Hunter Thompson, the Managing Principal of Asym Capital, returns to join Bob and Ben in a discussion on the current state of the economy and where are the best places to invest. Listen in as they share why it’s important to view the world of investing through an economic lens, and dive into topics like the inverted yield curve, making predictions on whether or not we’ll see a recession. Hunter also talks about a virtual event he’s hosting called “100K to Invest,” helping passive investors find the best places to invest their capital.
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Where’s The Best Place To Invest $100K? Interview With Hunter Thompson
We are joined by Hunter Thompson. He is our first repeat guest on the show. We are very excited to have him back. Hunter is the Managing Principal at Asym Capital. He has raised over $50 million from accredited investors and he is the host of the Cash Flow Connections Podcast, which has received over one million downloads. It is an amazing, incredible, and great show.
Hunter, we are super excited to have you back on. You and Bob were on a panel at the Best Ever Conference and on the main attraction of the conference in the economics panel, which was fun. We wanted to keep that conversation going. Hunter is putting on a cool virtual event called $100K To Invest. The whole point is looking for the areas in this unique economic environment where we should be investing.
You focus on, “What do I do?”
It is the 2022 outlook. Everyone is asking the same question. We are all seeing the same data. It is an interesting time to invest based on the lens of economics.
There is a wide range of opinions out there. All of a sudden, the yield curve, as if there is one yield curve, is inverted and therefore, everybody is like, “Flip the switch. The market is over.” You have got the Uber and Bulls. There is so much noise. We will see if we can cut through some of that noise and figure out how to make clear-minded and clear vision choices. My book is incredible. You do not want to have fear keep you out of the air from playing the game.
Talk a little bit about some of the things you shared at the conference and your perspective on where we are at in this economic cycle. Are we headed for a recession? Should we be investing? Should we keep cash on the sidelines? What is your perspective in a macro way?
First of all, most of the readers of this show are sympathetic to this view but I try to view the world of investing through the lens of economics because if you do not take economic data as part of your view, you can get slapped and be like, “What happened? My whole business was working perfectly, and all of a sudden, something took place that was out of my purview.” It is challenging because, as an entrepreneur, we want to put our heads down and do the thing in front of us. If the thing in front of us is working, we want to do more of it. What we saw in 2008 is an example that is used all the time but for me, what we saw in 2010 was equally pronounced for a lot of people in the United States, where the European debt crisis was there.
That is something that no one was paying attention to. Greece bond yields. The European bonds. It is like, “How is this something that is going to play a role in my financial future?” I am always trying to keep my eye on economic data points that may do that. At the same time, I do not want to be crippled by economic fear-mongering, especially in an inflationary environment. If I am sitting on the sidelines, even for a couple of years, waiting for this once-a-generation type of correction, I can get beaten up by my competitors who are simply going along, doing their business, and making risk-adjusted decisions.
That is why I wanted to talk to you about this. I am a big fan of both of you and Bob’s articles that he writes on your website. If the readers of the show have not checked it out, you did a very good job of outlining the economic data leading up to COVID and afterward. I am here as part of the fanfare to discuss some of the data points that we talked about at the conference. That set the stage for the conversation.There's an affordable housing crisis in the United States, and there is no clear way to alleviate that crisis. Click To Tweet
The thing that I love you do on your show is you bring in a lot of economists and people that have opinions that are maybe different than yours. You want to assimilate the vast breadth of knowledge and different opinions because no one person has all the right answers. It is challenging to navigate all these things that are going on and see all this information. Talk to us about some of the key indicators you are looking at and maybe start diving into some of the things you discussed on that panel at the Best Ever Conference.
There is one yield curve that a lot of people look at.
The 2s/10s yield curve.
When that starts to happen, it is typically thought of as a predictor of recessions. Historically speaking, all recessions in the modern era have taken place after a yield curve inversion. However, there have been several yield curve inversions that have not resulted in a recession. It is certainly caused for concern, generally speaking, because it is a weird phenomenon in the market. You would think that longer-term investments, ten-year holds, for example, would yield you higher returns than a two-year hold.
That is why people start to go, “It is like a net snip neck snap back moment. What is going on in the market?” However, there are a couple of reasons that we should take a second to look at. Number one, in the last years, this introduction of incredible monetary policy has resulted in the negative interest-rate bearing bond market is $15 trillion. That puts downward pressure on these curves. That data point may not be exactly what it once was.
