The Macro Case for Alts & Multifamily Investments, With Andy Hagans

The current macroeconomic landscape has made investments in multifamily real estate or other alts particularly attractive to investors. On this episode, Andy Hagans, Co-founder of the Alternative Investment Database (AltsDb) and Co-host of the Alternative Investment Podcast joins the show to break down what economic factors are having a significant impact, and why he’s so bullish on alts.

Episode Highlights

  • Andy’s four reasons for why alternative investments are so attractive to investors.
  • Why the current inflationary landscape and is changing investing strategies.
  • The story behind AltsDB.
  • Alt segments (outside of multifamily investments) Andy is particularly excited about.
  • Why multifamily investments are so attractive to investors.
  • Why investors are drawn to interesting stories, whether it’s housing shortages, or new technologies like cryptocurrencies.
  • What compelling stories multifamily investments can present, including workforce housing, having exposure to the next tech hub, and beyond.
  • Andy’s thoughts on whats next for alts and the macroeconomic landscape.

Featured On This Episode

Industry Spotlight: The Alternative Investment Database

AltsDb provides world-class tools, education, and analysis to help individual investors, family offices, financial advisors and industry service providers navigate the ins and outs of the alternative investment landscape. Our goal is to serve as the definitive, trusted authority in the alts industry.

Learn More About The Alternative Investment Database

About The Multifamily Investor Podcast

The Multifamily Investor Podcast covers trends and opportunities in the multifamily real estate universe. Host Scott Hawksworth discusses attractive offerings in the space, including direct investments, DSTs, opportunity zones, REITs, and more.

Show Transcript

Scott: Hi, everyone and welcome to another episode of “The Multifamily Investor Podcast.” I’m your host Scott Hawksworth. And today with me I have Andy Hagans who is the co-founder of AltsDb, The Alternative Investment Database, and host of The Alternative Investments Podcast. And today we’re going to be talking all about the macro case for alts and multifamily investments. I’m really excited to dive into this topic. Andy, welcome to the show.

Andy: Thanks, Scott. I’m happy to be here.

Scott: Well, thanks for being here. Let’s kick things off. Why are alts so attractive to investors, particularly in this current economic environment?

Andy: Good question. Well, I used to give three reasons, high level, why people invest in alts. And now I add a fourth reason. So I’m going to give you a fourth reason today. But the first reason is higher returns. We’re investors, we want alpha. And if you look across the alternative investment landscape, and especially a lot of segments within real estate, a lot of these asset classes have historically posted very high returns, and sometimes even, you know, very good returns during economic recessions or during periods of substantial inflation. So the first reason is alpha returns.

The second reason that investors traditionally invest in alts is for portfolio diversification. I want an investment that is going to zig when the stock market zags. And so that’s that context of overall portfolio return. Even if assuming that alts return the same as the stock market, if they have less volatility, or if they are lightly correlated, or non-correlated, or negatively correlated, you know, that just makes the overall portfolio better on a risk-adjusted basis.

The third reason that investors invest in alts traditionally, and this is a huge one right now is tax advantages, right? So Jimmy Atkinson and I, we were both on the recent OZ Pitch Day at opportunitydb.com. And essentially, there’s this entire segment of real estate that’s organized all around this tax wrapper of the qualified opportunity fund. And the qualified opportunity zones program confers massive, massive tax advantages for the real estate within that kind of a wrapper. And so right now, if you look at where inflation is, you look at where taxes are, first of all, if you’re an investor, I think there is a qualitative difference between a high net worth or very high net worth investor, and just your sort of everyday investor who’s putting money in their 401k, right? Because the tax advantages of a 401k or an IRA are substantial. Let’s take a bond fund that is yielding 4% or 5%. If that’s in a 401k, it’s actually not really returning anything after 5% inflation, right? But at least it’s almost holding its value relative…

Scott: It’s pacing a bit.

Andy: Yes, nearly, it’s nearly preserving your wealth. Exactly. But if you put that same 4.5% yielding bond fund in a taxable account, now Uncle Sam is going to take 175 basis points of that yield in taxes, right? So you’re taxed on that nominal income from your bond fund. So instead of the after-tax yield, instead of being 4.5%, it’s a little bit under 3%. So now that 5% inflation rate takes you negative, so now I’m losing 2% of my wealth every year, right? So once you have a certain amount of funds to invest, and you can’t really fit them all inside tax-advantaged spaces like 401ks or IRAs, I think a lot of investors are looking for tax-advantaged investments to maximize those triple net returns, returns after inflation, after fees, after taxes.

