Finding Opportunities in an Uncertain Real Estate Market

Host: Today I'm joined by Ali and Colm to talk about the forces reshaping the economy, where capital is flowing, why certain real estate sectors may be positioned to benefit more than others, and how investors can prepare for the next wave of opportunity. Ali and Colm, welcome to The Real Wealth Show.

Ali: Thank you so much for having us, Kathy.

Colm: Thank you. Glad to be here, Kathy.

Host: It's so great. We've got two of you, so I'm going to start with Ali. Tell me a little bit about your background in real estate.

Ali: Sure. I've been blessed to be in this business since at least the 1800s.

Host: You look great.

Ali: Thank you. By that, I mean I'm eighth generation in commercial real estate, literally going back to India to the bartering days. There's been this transfer of wealth and knowledge in different ways over the decades, or over the centuries. I'm second generation in our asset class, which I'm really excited to talk about today: manufactured housing, also known as mobile home parks. That's a little bit about me.

Colm: And really, we just want to help people today. Personally, I'm an LP in about 18 investments and a GP in about 15 investments. We're located in Northern California, and we're trying to build a well-informed and prudent investor base in Northern California, specifically the Bay Area. That's one of the things we'll talk about later today.

Host: The Bay Area is its own little world. You just can't compare it to anything else. I was born and raised there, and just a couple of years ago you could get stuff on sale. I interviewed somebody from San Francisco who said it was like 2012 pricing, and boy, has that turned around. What is the temperature right now in the San Francisco Bay Area, economically and in real estate?

Ali: I think it's on fire in many ways still, because of the AI impact. Like you said, it's an anomaly, very different from the rest of the country. You might have some micro markets that drop or are a little volatile here and there for whatever reason. Overall, I'm really big on California, as crazy as that sounds to most people.

Host: You time it right, you make money.

Ali: I've seen this over the decades. Generally speaking, if you're looking at long-term cycles, it's always going up.

Host: Over time it goes up, but when it goes down, it goes down hard.

Ali: Like I said, if you time it well and buy not at the peak, but at the beginning of a new cycle, that's when multimillionaires are made.

Colm: Building on that note, we focus primarily on the California market for investing. Kathy, I know you have a couple of pretty big projects in Truckee and Danville that you're wrapping up.

Host: We're just launching the Truckee one and wrapping up the Danville one. We still like parts of California for investing. Not buy-and-hold so much, but there's lots of opportunity. What were you going to say, Colm?

Colm: The key thing is there's a lot of wiggle room. If you execute properly, the upside can be a lot more. A lot of people are concerned about fine margins in real estate projects, and doing it in a market like California allows for a greater upside. While most investors are scared of rent control and the bureaucracy of California municipalities, if you're connected and have great relationships in those markets, it can actually be a big plus, because you have a lot fewer people competing there.

Host: Interesting. What kinds of deals are you looking at? My niece is a real estate agent for people looking for homes, and a couple of years ago it was more of a buyer's market. It is a hot seller's market today, and all strategies have to change. That's in residential, where people are making ridiculous over-asking offers, but you're not necessarily focused on residential. What are you looking at?

Ali: We're focused specifically on mobile home parks and manufactured housing communities. That's where we live. I've been blessed with 45 years of operating experience in the business, so we're capitalizing on that experience and that Rolodex. I don't love the term “buy box,” but if I had to use it, we're typically 100 pads plus, two to three star on a one-to-five scale, with one being the least appealing in terms of curb appeal and five being the golf course–type community. So we'd be in the two-to-three-star range, 100-plus units, in secondary markets. In California, examples would be Bakersfield, Fresno, maybe even still Sacramento, although that's growing fast. Markets like that, where we have value-add opportunities.

Host: So you're buying existing, or are you creating new?

Ali: Absolutely. In our asset class, Kathy, you rarely see development.

Host: I was wondering why there's not more of that.

Ali: It's really cost prohibitive. There's so much red tape, especially in California, but even elsewhere. You are starting to see some of it in Texas and in Florida.

Host: It seems like that would be a solution to affordable housing. Why isn't there more?

Ali: That's a great question and a good point. A lot of these communities still sit half full. They're not absorbed, and until they're fully absorbed, you won't see as much development. They're not sitting half full due to a lack of demand for affordable housing, as we all know.

Host: There's a huge demand.

Ali: But there are barriers that prevent residents, potential lot tenants, from actually moving in.

Ali: Barriers like the upfront cost of transporting the home in, setting it up and installing it. Those costs aren't typically financed with the home for the resident, and they're the major reason a lot of these communities sit idle. Our vertically integrated business model solves that problem. We are the dealer, we're even the retail financing arm where it's permitted, we're the asset management and property management, and then we own the real estate. That inverted funnel allows us to go from 50% occupancy all the way up to 95%, dare I say 100%, because the demand has always been there. We just solve all these other problems.

