Capital Preservation Strategies For Uncertain Times, Alts Expo May 2023 Panel

Josh Cantwell, Dany Roizman, and DJ Van Keuren joined moderator Andy Hagans at Alts Expo in May 2023 for a discussion about capital preservation strategies in the current environment.

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Episode Highlights

An assessment of where we are in the market cycle, including cracks appearing in the banking sector and elsewhere.
The importance of maintaining flexibility that allows investors to patiently hold through challenging environments.
Major threats that investors should be protecting against in the current environment.
The importance of planning, education, and focus for high net worth families.
Lessons learned from Warren Buffett’s strategy and track record.
Asset classes that look attractive in the current environment.
Live Q&A with Alts Expo May 2023 attendees.

Panelists

About The Alternative Investment Podcast

The Alternative Investment Podcast is a leading voice in the alternatives industry, covering private equity, venture capital, and real estate. Host Andy Hagans interviews asset managers, family offices, and industry thought leaders, as they discuss the most effective strategies to grow generational wealth.

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Show Transcript

Andy: What are the most important, what are the best capital preservation strategies for uncertain economic times? Obviously, that describes the times that we’re in. That’s the question that we’re going to discuss today. Joining me are three distinguished experts, bringing their insights. I’m gonna introduce our panelists first, and then we’re gonna dive into these questions. Very important questions.

First up is Josh Cantwell, CEO at Freeland Ventures. And Josh, I know you have a real estate investment firm, as well as a coaching program, a very popular podcast. I know a long-running podcast that’s very popular, and I know that you know a lot of the movers and shakers in the industry, and high-net-worth investors. So, really welcome your insights. Welcome to the panel.

Josh: Hey, thanks for having me. I appreciate it. Andy, Jimmy, thanks for having me on. Look forward to talking about some of these strategies. And, you know, our expertise, our niche is in multifamily. There’s a lot of different strategies when it comes to multi-family. There’s a lot of boom-bust markets when it comes to multi-family. We’ve focused on very stable, cash-flowing markets, like the South, the Southeast, and the Midwest. So, I’m excited to talk about that. Thanks for having me on.

Andy: Absolutely. Yeah. And we can’t get enough multi-family with our audience. This is what I’ve learned over the years working with Jimmy. Next up is Dany Roizman, who’s founding partner at Brainvest Wealth Management, which is a multi-shore, multi-family office, serving ultra-high-net-worth clients, in multiple countries around the world. And Dany, when I had you on my podcast, we talked all about capital preservation. That planted the seed in my mind, I need to get Dany back on for this panel at our upcoming event. So, welcome to the panel, Dany.

Dany: Hi, Andy. Thanks for having me again. And thanks, Jimmy. What has been a great, you know, program so far, so, congratulations. Well, happy to be here again. Love to discuss capital preservation strategies. I think lots of people talking about multi-family. I’m gonna try to bring something a little bit out-of-the-box as well, so we can discuss other opportunities as well that might make sense. But yeah, looking forward to the discussion. I think it’s gonna be great. Thank you.

Andy: Yeah, I love it. And yeah, to be clear, we love multi-family, but there’s a lot of other, you know, exciting asset classes. And, I mean, even today at this show, so much private credit, you know, so much interest in that asset class. And Dany, I know you also have other asset classes that you like, so I won’t spoil that. Well, I’ll leave that for my first question to you. But last but not least is DJ Van Keuren, who is co-founder at Evergreen Property Partners, as well as founder of the Family Office Real Estate Institute. And obviously, capital preservation, a big focus for families. DJ, you are as plugged in to the world of family offices as anyone in the universe. So, welcome to the panel.

DJ: Thank you very much. Appreciate it. And, you know, from my perspective, you know, we, after working for a number of prominent families, Evergreen, we do invest on behalf of families. But because of that, along with the experience in the Family Office Real Estate Institute, I’m gonna try to bring a broader perspective from families and, you know, some of the pros and cons, and how they invest in, you know, different ways, that families have accomplished that preservation, and how they.

