Before the pandemic, the idea of aging in place was becoming more popular. Some baby boomers are now wary of nursing homes, where at least one-third of U.S. Covid-19 deaths have occurred, so they are interested in aging in place. The trend is making home shortages and prices even worse for younger buyers who want to get a piece of the real estate wealth.
The Silent Generation (born before 1946) had long owned the majority of real estate wealth, but they sold later in life and moved in with extended family, or to an assisted-living community. Baby Boomers living in their homes are bucking the trend. A study from the Federal Reserve data shows that boomers surpassed the Silent Generation in real estate wealth in 2001 and have yet to relinquish it.
Despite their fears, baby boomers built wealth by investing in the stock market and purchasing real estate. They benefited from the 1980s bull market, which saw share prices soar and trading volume soar as more buyers entered the market.
Joining me in conversation is Joe Anfuso, CFO MG Properties, who will share insights into the efforts of owning and operating over $7 billion valued multifamily real estate.
--------------------
Bio:
Joe Anfuso is a proven and nationally recognized Financial, Operational, and Customer-Centric leader experienced in single and multifamily residential development in California and Nevada. As the CFO of MG Properties Group, Joe is responsible for directing the financial and fiscal management of the company’s operations, including budgeting, treasury, tax, accounting, information technology, risk management, and insurance.
Visit Joe on LinkedIn: https://www.linkedin.com/in/joseph-c-anfuso-1a734716/
Before the pandemic, the idea of aging in place was becoming more popular. Some baby boomers are now wary of nursing homes, where at least one-third of U.S. Covid-19 deaths have occurred, so they are interested in aging in place. The trend is making home shortages and prices even worse for younger buyers who want to get a piece of the real estate wealth.
The Silent Generation (born before 1946) had long owned the majority of real estate wealth, but they sold later in life and moved in with extended family, or to an assisted-living community. Baby Boomers living in their homes are bucking the trend. A study from the Federal Reserve data shows that boomers surpassed the Silent Generation in real estate wealth in 2001 and have yet to relinquish it.
Despite their fears, baby boomers built wealth by investing in the stock market and purchasing real estate. They benefited from the 1980s bull market, which saw share prices soar and trading volume soar as more buyers entered the market.
Joining me in conversation is Joe Anfuso, CFO MG Properties, who will share insights into the efforts of owning and operating over $7 billion valued multifamily real estate.
--------------------
Bio:
Joe Anfuso is a proven and nationally recognized Financial, Operational, and Customer-Centric leader experienced in single and multifamily residential development in California and Nevada. As the CFO of MG Properties Group, Joe is responsible for directing the financial and fiscal management of the company’s operations, including budgeting, treasury, tax, accounting, information technology, risk management, and insurance.
Visit Joe on LinkedIn: https://www.linkedin.com/in/joseph-c-anfuso-1a734716/
[0:01:25]
Hanh Brown: Hi, I'm Hanh Brown, the host of the A Living broadcast where industry leaders share information, inspiration, and advice for those who care for seniors. Our expert panel discusses senior healthcare, dementia, caregiving technology for seniors, affordable senior living options, and financial security, all of which address the social determinants of health. Thank you so much for participating in today's conversation. Check out CareString, our recently launched platform where we match seniors with their caregivers to guide businesses and their employees on the caregiving journey for their loved ones. So please check out CareString. For those in the audience, we'd love to hear from you, so please comment, ask questions, and thank you so much for tuning in to today's conversation.
[0:02:17]
Hanh Brown: We're all learning together as we approach retirement age and financial security through investing is a great way to do so. Today's topic is baby boomer multigenerational wealth and multifamily real estate. Before the pandemic, the idea of aging in place was becoming more popular. Some baby boomers are now wary of nursing homes where at least one-third of the U.S. COVID deaths have occurred.
[0:02:46]
Hanh Brown: Those interested in aging in place are making home shortages and prices even worse for younger buyers who want to get a piece of the real estate wealth. The silent generation had long owned the majority of real estate wealth, but they sold it later in life and moved in with extended family or to an assisted living community.
[0:03:07]
Hanh Brown: The baby boomers living in their homes are bucking the trend. A study from the Federal Reserve data shows that baby boomers surpassed the silent generation in real estate wealth in 2001 and have yet to relinquish it. Despite their fears, baby boomers built wealth by investing in the stock market and purchasing real estate. They benefited from the 1980s bull market, which saw share prices soar and trading volume surge as more buyers entered the market. Joining me today for the conversation is Joe Anfuso, the CFO of MT Properties, who will share insights into the efforts of owning and operating over one billion valued multifamily real estate.
