Lacy Hunt likes to call long and
variable lags. You know, it it varies how
long these legs are between peak and trough.
You start to see him come down. But
because we had so much money prop us
investment values. A lot of people are sitting
on a ton of equity,
or they've created a lot of cash flow
with their investments. And so what you see
is you see kind of this bi
economy, Rachel where you've got
66
percent of American households as of the end
of May. We're living check to check. And
that's even people making, you know, 250000
dollars a year. So people are listening to
inflation too. Right?
Exactly. Because the cost of living has gone
a ballpark 24 percent for the average American
in 2 and a half years. And so
when cost of living has gone up that
much. And those are things that are really
kind of locked in. You know, we talk
about inflation coming down. Doesn't mean prices are
ever going back to where they were. It
just means the rate of continued
inflation is lower than it was before. But
prices are still going up. So when you
have 66 percent of the population, literally living
check to check to check.
That gives you 34 percent of the population
that's doing fine. And so those
institutional investors, those family offices, those wealthier people
Yes, our costs have gone up, but we
can weather it. So you look at things
like vacations, You know, vacations, there was all
this revenge spending. There was a survey that
just came out Rachel. I just read it
a couple days ago, maybe a week and
a half ago, and it asked people, are
you living check to check yes or no.
Are you taking a vacation? Yes or no,
And are you putting it on credit yes
or no? And of, I mean, the vast
majority of people are still taking a vacation,
and they're putting it on credit.
So people are still spending
they're hoping,
it's different this time. My job's is gonna
be okay. I'm gonna put it on debt,
and then the fed's gonna cut rates and
things are gonna go back to normal. So
not only are they living check to check,
but they're increasing their debt. And now we're
starting to see big defaults in credit card
debt? In auto loans. Now that people are
having to repay their
student loans.
They're deb defaulting on student loans, we're starting
to actually see an uptick in foreclosure from
people who had their homes not have to
pay during Covid. They tacked it on the
back end. So we see a really stretched
consumer,
but we haven't technically been in recession because
there's just these little pockets that pop up
that have just enough growth that it keeps
Gdp just, you know, just high enough that
we're not technically
in the 2 quarters of negative Gdp
definition of recession.
However,
again, when 66 percent of your population is
stretched and can't stretch any further,
that does finally
impact the consumer where they stop spending. And
once they stop spending on most areas, you
know, most discretionary spending in the country, that
does,
cause pressure on employers. You start to see
layoffs,
you start to see cut pricing and you
start to see that inflation coming down. So
recession really is the cure for inflation.
Unfortunately.
But we're seeing all of that now, Rachel.
And so, yes, we're not technically in a
recession from the standpoint of 2 quarters of
negative Gdp.
But when you look at employment, you know,
people say employment so low. So I like
to to once a week, I'll hop on
Cnn
Msnbc and fix. I I don't get my
news from network news, but I'll just listen
to what they have to say, especially on
their financial stuff. And, you know, 1 channel's
gonna say, the economy booming,
unemployment is still at record lows. All these
people that say that it's not our doers,
and they just don't want Biden to win.
Right? And then they'll... The other channel will
say,
the consumer is stretched. We have up uptick
in,
you know, all of the new job creation,
and this is true is federal jobs.
And it's part time work. There are no
new net jobs created. And therefore the economy
is struggling. And then if you listen to
in, they say you just want Trump to
win. So, you know, it's it's always done
with a political spin, but I like to
look at the actual data. And what I'm
seeing in the data that's convinced me that
we are in a recession, And I believe
we have been since the end of last
year, at least the third the fourth quarter
is that when you look at real employment
numbers, and you look at the adjustments for
what was told the employment numbers are. You
will see
that there has been no net new jobs
in the private sector. So, in other words,
the number of people leaving and, you know,
going into unemployment
or moving to part time jobs
has exceeded the number of
actual jobs created by the private sector.
There's some stats that I I look at,
a lot, a lot of data and go
back and look at prior recessions, and there
are stats that show you that when more
than 20 percent of jobs created our federal
or health care. You almost always have an
immediate recession. Well, that was the case of,
for the last quarter of of 20 23.
The other thing about unemployment numbers is they're
often revised backwards. So we were told that
there was a job creation
up about,
600000,
I believe the number was for the last
quarter of 20 23.
But when you go back and look at
the revisions, we actually lost
780000
full time jobs. It was all part time
jobs. So we had a negative. We had
job losses for the last quarter. But they
know they don't really tout the revision. They
just tell you what it was. And so
when you look at that,
part of the reason there's this big disk
connect an employment number. So I'm I'm really
focusing yes on Gdp, but more so unemployment
because employment is really what drives continued Gdp,
and a loss of employment, unemployment is really
what what leads into a recession.
Employment is always.
