Any class of multifamily property has the potential to offer compelling returns for passive investors, but risk profile and strategy vary significantly among them. While Class A is often associated with newer construction and higher rents, Class B and C properties remain popular assets with distinct advantages.
On this episode, we take a look at the investment thesis for Class B and C multifamily properties with the help of Randy Langenderfer. Randy is Principal at InvestArk Properties, which specializes in B and C+ multifamily assets in addition to Class A properties.
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- The investment thesis for Class B and Class C multifamily properties.
- What differentiates Class A, B, C, and C+ properties.
- What characteristics make a Class B or C asset an ideal value-add opportunity.
- How Class A property ownership can blend well with other property classes.
- Which MSAs are particularly attractive for multifamily investment currently.
- The impact of economic uncertainty and looming recession on Class B and Class C properties.
- Rent growth trends in Class B and C properties.
- How to add value into multifamily assets after acquisition.
Featured On This Episode
- Are Households ‘Trading Down’ To Class B and C Properties? (Globest.com)
- What Does Class A, B & C Mean in Real Estate Investing? (Origin Investments)
Today’s Guest: Randy Langenderfer, InvestArk Properties
- InvestArk Properties (Official Website)
- InvestArk Properties on LinkedIn
- Randy Langenderfer On LinkedIn
About The Multifamily Investor Podcast
The Multifamily Investor Podcast covers trends and opportunities in the multifamily real estate universe. Host Scott Hawksworth discusses passive investment offerings in the space, including direct investments, DSTs, opportunity zones, REITs, and more.
Scott: Hello, and welcome to “The Multifamily Investor” podcast. I’m your host, Scott Hawksworth. And today, we are going to be talking about class B and class C multifamily investing, those kinds of assets. And joining me to offer his insight is Randy Langenderfer, who is the principal at InvestArk Properties. And, Randy, welcome to the show.
Randy: Scott, thank you so much. It’s a pleasure to be here, my friend.
Scott: Well, thank you for being here again. I kind of teed it up. We wanna talk about class B, class C properties, really all that goes into that and the investment thesis for those asset types. You know, a lot of our audience, they’re familiar with class A. You know, they like those kind of core plus type properties and things like that, maybe less so with value-add. And so I guess my first question is, what’s really your thesis for class B and class C properties? Where’s the value there? Why is that such a great type of multifamily property?
Randy: That’s a great question, Scott. And again, I just wanna pause and say thanks. Really enjoy being here. And I know I’ve listened to several years and you get a great audience, and so look forward to adding some value. But the thesis really, I mean, I think the short answer is that there’s so many more B and C’s than there are A’s, although there are many more A’s coming online across America as developers are starting to see the advantage of multifamily, etc., etc. But there’s just so many more B’s and C’s, and it’s the classic example of volume and affordability there. Those B’s and C’s are gonna be anywheres from 50 to 100, 200 bucks less per door per rent than the class A’s. You know, I’m in Houston, Texas, is where I’m home based at. And specifically, I’m in the medical profession. And so down in the Houston Medical Center, which is just a phenomenal place, I’ve seen over the last…I’ve been in Houston 10 years, probably 3,000 or 4,000 doors come out in that area, just attracting that high-net-worth medical professional. And those are renting for $3,000 plus a door. And so, I mean, that’s just a hefty price tag. And that’s not traditional across the whole U.S. So, I think start with, it’s just purely where the masses are.
Scott: I think that’s a really great point. And one thing I wanted to kind of dive into because as I was looking through your guy’s website and the properties you have, you use this term, C+. You said, “Oh, we focus on B and C+.” What’s the difference between, you know, maybe just a class C property as you define it between that and C+? I guess are there some characteristics or specific elements that kind of make that difference in there?
Randy: I don’t know that I can put a classification other than kind of sound like the Supreme Court said, “Pornography, I’ll know it when I see it.”
Scott: Right. Sure.