Scott: Right.

Andy: And that’s a big one across all kinds of different alternative investments, whether we’re talking about energy programs, obviously qualified opportunity funds in the real estate world. Obviously, you’re familiar with 1031 exchanges and DSTs. I mean, those are very big with multifamily investors. So tax strategy to increase your triple net returns is a huge factor why investors are turning to alts. The fourth reason though, the bonus reason that I’m giving today, a lot of investors are deploying capital into alts for impact. And I almost look at it like human beings are attracted to stories. If you look at crypto, it’s kind of the newest alts on the block.

Scott: Yeah.

Andy: Bitcoin, Ether. Investors love that story, it really attracts them and they feel ownership of the story. And then they deploy capital behind that, right? But I think that can also be true in the real estate world. Like a lot of these opportunity funds across the United States are doing incredible projects that are making impacts in local communities. I’ve seen a lot of projects in Puerto Rico, for instance, a lot of rebuilding going on there. And you know, it’s exciting to be a part of that. And this is true, really, all across the investor spectrum, where we’re talking to retail investors, who are putting $20 a week into crypto all the way up to ultra-high net worth and institutional investors, I think they’re all interested in impact. So I guess to sum it up, higher returns, portfolio diversification, tax benefits, and impact, those are the reasons that investors are putting so much money into alts right now. And then let me actually, if I could… Those are sort of the abstract reasons, right? But to contextualize all that, in the current moment in Q4 2021, it’s late November 2021 right now, we’re in a period of financial repression, where the inflation rate is 6%. I mean, some people would say it’s higher in the last year, and interest rates on bond funds are what, 2% or 3%?

Scott: Yeah.

Andy: Depending on where you are on the credit and maturity, even lower than 2%. And so as an investor, you have to look at your portfolio, and you have to go okay, the bond portion of my portfolio might be, “safe,” but it’s shrinking in value…

Scott: It’s shrinking. Yeah.

Andy:…by 2% or 3% a year. So you know, it’s kind of the old carrot and the stick. Well, that’s the stick, that’s the stick that I think is making a lot of investors say, I can’t afford to keep 40% or 50% of my portfolio in bonds anymore because that part of my portfolio is going to get murdered over the next 5 years. If inflation sustains at 5% or 6%, during the rest of the Biden administration, even 4 years, times 6% inflation, you know, you just lost 25% of the wealth, of the real wealth.

Scott: Right? And where’s that safety benefit there, if that’s happening. Right?

Andy: Right, exactly. So inflation, it’s the silent killer, right?

Scott: Exactly.

Andy: Silent but deadly.

Scott: So okay, you founded AltsDb. So all about this. Can you tell us a bit more about AltsDb, and you host a podcast, The Alternative Investing Podcast, what’s the story behind all that?

Andy: Sure. So, Jimmy Atkinson and I, we work together at OpportunityDb, which is the Opportunity Zones Database, and Jimmy hosts a very popular podcast in that space, right? So I’ve been working with him on that project. And we want to zoom out and look at the bigger picture of alts because I’ve remained very excited about opportunity zones and QOFs but I also think there’s this macro trend of more and more investor capital going into alts. And you know, there’s a lot of interesting products that as an investor, even I’m personally interested in whether we’re talking about interval funds or private equity.

And there’s, you know, a lot of attractive real estate…I love QOFs, but there’s attractive real estate that doesn’t exist in an opportunity zone and might be in a different wrapper. So we wanted to zoom out and look at that entire alts landscape, especially including real estate and private equity. So that’s the impetus for AltsDb, The Alternative Investment Database. And then you know, we love podcasting. We love talking to people, we love talking to sponsors, who are doing cool projects, right? And I also like to learn about new types of products. You know, again, as an investor, I’m always on the lookout for alpha. So the podcast is a really fun way just to talk to interesting people in the industry, learn about trends and learn about cool new products.