Unemployment is always the lowest
just before a recession. But everybody always says
an unemployment low, so we can't have a
recession. Statistically, if you go back and look,
it hits its lowest, and then suddenly, it
starts to tick up. And there's 2 recession
rules that have been accurate. Hundred percent accuracy
just like
the inverted yield curve is a hundred percent
accurate predicting a recession. Right? And that's been
inverted for, I think 2 years now Bruce
still have to correct me on the data.
No No. Just I was gonna say about
2 years. Yes. Yeah. So, you know, it's
been a long time, but there's a there's
a rule called them a covey rule, and
there's a rule called the sa rule. And
the Mackenzie rule basically looks at any
month to month change for a 3 month
period.
That is a 0.3
percent change in unemployment. So when unemployment ticks
up 0.3 percent month over month for 3
months, it always
indicates a recession is immediately there. And then
the sum rule is 0.5
percent on a quarter over quarter basis.
As of the end of May, 21
states had hit sum rule. So 21 states
out a 50 are in
recession
according to the employment, the unemployment ticking up,
and there are, I think 36
states that when you look at their unemployment
numbers versus their employment numbers are technically in
recession already. From an unemployment standpoint. So when
you look at the fact that
more, you know, around half, give or take
of Us states,
have growing
unemployment.
The employment that is there is mostly part
time jobs and not full time. It is
a telltale sign that you are in recession.
It's just not gonna be declared
until that ticks into 2 negative quarters a
quarters of negative Gdp.
Where Gdp is down below the rate of
inflation essentially. So there's different measures for that.
But I see in these unemployment numbers and
the fact that 2 thirds of households are
living check to check that the only thing
really keeping the nation of afloat in terms
of positive Gdp is government spending
health spending,
and it has been
the way that the Us government calculates
rental income, the the value of of, the
cost of living, the cost of having a
home. It's it's owners equivalent rent.
That insure and insurance are basically the things
that are keeping Gdp high, some travel,
almost everything else is in negative territory.
The last thing I'll say here because there's
just so much data, and then I'll I'll
shift gears for you. But the last thing
is if you look at Ism
manufacturing reports. Generally,
we need manufacturing to continue to create production
in this country. And
manufacturing is in a manufacturing recession Again, it
was in 20 19 just before Covid, but
it's there. And
the the surveys on manufacturing companies are that
they are about to lay off significant numbers
of people because they just are not selling
what they need to. And so all those
things are recession and they make me believe
we really are in a recession. I just
don't think it's gonna be declared until 1
of 2 things happen. We get past November
and the elections done. Does the N and
the Fed don't wanna accused of of making
political decisions with their rates and with what
they do. And number 2, if you had
a major
number of banks start to fail
immediately or a huge impact
in mass layoffs between now and November I
think the N will declare it and they'll
go back to the fourth quarter to say
we've been in the recession that long.
So stating after the fact. But you're looking
in. It's always after the fact. Yeah. Exactly.
They they're always late. It's usually... I don't
remember the exact data because they're all different,
but it's close to a year
before they actually declare
that you started a recession close to a
year ago. And by then, you're usually
almost out of it. But it's not till
it's declared
that really
employ, you know, employer start mass layoffs. Once
it's declared, I mean, that's when employment really
starts to come down and unemployment really goes
up, and then you kinda see the depth
of the recession on the tail end of
the recession, not at the beginning because people
don't recognize it at the beginning.
And that's after that is when the Fed
really cuts rates. And by the way, when
the Fed cuts rates, it's kinda counterintuitive.
It says for the world and the company's
U, we really are now in a recession
And that's typically when you see stock market
values correct,
and you start to see people panic that
we're in a recession.
And and then it just kinda gets worse
until, you know, people get that confidence back
to start investing again.
Oh, this is so rich. Just
particularly because you're bringing so much data and
analysis of that data. I mean,
we're getting close to the end of our
time here. So I wanna make sure that
we're able to leave a little bit of
space for you to really just talk about
kind of coming back to Bruce's question
what do you see? And I know that...
This is a a big topic, and this
is stuff that you could probably talk for
hours on, but
coming from where we stand right now, what
are the risks that you're seeing in commercial
real estate? And what are you seeing as
the ideal place to be now and
Absolutely.
Absolutely. So I'll say at a high level.
I'll talk commercial, and then I'll talk residential
just because most investors were Rachel are residential.
Most are not playing in the commercial, you
know, syndicated space that I'm I'm playing in.
Commercial has much more risk right now than
than residential does. It just does. And it's
because
commercial loans unlike residential are not locked for
30 years. We don't get to set our
rate and, you know, we didn't get to
borrow it 3 or 4 and lock that
for 30. So what happens with commercial loans
is they're typically done for 2 years. Sometimes
just for multi family, there's Fannie Mae and
Freddie Mac Financing. So we can lock a
loan term up to 10 years for those.