Andy: I love it. So, you know, I love, you know, high-net-worth investors learning from the ultra-wealthy, but DJ, I think you just kind of teased us. You’re gonna give us the good, the bad, and the ugly. I love it. You know, give us all that transparent information. Because it’s all important, right? The wins are important, but also the pitfalls, and how to avoid those pitfalls.

So, before we dive in, just a reminder, if you have any questions for me or for our panelists, please do use that Q&A function in your Zoom toolbar. For those of you who are just joining us, that Q&A icon can be found at the bottom of your toolbar, towards the bottom of your screen. You can submit a question. We’ll save a little bit of time at the end, hopefully.

But the first question, I’m going to pose to Josh first, and then if Dany and DJ want to chime in, please feel free. But Josh, where are we right now in the market cycle? You know, do you think we’ve seen the worst of the bear market, both in real estate, equities, or are we more in this late-cycle environment where there might be a little bit more pain to come before we start to see the next expansion?

Josh: You know, I think it really depends on what market you’re in. You know, if you’re in a boom-bust market, let’s say it’s the coastlines, or even the Southeast, which are typically boom-bust areas, obviously, those types of markets tend to rely on lower interest rates, population migration, income growth. There’s a lot of different factors that go into that.

A lot of different investors will buy into those markets expecting appreciation. If that appreciation continues, great. You know, those markets continue to expand. The problem with those markets, and one of the markets that we operate in is Columbus, Ohio, which is as competitive as any Southeast boom-bust, you know, type of market. But, you know, there’s a tremendous amount of technology there.

So, I think it’s very local. You know, for investors who are looking for, I think, a more predictable approach, one of the things that we do that’s not so market-driven or interest rate-driven, is really focus on heavier value-add. You know, if we looked at the ability to force appreciation in a property, that allows us to really buy something that’s more on the distressed side, focus more on a heavier value-add construction play, which is gonna be a lot less market-driven.

So I do feel like the recession that possibly might be coming is gonna be very light. I do feel like our labor market is extremely strong. There’s lots and lots of jobs available, even though the Fed’s pushing interest rates up still, as of yesterday. You know, our type of investment strategy is gonna depend on the heavier-distressed, value-add type of play that we can buy at a discount, so it’s less determinant on the market. It’s less determinant on what’s gonna happen in a boom-bust market. It’s much more of a cash flow play, and a forced appreciation play. So, I think it’s a very interesting question. I think it depends on the strategy of whether you’re gonna be impacted by that or not. We’ve really focused on stuff in our back yard, that we can really focus on heavier value-add. And so, I think it’s a fantastic discussion point. Tough to answer unless you’re really more local to the market that you’re investing in.

Andy: Well, I think it’s a fair answer, Josh, that, you know, it’s, in real estate, the cycle is going to be local. You know, obviously what… I asked about both the real estate market and equities, equities being more national, but all real estate is local, right?

And so, some of these markets had much more of a boom, so then sometimes the bust is a lot faster. So they’re probably all in a little bit of a different place. I kind of like your mindset though. Like, who cares? You know, I’m gonna sidestep the whole question with a different strategy.

Dany, how about you? You know, how about some of these other asset classes besides real estate? Where are we in the cycle?

DJ: Hey, well, okay, I wanna make sure we’re staying on the cycle.

Dany: Yeah, I wanna touch that as well. I’m a little bit more pessimistic on where we are in the cycle. I’m very worried about what’s going on in the credit market. We’re still seeing a lot of small banks having big issues. I think we haven’t seen credit spreads widen up. You know, the differential between AAA and BBB.

Remember when you were talking in our podcast discussion that we saw that in 2007, we’re seeing it again, and hasn’t opened up yet. So, you are not there in the cycle when you see credit spreads coming up, open wide. I think we’re still gonna see more pain, and that would in fact impact the prices of any real estate, equities, fixed income, all the markets, because there’s still more stuff to come.

But again, you have to do something with your capital, so you have to put it to use. I think, you know, as Josh said, yes, multi-family, it’s a great place. We do still believe that if you do locally, if you do it right, if you know how to buy it, and if you know how to operate low-leverage, good value-add, I think you can still, you know, ride the storm, and be able to get to the other side.