Something else is the overall state of the economy. Looking into 2020, very few people anticipated that we would see massive, historically significant rental growth. This might be a purview into what the future of potential recessions looks like. What is going on is, though it may not always be lived out, it seems to be the case that there is a commitment if the market sneezes, a potential challenge, or a pandemic.
Not just the Fed but globally speaking, the multitrillion-dollar button is there and they have proven that they are willing to smash it. When they smash it, a couple of things happen. Inflation likely increases and the job market tightens up, which further increases inflation. These are things that are favorable for investors. The net worth, income, and savings increase are some of the things that people are interested in. We can dive into more detail but that is what I am looking at in terms of the topics people are most paying attention to.
Let’s hit on the topic of recession. As you point out, the 2s/10s inverted while there was a Wall Street Journal article. The analysis that they did showed that the shorter duration yield curves, which have not yet inverted, are far more predictive than the 2s/10s yield curve. That is for one. We need to question it. For two, you have seen the charts, and if any readers have not seen the charts go to AspenFunds.us, click on the Resources tab and look at my latest charts. There is an article on inflation.
What happened is you see that the household net worth per capita has gone up 20%. Americans are 20% richer. If you look at it since 2020, their net income per capita is up 15%. The Americans are making 15% more money. If you look at debt service, it has hit an all-time low as a percentage of disposable income. That is because they paid down debt. You are looking at consumers that have extremely low debt service, very high income, and high net worth. Let’s call that the coiled spring. Why does that matter? It matters because 70% of the US economy is consumer spending. If the consumers are flush and they go spend, our economy goes into high flipping gear. The only thing that is keeping this spring from unloading is consumer sentiment.
If consumers are happy, feel positive, like what is going on, and feel confident, then they go spend. If they don’t, they don’t. Consumer confidence is low. As soon as that changes, let’s say we have an election result that people like, the war in Ukraine result, or we have COVID, the restraints and difficulties disappearing, and anything happens, it makes people feel better. You are going to see a massive jolt in GDP growth. I have gone out to the limits. We are not going to see a recession in the next years. I stand by that. We can all be wrong but I can’t see it in the face of the extremely healthy consumer. What are your thoughts on that?
When I was looking at that data and other similar data, when you talk about net worth at all-time highs, it is increased by 20% over a very short period. When you think about income, it is very difficult to tamper with that because with net worth, you can see a very small percentage of the population. There are a lot of money printing stock market shoots up. That can give you a distorted view but income is not so much the case. Savings, for example, a more fundamental kind of data point. All of that also could be tampered with if the consumer was leveraged to the moon. That is the first thing I started thinking when I saw that data point but it is the opposite, debt-to-income on a household basis. It is a 40-year low.
The combination of peak income, peak net worth, and an all-time 40-year low in terms of debt-to-income is an interesting point. That is at a household level but what about an institutional level or from a private equity level? We see record cash-on-hand because a lot of people are doing what a lot of people at that conference are doing, which is waiting for this massive buying opportunity. Bob and I were not saying it will never going to happen. We are saying it is happening.
One thing about consumer sentiment. I do agree that is creating a lot of opportunities to where people are saying, “This is a good time to wait. We can hold these reserves and see how this plays out,” whether it means international entanglements, election results, or something like that. Energy prices, in particular, do impact consumers. If that likely does work itself through and we are able to get some relaxation in that particular data point, a lot of that sentiment will be relaxed to a large degree.
Let’s roll forward. Let’s say we are wrong and there is a recession. How might it play out? Let’s look at multifamily or self-storage, a couple of industries, and the job market. Is it likely to see massive rounds of layoffs and the job market suddenly become an employers market? It is pretty unlikely, given the sheer number of job openings and the fact that the job market is in an incredible squeeze. It is hard to see that being alleviated in the short-term for sure or we can look at a couple of other data points as to what is going to happen. Let’s look at household and vacancy rates, for instance. Are we going to see people suddenly say, “We are not going to rent anymore. We do not need that extra space. We are going to downsize?”
