How Do Higher Interest Rates Affect Multifamily Investments With John Casmon | 654

Could higher interest rates destroy the returns when investing in apartments? What things should you watch out for that could cost you dearly?

Multifamily investor John Casmon shares with us what really happens when interest rates go up, and how that could affect YOUR investment.

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How Do Higher Interest Rates Affect Multifamily Investments With John Casmon

Welcome to our show. It’s for you and about you, those of you that work so hard for your money, and you’re ready for your money to start working harder for you. You want that freedom and prosperity, not 30 or 40 years from now, but now to be able to live that life that you love with those that you love. Most importantly, it’s not about getting rich and living a rich life, because as you are blessed financially, you have the ability to bless more lives. That is exactly why I’m so excited to be here with you. I appreciate you guys that have been tuning in, binging, sharing it with others, and helping us grow this movement in a way that allows people to become more financially free. I appreciate it so much. You’re seriously the best audience around.

As a reminder, if you’re thinking about, “How much passive income can I create myself here in the near future?” go to MoneyRipples.com. You can check out the Passive Income Calculator, put in your numbers, and within a few thousand dollars, it can be pretty accurate to what we find ourselves. That’s exactly the money you could be creating in the next twelve months. Be sure to check that out.

I brought on a special guest. He is someone who’s been in this multifamily space for a while, someone who understands what’s going on with the markets, what’s going on with multifamily and with apartment buildings, and whether it’s a good investment or not. I want to bring John on here to talk about that. With everything going on with interest rates and everything else, should we be investing in these real estate deals, or should we be staying out of real estate? That’s the big question I have for John.

To give you a little bit of background on John, he has been a multifamily syndicator. He has partnered up on lots of deals and done over $100 million of apartments. He also coaches and consults other multifamily syndicators on how to grow their own businesses. He has a great podcast which is called Multifamily Insights. You can check that out. He is also the co-creator of the Midwest Real Estate Networking Summit. I’m excited to have him here where he has gone from full-time employee to full-time investor. John, welcome to our show.

Thank you for having me. I’m excited to be here.

Fill in the gaps for us. You worked in Corporate America for a while. How did you go from that to becoming a real estate investor?

It’s a very important story because what’s important is understanding what’s the why, what drives you, what motivates you, and what’s the trigger. For me, it came down to taking control of my life and my future. Pretty early on in my career, I was working in the automotive space from 2007 to 2011. As you recall, the economy crashed. We had the economic recession, and ultimately, the company I worked for went bankrupt.

We had structured bankruptcies, so we emerged from it, but I watched a lot of people lose their jobs. The one thing that taught me was 1) Empathy for all the people who hadn’t seen this coming or a particular outcome for themselves, and then 2) How do I insulate myself so I’m not on the other end of this one day whether it be through layoffs or politics? I’m not someone’s guy. Those things are happening. They happened to a lot of people. I wanted to make sure I started insulating myself from that.

I saw real estate as a great vehicle to start investing and getting some passive income and learning. One of the things that attracted me was there’s this stat that 90% of rich people make their money in real estate or hold some of their riches in real estate. I thought, “If these many people can invest in real estate and make it work, there’s got to be something to it.” I’m not super techy. I can’t work the stock market, and I don’t understand all those things. I’m not coming up with the next great app, but real estate was pretty tried and true.

There was enough of that around where if you can do some basic math on an elementary level, you could invest in real estate. We moved on to more complex models, valuations, and processes, but real estate was a vehicle that we had confidence in. Eventually, I started building up my own personal portfolio, and I realized that I could help other people, particularly thinking back to those people who lost their jobs prematurely and didn’t have those solutions.

What if they had other things? What if they had money put into real estate? What if they had cashflowing assets that could protect them while they were going through this rough period of their life? That was one of the things that I wanted to do is to create an opportunity for other people to join us, which is why we partner with other investors to invest in these apartment buildings.

It’s true. I mentioned this on an episode where I researched. We did an episode on this alone, which was 100% of the 25 millionaires in this country had a real estate of some sort. It’s proven. The proof is in the pudding, so to speak. The fact that you’re not doing it yourself and have proven it in your own life, but you’re helping others do it, that’s the ripple effect we talk about in this show.