Scott: Well, you’re preaching to the choir here. I’ve been doing lots of podcasting throughout my career. And I think it’s so great, all the people that you can meet and learn from and connect with. So that’s awesome that you guys have the AltsDb, you have your podcast. I want to kind of turn it back to sort of your take on why multifamily investments are so attractive to investors because, you know, you were talking about there’s the real estate that’s exciting and things like that, but why, from your perspective, is multifamily so intriguing?

Andy: Yeah, that’s a good question, Scott. And I actually read your guide to multifamily investing, you know, the PDF guide that you published, and you referenced this statistic that I already knew about, but I was pleased to see it in your guide, which is, you know, the estimate that we’re short, at least, 5 million housing units in the United States. And if you look at what home builders are building right now, a lot of single-family luxury housing, because of inflation, because of labor shortages, because of uncertainty in the supply chain, that segment of luxury, high-end single-family housing, that’s like the safe play if you’re a homebuilder right now.

Scott: Sure.

Andy: But back to that 5 million unit housing shortage, the major shortage is in, you know, middle class, middle income, workforce housing, you know, lower-cost housing, not luxury housing. So, supply and demand, I guess, Scott, is my short answer.

Scott: Is the basic there, yeah.

Andy: Yeah. Because there’s not enough quality, affordable housing in the United States. And of course, I’m talking across the nation right now, I’m talking big picture United States. I mean, a lot of this comes down to states and cities and local areas. So I’m very, very bullish in certain locations, less so in others. I think, you know, real estate is local, right, so you have to know your local market. But I think that macro trend of affordable housing, in many places is just impossible to find right now. So there’s too much demand, too little supply.

So as an investment thesis, you know, it’s great to invest in things that there’s a ton of demand for, right, that gives you pricing power. And, you know, I was talking to a sponsor a couple of weeks ago and they’re planning a project to build a very nice multifamily. And he was talking about their previous project. And the lease-up time was like nothing. I mean, essentially, once it was built, it was fully leased, virtually fully leased. So that kind of just immediate lease-up and having the asset cash flow so much faster, that’s very, very appealing.

I think the hard thing right now, for me, as an investor, as someone who talks with sponsors, is, you know, a sponsor knows what they want to do, they know what they want to achieve, they know where to build, how many units to build, what they should look like, etc, etc. Well, because of policy decisions, either in…from Washington, DC or at the state level, they can’t get the labor that they need, the labor is not available, and also because of policy decisions. And some of these decisions are from a year ago, from the COVID lockdowns, you know, a year ago or more, they can’t get the supply they need.

Scott: Right, they literally can’t get materials.

Andy: Right. So there’s the risk, right? There’s a lot of frustration. And that’s actually a real risk, right? Because the timetable of the project and the time value of money, and all that sort of thing, that’s a huge factor. So there’s a lot of risks right now, I don’t want to sugarcoat that.

Scott: Sure.

Andy: But if you look at just at the demand side, that presents an incredible opportunity, especially in the right location.

Scott: I think you’ve broken it all down so well, Andy. And what I’d even add, too, I was thinking as you were kind of going through that, about what you were talking about is how investors love stories. And not only if you’re talking about affordable housing, but when you look at some metro areas that are seeing a lot of growth, there’s exciting new tech jobs, there’s just a lot of demand, how exciting is that, from a story perspective to, you know, invest in the housing where the next Silicon Valley or whatever you want to call it is up and coming and there’s a lot of exciting things happening. So I think that’s another piece.

Andy: Absolutely, and I think investors, to some extent, should be agnostic or apolitical in certain respects. But I also think, you know, when you’re investing in real estate, you have to consider state-level regulation, you have to consider local policy decisions. So for instance, several years ago, my wife and I, we moved from Chicago to Southwest Michigan, right? And part of that we wanted to move to a place with lower taxes, and less crime. So it’s all local, and so I think what you identified are some of these demographic trends and folks moving from…especially this accelerated in 2020.

Scott: Absolutely.

Andy: People realized that there’s certain cities where the value proposition of living there maybe isn’t quite there and you’re seeing a lot of migration to other states where maybe there’s less regulation, the real estate prices are more reasonable, where crime is lower, you know, where frankly, maybe there’s different policy decisions that are made relative to crime and policing and zoning regulation, all these sorts of things. So I think as an investor, you have to be aware of those things, but they’re also all local. So I would never say don’t invest in California, for instance, right? Like we know there are cities in California with just absurd housing regulations, and it’s impossible to build. But there’s a ton of real estate opportunities in California, right? So I also don’t want to paint with too broad of a brush. I think you look at macro trends, but you also need to look at micro trends in each specific location, every city, every state, every neighborhood within each city, and so on and so forth.