We are in one of the tightest markets we have ever seen as far as sheer demand because of household formation, and the Millennials are forming households. If you look at industrial space, it is the same thing. You have got incredible demand because of the rise of eCommerce over the last couple of decades, the need to build inventory to protect against COVID, and the idea of reassuring bringing manufacturing and things to America to eliminate risk. Are they any of those going to alleviate?
eCommerce is going to go down. People are going to stop reassuring and say, “No. We would rather have inventory ship from China every day.” It is inconceivable to think about these things reversing because the trends are so pronounced and powerful. Can we see any of that reversing? It is very hard even if there is a recession. It is unlikely to be an extremely devastating recession.
That is worth talking about because when a lot of people hear the word recession, immediately, it hearken back to The Great Recession of 2008 and 2009. It was once in a generation recession but not every recession is that deep, broad, and impact. Technically, if you look at the technical definition of a recession, it is two-quarters of negative GDP growth. We had a recession in April of 2020 as a result of the lockdowns from COVID.
We had the big unemployment spike and all those things but it was the shortest recession ever recorded. It was two months and very quickly, all the stimuli came in. We could talk about the recession. Maybe there are some penny things and the yield curve is a potential indicator of that but we have to realize, “What does that mean? What is the severity of that?” If there was a recession, there are a lot of other factors that play into that.Recession-resistant assets are well-positioned to be the benefactor of that trillion-dollar spending spree. Click To Tweet
You touched on something. I remember the annualized GDP loss was an all-time high. If you simply took that Q1 and multiplied it by 4, it was 30% or something like that. That did not happen. It was not annualized. There was massive money, a multitrillion-dollar in the United States and almost double that as well. Globally speaking, the United States functionally printed $6 trillion during that period. The rest of the countries in the world printed an additional $4 trillion. I am thinking about this as this massive tsunami of liquidity that is heading around the capital markets. In the US, the job market is very tight. You have a couple of different data points we are looking at.
You have a very tight job market, which creates inflation in terms of wages. You have a $10 trillion tsunami of liquidity looking for yield that, from my perspective, is about to crash on the US housing market to a large degree. First of all, we have trillions of dollars to place. That goes typically as a bond because it is the only place you can allocate trillions of dollars quickly but to search for yield, where can I find favorable risk-adjusted returns?
There is an affordable housing crisis in the United States, and there is no clear way to alleviate that crisis. When we had this debate, my first statement was, “If our debaters on the other side of this aisle have an answer for that question, I will see the rest of my time.” I do not see it. It is not just housing. It is a supply-demand imbalance of also favorable risk-adjusted returns. From my perspective, multifamily real estate cashflowing assets and recession-resistant assets are well-positioned to be the benefactor of that trillion-dollar printing spree.
Some of the top risks to me are inflation. The worst investment you could make in an inflationary environment is cash. If you have a savings account and you got $1 million in there, that is worth 8% less in one year. In ten years, it is worth 50% less on a buying power basis. That is your risk.
Can you dive into that? What you are outlining is compounding interest in the wrong direction.
You are on the wrong side of this. One of the things our government has figured out is that the best way to get rich in an inflationary environment is to borrow money because what you owe decreases in value. Borrow money as long as you can get good terms on your debt. You want to have good fixed-rate debt. If I can borrow money at 4% for a house and inflation is at 8%, they infect paying 4% to borrow money, “We pay you 4% to do that.” I am going to do that all day long. This is one of the reasons the US government does not default ever on its debt.
They do not need the default. It is simply a little inflated away, and in ten years, the debt is worth half of what it was before. It is 8% inflation in just ten years. Inflation is a massive transfer of wealth from savers to borrowers. You want to make sure you are on the right side of that equation. I can have an opinion about whether that is right or wrong, but the reality is it is, so let’s figure out which way the winds are blowing and we are going to put our sail up. Not only is it a huge risk to be in cash but it is a huge opportunity to be negative cash or short cash. The other opportunity is to get your wind up in this twenty, not breeze blowing, put your sail up in that puppy, and let it take you for a high-speed ride across the top of the waves here.
Inflation can be your friend. The top example is multifamily. Multifamily is priced on net operating income, which is going to go up with inflation as long as it is well managed. You are going to double the price of that in ten years. If you are leveraged, then you get way more than double. What is the risk? We have a recession but how is that likely to affect your higher vacancy rates? It is super safe because we have a vacancy problem and a shortage problem. To me, it is a once-in-a-lifetime opportunity to invest. As long as inflation continues, this is going to be an absolute win. It cures all ills in real estate.
