Why 2024 is the Best Time for Passive Investing in Multifamily Real Estate with Joe Fairless

On today's episode of Ritter On Real Estate, We chat with Joe Fairless. Joe Fairless is the Co-founder of Ashcroft Capital which has over $2,800,000,000 of assets under management. In addition to his responsibilities with Ashcroft Capital, Joe created the podcast, Best Real Estate Investing Advice Ever Show, which is the longest-running daily real estate podcast in the world and generates over 500,000 monthly downloads.

Joe is also a proud Member of the Texas Tech Alumni Advisor Board for the College of Media and Communication, as well as being recognized as Outstanding Alumni at Texas Tech University, where he is a former Adjunct Professor. He is currently a Junior Achievement Board Member and Volunteer for the Cincinnati chapter and has been recognized by the Junior Achievement’s Free Enterprise Society. Joe volunteers at Crossroads Hospice and was recognized as Multifamily Investor of the Year by Think Realty Magazine. 

He and his wife created Best Ever Causes which has proudly supported 76 different non-profits over the last 72 months. Welcome, Joe! 

Key Points From The Conversation:
- Why 2024 is a great time to invest in multifamily assets.
- Supply and demand, issues with new construction. 
- Kent's prediction for the future of the market.
- Navigating interest rates in deals.
- Josh's experience investing as a limited partner. 
- The importance of being a good operator. 

Books Mentioned: Breath: The New Science of a Lost Art by James Nestor

Transcript

Kent Ritter: 0:13

Hello, fellow investors. Welcome back to another episode of Ritter on Real Estate, where we teach you how to passively invest like a pro. Today I've got a very special guest, long term mentor and friend of mine, Joe Farrells. Joe is the co founder of Ashcroft Capital, which has over 2.8 billion of assets under management. You probably mostly know Joe from his podcast, the best real estate investing advice ever show, which is the longest running daily real estate podcast with over 500,000 monthly downloads. Joe really inspired me to start this podcast and what he had done. And in addition to that, Joe sits on the alumni advisory board at Texas Tech. He's on the board of junior achievement, and he's just given back in many ways through his charitable foundation, best ever causes. So Joe has really taken all that. He's built multifamily, and now he's making a big impact through his charity work as well. So, Joe, thanks so much for coming on the show today.

Joe Fairless: 1:22

Well, I appreciate it and thank you. And I'm looking forward to adding value in whatever way I can during our conversation. You know, you're a tagline, passively invest like a pro. I love that. And I think we'll have some good stuff to talk about that relates to that.

Kent Ritter: 1:37

Yeah, absolutely. Absolutely. Well, let's dig right in because this is clearly a, it's been an interesting couple of years for investing. I mean, pretty much whether you're investing in anything, but especially if you're investing in real estate. And I think you and I have a lot of similarities and are thinking about, you know, why the way that things have changed in the market, why 2024 is really a great time to start buying apartments and start investing in real assets. And so I think it's important for people to hear some of the detail behind the headlines, because a lot of the headlines, you hear things. It's just all fear, uncertainty, doubt. That's what gets the clicks from the news media. But really, if you look at the underlying detail, I think there is this really unique pocket of time that has presented itself to be able to buy some great assets. And it's something we haven't seen probably since the great financial crisis as far as where prices and things have gone without giving too much away. Joe, ID love to hear your thoughts on investing right now and why is right now really a prime time to invest in apartment buildings?