Host: I've always been fascinated by that.

Host: Colm, you network with a lot of commercial investors who are doing other things. What other asset classes are hot right now, specifically in Northern California?

Colm: I'd speak more on a national basis. There was a flurry of individuals really interested in real estate at one point. If you go back to 2020, there were 80,000 wholesalers. Now there are only 30,000. We can wholesale manufactured housing communities, but what I'm really trying to say is that there was a flurry of investment in private equity, especially on the retail side, and a lot into multifamily. I consider multifamily the gateway investing drug. You have your first single family and think you know how to property manage, so you think you understand multifamily, and it's actually much more complicated than you think. What we've seen, especially in the inflationary environment we're in, is people moving toward more cash-producing assets. You have to ask yourself: what goes first? If money's tight, people are still going to try to pay their rent. They're probably still going to keep their self storage, because maybe they have to downsize. Think about these need-based assets. That's where money is probably going. I think there's a lot more interest now in affordable housing solutions on the retail side, and in senior housing within our networking community.

Colm: I bought my first single family in 2013, so I've been a landlord since then, and commercial since 2018. I'm still relatively new, but to be frank, the senior housing investment space has gotten really sexy. There's been a lot of chatter about it since maybe 2022 or 2023, with this transfer of wealth from the boomers who are aging out. Peak boomer was 2022 in terms of population, but there's still going to be $80 trillion of wealth transfer. At our meetups in the Bay, I didn't hear about senior housing before COVID. Now every month there are three or four people talking about it.

Host: A lot of institutional investors knew 10 or 20 years ago that this wave of baby boomers was going to be aging. They built big senior housing, and they were too early, because boomers are living longer and they're healthier. There's biohacking and all these things. That silver tsunami didn't happen, and they overbuilt. Now it's happening. It's here, and I think we're going to see more and more of it. Also, after COVID, a lot of people decided they didn't want to put their parents in a big building. They want them in a smaller house where they're not as exposed. So that's a huge opportunity.

Ali: I couldn't agree more.

Host: San Francisco is its own animal. It comes out fast and furious, and then there might be overinvestment. Do either of you have concerns that this AI boom is going to turn out like the dot-com boom of the early 2000s, where we saw a big boom, then a bust, then slow growth back to another boom?

Ali: Absolutely. I think it begs a bigger question about what's happening overall in macroeconomics, and how that leads into AI and technology. We're seeing so many shifts globally, and I'm sure everyone listening has concerns like I do. At its core, I think it comes down to hegemony: the US remaining the hegemon. I'm not trying to go down a political conversation at all.

Host: It's hard not to.

Ali: Right. I'm looking at the math, and specifically at how it affects our business as commercial real estate investors, and particularly our asset class. When the top goal is control, making sure the global reserve currency remains the dollar, or at least stays in our control even if it's a digital currency, that creates an even stronger drive for this digital race. It includes not just currency, but passports, surveillance, essentially control by governments. That's why I think it's not just a huge push by the technology industry. It's supported by leading nations and governments around the world. There's a new race, a new frontier, a new real estate, so to speak, that everybody's pushing for, because they want control. We want to maintain hegemony, and maybe other powers want that hegemony too.

Ali: There are other factors creating several crises around the world, and I'll get to the point quickly. Take the bond market crisis. Our interest rates for commercial real estate are based on the Fed, and the Fed is based on what happens with bonds. It used to be that any concern with bond yields was isolated to the US, or to a single nation at a time. Today we're seeing many nations go through a crisis simultaneously, and that alone has a huge impact we don't think about day to day. Another one is the Japanese yen carry trade. The yen had always been where people globally could borrow at 0%, invest that money in our bonds here in the States and get a 5% return without doing anything. That worked globally for a few decades, and it's now going away, because Japanese bonds are paying a higher yield, so there's less and less reason to bring that money here. I'll bring up a couple more, if you don't mind. Wars and sanctions: the sanctions against Russia in 2022, I think, were the catalyst for nations around the world to start asking whether they really want their investments in other countries' currencies and bonds, and whether they should look elsewhere. And the last of the most important ones are the demographic shifts you talked about earlier. There's an author, Harry Dent—

Host: He's an economist, actually. I've had him on the show a few times.