Randy: I’ll know the C+ when I see it. But I think anybody that’s done this for a while knows that there’s…and maybe it’s the neighborhood. So, you know, I always talk about the asset, it’s a C+ asset in maybe a B neighborhood or a C neighborhood. And so I think as the more you get into this space, you begin to differentiate the asset and the neighborhood as well, just like residential. So, C to C+ I would say is probably age and just neighborhoods. So, if I were to try to put words around it, so I’m gonna say late ’80s and ’90s build probably C+, C+ probably, too, that probably can have more of a value-add opportunity than a 2000 build, something like that, that has newer vintage, that less deferred maintenance, and stuff like that. But I would acknowledge it as a very gray area to distinguish between…I mean, it’s difficult many times to distinguish between a C and a B other than just the age of the asset in the neighborhood again.
Scott: Right. And I think that’s such a good point, too, because when you look at these property classes, even within C, I mean, that is a wide range of properties out there. Like, you could have something, you know, that’s a value-add and then something that’s opportunistic, and they’re both class C properties. But then if you look, you know, maybe the opportunistic one is pretty rough and the neighborhood could be pretty rough as opposed to, you know, something like you’re talking about, where it’s like, “Well, it’s a C+ in a neighborhood that has a lot of class B properties there.” Right?
Randy: Yeah. And the example I’d probably give is the one we just purchased in August a couple months ago, Tucson, Arizona, 199 doors built 1965. So, you would typically say that’s a pure C asset, a straight C asset. But this particular asset it’s in Tucson, first of all, very thriving, growing, an upward mobility. And it probably is a C, marginally a C+ because it’s got a lot of value-add opportunity to it. The guys owned it for many years and hasn’t upgraded the interiors, and stuff like that. So, we’re looking forward. We’ve owned it for two months, and we’re seeing rent bumps of literally $200 a door, $250 a door on some of the early leases, which is phenomenal. And so I would label that one a C asset, but it could be marginally a C+ because of the neighborhood it’s in. But myself, I wouldn’t put a B on that because just of its pure age, a 1965 build.
Scott: Right, right. Yeah. I guess maybe when we’re talking about these property classes, it does seem like there are these kind of guide rails that are like, “Well, you just can’t call it a B because it’s that age or because it has this aspect to it,” which I think is something that maybe folks that are less familiar with all of the different, you know, class types and haven’t been doing this for, you know, as long as yourself and others, maybe they just don’t have that sort of subtlety knowledge, right?
Randy: Yeah. I think it’s easy to identify the extremes, A, you got out here, that’s the brand new build, that’s the 2015 or ’16 build newer, and they got all the amenities in there and the plush neighborhood at core or core plus neighborhood, and then the B’s were probably building the, I don’t know, 2000 to 2015, maybe late ’99s that are still very nice, garden-style apartments. And C and C+ is everything underneath that in my mind. And those are rules of thumb. There’s no…
Scott: There’s no hard and fast.
Scott: Like, this is the only way. I guess, pursuant to that, you know, we’re talking about all these different types of properties. So, when you’re going out and you’re looking to acquire an asset, maybe what are some of the factors you’re looking at? I mean, we were talking about neighborhoods, so obviously that would be one, but are there other factors that, as you’re going through and you’re looking at an opportunity that make you say, “Yes, this is gonna fit within our strategy, this is what we’re looking to do, this will work with our playbook”?
Randy: There are people that have very stringent playbooks or acquisition rules. And, you know, I’m only gonna buy, and the guy I just partnered with, he only buys in Tucson. He doesn’t have any other places. And that’s fine. He’s great. He really concentrate. He’s really good at it. He knows that market extremely well, extremely down to the streets and everything. And it’s a thriving, growing neighborhood. But I would say my thesis is really simply, you know, I subscribe to the real estate guys, said, you know, “Live where you wanna live and invest where the numbers make sense.” So, I have recently purchased with, in the last year, two class A assets and a class C asset. I mentioned in Tucson, we have a brand new 2020 build in Weatherford, Texas, a suburb of Fort Worth. And like I said, it was finished in 2020. And so it’s a drop-dead gorgeous asset.