I was excited about what I was doing because if you’re enjoying something, you’re having fun. It’s working well. It’s delivering all the goals and everything that you had as expectations. You want to share that with other people. You want them to get a slice of it. It’s why you hear people talk about cryptos so much. It’s not that crypto is this magical solution. It’s that they invested, they made money, they’re excited, and they want to share that excitement. That’s what I was doing, except people listen and they would nod their heads and they would be excited as well, but they didn’t understand the amount of work and effort that went into it, and they were not willing to commit that amount of energy to learn real estate.

I was going to events. I was reading books. I was listening to podcasts. I was doing everything I could to educate myself when I was starting out. A lot of my friends and family did not want to invest that time. They knew what I was doing and they trusted what I was doing, and they had an interest in working with me. That’s where the light bulb went off where maybe I could help them because they have some challenges. They’re looking for cashflow and to diversify. Some of them had their money in the money market accounts making 1%, 1.5%, or 2% interest, which is even lower than that now, probably less than 1% now. They needed better cashflow and a better way to park their capital than what they were doing at that time.

It’s true. I’m a passive investor myself. A lot of these readers are as well. Even with all the knowledge I’ve gained and even doing some active investing in the past, I can tell you I didn’t care to want to be an active investor. For you to deliver that value and then others that build say, “We’re on board. We trust you. We get what you’re doing. We support it and let’s ride this gravy train together. It’s a great way to do it.

Lifestyles change. You might have plenty of time early on. Maybe you want to manage some single-families or some small rentals, but as you have children or you get promoted in your job, it’s more demanding or you have other passions that you want to pursue, do you want to go over and paint a unit or collect rent or whatever it is you’ve got to do from that standpoint as a property owner? Maybe not.

You might have plenty of time early on. Maybe you want to manage single families or small rentals, but as you have children, your job gets more demanding, or you have other passions you want to pursue, do you really want to go over and paint a unit or… Click To Tweet

You can rely on property managers to help you out with that, but investing with a group that’s a little bit larger, has a bit more scale, and they can go on and manage things in a more professional manner, that alleviates that concern for you. You get all the perks of being a real estate investor without the headaches of being a property owner. You’d have to deal with the tenants, maintenance and contractors. You focus on the upside potential and getting cashflow. That’s ultimately what we’re trying to do.

Hitting $100 million portfolio is not an easy feat to accomplish. How long did it take you to get to that place?

A lot of partnerships, first and foremost. That’s not all John Casmon. That’s a matter of having great operators that we’ve partnered with, being able to do our own deals as well as lead, but also having great investors who came along for the ride with us, saw the deals, saw the opportunities, and wanted to get a piece of that. That $100 million portfolio is probably about a 4 or 5-year timeframe. Going back from 2017 to present day, we have sold some of those assets.

Our AUM, which is Assets Under Management, is probably more in the $40 million to $45 million range. Over the last 12, 18 months, we’ve had a number of projects go full cycle where we sold them. We’re able to return investor capital plus profit. Some of them reinvested in future deals or current deals we have now. We’re excited to continue to grow and continue to try to create wealth for these families.

As you’re starting to see the markets shift from 2017 and 2018 and until now, and you’re getting these new deals, what are you looking for? What are the things that you’re trying to watch out for specifically?

We try to stay true to our fundamentals. For us, cashflow is first and foremost. We want properties that are able to generate a profit out of the gate. Not every single deal is like this, but for most deals, we are looking for cashflow right away. It may not necessarily be an 8% or 10% return cash-on-cash out of the gate, but we want something where all the expenses plus the debt services are going to be paid when we buy it.

From there, what we’re looking for is the opportunity to force appreciation. With commercial real estate, that means we’ve got a business plan where we can go in and drive up the income. That could be anything from renovating units to reducing some of the expenses and utilities, or it could be adding new amenities or adding new revenue streams.

We’re looking at, “What can we do to this property to add value?” By us adding that value, we’re forcing the property to increase. We’re not solely relying on rents going up organically or solely relying on inflation. We’re going in with a specific business plan that we can control that will generate better returns. For us, whether interest rates go up, go down, the demand goes up, goes down, we’re still looking at those fundamental things.