Let’s dive into that because this is an important point. A lot of people are concerned about rising interest rates. If you look at typical agency debt, let’s call it 4%, or if you anticipate that, we are experiencing 7% or 8% inflation. You have got functionally negative rates. Perhaps, I did talk about this topic where I was making a more bullish claim on the fact that I do think interest rates will go down into the right for the foreseeable future forever. I do think we are going to see negative rates over an infinite time horizon as an investor. It is not helpful but I have seen it for many years. I extrapolate that out into the future.
My point is we are prepared for rising rates. We are still in a negative interest rate environment on real terms, adjusted for inflation. The other piece of this is, not only does it eat into debt in the sense that inflation erodes the purchasing power of the debt that you are borrowing. To your point, over ten years at 7% or 8%, if the purchasing power is half of what you borrowed, you also have this phenomenon taking place regarding NOI. If everything is being equal, let’s say a typical multifamily apartment, you implement your value add, bring it up to market rates, and then if you are being conservative, you should clip along at the same rate as inflation clips along. Let’s call it 4% across the board. This means that your gross income and expenses will increase by 4% per year.
These things take place on a one-to-one basis, generally speaking. If you look at the balance sheet and the financial statements, though income and expenses do increase on a one-to-one basis, there is not a one-to-one ratio between income and expenses. Most multifamily is a 40% operating expense ratio. In self-storage, you can see a low 30% or even 20%, which means that only 20% to 30% is going towards expenses.
Meaning that every year, even if you do continue at a one-to-one ratio of expenses increases and income increases, you are getting the favorable end of that from a net in a Y perspective. This is an ATM with leverage. I am super excited about the opportunity in buying quality assets with quality sponsors with inexpensive leverage. That is what I want to talk about at the summit that is coming up.
The caveat being, “Where can I infer there are a few caveats?” You have got to get good debt. We are avoiding some of the bridge debt that is being used out there. It is very dangerous. You want to get multifamily deals and other self-storage fields that are not using this bridge debt because bridge debt has short caps and interest rate caps. They are variable in interest rates and have higher LTVs. They are a lot riskier. You are dramatically increasing the risk profile. A lot of borrowers have even multiple debt stacks. You have private equity ahead of these kinds of things. I do think you want to be careful to pick very well-structured deals at this time.
I have been super bullish during this conversation. It is mostly because I do not want my audience and investors to get stuck where I was for many years. My career was born in the wake of The Great Recession. I was always thinking, “How can you not be deeply impacted as a young entrepreneur, see that happen, and think, when the next one is?” That was an impactful moment for all of us. The reality is it is very difficult to overcome the supply and demand in balance, both liquidity, affordable housing, and the related asset classes to that. What I would want to say here on the other side of this is that we are not praying and spraying with our investment pieces.
We want to find quality operators that have a significant market advantage. I will use Aspen Funds as an example. This is not your first time pulling investors together and buying notes. You have purchased and put tens of millions of dollars and bought hundreds of millions of dollars of debt. What happens there is not just that you know what you are doing. You have got strategic partners that you rely on over and over again. You have got providers, servicers, and the whole thing where it is a rinse and repeat.
As an investor, I can quantify the risk-based more on the proforma than my gut feeling because it is very difficult to underwrite objectively, but if it is a rinse and repeat, the predictability of outcome is much higher. Those are the types of opportunities I am looking for where if the person has done the same thing over and over again for the last ten years, what is the likelihood that they can do it correctly for the eleventh year versus pursuing some new venture with new technology, venture partners, and market? That is the stuff I am continuing to stay away from during this economic climate.
I have been through four cycles and they all are very similar and different. It is funny because everybody is always worried about the last one. The next one that you are going to experience is going to be nothing like the last one but they will share some characteristics. One of the things you see typically is when the shaking happens. It always shakes out the weaker players. Every bank did not fail in 2008, just the weak banks. It is the same in the S&L and dot-com crisis. The Amazon is still here. They made it through the dot-com crisis.