Scott: Oh yeah. I’m sure.
Randy: And so my thesis is, is when I’m looking, I’m looking for a story, something that we can fix or improve and sell to investors and simply make a return. And I agree that, in today’s market, the class A’s are less maintenance and probably upward mobility, people who are working from home, etc., that are, you know, white collar individuals versus the B’s. But there are just so many B’s and C’s available where working class, they may have some challenges. But, man, if I can find one that pencils or something that I can prove, I’m really not that particular. And so back to your previous conversations, I don’t hear many brokers labeling assets class C’s. They’re always B, B+, B-, anyhow, whether they were built in ’50s or the 2000s. But to that, it’s building the relationships with the brokers and trying to develop a rapport with them as to what you’re looking for. So, if there’s a brand new class A that there’s nothing can be done to it, then thank you, I’m not interested. But I was looking at one, the other extreme here in Houston last night where there’s a fire in 112 units and 29 of them are in fire, gutted. Well, that’s a pretty heavy rehab…
Scott: Yeah, that’s…
Randy: …that I’m not interested in at this point. So, it’s developing your strategy. So, I say I can develop the extremes on both, you know, tail ends of the bell curve, what I want and what I don’t want. I don’t want that deep value-add asset like the fire. I’m really looking for that one in the middle of the bell-shaped curve where there’s value to be added. This new property we bought in Weatherford, I said, you know, the developer had focused on leasing it up. He wasn’t focused on getting market rents. And rightfully so, it’s a large asset, it’s 396 doors. And so he was just focused on leasing it up. Well, so the value-add there, the play is really just to add some minor amenities and bring the rents up to market rents. And so far, it’s kicking but taking prisoners.
Scott: Right. Well, and I guess that circles back to your point where, you know, when you’re looking at a potential acquisition, you’re saying you’re driven by the numbers and do they make sense? So, hey, if it’s a class A asset and you’re looking at those rent rolls and you’re saying, “These are not market,” then you feel, “I can capture that. I can do that. We can improve some things.” Or if it’s not too heavy of a lift and it’s a class B and you’re thinking, “Hey, we can make some other improvements here and then go back to, you know, increasing those rents,” it’s just kind of just following it that way?
Randy: That class B, we can do amenity improvements or improvements to the exterior to justify the rent bumps that we wanna make. And those rent bumps have to be justified by comps in the neighborhood that we get off CoStar or elsewhere. It’s kinda like the real estate, your primary residence, “I wanna buy a house, the worst house in the nicest neighborhood and fix it up.” And so it is multifamily. If I can find that asset that’s been undermanaged and not had any tender loving care given to it, then that’s a traditional value-add, and let’s go after it. But to your point, I think, Scott, everybody’s different. So, there are some people that only…I know I have friends, they’re only looking at class A’s in Austin or Dallas, and they have just a different thesis and neither one of them are wrong. But the passive investor should educate themselves and ask the syndicators those questions as to what their strategy really is. So, you gain comfort with it. I mean, the question is, as a passive investor, are you comfortable with that?
Scott: Right. Right. Do you buy into the market or the thesis of…
Randy: The thesis of the syndicator or the…
Scott: Yeah, exactly.
Randy: … general partners. We all struggle as investors, right? I call it the shiny object syndrome. Somebody sends me the email, it says “29% IRR in three years, or double your cash in 24 months.” And so we’re all excited and that draws our attention. But really, what’s the rationale behind that as an investor and trying to make sure you have comfort with that business plan?
Scott: Right. Well, I think that’s such a great point, Randy, because, you know, I’ve got my email inbox, you know, I’ll see shiny new emails with, “Oh, wow, look at this property.” And, you know, I look at pitch decks and all of this for funds and the assets. And, of course, they’re presenting it all, you know, as great opportunities, and so many of them are. But that’s where you dig in and that’s where you start having conversations with the sponsor, the GP, the syndicator, and you start really looking into, “Okay, well, what is your strategy here? Why is this strategy gonna be so successful and deliver on these shiny numbers that I see in your presentation deck?” Right?