Ali: Oh, you have? I think he's done a wonderful job. He's made some great predictions in the past and some that didn't work out, but he does a great job analyzing the aging of the baby boomers, and people should check that out. My point is that all of these things combined lead to major uncertainty. When there's uncertainty in the market, you see what we've seen three or four times since the Great Depression: a capital rotation event, the other CRE we should be talking about. Remember Tom and Jerry, where the mouse runs into a room and a whole crowd of cats follows? Maybe that's not the best analogy, but you see this herd reaction. Because of this volatility and uncertainty, there's a massive shift, not just by consumers but by governments, away from currency like the dollar and away from bonds, toward gold around the world. When you see that massive shift, people want to go to hard assets. That includes gold, which the major nations are buying, but also commercial real estate. Then, within real estate, you look at what's essential, because those are the investments that stick. We saw the last capital rotation event during the dot-com bust. We saw it in the seventies during the original Iran crisis. We saw it through the Great Depression. Every time there's this kind of uncertainty, people go to hard assets, and within hard assets, they go to essentials. That's why we're so big on mobile home parks. Since 1981, we've seen this asset class stay resilient through all these waves, uncertainties and down cycles, because it's an essential. Thank you for letting me get all that out.

Host: I appreciate that.

Colm: To build on that, we want to encourage our listeners and everyone we speak with to be disciplined and well positioned for growth. A couple of actionable takeaways: within an asset type, hunt for fragmentation. Look for areas that haven't been completely institutionalized. That doesn't have to be an entire asset type. It could be hyper-local, a single market, or a size within an asset type that hasn't been institutionalized. We also recommend having your buy box set as a passive investor, so you can say no quickly and yes with conviction. That's really important, so you can save time as you look through all these investments.

Host: That's such good advice.

Colm: I always tell people to first build out your war chest. That means X months of runway for paying all your bills. I have a friend whose war chest number is $215,000. I have another friend whose number is $40,000. It's unique to each person. Once you have your war chest, you start looking for opportunities with permission to invest. You've given yourself permission because you have your number, and anything above that number, hopefully held in a short-term CD or some sort of P note investment. Come to these local meetups. There are a lot of people there helping others build selection criteria spreadsheets. One thing that has come up more recently is looking at a partitioned IRR. Kathy, I'm sure you know what that is. It's where you look at what percentage of the IRR comes from the cash flow and what percentage comes from the exit, because the exit is all a projection based on assumptions. We've been looking a lot at partitioned IRRs with our investments.

Host: With all this uncertainty and change, name some of these opportunities. You gave a broader view, but what would be an area or asset class that hasn't been institutionalized yet?

Ali: I'm very biased toward our asset class of mobile home parks. In the last 10 or 15 years, some institutions and private equity have come in, but the opportunity, in my opinion, is still abundant. There's still plenty of opportunity for small and mid-sized players. There are something like 500,000 communities with over 5 million units, or pads, across the country. Many of these communities, like I said, sit half full, and they're in secondary and tertiary markets where the larger players wouldn't necessarily want to play.

Ali: Kathy, I also want to go back to the 800-pound gorilla we didn't cover earlier when I was talking about the economics, because it impacts exactly what we're discussing: the real possibility of hyperinflation. I don't mean to preach doom and gloom, but I think there's at least a 10 to 15% chance we're going to see it. Kevin Warsh has come in and feels essentially trapped by the stagflation environment we have, and they're going to come up with a new way to rate our inflation rate, the criteria used to judge it. I think that push is going to create even more opportunity for commercial real estate investors who are savvy and looking ahead to this timing. It's probably one of the greatest opportunities in history to get ready and invest, precisely because of these challenges. While they're really difficult for all of us as consumers and investors, this is the time.

Host: Well, I hope you're wrong about that hyperinflation.

Ali: I hope so too.

Host: All you have to do is look back. As you get older, you realize it's already been hyperinflated. My father bought a house in Atherton, California for $99,000 in the seventies. Look at it now. Of course, that's unique, and Silicon Valley changed all that. But even in the last four or five years, some would say there's been hyperinflation, because everything is so much more expensive. What's your response?

Ali: Great investment by your dad.

Host: He sold it when it was worth a million. He bought it for $99,000, it became worth a million after living in it for several years, and he sold it. Two years later it was worth $4 million, and he walked around depressed for a while. So if you've got a good deal in the San Francisco Bay Area, maybe you don't sell it right away.

Ali: I lived in Atherton in the early 2000s, and I regret having left. Some of those homes are now in the $40 and $50 million range.

Host: Oh yeah. This is my whole reason for loving real estate. When I was very young, I would hear my mom say, “There are some really cute houses in Palo Alto for $50,000. I think we should buy some, one for each of the kids.” And my dad said, “Oh, Barbara, that's crazy talk. How are we going to manage those?” I think my dad was looking out for me, because I'd have been a very spoiled trust fund kid if he had listened to my mom.

Host: What characteristics do you look for when identifying opportunities before they become mainstream?

Colm: That's more of a question for our acquisitions team, because I'm more on the investor relations side. But we want to think about the unique skills, resources and relationships our managing partner Ali has developed over the last 45 years, and how we can apply those specifically to each opportunity. I think that's the most important thing, because two different groups can look at the same project and take a different approach, and each approach will produce a different change in NOI.