What I’m gonna try to tell you is that maybe there is other options that we still believe that make sense, that we look at contra-cyclical. So, as interest rate goes up, if we invest something that relates to that in terms of, like, if you have rates that are adjusted into SOFR or to LIBOR, that as it goes up, it will increase your returns as well.

That would help you increase your returns, while keeping a good asset while the interest rate going up. So, we do like that strategy. One particular asset class that we have been investing a lot, and has been performing really well, it’s specialty leasing. So, you do invest in the leasing of equipment that are 100% contra-cyclical, so they don’t care about how the economy, so, we’re talking about locomotives, we’re talking about ships’ containers, we’re talking about search and rescue helicopters, barges that does maintenance into wind farms in the North Ocean, North Sea, sorry. So, there is other options that you can get. It’s still, you know, kind of a private credit lending, that you have a real asset behind, that you have very, good strong operators.

Sometimes they are even state-owned, or state-sponsored, so you don’t have a risk of credit. The contracts are floating. So, as interest rate goes up, you continue to increase your returns. And we are seeing in our distributions as well. And you are not related to the economy.

If the economy’s stinking, you know, sinking, you still gotta be able to have to salvage someone with a helicopter. You know, there’s still containers going up and down. You still have, you know, here in Europe, trains moving around. So, this is one strategy that I think, it does help a lot.

Andy: Well, Dany, sorry to jump in. I just, I think that’s very interesting that you and Josh, well, you both kind of cheated. You jumped ahead a little in my questions, but I like it, but, because you both basically said, you know, there might be more pain to come, but we are investing in asset classes where it doesn’t matter, right? They’re literally uncorrelated.

And sometimes with alternatives, we like to say they’re uncorrelated, but a lot of alternatives are still somewhat correlated or even, you know, very correlated to those equity and bond markets. You mentioned equipment leasing, Dany. I mean, that’s very interesting.

I remember when I started the podcast, I was like, well, I know quite a bit about alts, but I have some holes in my knowledge. So I bought these books about alternative investments, and they mentioned equipment leasing. I’m like, what is this? I don’t even know this world exists.

So, it’s so interesting, you know, connecting with family offices and asset managers who are investing in things that a lot of investors don’t even know about. But DJ, I wanna move on in a second to asset classes. But DJ, I know you have some maybe interesting theories about market cycle, so I also wanna make sure that we get your take on where we are in the cycle.

DJ: Okay. So, everything that…you know, there’s different cycles, if we’re talking about, you know, stocks or real estate. From my perspective, it’s all about real estate. And so, when you ask where we are in the market cycle, you know, and I’ve gone on the record for years about this, but we are not gonna see a recession until probably ’28 or ’29.

And I’m saying that from the part of, you know, the real component of the market cycle, right? You go from phase one of the recovery to the expansion, then you have the hyper-supply, and then you go into a recession, right? Well, we’re nowhere near any type of hyper-supply at this point in time. And that’s because, when you look at a lot of the markets, you know, that was just brought up, like Columbus, and yes, you do have a lot of local components of that, but you have to look at the fundamentals. The fundamentals is that there’s still an issue where there’s, you know, housing shortages in certain markets. People are having to rent because they either don’t have the money, they got too much debt, right? It’s too expensive for the housing.

So, you still have to look at the fundamentals. You know, where are the jobs? Where are people migrating to? What’s the cost of living? What’s the quality of life, right? Now, within where we are in the cycle, the reason why I’m saying is that we’re still a ways out is because a lot of the fundamentals are still the same.

Covid basically was a blip on a map. We thought there were gonna be some issues, but it really didn’t happen like we thought of. Now, what will happen, and was talking the other day to the head of real estate at the Fed. And there is gonna be a lot of banking problems. There are issues on the books that are starting to happen, and there’s also, you know, banks have already started pulling back on some of the amount that they’re lending, and you’re gonna get a lot of banks that are just gonna shut stuff off, right?

So, how can you have increasing vacancy, or you’re gonna have new construction that’s gonna be happening? So it’s all gonna be pulled back, which is gonna delay an actual recession when everything is just going full-bore, right? If we had kept going to where we were, and the interest rates were so low, you’re gonna continue to have that building, which is gonna create oversupply, which is then gonna get us into an issue, which we’re gonna end up going into increasing vacancies, right? You’re gonna have more completions, and that’s where the recession comes in play.