We should make the point like in mortgage notes, for example. In 2009, the peak default rate of mortgages, people think it would be 30%, 40%, or 50% because everyone was being foreclosed on. That was very impactful for banks that have very small interest margins. They operate on a 5% default rate. It was not what a lot of people think of. Everyone was not impacted by this to the same degree.Don’t spray and pray with your investment pieces. Find quality operators that have a significant market advantage. Click To Tweet
These cycle turns are good times to be opportunistic. All the successful dot-coms bought up the failed dot-coms and took their market share. All the good banks bought up the weak banks at a fraction of their value. It is an opportunistic time. You have to pay attention to your sponsors and vendors to know that they know what they are doing and have structured things to be bulletproof. They have thought about this and are not on the cutting edge of risk-taking and living at the ragged edge.
How do you position your portfolio and how are you thinking about interest rate risks going forward? Inflation is the elephant in the room but interest rates and rising interest rates are the other sides of that equation. Talk a little bit about your perspective there.
My ideas are not 100% foreign on this topic but let me give you some of the things that I am thinking about. One clear thing is that, in the media, this discussion around inflation is front and center. What happens when that happens? There is a lot of discussion around that and that creates political pressure. On the other side of that political pressure is this conversation that we are having, meaning that people who disproportionately control both the media and the political class stand to gain from inflation.
It means that the rich get richer and the poor get poorer. That is the name of the game. I do not know how this is going to play out. If you have the majority of democracy being hurt by inflation but you have a very small percentage of people who tend to control congress that have stocks, bonds, and mutual funds, where there is quite a lot of people out there on a fixed income that is losing this argument, the number of people is large but the amount of control they may have is smaller. That is something to think about.
Similarly, there is something called The Misery Index that I was contemplating before our discussion at the Best Ever Conference, where that number is significantly higher, which is a combination of unemployment and inflation. Unemployment is low but inflation numbers are so high that it is creating a squeeze. That creates political pressure and discussion.
There is someone that was on the stage at my conference. Mark Moss was talking about the discussions around price-fixing. We are hearing rumblings regarding rental controls and such. Unfortunately, that is something that investors should be very concerned about if you are in those states that are sympathetic to price controls, with the most common example being rent controls. I am interested in getting your thoughts on that.
There are always reasons to stay on the sidelines. We might see the high old process, interest rates continue to rise, or Powell continues to channel Paul Volcker. It is still a little unlikely to me. Rent controls are a real possibility and this wealth divide as you point out, has been happening since the ‘80s and ‘70s. It is because of inflation and stocks go up. Everybody loves when stocks and housing prices go up but only a certain percentage of the population has houses and stocks. It hurts the poor for sure. There is a huge amount of political risk and political backlash that is likely to happen but even those things will navigate.
It will be a very haphazard thing as well. I do not foresee rent controls being implemented at a federal level because real estate is so localized, and maybe at a state level, you could see that. A lot of times, especially in the Sun Belt, where you are seeing high rent growth, you are also seeing high wage and population growth. There are these other compensating factors where if you have high inflation but poor wage growth, people are going to feel that more because they can’t keep up with the rent increases and other things. We will see it more but it will be more sporadic way and not in a global way.
Let’s do something fine here. We have a $100K To Invest. What is going to be that top choice? Let’s rank and stack them. What are the best things you can put your money on theoretically and the worst things? What do you want to avoid? Let’s go with our best choices. All of us can do this together.
This is how I came up with the idea of the summit. This was the question at our conference. It was called the Intelligent Investors Real Estate Conference. Someone asked, “If you had $100,000 to invest and investment minimums were not applied, how would you allocate your capital?” You can think of it as a $100,000 portfolio. This is how I got the idea. I interviewed a bunch of people about this topic. I will say it this way to be a little bit inflammatory. Number one, multifamily might be the most undervalued asset class in the country. I am a big proponent of self-storage because of the recession-resistant component, especially in this climate when people tend to downsize. I am sure you are familiar with the thesis. We can go on to number three to run through them.
My number one is self-storage. The reason is that it tracks inflation with very little delay. If you are aggressive, you have a 90-day delay so it will track with inflation. Multifamily has tracks probably on a 6 to 9-month basis. There is more of a lag. Self-storage is surprisingly recession-resistant. I would not expect that but it is. To me, multifamily is incredibly safe because these are people’s homes. Those would be my top two.
On the self-storage, it has a pretty high price inelasticity even relative to multifamily, where if you have a 10% increase and someone is paying $1,500 a month, that is $150. They are going to feel that but a 10% increase if you are paying $75 a month, $8 a month higher, but you are still getting that spread and people are willing to pay that.