If the property is stable when you buy
it, meaning it's 90 percent occupied. So you're
not buying those to do heavy value ads,
you're buying those to buy and hold. You
might do some value add increase the values
and then you wanna sell them after 10
years. But a lot of investors were using
those for multi family and then selling them
after 2 to 3 and taking a huge
prep payment penalty for locking in those rates.
And that's why a lot of investors wouldn't
use Fannie Mae.
Because they might have A23 million dollar prepaid
penalty to sell that property before the 10
year term. So instead, they did bridge debt.
Or they went to a small bank to
get their loans, and they typically lock your
rate and sometimes your term is only up
to... It's either 2 years or 5 years.
And you can lock your rate for 2
to 5 years. But after that, the rates
reset. And so you have a lot of
deals that were done in 20 21 and
20 22
with a 2 year bridge loan and maybe
2 1 year extensions. So through 20 25,
and even into part of 20 26,
you're gonna see a lot of operators who
got loans at literally 3 4 percent.
Now they're going to refinance those debt... Those
loans and they're 09:10
11 percent. So you you simply cannot make
the new payment work. You'll be upside down
in cash flow that makes you ins installment,
and you gotta hand over the keys. You're
done. You've lost all your equity. You've lost
all your work. You can't refinance a property
that is worth today than it was when
you bought it in most cases. So today,
because that treasury rate went from, literally, you
know, like 1 up to, you know, almost
to 5 at some point, your
treasury rate is considered the risk free rate
of return went up so high, that then
your
cap rate, the the
for for high level, the cash on cash
return you demand for owning that asset if
you paid cash has gone up above the
treasury. So now it should be 6 or
7 percent. But when you bought a property
at a 3 or 4 cap, and you
have to sell it or refinance it at
a 7 cap, it's taken about a 20
to 40 percent hidden in value.
So when you wanna go ref refill, it
doesn't matter that it's cash flowing, it doesn't
matter that it's doing good. Even if you
could get a lower rate next year if
the Fed cuts rates because of a recession,
your value and your cap rate your value
is lower. Your cap rate is higher. Most
people don't have the cash to cash in.
To keep their loan to value rate the
same as where it was when they bought
it, So they're losing properties.
So that's gonna create
big risk. The risk of buying today. The
good thing about buying today is if you
have the funds, You can raise money. You're
a family office. You have
tens of millions tens of dollars,
you can buy properties on pennies of the
dollar compared to where they were 2 years
ago. The risk is that you think that
they're gonna go back to a really low
cap rate rates are gonna go right back
to 0.
And if rates don't go right back to
0 and the cap rates stay higher, then
you have more inflation in the next couple
of years,
that cap rate will go right back up,
and you could actually have the same problem
that people are having today. So you've gotta
be really careful in commercial real estate. You
can buy on pennies in the dollar today.
But you've gotta have the wherewithal that you
have a low loan to value loan
you have the wherewithal to handle
the cap rate tomorrow being higher than it
is today. And you know you have the
experience to get that net operating income up
high enough that if your income high, even
if your cap rate goes up, which would
bring values down, that increased income will bring
values back up to kinda balance it. So
you've gotta be in it for the long
term hold if you're buying today,
not buying thinking you're gonna turn it in
3 years and and make money the same
way you did during the height of the
economy. So that's the biggest thing with commercial.
The other thing is you've gotta know your
market. So the good thing is
most commercial about properties go up in value
in really big cities.
Because they're traded by big funds that want
stable economies,
stable local economies with lots of employers, lots
of employees,
so that even if there's a recession, their
Gdp is gonna bounce stock faster than the
nation. So you wanna invest in those big
cities that are good employers.
But at the same time, that's where a
lot of commercial real estate was built over
the last couple of years. So there's massive
overs supply in some of these markets.
Because they thought people would keep coming like
they did from Covid, so that's gonna impact
value. So commercial real estate right now. It's
for those that are greedy, when others are
fearful.
And they've gotta have a really good game
plan with, you know, option A, b and
C for their exit. When it comes to
residential rachel,
most people are buying, you know, less than
10 units over their lifetime. So if you
can buy a small multi family property from
a small multi family operator who's distressed
because of their loan as well. You might
be able to buy a small property for
close to replacement value.
And if you're in an area that has
low
supply and high demand for housing, that is
really the key because all economics comes down
to supply and demand. And so if you
can buy a house, a duplex. A house
isn't gonna cash flow a ton. It's a
long term hold. But if you can buy
a single family,
ideally, a duplex triple or quad, you can
lock in sometimes 30 year fixed financing. So
when we have a recession and rates fall,
because there's they're cut to stimulate.
That's the time to go pick up some,
you know, duplex, triple squads, get 30 year
fixed mortgage on those things at your low
low rate,
cash flow, and then hold those things for
10 years.