[0:03:46]
Hanh Brown: Joe Anfuso is a proven and nationally recognized financial operational customer-centric leader experienced in single-family and multifamily residential development. As the CFO of MT Properties Group, Joe is responsible for directing the financial and fiscal management of the company's operations, including budgeting, treasury, tax accounting, information technology, risk management, and insurance. So, Joe, welcome to the show.
[0:04:24]
Joe Anfuso: It's my pleasure to be here and participate.
[0:04:28]
Hanh Brown: Thank you so much, Joe. Can you tell us a little bit about yourself, professionally and personally?
[0:04:33]
Joe Anfuso: Sure, I'm the CFO of our M&M Properties. M&M Properties is a fairly large, privately held owner-operator of multifamily properties, mainly in the West. You'll find us in Washington, Oregon, Arizona, Nevada, and Denver. We're just about to hit about twenty-six thousand units. We're closing our portfolio in Reno, Nevada, as we speak.
[0:05:04]
Joe Anfuso: We have about six hundred and fifty employees. We're very vertically integrated. We're a property management company, corporate asset management, acquisitions. We're structured for management. We're kind of a soup-to-nuts general partner of all our deals.
[0
:05:24]
Joe Anfuso: About twenty to twenty-five percent of our current portfolio is institutional, so mainly large pension funds. We've done deals with Blackstone, Intercontinental, and a number of big players. Private capital is for eighty percent of our properties, so real private, high net worth, family offices, and so on.
[0:05:44]
Joe Anfuso: We're fairly diversified, have a fairly big portfolio which is now approaching a little over seven billion dollars in assets under management, and try to make sure we're investing the best dollars on behalf of our investors, providing a phenomenal return and wealth creation over their generations.
[0:06:04]
Hanh Brown: Congratulations, professionally. Wow, thank you so much for being here and sharing your wisdom on this very important topic. So, to get everybody on the same page: What is multifamily real estate and how does multifamily real estate differ from the other types of real estate?
[0:06:24]
Joe Anfuso: Sure, multifamily is kind of what it says it is, it's residential real estate. I actually teach a class at the University of San Diego. I'm an adjunct professor teaching commercial real estate finance and investment. For everybody out there, in commercial real estate, you have different types. You get office, industrial, storage, and everything in between. Multifamily is simply residential real estate used for individuals or families all living on premises.
[0:07:04]
Hanh Brown: I apologize if you hear some noise in the background, we're located near Miramar Naval Air Station and sometimes we have planes flying overhead. Moving on, for us at M&M Properties, we're investing in multifamily properties. Our typical property has around 150 to 200 units, with our largest property containing 760 units.
[0:07:24]
Hanh Brown: We primarily own suburban-style walk-up properties. We don't typically invest in properties in major metropolitan downtown areas like Los Angeles, San Francisco, or San Diego. Rather, we tend to focus on suburban areas located about 15 to 20 miles outside these metropolitan areas.
[0:07:45]
Hanh Brown: Our properties usually are three to four stories tall, built over a podium structure. This type of product is currently very desirable, especially given the migration patterns we've observed during the pandemic over the last two years.
[0:08:05]
Hanh Brown: So, what are the benefits of owning multifamily property?
[0:08:09]
Joe Anfuso: There are numerous benefits. I think the first one is the ability to create wealth because of our tax code. We have a tax code that encourages investment in real estate. As a passive investor, you can receive tax benefits such as depreciation deductions which you can use against other passive income.
[0:08:25]
Joe Anfuso: Another big advantage, especially for larger properties, is the ability to utilize the 1031 exchange. This provision allows you to reinvest your gains from a sold property into the next property you buy, deferring any taxes. As these properties appreciate, those gains get larger, but you're not paying taxes until you actually sell the property and take the cash.
[0:08:45]
Joe Anfuso: This mechanism allows for substantial wealth creation. To illustrate this, I've provided a chart to give your audience an example of what I'm talking about.
[0:09:06]
Joe Anfuso: To clarify, I should say, "I am not a financial advisor. I'm not giving financial advice. I'm a recovering CPA who likes to talk shop." This example shows what happens if you make a $100,000 investment in a real estate transaction, hold the property for five years, earn an average annual return of 15%, and have a tax rate of 35%.
[0:09:29]
Joe Anfuso: What does that appreciation dollar look like held over a 30-year period? The blue part of the chart shows if you simply took the $100,000, sold the property in five years, took your cash, paid taxes, and then reinvested that $100,000. Over 30 years, you'd get to about $500,000, which is a reasonable return.