So, are we gonna have a period of time that there’s gonna be pulling back, and there is gonna be opportunity? Yes, there is. But if we’re really talking about an actual recession, which was your question, from a real estate standpoint, you know, we’ve still got a six, seven-year run until we’re gonna actually see that.

And so, you have to be patient. You have to make good decisions, which is what your whole topic of the show is about, is how do you get through times like we’re in, you know, with the forward curve and the interest rates and everything else, and how do we deal with that? So it’s about getting through the hump. It’s not about going into a recession.

Andy: Well, DJ, I think that’s interesting. I mean, you know, to me, what I’m taking from your theory and your points is we’re just pushing forward some of the pain, really. And I felt like that’s what the zero interest rate policy did. And it’s like, when are prices really gonna clear? When are we gonna have true… Maybe never, right?

Like, I’m 30…I’m turning 40 next week. Maybe I’ll never see that in my lifetime. True price discovery. But DJ, to your point, this leads to my next question. The value of patience. For a high-net-worth investor, or ultra-wealthy investor, family office, in this time period, you know, the next 12, 24 months, should the goal be just to preserve capital? Should that be the main focus? Or, alternatively, should we be looking at this uncertainty as potentially an opportunity, right? Because where there’s uncertainty, maybe there’s fear, maybe there’s attractive opportunities. Are we just purely preserving capital, or are we being opportunistic? What’s your advice to high-net-worths and families?

DJ: So, that’s a very interesting question. And from my perspective, it’s not a 12 to 24 months question. It’s a lifetime question. It’s a generational question. Seventy percent of families, and we’re talking families worth $250 million or more, 70% lose their wealth by the second generation. Ninety percent lose their wealth by the third generation. The average return for a family’s portfolio is about 7%.

And so, the only way that you’re going to maintain that legacy and that wealth for future generations is about maintaining, and being smart with what you’re doing. And one of those things are actually holding on to assets. And then it’s a question of how do you get through it.

Historically, multi-family has never gone below 11% vacancy rate, right? So if you can get through 11%, 15% vacancy, you’re gonna get through it. If you’re always having cash flow, and it’s more than what the debt is, you know what, it doesn’t matter if the value’s zero. You can hold until the market comes back, and sell.

Where people get into problems is where you’re gonna see a lot of this negative leverage, especially in the real estate, or the multi-family space, where people are saying, I’m buying it at a 5%, I’m selling at a 4.5% cap. Well, now what are you gonna do when you have to refinance, and you had interest-only, and you’re picking up that refinanceable loan at a 6.5%? You have troubles, right?

So, families need to really focus on maintaining at least a portion of their allocations for consistency, long-term growth. And that’s the benefit that individuals, regardless of wealth, families have that ability to be patient. Unlike institutions that have to put money to work, or certain funds that have to put it, because they close after a period of time.

So, I think, make good decisions, even if it’s outside of real estate, you know, like was being brought up a little bit before by Dany. But you have to make sure that you can last through the storm.

Andy: Understood. Well, Josh, that kind of seems to dovetail with what you were saying earlier about some of these real estate… You know, there’s still opportunity. You know, maybe some of these deals are in a situation where, you know, they have to refi, and they’re in trouble.

So, do you see, you know… But I do wanna ask about the next 12 to 24 months. I totally appreciate the long-term perspective, but I still want to know what to do now, right? So, is this, Josh, do you think this is a little bit more of a wait-it-out period, and stay the course? Or are you actually seeing, you know, cap rates expand enough where you say, “Okay, this is the time?” You know, “This is where the money is made. Let’s go.”

Josh: Well, look. Acquisitions, across the board, are down substantially, like 75%, right? So, the market’s definitely slowed down tremendously as buyers and brokers and lenders recalibrate cap rates versus interest rates. So, it’s definitely slowed down tremendously.