The only difference for us comes from what some of those numbers end up being. What can we get a loan for now? Do we want to lock in a rate or do we want something that’s more flexible? That’s going to depend more on the business plan, but it is something where our fundamentals don’t waiver very much. Because of that, we’re not as concerned with some of the rising interest rates.

I’ll tell you this, if I were in residential, the story would be way different because when people are looking to buy a personal home, they’re looking at, “How much can I afford? What’s my monthly mortgage going to be?” $400,000 versus $415,000, that $15,000 is probably not a big deal to most people. If that payment goes from $450 to $550, that’s probably going to be a deal breaker for many families. That’s the thing that people are looking at. I said $450, but I mean $4,000 or $4,500.

If your mortgage payment goes up another $500, that may be the game changer to say, “We can’t afford that. We’re not going to qualify for the loan based on our income.” That’s where things start to get a little hairy because it doesn’t matter as much that the house costs $400,000, as much as it does what’s the monthly payment for that borrower. That’s what most people are looking at. They can get as many houses as they can get for the amount of money. That drove the market for a long period of time.

MORI 654 | Higher Interest Rates — Higher Interest Rates: It doesn’t matter that the house costs $400,000 as much as the monthly payment for that borrower. That’s what most people are looking at.

As the interest rates go up, you’re not going to be able to get the same amount of house. If you knew that a few months ago, you could have got a 4,000-square-foot home in a great school district for the same budget. Maybe you’re not going to be as willing to pay a premium for a smaller home or a different location.

That leads to the question I opened up with. The one thing that’s driving up house payments is the fact that the interest rate skyrocketed over the last few months. That’s driving everything up, which of course has to drive up rent. If it doesn’t drive up rents, then we’ve got an issue. How is that affecting what you do with multifamily? In the single-family space, this is a big deal. This eats into your cashflow big time because rents haven’t caught up to that yet. How do you see that playing out with multifamily?

You can look at it from two different ways when you talk about multifamily. One is going to be values and buying and selling the multifamily. The other side of that is cashflow and rent. On the value and buying and selling of the property, we’re seeing that demand is still strong. You’ve got to keep in mind that we are coming out of a global pandemic. We have a war going on in Europe, and you have consumers across the globe who are looking for secure places to park their capital. If you are in one of these countries where maybe you don’t trust your local government, or there’s a lot of chaos going on in your home market, do you want to keep your money in those banks?

We saw what happened with people in Russia. They are shutting down businesses. You have major employers who said, “We are not going to keep these businesses open. We’re not going to do business there and we’re closing down banks. We’re cutting off the financial arm of this country.” What does that tell you? Do you want to keep your money there or do you want to park it somewhere where it’s more secure? You’re not going to be worried about the government seizing your assets. You’re not having access to your assets and things that are making US real estate attractive.

It’s been attractive and, in my opinion, it’s only becoming more attractive because it’s something that people can rely on. People know that the United States from a legal standpoint is a fairly, easy relaxed environment to do business in. No one’s going to seize your property just because. It’s fairly easy from that standpoint in comparison to other countries. We have that.

You look here in the United States alone, you have investors, high net-worth individuals, private equity firms, and big-time investors who need a place to park the capital. They need to deliver returns on the money that they have. You talked about interest rates going up. What are lenders going to do? They’ve got to find a way to put that money to work so they can get their payments and make money. I do think that demand is going to stay strong even in a rising interest rate environment because demand stays strong. I have not seen any signs so far that demand is slowing down for US-backed multifamily. I expect that to continue for the next couple of years but we’ll continue to monitor that.

On the flip side, when it comes to rent and rental income, rents grew double-digit in 2021. I saw an average, it was around a 12% rent growth or something like that across the country. Some markets grew 20% or more. That’s in line with what we’re seeing with inflation. They are slated to grow in a similar fashion this year, although it seemed to be not realistic. The reality is that the Q1 metrics show that it outpaced Q1 of 2021, and the projections will either be similar to or exceed rent growth from 2021. Rent is going way up across the country and residents are going to have to figure out a way to be able to make do with it. That could be a challenge. There’s certainly an affordability issue that comes into play.