Joe Fairless: 3:00

Were about to experience a severe undersupply of apartment units, what youll read in the headlines right now. So its important to have some context. What youll read in the headlines right now, which is accurate, is that apartments are flooding the market, their completions are flooding the market. And that is absolutely the case from a historical standpoint. Just the first half of this year, to put it in context, there have been 284,000 completed units, which is more than the average for the full calendar year over the last 23 years. So the average is two hundred seventeen k new apartments sit in the market for a full calendar year. So 217k for a full calendar year. Just this year alone, 284,000 in the first half of the year. So from a historical context standpoint, man, apartments are absolutely flooding the market. Oh, that is making rents currently remain flat. Im talking about a national perspective. Obviously, this is market specific, submarket specific, property specific. From a national perspective, though, rents have been relatively flat during this period of time. And what is important to note is, okay, so weve got a whole lot of apartments sitting in the market. So what is that doing to occupancy? And the fascinating thing about it is that occupancy has held strong for the last three months. Occupancy has been at 94.2%. It's stayed there the last three months, 94.2%. So with this historical flood of new apartments coming online, the occupancy hasn't moved a bit. Now, rents remain flat, but occupancy hasn't moved a bit, and I mean 94.2%. So why is that? Well, there's a bunch of demand. There's a whole lot of demand. You mentioned the great Recession. That's where a lot of this started from. When, during the great Recession, people didn't build new apartments. People didn't build anything during those two, three years that created a big deficit of housing. Units tried to catch up from 2012 to 2022 or so. But during that period of time, there were about three and a half million more new households formed than units completed. So even during the 2012 2022, there's still a deficit, and we're facing a major deficit of housing. So can the continued flood of new completions, will it continue? Absolutely not. It's not continuing because what we've seen is that this year there have been 59,200, the difference of almost 60,000 new apartments that have been completed, minus there's a deficit of almost 60,000 new apartments minus the ones that have started. Look at the new apartments. Look at the ones that have started. There's a deficit of about 60,000. So what's that telling us is that is the greatest swing from year over, year of completed, minus started since the 1970s.

Kent Ritter: 6:42

Yeah.

Joe Fairless: 6:43

So we are already seeing the swing now from how things have, are going to be shifting. And the reason why is we all know interest rates have increased, prices are higher, new construction doesn't pencil regulatory issues across the board. It's harder to build right now. Just recently, if you look in the news, Jacksonville is considering a one year building pause on all apartments because the city's growing so fast and they need to reevaluate if their infrastructure can withstand the growth. So they're considering pausing all new apartments for twelve months. And that's more of the exception, not the norm. But what absolutely is happening across the board is that the new permits that are not being sought after because the deals don't pencil. And so where does that leave us? That's what's happening now. And so where does that leave us moving forward? Well, for the next twelve or so months, we'll still see the headlines of hey, new apartments come into the market. But man, at around mid 2025, late 2025, that story is going to completely do a 180. It absolutely will. Because a tiny bit of this is speculation because there could be a black swan event that, you know, who knows, maybe it makes building much easier or maybe there's a new technology that comes out or something else that changes this dynamic. But the majority of this is fact. And the reason why we can predict what will actually happen mid 2025 through 2028 as it relates to supply and demand only supply and demand is because you have to get a permit to build and then it takes 18 to 24 months to stabilize. So we can see this, we can see it in advance. We see what's coming. And so why is now a good time? Well, multifamily owners know this is taking place, so they're trying not to sell. But the ones who are forced to sell, man, this is when we can capitalize within this twelve month period of time or so on the opportunity that when apartments just cease to being completed and there is no new product coming online, that demand is going to soar. Rents are going to soar, and it's going to be a very desirable time to be an apartment owner.

Kent Ritter: 9:41

Yeah, yeah. I think that's really well said. You hit on a few points there. Let me summarize a little bit what I heard and you let me know if I make sure I heard it correctly. So there's, yeah, we're in this interesting window right now where current, well, supply and demand. Right. Supply has run up. So rents have been relatively flat right now. But what we're seeing and facing is really this cliff of supply because of where we are with inflation on construction prices, materials and labor and interest rates, it's very difficult to get a new construction project started right now. And even anecdotally from the developers that I talked to, many have said, and this was going into 2024, that they're going to start maybe only 25% of the projects that they plan over 2025. They're not doing five because they're just not, they're not penciling out. And so what this is going to cause, right, is this cliff where supply is going to just fall off, right. And we're going to see that kind of in 25 and 26, we can predict that because, as you said, there's permits out there that we can track and we can trim the data and we see this coming. And so while demand is continuing to increase because housing formation has stayed strong in the US, which is a great part of the US, which isn't happening in other countries, like countries, many countries in Europe, we're still growing. So houses are being formed. They need a place to live or in a deficit that's going to get worse. Right. And then on. So that's the future. But right now, what's happened because of where interest rates are and because cap rates and interest rates largely move together, we've seen for the first time since 2010, current asset prices decrease. Right. And we've seen this time wherever, even in my own experience, you know, we've seen cap rates expand, you know, a half of a percent to a full percent on certain deals, which for folks, what that means is basically we're able to buy to better value. It's less of a multiple on the income. We're buying assets at a better value. And we haven't seen that in, you know, let's say 1213 years. Right. That won't, that is a function largely of interest rates. So right now, were in a period where interest rates remain high. I dont think anyone expects interest rates to be this high forever. And I imagine about that time when construction starts, start falling off a cliff, were also going to see interest rates begin to come down. Were already starting to hear some things from the fed. And as interest rates come down, current asset prices will increase as well. It's this interesting time right now where we have these depressed prices, which is only a limited time, really a function of interest rates being up. I think that's where you and I share this mindset of right now is a very unique buying opportunity. I'll tell you one more thing I saw. So Howard marks one of the most prolific investors out there with Oaktree in their annual event. He called out commercial real estate as a once in a generation buying opportunity, and he specifically drilled into multifamily and industrial as where those two opportunities exist. And his point was the exact same as you're making all the same points, and it came down to really current asset pricing and future demand imbalance. And so, there's a lot of smart people saying this out there, including yourself, but does that kind of, you know, package it up, Joe?