[0:10:01]
Joe Anfuso: But if you follow the strategy I just explained, where you keep exchanging the properties and deferring the taxes, at the end of 30 years, you cash out and pay your taxes, you get to almost $2 million for that same $100,000 under the same scenario.
[0:10:15]
Joe Anfuso: The real generational wealth creation happens when you start with that $100,000, keep exchanging into the next property, and let the appreciation happen. When you pass on, your estate goes to your heirs with a stepped-up basis, meaning all that deferred tax goes away. All of a sudden, that $100,000 investment, under the same scenarios and properties, can reach over $2.7 million.
[0:
10:48]
Joe Anfuso: This is a huge wealth creator which many families have done over the years for their families and heirs. It's a great way to gain and keep wealth in the United States. I hope that helps!
[0:11:08]
Hanh Brown: Absolutely. The key is to start early and start right away. You don't need to be in your mid-fifties or sixties to start. So, thank you for that slide. What factors do you consider before investing in multifamily properties and how do you maximize your return on investment?
[0:11:20]
Joe Anfuso: That's a good question. Like any other investment, you should first decide how much of your portfolio you want to invest in real estate. This largely depends on your risk tolerance. One of the most common mistakes people make is not fully understanding the risk they're taking in a deal.
[0:11:40]
Joe Anfuso: Every deal is different and you really need to take the time to understand what you're getting into. There are several types of strategies in real estate: core, core plus, value add, and opportunistic.
[0:12:00]
Joe Anfuso: For example, with a core investment, you're likely investing in properties in a major metropolitan area. Your return may be lower, but it's considered a safer bet.
[0:12:12]
Joe Anfuso: On the other hand, with a value-add strategy, companies like ours look for properties that can be improved. We have the opportunity to renovate these properties, raise rents, and improve property management. This type of strategy involves a higher level of risk, but also offers potentially higher returns.
[0:12:41]
Joe Anfuso: Where somebody like us we made our bread and butter in that market over the last thirty years we're were out there, we're looking for properties that need to be improved our you have the opportunity to go in, do some work, race and rents, manage their property.
[0:13:01]
Joe Anfuso: With our asset management and construction manager, we're able to create value by increasing rents, controlling expenses, and over the investment horizon, your investors profit from this type of management. People need to understand this; it's not just about investing in multifamily, it's about the type of multifamily it is.
[0:13:21]
Joe Anfuso: You have to consider the risk of the different types of multifamily properties. One thing people may not consider is who their partner is, who the general partner is that is out there doing the research, doing the underwriting, and doing the legwork to look at those properties. Whether it's value-add, core plus, or opportunistic, you're entrusting your money with someone who has a track record of making money in good times and bad.
[0:13:54]
Joe Anfuso: That partner should be a good steward of your money and ensure that you'll get a return over the investment horizon.
[0:14:01]
Hanh Brown: That's great, so who are the typical buyers and sellers in the market?
[0:14:07]
Joe Anfuso: That runs the gamut. I've seen everything. For buyers, it can range from a group of doctors who have an investment club to individual high net worth individuals, to accountants and other professionals, all the way to large institutions like Blackstone. We've done ten property deals with them. So, your buyers can be as large as institutions or as small as a mom-and-pop investor who have money to invest and want to be part of the wealth creation in multifamily investing.
[0:14:49]
Hanh Brown: So, how does the financing process work? I know that's a big question. Could you give us a high-level understanding?
[0:15:08]
Joe Anfuso: It's no different than when you buy a home. You research the property you want to buy and then you get a mortgage, just like anybody else. It's about what the market is going to provide at that time. We're not a high leverage shop. I think the highest loan-to-value ratio we've had in the last forty years has been somewhere in the neighborhood of 60 to 65 percent.
[0:15:29]
Joe Anfuso: The majority of our funding over the last ten years has come through Fannie Mae and Freddie Mac loans, just like people get for their mortgages. But that has actually changed during the course of the pandemic. Over the last year, we've seen many more players willing to provide funds for mortgages on multifamily properties. These could be life insurance companies, private equity funds, debt funds.
[0:16:09]
Joe Anfuso: They want to get into multifamily through one vehicle or another, and it's either direct investment through a fund or they can support a mortgage for some of their other investors.
[0:16:25]
Hanh Brown: So what are some of the most common disputes that occur in the multifamily deals?
