“The best investment you can make is an investment in yourself. The more you learn, the more you’ll earn.” – Warren Buffett
I often get asked what my perfect deal looks like.
People want to know what they should be doing with their money.
I speak with a lot of investors.
Obviously, interest rates are rising.
Multifamily is getting more challenging with lending.
Warren Buffet talks about being fearful when others are greedy and being greedy when others are fearful.
I, for one, see incredible opportunity right now in several different areas.
Let’s get into why I think that is.
1. The Perfect Deal
There are a lot of deals out there.
Some could make sense for certain people, but for me, the perfect deal looks like this:
Firstly, it has cash flow from the offset (or early on).
It should also have an inflation hedge.
This means the investment value keeps pace with inflation.
My perfect investment also has tax advantages, aka: paying little or no tax.
I also try to use leverage or other people’s money to buy an asset.
We like investments that have low volatility so the value doesn’t change dramatically.
What deals meet these criteria?
In the past, it’s been multifamily.
With inflation hedge in play, rents and inflation really go hand-in-hand.
I’ve used credible tax advantages to reduce my tax bill from around 25% when I was doing medical sales to about 1% total tax now.
That’s pretty awesome!
When I use leverage to buy, a lot of it is done through loans.
Traditionally, you only put a down payment of between 20% and 35% – although now it’s changed a little bit.
With all of those factors, the volatility in multifamily has been very low.
It’s been a great investment overall.
But people are asking me more and more these days if multifamily is still a good deal.
2. Is Multifamily Still a Good Deal?
Things have changed.
We’ve had a golden age of multifamily for so long.
Now we’re facing some headwinds.
Lending has changed.
Instead of putting 20% to 30% down, we put 30% to 50% down.
Interest rates are also higher.
It’s harder to find deals that pencil.
Approximately 85% of the multifamily deals out there now are using bridge debt.
Bridge debt is typically two- to three-year debt on a variable rate, which means it changes depending on rates.
Years ago, we got interest rate caps that act like insurance.
They prevent rates from going higher.
Well, the rates have gone higher!
Now those cap rates have gone way up.
Insurance caps now cost 20x what they used to.
It’s still costing more, even though you’re not paying it on the interest rate – you’re paying it on the insurance.
It’s kinda odd, but that’s how the system works.
Also, investor sentiment has changed.
A lot of people have been sitting and waiting to see what happens next.
Costs have gone up, including cost of labor and cost of materials.
One positive that we’ve seen is in Jacksonville.
Rents are continuing to rise there and we’re seeing a lot of positives.
This isn’t the case everywhere, but there could be further opportunities for growth.
It’s important to be open to that.
3. The Right Deal Can Still Make Sense
I believe the right deal can still make sense.
There is a perfect deal out there.
We’re seeing discounts on some deals of 10% to 30% off.
That’s pretty awesome!
I look at value-added deals as better than most other deals.
If we buy older properties, we try to add some amount of value so we can create a margin of safety.
This usually takes the form of us renovating units so we can rent them to other tenants at a higher amount.
That can lead to a rent bump of 20% to 50%.
Talk about a big margin of safety!
I look at Class A deals as a very high risk.
A two-bedroom apartment in Pasadena, California that’s getting $4,200 a month will not get $4,200 a month when there’s a major recession.
That will put the entire deal at risk or will at least dramatically hurt the cash flow.
When it comes to investing, it’s important to ask:
Compared to what?
My friend Jason Hartman asks this question all the time.
If you’re not going to invest in a deal, what will you invest in?
Are you gonna put your money in cash?
Will you hold it and wait?
Waiting is a good way to guarantee a negative investment return of 15% per year according to Shadow Stats.
It’s important to compare your options.
I think it’s a great time to buy.
But if you do, make sure to buy at a fixed rate when you buy a property during a time of high interest.
If I buy a $10 million apartment right now, that price won’t change.
What can change is the interest rate.
It’s the same with single family houses.
I think the right deal at the right time can make a lot of sense.
There are always opportunities for deals if you’re paying attention.
My friend, Jeff Clark, says that the average time between the Fed hiking rates to cutting them is five months.
The longest they’ve ever hiked rates in the last hundred years has been 13 months.
They started hiking rates in March 2022.
If we follow the 13-month timeline, that would put us into April 2023.
In the next three to six months, there will be some recession and some political pressure.
Then, eventually, they will cut rates again.
When that happens, a lot of money on the sidelines will flood in.
In summary, don’t sit on cash.
Saving is losing.
Try to deploy money.
I’m always looking to deploy around 95% of what I have.
I want to own assets with cash flow that pay me to hold them.
I want safe deals that have an inflation hedge.
Now I want to hear from you!
What does your perfect deal look like?
Stick your answer in the comments below.
Before you leave, make sure to check out our special report about inflation investing. It shares the best choices to invest during an inflationary environment.
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Disclaimer: I am not your investment advisor. This is for educational purposes only. I am not giving specific advice on what you can do. I am simply giving my opinions.