So, the number of opportunities for a retail investor or a family office or an institution to invest in multi-family is down because there’s just not as many operators buying buildings. That’s the direct impact of what the Fed’s done with interest rates. Bridge lending, which, as Dany mentioned before, and DJ mentioned, bridge lending, that low-cost, SOFR loan, floating-rate loan, is almost evaporated. Nobody’s using that anymore.

And so, you know, deals that we would’ve seen a year ago, or that we would’ve seen in multiple markets, in Texas and Columbus, and all over the place, people were using bridge loans, now, it’s very much a non-recourse agency loan, with a very low loan-to-value.

And if you can find a place where you can still enter at a 4.5% or a 5% cap and hold, it’s a great place to preserve wealth, for a family or a retail investor, because they’re getting cash flow day one. And so that’s the challenge of finding those deals.

So, if those deals can be found, and the seller, the broker, the buyer can find a way to kinda meet, and have that deal make sense, it’s, then that’s a great investment opportunity for any investor. The challenge is, and for us as an actual operator, that’s bought, you know, dozens and dozens of these large buildings, it’s really tough to find something like that, that makes a lot of sense.

A lot of buyers, a lot of offers. Before, there were 30, 40, 50 offers on a building, and now there’s maybe 10. And then there’s other places that, you know, we were just, in a deal we offered on last week, there were 52 offers on one building in Columbus. And so it’s very much a deal-by-deal basis. Very hard to find right now.

And really, the only game in town is something that you can buy with long-term agency debt, not recourse. Or, if you’re a local operator, maybe you can go with a recourse bank loan. But, to Dany and DJ’s points before, there is not enough supply to handle all the demand for housing.

So, I do believe what Dany said is accurate. I do believe that if there is a recession, it’s minimal. I do believe that there’s long-term growth for a long time. So, again, the next 12 to 24 months, those opportunities come up, absolutely invest in them. Tougher to find, for sure. Longer-term thinking is what’s gonna win right now.

Andy: Understood. Yeah, yeah. That makes sense. So, I mean, I am hearing, I think, from all three of you, patience. That’s a tough message for me. I’m not a very patient guy, but it’s a good message, right?

So, I feel like, you know, you guys are like my dad. I mean that as a compliment. You know, giving me words of wisdom. Like, “We’ve been in this situation before.” This is the message we need to be preaching, that, just because you have cash, doesn’t need to be burning a hole in your pocket, right?

The name of the game might just be to preserve it, and there’s a better opportunity down the road. DJ, I… Go ahead, DJ. Real quick.

DJ: No, I was just gonna say, I mean, if you just take a look at a couple examples, right? I mean, talking to Peter Linneman the other day, he’s talking about the importance of long term, but who’s the greatest investor of all time, right? Buffett. Warren Buffett. And he buys and holds.

I mean, anybody you talk to… That’s why there’s a janitor in Massachusetts, when he retired, had $30 million. He had bought GE. He bought, just, these big stocks, and just held long-term. Unfortunately, our emotions get involved.

Andy: Yeah. Well, on the note of emotions, right? And we’re talking about uncertain times, and fear, right? Because a lot of investors make bad decisions once fear enters the picture and human psychology.

So, Dany, I wanna ask you this first, because I know you started in wealth management in Brazil, where a lot of families in Brazil, ultra-wealthy families, you know, they’ve seen hyperinflation, they’ve seen, like, what I would call black swan-type economic events. You know, what are the main threats?

Like, if we’re trying to implement a capital preservation strategy first and foremost, what are those, you know, top few threats that investors’ families need to be protecting against right now? Is it the banks? Is it the bank balance sheets? Is there something else that should be on our radar?

Dany: No. Actually, that’s a very excellent question, but the worst enemy is themselves. As you said, it’s investor behavior. The problem is, it’s like, you know, the FOMO, the, all the new names that they come up with. The question is that if you have a portfolio strategy, and it’s well-constructed, and it’s for long-term, if you implement it, it’s gonna work okay.

The problem is that people panic, that people get scared, that people always believe that, you know, that’s, the best, next, only opportunity, it’s gonna happen tomorrow. Just like you said, for the next 12 to 14 months, I would say stay in cash. Right now, you’re getting more on a treasury bill than you get on a five-year loan, bond, or wherever.