[0:16:33]
Joe Anfuso: Obviously, when it comes to buying and selling, one major dispute can be over what the real net operating income is. The value of your property is really based on the investment income, or what net operating income is being produced.
[0:16:53]
Joe Anfuso: This differs from residential real estate home buying, where you're buying for the production of income and the production of income is shown through net operating income. Buyers and sellers may calculate things differently, and one of the disputes that come up is what one
person's net operating income may not be what another person's net operating income is.
[0:17:33]
Joe Anfuso: That's why a good general partner can evaluate and do the due diligence to understand the production of income and expense ratios, so they can in turn make an assessment as to the value and the ability for their investors to profit by knowing how that's going to be adjusted over the course of the investment horizon.
[0:18:04]
Hanh Brown: Great. What trends do you see happening in the market over the next five years?
[0:18:24]
Joe Anfuso: Technology. It is all about technology at every level. Whether we own a couple of adult-type buildings catering to a younger age cohort, everybody wants technology. Smart home technology is a big deal right now.
[0:18:44]
Joe Anfuso: People want to control thermostats, locks, water leak detection, things like that, anything to do with smart home technology is what everybody wants. If you can sign your lease on your phone, do a tour on your phone, anything to do with technology is the wave of the future. My students are much better prepared than the older cohorts working in this business because they've grown up with this technology.
[0:19:05]
Joe Anfuso: Younger people, they do everything with their phone, and are much better prepared to participate in the technological advances in multifamily than the older people like me. They're coming in, they know all about it, so they're accustomed to what needs to be done instantly to make it work for the younger generation or for those who are technologically advanced and want to be able to use their phone every day for everything.
[0:19:32]
Hanh Brown: So, I've noticed a lot of technological advancements now, and maybe in the works. Just a thought, what would you like to see in that regard for multifamily?
[0:19:52]
Joe Anfuso: I think we need to do a better job. There are a couple of players out there. Anything that can improve relations with the tenant can really help. We're getting to a point where we'll be able to consolidate many of the functions between the tenant and the landlord, the owner, into one area rather than having it piecemeal.
[0:20:12]
Joe Anfuso: There's a number of separate applications that are all working independently within the business to perform on behalf of the relationship between the tenant and the landlord. I think in the future, you're going to see it consolidate into one. There are companies out there like Funnel that are trying to improve the relationship with the tenant at different levels so everything is done within a particular app, as opposed to having to use many different apps to perform all the tasks.
[0:20:52]
Joe Anfuso: We, as owners and landlords, have to always constantly look to see what makes the relationship easier for the tenant by virtue of technology.
[0:20:58]
Hanh Brown: I like what you said about bundling up because right now they are separated in different silos. For those of you in the audience, let us know what your thoughts are, leave a comment or ask a question. We all can help each other get closer to a secure retirement. Now, let's talk about some metrics. What metrics should be considered in addition to vacancy rate and market rent in assessing your multifamily investment?
[0:21:30]
Joe Anfuso: For most of your individual buyers or even large family offices, they're looking at one metric, most of the time, that is cash on cash. We oversee the investment reporting for all of our investors. They want to know what their cash-on-cash return is.
[0:21:50]
Joe Anfuso: For most people, if they're giving you a hundred thousand dollars or a million dollars, they want to know what they're getting back for that money. For us, our model is a cash-producing model just like a bond or an annuity. People invest with us expecting to get a return on a quarterly basis. They expect that check to be deposited in their account fifty days after each quarter.
[0:22:30]
Joe Anfuso: For institutional investors, it's much more about the internal rate of return. They want to know what their multiple is on their money, the return on their money overall, as opposed to what is the cash on cash on a specific basis or over a specific period of time. That's the difference between the institutional investor and the private investor.
[0:22:51]
Joe Anfuso: For us, we're always looking at what has been big and huge over the last eighteen months, and that's your rental rate with regard to an increase at the renewal rate and your new lease rate. It's a constant metric we're always looking at to see where
we're able to raise rates.
[0:23:11]
Joe Anfuso: And obviously, it's vacancy rate, occupancy rate, there's turnover, cost, a number of different metrics we look at just to determine how the property is operating and if we're meeting our goals and our forecasts moving forward.
[0:24:11]
Hanh Brown: Do you have any guidelines or examples of appropriate debt coverage ratios to look at when investing in a multifamily property?
[0:24:13]
Joe Anfuso: Usually the debt coverage ratio really is more of what you're dictated by from the mortgage lenders. The lender is going to be somewhere around 1.25 to 1.35 somewhere around that range, that's usually their comfort level, how much you can cover your debt service with.