Randy: Yeah. I’m in about 1,100 doors today as a general partner. And I still passively invest in other people’s deals, and I hope I always will. And so I’m in several thousand doors as an LP. But to your point, there are people that I have invested with multiple times as a limited partner because I know their thesis. And the first several times I invested, I flew or I drove to the asset, and I looked at it, and I’d say I interviewed the general partners and understand their thesis. And it’s to the point now where seven, eight years later where I get it, I know what they’re looking for, here’s a deal. You know, I usually sign on if I’ve got available funds. But there was a courting relationship there is what I’m saying to get acquainted with, as we say, to know, like, and trust the sponsorship team. And these days, the deals are getting bigger and bigger. So, it’s seldom just one individual. It’s usually a team of general partners. And so what are the different roles those partners are taking, you know? And they vary. Each group is different. So, I really caution the limited partners. I always say that education is really, you know, continue to educate yourself. I’m still doing it today. Nine years later, I’ve been doing this. And, you know, that’s how you de-risk an investment, is by knowing the thesis, knowing the business plan, and having confidence in the operators to do so. To me, that’s called investing versus speculation, that I’m just, “Oh, I know Scott. Here’s $50,000 or $100,000 because I’ve got it. Go knock out.”
Scott: I don’t need to ask any other questions.
Randy: And I have some people in my portfolio that do that, and I’m challenged and I appreciate their trust, but I really appreciate the investor who asks questions.
Scott: Right. Well, and you should want to have those conversations. And if you’re doing your due diligence, you’ll have those answers. You’ll say, “Yeah, this is my thesis, this is why we’re doing this, this is my plan.” And so I think that’s doing it the right way. I wanna shift gears a little bit and talk markets real quick because you mentioned a few places, you mentioned Tucson. I know you’re based in Houston. Could you speak a bit more to some markets that you like right now and sort of what you like about them? I mean, we’re talking Sunbelt, so that’s kind of self-explanatory, but if you could tease that out a bit.
Randy: Yeah. Today, I’m a general partner in Greenville, South Carolina, Dallas, Texas, Houston, Texas, and Tucson, Arizona. And I think the thesis or the assumption is pretty much pretty straightforward. Growth areas, the Sunbelts, the Southeast, the Southwest, and Texas. You know, if threw a dart at the dart board, and that’s where it would land from a growth perspective, growth of population and growth from… And I’m from Cleveland, Ohio. I moved here in 2013 from Cleveland, Ohio.
Scott: I’m from Columbus. Hey, Go Box.
Randy: Go Box? We didn’t even talk about that. Great. And so, you know, still, I invest in those markets back to where it makes sense. I’m primarily looking at those markets today, the Southeast, the Southwest, and Texas. You know, I’ve been in Texas for nine years. You just can’t deny that the macroeconomic trends in Texas. And I don’t see them changing anytime near soon. And I’ve been to Phoenix and Tucson many times looking at properties and exploring it. And it’s the same there, except it’s a dry heat versus a wet-heated Houston.
Scott: Versus the humidity. Right.
Randy: And I got involved with a group, Carolina’s in a fund, actually the first asset in a fund in Greenville, South Carolina. And just what a drop that gorgeous part of the country, I mean, growth numbers. They just announced that, I think it was BMWs or somebody at one of the auto…yeah, one of the manufacturers is building the EV plant there, electronic vehicle plant there. So, by investing in those areas as an investor, as a limited partner and a general partner, you’re lowering your risk just because the demographics are working for you. And so then, you know, I got a home, too, which I mentioned was Cleveland, Ohio. So, I have not yet invested in Cleveland, Ohio, but I’m looking at it. I’m trying to find something. I do have, as a limited partner, a couple properties in your city of Columbus, Ohio, that have just knocked it out of the park as a limited partner. Just knocked it out of the park. And, you know, I say that if you look at Ohio, I would go to Columbus before I’d go to Cleveland because of just the demographics again, the state capital and all the industry, you know, that’s there. And that’s where all the growth is in the state of Ohio.