20 years, sell them at the top or
create true passive income, but do it in
areas that are under supplied with a lot
of jobs, a lot of job diversity where
you're gonna continue to have that good tenant
pool and ideally in conservative states that are
landlord friendly and low tax. And that's where
you're gonna make the most money if you
go in and buy now, and especially when
we have a recession, and then you hold
them for the long term. Don't try to
value add or flip properties in the next
2 to 3 years in my opinion unless
you you have a a business and you
really know what you're doing and you can
also wholesale or retail them.
Bruce, I feel like we've covered so much
ground. Is there anything that you want to
comment on before we kind of wrap up
and and direct to anna a for anything
that people wanna follow.
No. I think
I think that all the follow ups it
would take us another hour for me to
do. So
the 1 thing I maybe real quickly and
I know this maybe not... It's not a
very fair
question
to give you a minute or 2 to
talk about, But do you do you have
a real rule you have a rule thumb?
In this in this environment for loan to
value,
how you should use leverage is at 50
percent is 60 percent is a 65.
I know it depends on
what the asset is and what area it's
in and so and support, but is there
something that you use that the listeners could,
you know, learn from? I think I think
at a very high level. It's a really
important question. So at a really high level
I believe that you should buy properties that
that cash flow. So, you know, I I
say first and foremost, why do people buy
properties? At any time during your life, you
have 1 of 3 primary financial goals. It's
either you need more income, you want equity
and growth and appreciation for the future or
you're an at preservation mode. And the answer
to the question is gonna depend on what
mode you're in in your phase of life,
and how much liquidity you have to weather
these economic conditions. But generally speaking,
people say, I wanna buy real estate because
I want income. So
you're not gonna be able to cash flow
today at today's prices and today's rates on
most
properties
unless they're in war zones because they look
really good on paper. They look like cash
flow. You wanna buy properties in strong areas
what I call class A or b properties,
Class A or b market.
Ideally 30 or 40 years or less in
areas with really strong Gdp and growth. If
you're in those kind of markets,
right now, we're in a negative leverage
situation, meaning the the more I put down
the better my cash on cash return is,
when rates are low and they're below about
6, the less I put down the better
my cash amount of cash return is. So
you wanna make sure that your cash on
cash return is better than what you could
get in a 5 year treasury rate. And
you've got either pay less for the property,
or put more down and lower your Lt
in order to get that cash on cash
return at least equal to the Us treasury
rate plus.
And then you have your equity that's paid
down with your mortgage payment and you have
some appreciation over time that give you a
better return. But, essentially, I look at if
you need it to cash flow, you gotta
put down as much as you need for
it to cash flow and hit that Us
treasury rate, and that's gonna be different for
everybody at different times in the market.
Yeah. And, obviously, the higher the interest rates
the more you'd have to put down necessarily
to get to that cash on cash return.
Absolutely.
Yeah. Okay.
Anna, This is ben I I'm good. Yeah.
Okay. Anna, this has been a fabulous conversation,
And I think for anyone who's listening and
who is trying to assess the market conditions
and trying to make good decisions whether they're
starting in real estate or whether they're continuing
a real estate investment
strategy,
this is a really important conversation to listen
to. How can people find you to be
able to lock into what you're doing, Learn
from you, grow from you. I know you've
a blog. You speak on podcasts on you're
doing a lot of work in this space
and how can people find and follow you?
Great. So on social media, I'm anna a
Kelly Rei mom, you can find me on
Youtube and, and, Facebook. But if you're interested
in coaching or consulting, you know, looking at
your portfolio looking at real estate and what
might be good options for you depending on
where you are
in your investing cycle, you know, what your
financial goals are. And and how much money
you have to invest. I do 1 on
1 consulting,
hourly consulting as well, and then I do
have a coaching program if you wanna get
deeper and walk through an entire, you know,
plan and then start to execute that strategy
together. So you can find me at anna
kelly investing dot com. It's ANNAKELLEY,
investing dot com, and there's a a link
to set up an appointment with me if
you'd like help reviewing your port... Your real
estate portfolio.
That's awesome. Thank you so much, Anna for
being with us today. I feel like that
time just went by so fast. Normally, we're
doing 3 minute episodes right now, and we
are at,
64 minutes today. And so thank you so
much for just sharing your wealth of wisdom,
your experience that has led you to the
success that you have right now. And so
for anyone who is wanting to make great
decisions in real estate, I highly encourage you
to check in with anna, learn from her
and be able to just lean on that
was done that she's built. So I Thank
you so much for your time today, and
best to you. Thank you to our listeners
for hanging into this conversation.
Thank you.
Awesome. Well, with that, please remember success leaves
clues. So model the successful fee, not the
crowd. And build a life in business you
love. We'll see you next time.
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