[0:24:33]
Joe Anfuso: That's usually where the number falls out and parameters the lenders usually set parameters on you with regard to how high they're going to let your debt coverage ratio go and the maximum loan amount. You're almost like bumpers in a bowling alley, you're not going to get too far away from what they're telling you they're going to do as long as you fall within those parameters.
[0:24:53]
Hanh Brown: Great, I want to acknowledge a question from the audience, they're asking what are the qualifications in attaining financing to invest in multifamily. That is a great question.
[0:25:13]
Joe Anfuso: A lot of it depends on how big you are and what you're trying to purchase. For larger players of substantial means, like M&G Properties, their ability to get loans is easier than somebody just starting out. Once you've provided your financial wherewithal and established yourself within, let's say, Freddie Mac or Fannie Mae as a preferred borrower, they have everything they need with you, and it becomes very programmatic.
[0:25:53]
Joe Anfuso: However, for those just starting out, if you have very little money or equity, you're going to have a harder time, no doubt about it. A lot of people just starting off bring in a co-GP, someone who's got a bigger balance sheet and more liquidity, so they can get the deal done.
[0:26:34]
Joe Anfuso: I don't want to deter anybody from looking at that, but certainly, your net worth, your history, balance sheet can dictate how easy it is to get the loan.
[0:26:54]
Hanh Brown: Hopefully that answers your question. Thank you so much. Now some providers offer leasing measurements, so can you describe what exactly this does for investors?
[0:27:08]
Joe Anfuso: If you mean the rate of leases, then I would call it absorption. We show how fast we're able to lease out a property and we look at the turnover rate as well.
[0:27:48]
Joe Anfuso: In a market like this when you're over 96% occupied, you're able to meet those parameters. However, the amount of work that needs to be done on an apartment to turn it around will dictate how fast you can lease it.
[0:28:24]
Joe Anfuso: We've invested in a significant number of properties within the last 24-36 months, and some of those are still in a lease-up phase from the very beginning. If you've got 300 units in a new apartment complex, you need to know whether you're leasing up three apartments a month or three a week.
[0:28:57]
Hanh Brown: Great. I know we've touched on this throughout the conversation, but maybe we could do a deeper dive. What are the key factors that you consider when evaluating a multifamily real estate investment?
[0:29:15]
Joe Anfuso: The first key factor is the sponsor. As a passive investor, your ability to manage is almost non-existent, so you're relying on the sponsor of that deal. You need to do your due diligence not only on the sponsor, but also on the deal.
[0:29:55]
Joe Anfuso: You need to understand what the sponsor has accomplished, both in good times and bad. There's a lot of sponsors out there who only talk about the great things that happened but never want to talk about the time they gave back five properties during the Great Depression, for example.
[0:30:02]
Joe Anfuso: The second thing is risk assessment. Many investors do not spend enough time looking at where their property is. Sometimes people just look at the return but they might be in the outskirts of nowhere, Ville with a huge risk premium and an unqualified sponsor who doesn't have a long track record.
[0:30:41]
Joe Anfuso: Alternatively, you might take a 5% return on a qualified sponsor with a long track record who has hundreds, if not thousands, of investors that have a long-term appreciation. The question then is, where is your
money better invested?
[0:31:01]
Joe Anfuso: Like anything, you need to understand this is your money. Make sure you understand the risk you're taking, not just looking at "Oh, this guy is providing or this woman is providing an X percent return," you really need to dig into the details. That's why we all provide a private placement memorandum which goes over the details.
[0:31:21]
Joe Anfuso: Where it's located? What it's costing per unit? What the cost per foot is? What the market dictates? All those items. What is going to happen with the property's value? Why we're going to spend five million on that property, why we're going to put in new cabinets, new countertops, new flooring? How that's going to impact the rent, and how that's going to increase the value of the property over the term of your investment.
[0:31:43]
Joe Anfuso: So my advice is: find a good sponsor, a credible sponsor, and you have done your work with regard to assessing the risk that you want to take with your dollar.
[0:32:03]
Joe Anfuso: If you've done the majority of leg work, you can be successful and create wealth for yourself.
[0:32:14]
Hanh Brown: It sounds like due diligence in the investment and the syndicator, and possibly previous LPs, is important.
[0:32:24]
Joe Anfuso: Yeah, there's no doubt. I think that's where people really need to concentrate on. If you're going to put fifty thousand dollars or thirty percent of your net worth, you need to be concerned about the risk you're taking. If it's two percent of your net worth, then maybe you want to be outside of your comfort zone, in the suburbs of Tennessee for example, willing to take a higher risk-reward premium.