So, why do you want to rush to put money to use? I think there’s gonna be excellent opportunities, as just said. I think we’re gonna have a lot of distress, because, as you said, banks are pulling capital back. There’s gonna be people that are not gonna be able to service their debt, in real estate, corporate. In every single place that you can imagine, there’s gonna be excellent opportunities.

And if you have your cash, and if you are patient enough to understand that you don’t have to do the first deal, you don’t have to do the best deal, you just have to implement a strategy that you have planned and executed over the last 10, 15 years.

I think DJ said a very interesting point. The long-term way of holding wealth for a family is not to look at the short term. It’s to really being able to have an asset allocation, and say, you know, let, you know, I would say to my own, say, let to a professional to do the job, so they would act rationally and not emotionally, and then you’re not gonna fall into the trap of saying, “Well, you know, should I buy now?” or, “Now I have to sell because everything’s gonna tank.” And then you just, you know, do the worst type of investments that you possibly can.

So, I think it’s a mixture of everything, what Josh said, what DJ said, what you said. But for me, the problem is that if you really want to preserve your capital, it’s investor behavior that really kills the returns.

Andy: Well, I love that. And I think there’s a lot of research, academic research, that backs that up. Certainly…

Josh: Well, a Nobel Prize, right?

Andy: Sure. And I’m guessing any financial advisor in our audience watching this right now has, you know, seen this play out, where, you know, clients can be their own worst enemies. On that note, DJ, you kind of alluded to it. You gave us a sneak preview, and you talked about what families do right, and what they do wrong.

Where did they go wrong with capital preservation? I mean, you know, obviously, you don’t need to share any personal details, but you’ve seen, you’ve spoken with so many families, you’ve worked with so many families. Is there a pattern that you see play out, where they make mistakes during times like this?

DJ: Yeah. I would say, all in general, and, you know, I’m gonna go back to the long-term mistakes, right, where they’re losing their wealth. And that comes down to a couple of areas. One is the patriarch/matriarch, or the head of the family, right? They don’t involve the next gen or others on what they’re doing, how they’re doing it, right?

There’s an education gap, as a whole. And sometimes that’s because they just don’t share, or that sometimes, the kids just don’t care, right? And so, they’re like, “Just gimme the money. I’m gonna do what I can,” or “what I want to, right?”

So, but that’s why I think real estate is such a powerful… I believe that is the solution, because it’s a hard asset. You can’t just sell it. You can’t just say, “I’m out.” I think we’re gonna run into a problem with tokenization because of that. People will be like, “I’m gone.” Because they want instant gratification.

So, you know, the mistakes really come down to education, taking that long-term perspective, and making good decisions. And that is where, you know, as Dany brought up, it’s important that you have those resources with advisors, you know, that are really taking a full, holistic view. You know, unfortunately, a lot of people say they’re a multi-family office, but they’re not, because they’re only dealing on the investment side. They’re not dealing with the other issues of generational, you know, how do you transfer it to the next generations? What’s gonna be some of the safeguards that are in there? What happens if the patriarch dies and they wanna split out the portfolios, right? What about governance? What about investment policy statements, investment committees?

And if you’re a high-net-worth, you don’t have to get into those details, but you still should sit down and say, “What’s this plan, if I really wanna carry it to the next?” And that is gonna be based upon the risk tolerance of each individual, right? Some are more aggressive than others.

Andy: Totally. And it’s interesting, DJ, that you mention IPS. You know, I like to preach the, “if family offices do it, there’s a reason why they do it,” right? You can write your strategy down, write your goals down, gives yourself a little bit of accountability, even if you’re a self-directed investor, right?

DJ: Yeah, you’re right. But what is a misnomer is sort of what you said. You would not believe how families will run these businesses, and they’ll have goals and objectives. They’ll have quarterly meetings. They’ll have the best people and everything else. They don’t put these in place.

It’s like when you hear people didn’t have a will in place. They don’t do this. And so, that’s why, you know, that is a huge benefit of working with somebody, because they should be able to say, “All right. Let’s have a quarterly meeting,” right? They make it happen. “Let’s review. Let’s look at other investment types during this time,” that maybe you weren’t aware of, like the equipment leasing, or loans, or debt.