Those are my top two. That is interesting. What is number three?
In terms of getting outside of the real estate, I am a big proponent of Bitcoin mining, generally speaking. It is a good way to decouple the overall economy in general. The price of Bitcoin is focused. They do not want to admit it but it is the truth. It is tied but Bitcoin mining is a cool way to get some depreciation cashflow, especially if you can receive your distributions and cash versus Bitcoin or a combination of both. I am a big proponent of that asset class.
Here is one that a lot of people are not thinking about but I talked about it the last time I was on your show, which is the ATM sector. This is such a cool recession-resistant play, where the more pronounced the recession is, the more people are armed with a low credit load balance sheet. Low income cannot get bank accounts and are forced to use ATMs to transact.
We do not anticipate selling the ATMs later down the road. It is not value-dependent. There is no multiple of income that we sell it for. The multiple at which ATM trades is irrelevant. It is a very cool cashflow focused play as well. It is some sort of quasi-real estate, maybe an RV space or something like that. The mobile home park would be something that is always going to be up there for me.
I will twist the question a little bit because I love that you are contrarian by nature. You like to look for opportunities and the whole point of your company Asym is asymmetric. It is where you are going to find opportunities that have a much higher risk-adjusted return than others. What would you say would be the best contrary and investment to make that you are going to have a high likelihood of winning in where maybe it has been undervalued in the market, sentiment or against it? Do you have anything that comes top of mind that you are thinking about or looking at it? There might be an opportunity being created here.
In this audience, maybe they are more sympathetic to this, but in the senior living business is when I measure tailwinds versus headwinds. The headwinds are in the media, the questions around COVID, and the fact that the tenants were susceptible to that risk far more so than any other population has put a pause on that space. There have been significant distressed assets in that space. That is pretty much the only real estate asset other than hotels that had legitimate and potentially longer-term distress than hotels. If you are trading at nine caps and what I am saying is true about this trillion-dollar tsunami, how smart are you going to look in ten years when they are trading at sub-five? That is a total possibility.When unemployment is low but inflation numbers are so high, it creates the squeeze that creates political pressure, and that creates discussion. Click To Tweet
I am not going to go with you on Bitcoin mining. It could, but it is speculative. Who knows what Bitcoin is going to do? There could be a new coin come out that becomes the coin, and all of a sudden, no one cares about Bitcoin. It could go up, but is it a core? I would not put it there. I do not think that ATMs are a recession-proof and great cashflow investment. What I would put very high would be industrial real estate. It does not track as closely with inflation but the demand characteristics are off the chain. There are huge shortages and massive demand. I do not see it changing.
The other thing I would add is retail. This is super contrarian. We see a good cashflow in retail trading at 9 to 10 cap rates. If you look at retail, there is a resilience that is happening there. There is a lot of retail that has been reinvented and shows that they are meeting consumer demand. It is ripe for resurgence but on a risk-adjusted basis. Multifamily has to take the cake because retail is more of a risk, but if something goes from a 10 to 5 cap, you are going to make a lot of money. What are the worst investments? What are the places you want to avoid no matter what? I already said my number one.
I have interviewed 400 people on my show and all of them have been wealthy and successful. They have all pursued different strategies. Some of which I would never do and some of which I am super bullish on but something that I have stayed away from is the hotel business. The cyclicality and anything in hospitality gets hammered during recessions. The counterpoint to that is that hotels are probably the most inflation-resistant asset class. They are priced daily as opposed to self-storage, which is 30 days and retail, which is five years or so. That is something that I have always stayed away from.
Similarly, I have stayed away from development as well. I am not even sure that it is about the risk-adjusted return. It is more about the lack of predictability of the cashflow. As an example, if someone said I have a pretty reasonable degree of certainty that this development deal will produce a 40% IRR, which is an indication of a startup type of investment, I would still pass because of the nature of the investment, as opposed to the risk-adjusted return. Those are a couple. I do not want to throw anybody under the bus. I am not going to go too far. The nicest house I have ever been in was a real estate developer. Thank you for inviting me to that house. It was beautiful.
The worst place to be is cash. The second worst place to be is negative-yielding bonds. It is a way to lock in your negative yields. Let’s lock those puppies in. That is the worst place to be. Do not go there.