[0:33:04]
Joe Anfuso: People really need to assess if this is thirty percent of their net worth, or is it three percent of their net worth, and make decisions accordingly.
[0:33:06]
Hanh Brown: Great. I know we touched on value-add earlier, but let's again do a deep dive. So, what does the term "value-add" mean to you, and in what ways do you add value?
[0:33:25]
Joe Anfuso: Value-add is somewhat self-explanatory. You're adding value to the property by doing more to it. There's risk involved. It's different than a house flipper on a single-family home, as seen on those TV shows.
[0:33:45]
Joe Anfuso: A value-add property, or multifamily property, requires that you are buying a property that you believe to be under market or under-utilized and you're going to improve that property.
[0:34:05]
Joe Anfuso: The idea is that once improvements are done, you'll be able to increase rents, better control expenses, better manage the property, and then be able to increase NOI (Net Operating Income) and yield. As NOI increases, you've added value to the property and created value for your investors' returns.
[0:34:22]
Joe Anfuso: There's risk and reward in that, and you should be compensated for that risk reward, as opposed to just buying a new property that doesn't need any work and you're just riding the market.
[0:34:30]
Hanh Brown: So what's the best way to measure NOI, and why is it important?
[0:34:36]
Joe Anf
uso: For us, cash-on-cash is really the key metric. A majority of our investors look at return on investment as the foremost measure of their gains from the property.
[0:34:51]
Joe Anfuso: Over time, especially with exchanges, seeing that multiple grow or the multiplier effect of being able to defer capital gains tax on the next property has been huge.
[0:35:11]
Joe Anfuso: We find that a lot of our acquisitions are based upon prior acquisitions that have run their term and it's time to sell. About 80-85% of our investors will move on to the next property through an exchange.
[0:35:40]
Joe Anfuso: They do that because they see the ability to create wealth, defer taxes, and pass on wealth and accumulate income over time as being substantial. They'd rather continue doing that rather than take their chances putting it in something else that may not provide the returns they're getting through real estate investing.
[0:36:00]
Hanh Brown: It seems to be relatively passive, right?
[0:36:11]
Joe Anfuso: Absolutely. You get the benefits of earning and there are a lot of passive losses due to depreciation that get passed on to the investors. So, for someone that has a large portfolio with other passive investments and has passive gains elsewhere, you have the ability to offset those gains on an annual basis.
[0:36:33]
Joe Anfuso: Or you have a loss carryover that you'll be able to use at some point in the future.
[0:36:44]
Hanh Brown: So, how do you compare income and outgoing amounts to create a better value judgment of return and upkeep?
[0:36:54]
Joe Anfuso: Sorry about the airplane flying overhead. (laughing)
[0:37:00]
Hanh Brown: The next top gun movie seems to come out presently.
[0:37:03]
Hanh Brown: They are practicing, then.
[0:37:05]
Hanh Brown: So, I apologize personally. And oh, sure, sure. So how do you compare income and outgoing amounts to create a better value judgment of return and upkeep?
[0:37:17]
Joe Anfuso: To answer your question right, and I can give you an example. There's always a finite amount to be spent on the property, the outgoing. And now you have to make the determination of what risk you're willing to take and the return that's being provided by the property.
[0:37:37]
Joe Anfuso: For the majority of our history, we've always been pointed towards value-add properties because the risk-reward was beneficial. We have the expertise, and that's what we did.
[0:37:53]
Joe Anfuso: For the last four years, a good portion of our investment, probably in the neighborhood of forty to fifty percent, has been because there have been so many new players in our market meeting the larger properties over two hundred units that are looking to buy.
[0:38:13]
Joe Anfuso: With value-add properties, the competition has grown so much and the chase for yield has grown so much that the spread between the return spread between what you would get from a value-add property.
[0:38:31]
Joe Anfuso: And a core property, like I talked about earlier, that's a new or property, is now minimal.
[0:38:40]
Joe Anfuso: So, as a sponsor, you can do one of two things. You can search for those diamonds in the rough and run across those value-add properties where you're going to try to find a little bigger spread, which we do.
[0:38:52]
Joe Anfuso: Or you can go the other side and ask, why should I take on the risk of value-add for just a little bit less of return? I could buy a property that's built in 2021, in a prime location. It's still going to be a good property in five to seven to eight years, and ride out what the market's going to give you in the future, through rent increases and good property management.