Joe Fairless: 13:49

Yeah, absolutely. Yeah, absolutely. I mean, and a lot, as I mentioned earlier, a lot of multifamily owners know this. Therefore, the ones that are selling, you know, they are, they're in a tough spot. Most likely, they're in a tough spot. So they mean combined buying in an opportune time from people who are in a tough spot. You're getting some good deals. Yes, you can get some really good deals. Yeah, we are already, yeah, we're already seeing cap rates compressing on the deals that we're underwriting for class a properties that we're looking at. The cap rates are around 4.85% or so. We have a property in Orlando. We're buying at a five and a half cap for class a because of an interesting opportunity that we're able to get ourselves into. So cap rates are already starting to compress. And I would say what is most compelling about this is, I believe it's not dependent on interest rates decreasing. If interest rates were to stay the same. Okay, let's just say they stay the same for whatever reason, fill in the blank for what takes place to make them stay the same. You still got that severe undersupply of something that is highly sought after and needed.

Kent Ritter: 15:27

Sure, sure.

Joe Fairless: 15:28

So what happens when you have a little bit of something, but a lot of people want it?

Kent Ritter: 15:34

Yeah.

Joe Fairless: 15:34

Prices go up.

Kent Ritter: 15:35

Absolutely.

Joe Fairless: 15:36

And so, man, they're barring some black swan event, which could happen, but this is, this will take place.

Kent Ritter: 15:46

Yeah.

Joe Fairless: 15:46

And it's going to happen in about twelve months when you're going to see it shift, start shifting like this. And then when it shifts, I mean, it's going to, the momentum is going to go quick and you're going to want to be an owner or a passive investor of multifamily during that period of time. And now, over the next eight or so months, is the time to get in on it before that shift really starts taking place.

Kent Ritter: 16:16

I completely agree with you. I think it's a good point about interest rates, because the things we're buying now, I mean, the interest rates are priced in, right? We're buying at these rates.

Joe Fairless: 16:26

Right.

Kent Ritter: 16:27

The rates stay neutral. That's not a factor. Rates go down. It even multiplies the impact on value that we're going to see from the supply demand imbalance. Right. And you're right, it's Econ 101. If there's more demand than supply, what happens is prices go up and it moves up the curve. And so, yeah, I appreciate that, Joe. I appreciate you laying this out for folks. I think it's a really compelling case. I think it's an easy way to kind of understand all the different things that are moving around and oftentimes helps to get below the headlines to really understand the news.

Joe Fairless: 17:04

What I would say is that, so that is what's happening on a macro level. As we talked about, what's most important is, okay, that's macro level. But is this particular thing that I'm looking at a microcosm of the macro level picture?

Kent Ritter: 17:23

Sure.

Joe Fairless: 17:23

So as a passive investor, if you're looking at a deal double check that does, are you on the right side of the supply demand dynamic? So you look at completions and you look at absorption and you see where is that property at? Specifically, over the next five years? And the operator should be able to tell you by a subscription with costar what the projections are. Will the absorption outpace the supply in that particular submarket? So that's what you want to look at from a passive investor standpoint?