We have talked about NOIs and how those can track inflation. The other piece to the equation of values is cap rates. Generally, the sentiment or at least the belief is that as interest rates increase, that is going to increase cap rates as well because the overall cost of financing is going to go up for purchasers. Increasing cap rates hurt values and reduced values. 1) Do you see cap rates reverting, meaning going back up? 2) Even if they do, how do you navigate that? What do you think about that? Do you hold on longer? Do you make sure you have good cashflow? What are the things you think about?
My view of a lot of this space was deeply impacted by 2008. Going in through 2012, 2013, and 2014, I was constantly thinking about cap rates like a pendulum. When are they going to snap back to 2010 levels? How can you not think like that as an investor? Eventually, I realized that that might not be a reality. If that is not a reality, I should be investing through a different lens. I do not see a snapback to 2008 levels in this market. Even if I am wrong and it takes a couple of years to happen, I can probably build a business and grow my investors’ portfolios significantly so that we can overcome some potential changes in cap rates.
I will give you an example. This predictor of recessions, which is the inversion of the yield curve, usually is 18 to 22 months prior to a recession if there is a recession. We think it is 18 to 22 months. Most recessions do not deeply impact real estate. I saw a deal in Phoenix that we did with a sponsor go full cycle that produced a 29% IRR over a 22-month hold. It is a net investor. I have got to intelligently participate in that market as opposed to worry about interest rates and cap rates.
Cap rates track real interest rates. Real interest rates track inflation, and so does real estate. Both are adjusted for inflation. Cap rates do not track real interest rate and normal interest rates attract real interest rates, which is inflation-adjusted interest rates because both are inflation-adjusted. Worst case scenario, let’s say cap rates, which speak to investor appetite. Cap rates make it go way up suddenly. That means investors think it is a bad idea to invest in this stuff. NOI fixes all things inflation. Is that inflation keeps going and your NOI keeps going up? Ultimately, even if cap rates double, it is unbelievable.
It is hard to think about it, but your NOI doubles. You are still making money. You just do a long hold. That is why I say, “Inflation fixes all ills.” Cap rates are unlikely to reverse like that. Furthermore, the market has always emphasized growth. Why Amazon is priced as high as it is? It is because it is Price to Earnings per Growth. It is PEG. What are the high-growth stocks? It is inflation-protected real estate.
There should be a growth premium on our cap rates. If you are looking to predict inflation, you want to invest in multifamily and are willing to pay more for that because it is the growth stock or the growth investment. It has premiums meaning that driving kept rates lower. It is hard to see cap rates taken as a header. If they did, we will hold for the long-term and let inflation fix all else.
Hunter, what is the best way for folks to get information on this cool virtual summit?
Thanks for the opportunity. You can get it at 100kToInvest.com. It is a free summit. It is awesome. You should do the VIP upgrade because you can get the recordings for life. We have some awesome all-stars 22 people talk about their various niches. Some people talk about all the asset classes we talked about. Ben came and talked about non-performing notes. We also had some people talk about life insurance, tax savings, deferred sales trust, and all these cool things that passive investors need to know about, especially if you have $100,000 to invest. If you are interested in learning more about our private equity company, you can take a look at AsymCapital.com.
If you want to raise capital for real estate, Hunter wrote the number one book on Amazon about that. It is Raising Capital For Real Estate.
It is RaisingCapitalForRealEstate.com. It is pretty much everything I know about the topic. It is $7. Have fun.
This has been fun. It is always a pleasure to have you on. We look forward to that summit. Thanks so much again.
- Asym Capital
- Cash Flow Connections Podcast
- Best Ever Conference
- $100K To Invest
- Aspen Funds
- Mark Moss
- Intelligent Investors Real Estate Conference
- Hunter Thompson – Past Episode
About Hunter Thompson
Hunter is a full-time real estate investor and founder of Asym Capital, a private equity firm based out of Los Angeles, CA. Since founding Asym Capital, he has raised more than $50 million of private equity from hundreds of investors. He is the manager of nine investment funds spanning senior living, mobile home parks, self-storage, multi-family apartments, and other various niches in the space. He is the author of Raising Capital for Real Estate: How to Attract Investors, Establish Credibility, and Fund Deals which hit #1 on Amazon for Real Estate Investments & Real Estate Sales. Hunter is also the host of the Cash Flow Connections Real Estate Podcast which has received over 1,000,000 downloads.