Host: So true.

Host: You mentioned earlier that a lot of investors went into multifamily and have been licking their wounds since then.

Colm: Including myself. Like I said, I'm an LP on about 15, and I have, let's call it, four that are in the dump and 11 that are doing pretty well.

Host: Good. Well, you're lucky.

Colm: I did those investments in my mid-thirties, so I give myself grace. A lot of people came in not understanding the risk as it pertains to the debt, and they went after somebody who was really well marketed, not understanding that right now, more than ever, the premium is on the operator. That's what I love about your group, Kathy. You focus on good operators, good contractors and good fulfillment teams. The capital is the spark, but it's the asset management, the construction and the property managers that actually triple or quadruple the NOI. I really hope that in this next decade, people focus on premium operators and understand that the money is made during the hold and the disposition. We shouldn't be celebrating how much money we raise. We should be celebrating how much money we've made for investors. I really hope that changes in the next 10 years, and I know your group really focuses on great operators.

Host: Thank you. There's a reason for that, and it's that I already have wounds.

Colm: Anybody who saw your presentation at the 2023 Best Ever Conference really appreciated your transparency. When I was first watching it in person, I thought, “She's telling me way too much.” But at the end, you said these things happened in 2003, 2006 and 2008.

Host: Yes. I went through a lot of pain, and that's what a lot of people are going through right now. They will be more careful, both the investor and the operator. Many of us stood on the sidelines during the frenzy of 2021 and 2022, because we had already seen it. We'd already been there, already lost and gone through the pain. You can recognize it the second or third time around, but it's really hard to see in the beginning. Myself included: my first syndication hit a 26% IRR in 2010, at the depths of the Great Recession. My second one, 40%. Then I got cocky, and this is what happens to a lot of people. It's like, whoa, that was easy. The next one is where the mistakes happen, and it usually comes from trying something new, something you haven't done. I think there will be a lot more people focused on operations. What so many people didn't understand is that they weren't investing in multifamily. They were flipping apartments. Huge difference. None of those properties worked just as a cash flow property. They were paying too much, and the idea was to fix them up and sell them for more. It was a flip versus a cash flow deal. Now I think people have learned that this has to work out if I can't sell it. If we're holding it, is the loan going to last? Are we going to end up with a balloon note and not know how to pay it? A lot of lessons were learned, and there are a lot more wise investors and operators as a result.

Colm: I think that's going to come with the clarity and the trust developed through these relationships, going back to the operators, not the capital. That's a great transition into the support infrastructure that the Real Wealth Network, BAM and the RISE real estate investing communities in the Bay have created. We've created these communities in the Bay to help people avoid that short-term pain, so that as an LP you have a sounding board to learn from other people's mistakes in person. AI can replace a lot of things, but community is a real competitive advantage as an investor. I encourage people to look on Meetup.com, Eventbrite, Luma and all those places to find a community, so you can talk to somebody with 20 years more experience than you and get feedback on your ideas before you take a financial jump.

Host: So important.

Host: With that, we need to wrap up. Any last thoughts, Ali?

Ali: Yes. I was recently watching one of your podcasts, and congratulations on all the success over the decades. You and Rich are at over 20 years of Real Wealth now, so hats off. When you were talking about how you and Rich Fettke came up with the name on the napkin, “real wealth” said a lot to me. Earlier I talked about being in this business for eight generations and a transfer of wealth. Many people probably thought I meant hard assets, liquid assets, money and capital. That is not the case. Real wealth includes the most important assets you transfer generationally, and that is not capital. Your dad didn't just hand it to you, and you found that to be a blessing. My father also said, “I'm going to teach you how to fish. I'm not going to give you fish.” More importantly, through those eight generations, the hard assets and the capital were lost due to wars, migrations, all kinds of things. But the knowledge was transferred. The tenacity, the motivation, the ambition: that's the real wealth that can be transferred. So I want to highlight the brand. I love the name you have. Congratulations on all the success, and let's keep the real wealth being transferred.

Host: Thank you so much. I look forward to seeing you July 21st at your event. We'll have the details below.

Ali: Thank you, Kathy.

Host: And thank you for joining me here on The Real Wealth Show. If you'd like to find out about some of our commercial syndications, our multifamily fund or our single-family rental fund, we're just about to launch a new syndication in Truckee, California. Go to realwealthshow.com, click on the Invest tab, and you'll see the dropdown for group investments, syndications and our funds. You'll also see a dropdown for the different markets we're bullish on, and you can schedule a free session with one of our investment counselors at Real Wealth. What do you have to lose? Again, go to realwealthshow.com. I'm Kathy Fettke. Thanks for joining me here on The Real Wealth Show. We'll see you soon on the next episode.