Kent Ritter: 18:03

Yeah, that's a great little golden nugget right there. Because I think oftentimes people focus a lot on demand and how much can we raise rents and what's the demand going to be? Not. And that's often what's presented at the forefront of focus on supply is usually less at the top of people's minds. But I think that especially where we are right now and everything you've just said, focusing on that supply and what's come is extremely important. So I think those are some great questions to ask as folks are evaluating deals. So appreciate that nugget there.

Joe Fairless: 18:38

Yep.

Kent Ritter: 18:39

So Joe.

Joe Fairless: 18:42

As you probably segue into this, I'm also a passive investor, so I'm thinking of that too. As I'm presenting opportunities, I'm asking, hey, what's the absorption look like relative to supply and over the next five years?

Kent Ritter: 18:55

Yeah, yeah, absolutely. And that's just a great segue because that's exactly where I was going to go. I was going to say that most people probably don't know this about you. I mean, we know of you from Ashcroft and everything you guys are doing, but you're also a very prolific limited partner and passive investor. You've invested in over 120 deals as an LP. So it's probably something most people don't know.

Joe Fairless: 19:21

Yeah. I currently have over 120 LP investments. I was looking it up earlier, and I've invested in over, I think, 160 or so. I think. Don't quote me on that one. But some have sold. It's a lot, obviously. Yeah. Over 150, I believe in total, I've invested in. So, yeah, I'm our Ashcroft capitals. I think I'm our second or third largest investor as an LP, but obviously I'm the co founder also, so I'm the GP, but I have invested. I currently have money with over 50 operators as an LP. So I've seen some things and seen what works, and fortunately, I'm invested with you. So thank you, and I'm grateful for that.

Kent Ritter: 20:13

I appreciate you.

Joe Fairless: 20:14

Yeah, well, you created the opportunity and I'm just tagging along, so I'm grateful for that. You're doing the work and I'm just benefiting. So thank you.

Kent Ritter: 20:25

That's the goal, right?

Joe Fairless: 20:26

Yeah. Thank you.

Kent Ritter: 20:27

So tell me, with all these different investments that you've seen with all these different operators, just what are your top lessons that you've learned to on, like, how to be a good passive investor? What are the things that we should be looking at, you know, and what are the things that you maybe have changed your perspective, like, over time after doing all these deals? Yeah.

Joe Fairless: 20:54

So one thing that. That stands out to me is money is made, money is. I'll rephrase. Money is lost in the operations. So that, to me, from what I've seen, is the biggest risk factor, the operations, because you tend to make money on how you purchase it and when you sell it, certainly the value add business plan comes into play. But there's the operations component. What I've seen as a passive investor, the deals that. So 123 deals that I'm in now, one of them will likely lose 100% of my money. And it was because they weren't doing well operationally. The occupancy was like in the eighties or seventies, and they had debt on it that was floating and they couldn't navigate that. When those two things are present, operational issues and some sort of debt issue, you're likely toast. That's what I've seen and the operators that are able to navigate it are the operators who have solid operations. Maybe there's a debt challenge. I mean, with my company, Ashcroft did our first capital call on a fund because we had floating debt with rate caps that were due. So we ended up doing a capital call. Now we're refinancing a large majority of the floating debt into fixed interest rate loans, and then we're going to sell the other properties when the market turns around and we'll navigate it. Operationally, we're solid. So that's how we're able to navigate that. If there's a deal or an operator that doesn't have the operations solid and they have some debt issues, you're likely in trouble. So that's Monday morning quarterback. So now what can we do as passive investors when we look at opportunities? Because what's done is done. If you're in a deal, passively you're in a deal. So that didn't really help you much. But now for future stuff, what do we look at? So what I look at is, does the operator operate the properties and manage them, oversee the properties themselves? Do they have the controlling interest to make the decisions and do they have the experience and track record that you want them to be making the decisions? Because a lot of times in our industry you'll get people who raise money for things, but they don't have any decision making power on it. And when things go wrong and you invested with them, they're like, well, my hands are tied. Yeah, we should have done this, but I don't really have any decision making power. So what I will only do from now on is invest with owner operators, people who have their own deal and are overseeing the execution of the business plan and are qualified to do so. So I'll want to know what type of projects have you done that are similar to this? Have you taken them full cycle? What were those results? Whether the projects that you have done similar that you haven't taken full cycle yet, where are you at with those? Maybe can I see the latest monthly update or just pick a random month? Can I see the latest monthly update from that? I just want to check in on, you know, when you sent the financials, how things are going. That's the big takeaway from an lp standpoint. More emphasis on owner operators and the operational expertise.