Andy: Totally.

DJ: And so, it goes back to education, and implementing.

Andy: Totally. And one other point, DJ. You mentioned the illiquidity of real estate. I like to preach, you know, illiquidity can be a feature, not a bug, right? People talk about how it should pay a premium if it’s illiquid, which I guess I agree with, but at the same time, if the illiquidity can protect an investor from themself, then I almost look at it like an asset.

We’re almost outta time, so I guess this is kind of a rapid-fire question that I do wanna give to each of you. Some of it you have already alluded to it, but Josh, I’ll start with you. You know, what’s your favorite asset class right now, or a few that you think that high-net-worths should be looking at right now, where valuations are favorable, or where it’s a strategy that you think is proven that will work, you know, in the phase that we’re in?

Josh: Well, look, I’m a multi-family investor. That’s what we do. That’s what we’re talking about. I do feel like, you know, the opportunity right now is not gonna be in those gateway markets, where steals are still trying to trade at a 3% or 4% or 5% cap, and cost of debt is 6%. It’s not gonna make a lot of sense.

So I think it’s gonna be a secondary, tertiary market, outside of a growth market, like a Columbus, or like a Phoenix, that’s expanding. I do feel like it’s existing real estate, not new construction. The cost of debt is prohibitive. And so, you know, outside of these growth markets, like Columbus, or outside of some of these markets in Virginia, where the path of progress is there, but buying an existing building, and investing in an existing building, whether it’s a retail investor or family office, where the operator can demonstrate that they can execute a little bit deeper value-add plan.

I believe that that’s a winning strategy. And if they can secure longer-term debt, because, back to the question you asked Dany, where do people get in trouble? And Dany said, you know, it’s basically them. One of the ways that they get in trouble, too, is with short-term debt. So, the debt that was acquired over the last two or three years, using floater rate-type of loans, with interest rate, you know, caps, those caps went up, and the cost of mortgages doubled and tripled, and people got in real trouble.

So, if you’re managing money for a family office, and they put money into that type of deal, that’s how that family wealth evaporates, when a deal has to be sold or basically taken over by a bank. So, again, we go back to the fundamentals of long-term debt, forcing appreciation, and me, a secondary type of market, outside of a growth market, I think is a fantastic play right now. And I think as long as the operator managing the real estate executes that plan, and has experience executing that plan, that’s a winner going forward.

Andy: Totally. And, you know, Josh, I appreciate, kind of alluded, I’m a multi-family guy. It’s what I know, it’s what I love, but I think that’s totally fair in this kind of market environment. You know, what’s the saying? I think it’s Warren Buffett. You know, “I put all my eggs in one basket and I watch that basket very closely.”

So, I wanna understand the eggs. I wanna understand the basket, right? Because there’s a million types of alternative investments. Some of ’em, you know, I understand, some of ’em I don’t understand anything about hardly. You know, there’s all kinds of crazy cryptocurrencies that I don’t know the first thing about.

You don’t have to invest in everything. If it’s an asset class that you understand, maybe that’s gonna help you manage your own psychology around it better. Because that’s a theme that, from all three of you, that’s a theme I’m picking up, is a pattern you’ve seen over and over.

Well, Dany, you mentioned equipment leasing. I know also when we spoke earlier on the podcast, you know, you mentioned you’re a big hedge fund guy. What are your favorite asset classes right now? Or maybe I should ask, what are your clients’ favorite asset classes right now?

Dany: Well, I think that, again, we’re a big multi-family too. I think that if I have to say that if you need to jump into multi-family, I maybe would play it a little bit different that what Josh is saying. I think there might be value in maybe REITs, because they have already a working portfolio. They are heavily discounted, and then you can get into much better pricing, and then might be a way of playing that as well.

Besides multi-family, which we love as well, everybody here, but I think ground lease is something that makes alt sense. It’s very well inflation-protected, very, very conservative, ridiculously loan-to-value. Again, it’s a quasi-fixed-income strategy, with a real estate guarantee. So we love that, and families like that as well.