It also depends on what markets you’re in. If you are already in a high-priced market, it’s going to be tough because those residents may not be able to take on much more rent. However, in some of the markets that we’re in, particularly in the Midwest, there’s already a gap because these are pretty affordable markets for the most part.

It’s not going to be as affordable as it was 2 or 3 years ago. That gap is starting to decrease, and there’s going to be a little bit of a sticker shock for many residents. Prices and rents are going up and you’re going to see it across the country. You’re going to see it in many markets and many apartment buildings, particularly with not just interest rates, but all of the goods increasing in cost.

As a result, you’re probably not looking for this superclass A type of stuff because if there is that affordability issue, people are going to have to start downsizing it to lower-rent units.

That’s something to pay attention to because on the superclass A stuff, you’re looking at maybe giving some concessions. You’re giving maybe the first months rent-free or something like that. Also, if you’re a resident and you’re going to pay $1,000 for rent, you’ve got to look at, “What can I get for $1,000?” They’re going to shop. They’re going to be looking for a bargain. For $1,000, what can they get for rent? If that’s different today than it was years ago, there’s a point where they trade up. If I’m going to pay $1,000 for this or $1,020 or $1,050, I’d rather go get that property that has a swimming pool and a free Wi-Fi and all the other gadgets. Some of that starts to come into play as well. As the top-end goals, the rest of the market falls in line and fills in some of the gaps.

John, if people want to follow you and get to know about your deals and what you’re up to or even follow your podcast, how would they best go about doing that?

The podcast is called Multifamily Insights. You can check that out anywhere you listen to podcasts. We put together a sample deal package, whether you are an active investor looking to start scaling into larger multifamily, or you are a passive investor, you want that cashflow and you just want that mailbox money. This is a great way to wrap your head around conceptually what a deal looks like and more importantly, what a deal package looks like. What questions should you be asking? How is the deal structured?

If you want to get a sense of, “What do I dig into? If I’m looking at this, what are the things I need to know and the questions I need to ask?” This deal package will start to open up the door there. I’ll send you a follow-up that gives you seven questions you need to ask whenever you’re evaluating a real estate opportunity on a deal like this. You can check that out on our website. You can go to CasmonCapital.com/sampledeal. You’ll get added to our new newsletter as well, and we’ll give you more tips and insights on multifamily investing.

That’s very generous information to have. In fact, everybody, I’d recommend you get that regardless of where you’re at. That education is so valuable whether you’re trying to be an active investor or a passive investor. John, I appreciate the generosity there.

Thank you.

I appreciate you having you on. You’ve given such great counsel. This is the thing that everybody needs to remember, especially as we move into a time where we’re going to start seeing syndicators get burned. We’re going to start seeing those that as Warren Buffett says, “As the tide rolls out, we’ll see who’s swimming naked.” We’re going to start seeing that over the years to come. It’s good to have that education upfront. I appreciate your time and the wisdom you’ve shared on this show.

Chris, thank you for having me. I’m excited to be here. Please feel free to reach out as well. Check out the free download there. I say free, but it’s no cost. It took me a lot of time and effort to put it together, but go ahead and check that out from our team. Thanks again.

Everybody, that’s the thing. It’s one thing to hear about this stuff. It’s another thing to internalize it and use it in your life. When you get this education, it might be a free download. However, it’s not what it does or doesn’t cost you, but what it can save you and especially in the errors and the mistakes you could be making by doing the wrong things or not asking the right questions. Take this to heart. Take this advice and use it to gain more wisdom so that you can ensure you have financial freedom. Everybody, make a wonderful and prosperous week. We’ll see you later.

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About John Casmon

John Casmon is a real estate entrepreneur, who has partnered with busy professionals to invest in over $100 million worth of apartments.

John also consults active multifamily investors to help them start or grow their business. He hosts the Multifamily Insights podcast (formerly Target Market Insights) and is the co-creator of the Midwest Real Estate Networking Summit.

Prior to becoming a full-time investor, John worked in corporate America, overseeing marketing campaigns for General Motors, Nike and Coors Light.