Kent Ritter: 24:56

Yeah, I think that's a great insight. I think that it's interesting, right? I mean, I think what we've seen over the past couple years as prior to that, I think cap rate compression glossed over a lot of operational issues because you just had value creation. Because of value, prices kept going up and up. You didn't necessarily have to be a great operator to make money. I think that's drastically changed over the past couple of years and I think the people that are still in it and being successful now, I think largely it has to do with, you've got to be a good operator. You've got to be able to really run the property well to create value. And so I think that's a really good insight. What are some of the questions that you ask? You mentioned getting a look at the actual financials in an update. I think that's great. What are some of the other questions you ask a sponsor or some of the due diligence that you would do to kind of dig in deeper in those areas?

Joe Fairless: 26:01

Yeah, I would ask to remove the variable of cap rate compression, bailing them out on previous deals. Ask what was the NOI growth from start to finish? What percent did you increase the NOI growth and get understanding of where did the value actually come from when they exited? Did it come from cap rate compression? Did it come from NOI growth? And from NOI growth, where did that come from? Was it the increase in rents or was it just something with operations that they did, like learn the story and good operators will tell you the story about each property because they'll know it through and through. And it might not be the person that you're speaking to, by the way, you might need to jump on a call with their asset manager, for example, and that's totally fine. And that's acceptable because the asset manager's job is to do just that. And the investor relations person might and probably won't know the new. They won't, they won't know the nuanced details of the operations, but talk to the asset manager, talk to them, have a conversation with them about the most relevant deal that they're pointing to that says, yes, we've done this before. Okay, may I talk to the asset manager about that? I just want to understand where did the growth come from and how you're able to exit and then ask them what hasn't gone right.

Kent Ritter: 27:37

Yeah, I think.

Joe Fairless: 27:39

And when you ask them that, the type of way they respond is more important than how they, than what they say, generally speaking. What do you mean by do they take ownership over their mistakes? That's basically it. Are they taking ownership? Are they stepping up to the table and saying, yes, we made this mistake. Here's what we learned from it, and here's how we're mitigating the risk from that happening again. Because I make mistakes. You make mistakes. Everyone listening makes mistakes. But do the people we invest with own up to those mistakes? Because you don't want to get in a position investing passively with someone who is a narcissist or doesn't take, doesn't own their mistakes. Because if they don't own their mistakes, then maybe they'll start covering stuff up and then they'll pretend that a big issue doesn't get bigger if it's not spoken, which it does. You know, there's all sorts of issues with that, and they might be too late to try to course correct what they need the course correct. So that's. That's another big thing from a, you know, just a comfort level and a confidence level standpoint.

Kent Ritter: 29:04

Yeah, well, yeah, those are great. So, you know, I heard you say that I love the idea of digging into Noi growth to separate a. If somebody says, we had a 30% IRR on an exit, it's like, well, how much was driven through true value add, through true Noi growth and how much of that was from the market changing and the market improving cap rate compressions? I love that Noi idea. And digging into that and the factors and the story and then taking that further to actually understand kind of the case study around the deal. Right. And showing the expertise, the understanding, and even speaking to an asset manager, I think that's really a next level of diligence that could be really powerful. I think those are great. Those are great little nuggets. And then. Yeah. The idea of, if you've been doing this long enough, right. There are, there are things that are going to go wrong. I think it's a big part of real estate, right? It's solving problems. That's how you become a successful real estate investor. You're always solving problems. So it's, things are going to come. We're all learning. I think as a passive investor, you're trying to benefit from our lessons learned, right, versus us making those mistakes or you making those mistakes. It's understanding the mistakes, I think, like you said, owning up to them, and then what are you going to do different and what did you learn and how has that changed? And I think that's super important. So I think those are great little, again, nuggets of wisdom for our passive investors to be able to ask some great questions and dig into the right areas. So appreciate you sharing those, Joe.

Joe Fairless: 30:44

Well, I'm here to add value. I mentioned the beginning. That's my focus. So I'm glad to hear that.