We do love also affordable housing in the UK, because it’s rented to housing associations that are funded by the government, with 20, 30-year contracts, with inflation, CPI plus one on a yearly basis. So, you had a real interest rate gain, with no risk of credit, with long-term contract. So, we do love that as well.

We like light industrials. I think it’s also pretty good, and I think it’s very safe as well. So, there are different ways that you can still play. But again, you have to look, for me, whatever it’s contra-cyclical right now. I think inflation, it’s going to be a burden. I don’t know if the Fed’s gonna…I don’t know if it’s gonna go higher, but it’s gonna maintain it for a long time, and that’s gonna squeeze the market even more, and that, lot of pain will come, and you don’t wanna be there, you know, exposed to assets that are gonna be squeezed out of you, even if you are holding something that works well.

And that’s something that I just want to finish. The liquidity of our markets, of the private debt markets or real estate, can be a blessing, but it’s also the devil in disguise, because you have to try to manage the pricing according to what it is, if you really want to dispose of it. It’s not because you don’t have to sell it, that you don’t have to price it at a real market price that is actually helping. So, the way that we price our, you know, illiquid assets, we try to be as close as the reality, even though we don’t have to. Our families, as DJ said, they don’t have to sell it, but it’s always good to know exactly, if you need to sell it, what is the actual price, and you see that you have to incorporate a little bit of the volatility of the market as well, if not, that you believe that you are in la-la land, and then you start making wrong decisions.

Andy: Well, yeah. We don’t wanna be in la-la land, so, you know, mark to market. I mean, I think that’s a fair point, even with privately-owned businesses, certainly private credit, private real estate. And there, yeah, I have to say, I agree with you, Dany. I mean, I’m normally a private real estate guy, right, with the vast majority of my real estate investments are in private real estate.

But I had Michael Episcope on the show a while back, and when he told me he was looking at publicly-traded REITs, I’m like, well, shoot, this is Michael Episcope telling me to look at publicly-traded REITs. So, you know, that’s when I started looking hard at them. And you have to admit that the valuation gaps sometimes between the publicly-traded world, the private world, it barely makes sense. But as you say, it’s something to look at.

And I, you know, to your point about inflation, the interesting thing where we are now, you have to earn 6%, 7% just to preserve capital. And that’s presuming that we’re not even talking about taxes. That’s presuming it’s in some sort of tax-advantaged account. So it is a tough environment.

DJ, I’m gonna give you the last word. You know, working with families, obviously your work at Evergreen and in the Institute, what’s the asset class that you’re most excited about right now?

DJ: Right now? Well, I will tell you this, and you guys are gonna probably kill me for this, but my favorite asset type, property type is multi-family. I have not touched it in five years, and I will not touch it. And the reason why is because, one, I believe that there’s a lot of people that had jumped in since 2012. Everything’s been going up. I believe there’s gonna be reverse, or negative leverage, which is gonna create a lot of opportunities.

But my answer to you, in this environment, is anything 7% cap or greater. And, you know, a professor of mine one day just said, “If I buy… You buy at a high cap, and you sell at a low cap.” So, you know, opportunities like small bay, industrial small bay, you can pick up 7%, 7.5% caps. We’re working on a modular for-rent deal we’re building at an 11% cap.

You know, why go into something at a 4%, 4.5% cap when you can get something greater than that? And so it would be anything a 7% cap and greater. And, the other thing would be is that if somebody does go lower than that, I would say that you’d work off an institutional analysis, which you’re gonna add 20 bips for every year of the project. So, if the person that you’re investing with says we’re gonna exit at a 5% cap, and it’s a five-year hold, then you need to have it modeled out to say, “What happens if we sell at a 6% cap because of cap rate expansion?” And you can’t focus on that, of what you think’s gonna happen, because a year ago, we had no issues with interest rates, right? We had no issues with… We could get better leverage. So, you’ve got to be smart. You make money when you buy. And, be conservative.

Andy: I love it. You make money on the buying side. I think those are words of wisdom. Stupendous insights here. And I think we’ve run out of time, officially, so I’m gonna cut you all loose. Josh Cantwell from Freeland Ventures, Dany Roizman from Brainvest Wealth Management, and DJ Van Keuren from Evergreen Property Partners. Thank you so much for joining the panel today.