Scott: Yeah, and one thing I’d add to that in terms of the migration to areas that may have lower taxes, lower cost of living with this whole rise of remote work and work from home, and you can do your job anywhere, a lot of people are now…they may have that big tech job and realize, you know what, I actually don’t need to live in this more expensive city and I want to look, you know, at the Southwest or something else. Those kinds of things are happening. And so if, as an investor, you can identify, hey, this is a metro area that is…a lot of people are moving to for various reasons, that makes it even more exciting, right?

Andy: Yeah. And that trend you identified puts even more pressure on residential, including multifamily, which is there’s not going to be so much pressure on office space, or so much demand for office space, if a ton of workers are no longer going to offices, but then the flip side of that is they may need more space in their residence, whether that’s an apartment in a multifamily building or whether that’s, you know, a house, but just across the entire residential sector, you know, I think that just puts more pressure on it and creates even more demand. And by the way, I’m not saying there aren’t good opportunities in office space right now. I think there are for people who know what they’re doing and can think long term. So I do think there are, I think there’s a lot of opportunity there. But that exact thing you just said, I mean, we’re coming off an 18 month period where a lot of people have spent a lot of time in their homes.

Scott: Looking at the same four walls and thinking, you know what, could I find nicer walls?

Andy: Exactly, or maybe cheaper walls…

Scott: Exactly.

Andy:…in a different city or state. So yeah, I think you hit the nail on the head there, Scott.

Scott: Well, Andy, I really, really appreciate you jumping on the show today and really sharing all these insights when we’re talking about alts, but I’m curious, I want to find out a bit more about the different segments. So can you share maybe a few old segments that you’re particularly excited about outside of when we’re talking multifamily?

Andy: Yeah, that’s a good question. Well, as far as asset types go, I love farmland.

Scott: I won’t give up farmland. I love it.

Andy: A quote the other day, why buy farmland? Well, it’s gold that pays a coupon. Right? And of course, farmland prices have been on a tear. But really every segment in equity markets, every segment in real estate is up so much year over year, that I think that that’s kind of relative. So I think there’s still opportunity in farmland, even though a lot of segments within that have gotten very, very expensive. I also like the hospitality segment within real estate. It’s obviously a little bit risky. I mean, where there’s risk, there is opportunity. Right? And I think, to our last point, a lot of people are sick and tired of staring at the same wall over and over.

Scott: They’re chomping at the bit to go somewhere.

Andy: Yeah, we’re already seeing travel rebound a little bit. And I don’t know that it’s going to hit the floor that it hit in 2020 anytime soon, regardless of what happens with this virus or that virus. I don’t know that people will be willing to just not travel for a year at a time again. So those are segments within the real estate world. But I have to mention also just a wrapper that, you know, I’m an OZ guy.

Scott: Yeah.

Andy: I love opportunity zones. I love the program. I love the QOF wrapper. If you can find good real estate that has the potential for cash flow and appreciation, and it is within an opportunity zone and you structure it within a qualified opportunity fund, I mean, the tax advantages to that are just massive. So I’d say as far as wrappers go, I really like QOFs.

Scott: That’s awesome. And for folks listening, if you didn’t listen to our previous episode, do fire that one up because we had Jimmy on and he broke down so well, why these opportunity zones are so exciting, and particularly when we’re talking about multifamily real estate as well. Well, Andy, thank you for joining me as we kind of wind down. If folks want to find out more, they want to learn more about alts, connect with you guys, where can they do that? Where should they go?

Andy: Sure. So our website, AltsDb, is at altsdb.com. We are also on all the major podcast platforms. So you can open up Spotify or Apple Podcasts and just search “The Alternative Investment Podcast” and Jimmy and I, our smiling faces will pop right up. Yeah, we co-host it, by the way, so it’s not all me. I got to give Jimmy some credit as well. But no, we’re having a ton of fun with that show. So if you’re interested in alts, and including real estate and multifamily, check us out.

Scott: Awesome. Thanks again, Andy.

Andy: Thanks, Scott.