Kent Ritter: 30:51

So as we wrap things up, I want to take you through our keys to success round. I've got four questions I want to ask you, Joe. Same questions we ask everybody. And the first one is just a great dovetail in our conversation. If you could only ask a deal sponsor one question before you send that check. What is the one question you would ask them?

Joe Fairless: 31:15

I would ask them. Tell me how many returning investors you have in your deals.

Kent Ritter: 31:29

Yeah, that's great. It gets to a lot of points around probably how they communicate, how they've performed. Right. Really cuts through a lot. And how many returning investors. I like that. What are you most proud of in your career?

Joe Fairless: 31:47

I'm most proud of the impact that I've made through the various things that I've done.

Kent Ritter: 32:02

Absolutely. Which you've had a huge impact on the industry, including my own personal story. Right. And the growth and mentorship that you've given to me. So very much appreciate that. What is a book that everybody should read?

Joe Fairless: 32:19

Book by James Nestor. I think it's James Nestor called breath or breathe talks about, he writes about breathe through your nose, not your mouth, and all the benefits for doing that. And it's just a healthy way to. A way to be healthier.

Kent Ritter: 32:35

Yeah, it's a great book. I try to focus on that. I realized maybe how bad I am at times of breathing.

Joe Fairless: 32:45

Yeah. A lot of you listening will curse me for suggesting this book after you read. It's like, dang, now I'm going to be thinking about breathing. It's like, I know, like a book about blinking or something. Like don't think about blinking. So I apologize in advance for sending you down this rabbit hole, but you will better off from a health standpoint after you read it and implement it.

Kent Ritter: 33:08

Yeah. It is a really fascinating book. I agree. And last, Joe, what is your number one key to success?

Joe Fairless: 33:19

Consistency. I did the daily podcast for 3500 episodes now, every day a week, seven days a week. Now I don't do those episodes anymore, but for the first 1500 days I interviewed people, maybe 2000 days. You know, I've interviewed more real estate investors than anyone in the world, I think.

Kent Ritter: 33:41

Yeah.

Joe Fairless: 33:42

And it's just, you know, that consistency is challenging, but there's a lot of growth that is forced as a result of that and it's been beneficial. That's one example of many things where I believe consistency is much more important than, you know, starting fast and fizzling out or, you know, going at something hard for a short period of time. I think consistency over time is the better approach.

Kent Ritter: 34:13

Yeah, absolutely. And I couldn't agree more. And you are just a great example of that. And all you've been able to build off of what started as a podcast. I think you had told me a long time ago you were in your New York apartment, in your closet when you started that. And everything's grown since then, which my.

Joe Fairless: 34:32

Yeah, my closet wasn't too much bigger than the overall apartment. Like it was like shoebox. But yeah, I would interview, I would because it was loud. We live right next to the street, obviously, in New York and 9th street and First Avenue. And I would literally put like a blanket over my head. I shoved my face in this tiny little closet. The computer would be propped up on a pillow. So it would like go like this. And then I would try to interview people in a sound studio.

Kent Ritter: 35:03

There you go. I mean, yeah, look at all that's been built off of that through consistency. Awesome.

Joe Fairless: 35:10

That's right.

Kent Ritter: 35:11

Well, Joe, if people want to learn more about what you have going on, whether it's with Ashcroft, other things, how can folks connect with you?

Joe Fairless: 35:20

Yeah, we have a deal that I mentioned briefly earlier. You can check it out@ashcroftcapital.com. Dot just go to current offerings. It's a deal where a surprise. We're on the favorable side of supply demand. Over the next five years, the demand is going to outpace supply by more than 20.5% is what it's projected for this specific submarket. Residents make. One hundred fifteen k a year at this property. So it's a great area, a class property built in 2021, and it's a plus school district. And it is the prototype for the type of deal that we want to get into right now. And I'm grateful to be able to share this with everyone.

Kent Ritter: 36:11

Awesome. Well, yeah, everybody will link that below. Make sure you guys go check that out. And Joe, thank you so much for coming on the show. Thank you for providing value today, giving us some great golden nuggets. And I hope you have a great rest of the day.

Joe Fairless: 36:24

Thanks, Kent. Thanks, everyone.