[0:39:29]
Joe Anfuso: You're not taking on that risk of new cabinets, new flooring, and new additions in the expectation that you're going to get a bump in rents.
[0:39:49]
Joe Anfuso: We've had to make that value judgment moving forward and so the on a number of our investments have been that way. Why does it work?
[0:39:53]
Joe Anfuso: It's honestly because in chasing yield, people have understood that they have to take a lower rate of return simply because there's no money in bonds and so.
[0:40:13]
Joe Anfuso: To chase yield, people are willing to take lower returns than they were five years ago, and they'll take it on a new, more stable property in a better location. And they know that it's going to be that way for the next five, seven, ten years.
[0:40:34]
Hanh Brown: Great point, so how do you know if a multifamily property is overvalued or undervalued?
[0:40:45]
Joe Anfuso: Ah, the sixty-four thousand dollar question, right?
[0:40:52]
Joe An
fuso: I think we can all really say that the market is in a different place. We're looking at a market where job rates are not low, interest rates are starting to creep up a little bit. If we're on the economic cycle scale, I think we can all agree we're probably on the upper side of that scale.
[0:41:15]
Joe Anfuso: Last year, rents increased substantially, by double digits, and everything in the real estate market, like the house price index, was out of control.
[0:41:35]
Joe Anfuso: For our company, MGM, I think the difference when we look at things is that we're in this for the long term. We bought in 2012 and those investments from 2013, 2014, 2015 are panning out extremely well for our investors. They are reinvesting now, and people ask, "Why should we reinvest when we know we're probably at a higher end of the cycle?"
[0:41:55]
Joe Anfuso: It's because as an investment, we look at it and we make adjustments for a long term. Most of our properties now, with exchange money, have loan to value rates probably in the low fifties.
[0:42:16]
Joe Anfuso: We're not putting on a lot of debt on anything we buy, or anything we've bought over the last few years. We're looking at low leverage and lower returns, but also a much safer bet. When that time comes...
[0:42:31]
Joe Anfuso: And I'm old enough to know that it always comes when we hit a bump in the market. Those sponsors and those investors who have no leverage, who have the ability to keep the doors open, will be the survivors and be able to move on.
[0:42:51]
Joe Anfuso: When you look at an investment horizon, most of our investment horizons are somewhere between five, seven, and ten years. We bank on the fact that we can play this game for the long term. The old adage, especially in Southern California, is you never paid too much for real estate, you just sometimes buy a little early.
[0:43:10]
Hanh Brown: Or it just means if you can hang on, you're not highly leveraged and you can support the property over the long term, the market will always come back and the market will always treat you right, and I think that's where you have to look again. When you're investing, make sure your sponsor has that ability to keep the property going on and...
[0:43:31]
Hanh Brown: Know the sensitivity to if rents come down. Can you still make a mortgage payment, can you still pay your bills, can you still cover the expenses and pay your property taxes? We show that to all of our investors, right? We give them that sensitivity analysis. We know what those numbers are, and we have a plan for things that might happen during the course of the investment.
[0:43:51]
Hanh Brown: But over the long term, we're quite certain. If we operate it correctly, we're going to come out and be profitable for our investors.
[0:44:00]
Hanh Brown: So we have a few more questions. I know we're kind of at the tail end, so I want to make sure we cover them. How do you predict how a multifamily investment will perform in the future? I know we've touched on many moving components, but I really want to hone into this. So, how do you predict how a multifamily investment will perform in the future?
[0:44:19]
Joe Anfuso: You're right, it's a great question. We bring in a lot of market data, and there's no doubt there's a lot of historical data we use. We use metrics, for instance, everybody's out there making predictions with regard to where rents are going. Remember, all real estate is local, so you've got to be looking at your local market.
[0:44:39]
Joe Anfuso: In their prediction, we're using rent growth averages. You look at the four elements to each property. I think you have to look at those to help determine the deal. There's the raw data - jobs, capital, supply, and sentiment.
[0:44:59]
Joe Anfuso: Jobs - what does the job market look like in your local market, and will it support rent growth? Capital - by way of mortgage and equity capital. Is there mortgage capital available to finance it? Is there equity capital out there for purchasing and developing?
[0:45:20]
Joe Anfuso: Supply - what's the supply side look like in those particular markets? Is four percent of supply being built every year or maybe one percent of existing supply is being built every year?
[0:45:40]
Joe Anfuso: And then the last one is sentiment. You've got to know your markets. Are people exiting the markets or coming into it? Is it still a growing market like Austin, Dallas, Denver, or Phoenix?
[0:45:42]
Joe Anfuso: All those items, people are looking at those four elements of each location. That, along with the statistical and market data, helps you determine what the average rent increase should be over a longer period of time.
[0:46:02]
Hanh Brown: Great, great! Wow, okay. So I just have a few more. With regard to partnership, how do you know if a partnership is a good fit for you and what are some things that you should never do when joining a partnership?
[0:46:17]
Joe Anfuso: That's a great question. For the most part, in about eighty percent of our deals, the
partnership is where we, the general partner, really have individuals who have very little control over the property itself.
[0:46:37]
Joe Anfuso: They need to be doing the due diligence on MGM. They need to be looking at what we do and so forth. But the better part is for us to be more the minority partner, still a general partner, with regard to a large institution.
[0:46:51]
Joe Anfuso: That's where you really have to start to look. Is it a good partnership when you're just a minority partner? For the most part, it is. Are your goals in alignment with regard to the future of that property?
[0:47:07]
Joe Anfuso: For instance, if someone says, "Oh yeah, we're in this for the long term", but that institutional partner, in a specific fund, always sells in three years, then you have to ask: Is that the kind of partnership you want to have?
[0:47:29]
Joe Anfuso: Knowing that we've got our people at a site, let's say we've got a big property with ten people working there and we're managing it, do we want to be in that partnership knowing that the property and people's jobs might go away in two years?
[0:47:50]
Joe Anfuso: Now we can make the decision that it's an okay partnership and we're willing to do that, but first and foremost, make sure your goals align with regards to what the property is and what you want to be doing with the property over the course of the investment.
[0:48:04]
Hanh Brown: Wow, thank you so much! This is a wealth of knowledge, and for you to take the time to share with us, I really appreciate it. Do you have anything else that you would like to share?
[0:48:25]
Joe Anfuso: I would just say that for any of you out there who are thinking, "Why would I invest in multifamily as opposed to any other type of investment?", I would just note that I'm old enough to have lived through inflation once before.
[0:48:30]
Joe Anfuso: And if any of you remember that, where you want to be is in income-producing real estate, especially in multifamily. The two things people have to do is they need a place to live and something to eat.
[0:48:51]
Joe Anfuso: They're always going to find a way to be able to live, and they're going to spend money on where they want to live. I just think if you're looking into the future and are somewhat uncertain with regard to where inflation might take us over the next eighteen to twenty-four months, or where the market is going, I think one of the best inflation hedges you can have is over the next...
[0:49:11]
Joe Anfuso: Just in the foreseeable future, we're going to be multifamily properties where the demographics, the supply, and so forth are working in our favor for the foreseeable future. That's one of the reasons I'm in this business.
[0:49:31]
Joe Anfuso: Earlier in my career, I just always thought that over the last part of my career, multifamily was going to be the place to be, and luckily that's kind of how it turned out. We'll have our bumps and bruises, don't get me wrong, but I still think in the long term it's still working in our favor.
[0:49:51]
Joe Anfuso: And will continue to do so.
[0:49:53]
Hanh Brown: Thank you, thank you so much, I echo that. We all need a place to live and food to eat, so multifamily real estate is a popular way for baby boomers to invest and preserve their wealth as they enter retirement. They are looking for opportunities to secure their future while still enjoying the present.
[0:50:13]
Hanh Brown: Multifamily real estate offers them stability in an uncertain world, as well as a potential income stream for generations to come. Thank you so much for being on the show today. For anyone that's listening, I really appreciate you and tune in tomorrow, Thursday, the twenty fourth at twelve thirty Eastern time.
[0:50:33]
Hanh Brown: My guest will be Leith States from the U.S. Department of Health and Human Services and we will discuss aging population and the social determinants of health. Again, please subscribe to our YouTube channel Aging Media Show and leave a review on iTunes Podcast Boomer Living.
[0:50:53]
Hanh Brown: Thank you so much for joining today, take care.
[0:51:04]
Hanh Brown: Thank you for listening to another episode of "The Boomer Living" broadcast. I know you have a lot of options when it comes to podcasts and I'm grateful that you've chosen this one. Please share this podcast with your friends and family, write a review on iTunes, Spotify, and Google Play. It helps others discover the show. You can also contact us at 736-350-6842 to leave a review and request content for the show. We love hearing from our listeners.
[0:51:20]
Hanh Brown: Check out our TikTok, Instagram, and YouTube channel, Aging Media Show, and subscribe to get weekly tips on how to best serve the senior population. We want to help them have a great experience as they age. Thanks for tuning in until next time.