Scott: Well, and one of my arguments I make, you know, for a place like Columbus, and, obviously, I’ve got some bias, you know, being born there, but also you look at something like the Ohio State University and you look at all of the employment tied into that. And this actually is a good segue because I wanna talk macro a little bit. But if you look at historical recessions and things like that, boy, universities tend to do okay, and those employment numbers stay stable. And, you know, a lot of people go back to school when the job market isn’t so good or whatever it might be. So, I think that, again, goes back to what you were saying earlier about being educated about the markets, about the thesis. So, whether you’re looking at Columbus, Ohio, or a beautiful place in South Carolina, okay, or is the population moving there? Or if it’s not particularly growing too much, are there other stable factors that are good signs? Right?
Randy: Yeah. And, to me, there are people that won’t look at tertiary markets, I’ll say, like Cleveland or, like, I don’t know, someplace in Alabama, Huntsville, Alabama, or someplace like that. And they won’t look at any of those tertiary markets because that doesn’t fit their thesis. But I think there is plenty of opportunities there. It just takes a lot more digging. And as a general partner, properties are so competitive today that I think there may be some opportunity in those tertiary markets. But, you know, I wouldn’t consider Greenville, South Carolina, a primary market, but it certainly fits the macroeconomics. And there’s some…back to where the numbers make sense, those tertiary markets, my first asset was in Beaumont, Texas. You probably never…
Scott: Beaumont, Texas.
Randy: You’ve probably never heard of it. It is about 150 miles, just due east of Houston, between Houston and St. Charles and Louisiana. And it’s a small Texas City of about 300,000. And so heavily blue-collar, heavily energy-related, it’s near the ocean, and there’s a lot of works there. A lot of people wouldn’t go to Beaumont because it was tertiary and it was off the beaten path, but it’s a 300,000 community. So, there’s a lot of people living there. And we had challenges, but we did very well there. And I would go back in a heartbeat if I found the right asset, just because there’s less competition there than there is in Houston, or Dallas, or Austin. And those tertiary markets, I think people will disagree with me and that’s fine.
Scott: Of course, there’s always different ways of approaching it. But, you know, we’ve had folks on this show that are all about tertiary, “I don’t look at anything that’s not tertiary markets.” So, I think that really speaks to that. Randy, I wanna talk macro because, you know, earlier, we were discussing, you know, class B, class C properties. You were talking about class A as well, and you’ve had been able to have those rental bumps and certainly on class B and class C. Looking at the larger macroeconomic trends, we’ve got inflation, we’ve got interest rates, you know, continuing to rise, we’ve got economic uncertainty that has kind of continued throughout, you know, this back half of 2022. And, you know, recently, looking across some markets after just sort of meteoric rises in, you know, rental growth, we’ve actually seen some markets starting to sort of flatline a little bit and starting to dip. And then, you know, with potential concerns about, you know, recession, job market, what have you, what are you seeing specifically in the properties, the assets that you have? And when we’re talking about that class B, class C area and how this impact has been felt or not, and where you expect it might be?
Randy: You got any other questions I don’t know the answer to?
Scott: And so just pull out the crystal ball and tell us where we need to invest and not. But I’m curious what you’re seeing. Yeah.
Randy: Yeah, I thank you for the question. And certainly, it’s just an opinion, but everybody, again, respectfully can disagree. So, I’m owning a couple different markets. And so I think what I would say is, it is very submarket dependent. I agree with the macro statement that you said. I’ve heard that on the news to rents softening even beginning to decline. I would say in the markets of Carolina, Tucson, and Texas, we have not seen any declines yet on our properties. I would say that our Greenville property is, they’re both new, and the Tucson one are really a month and two months old. So, we’re seeing rent growth yet, but some of that’s because the property was under market so drastically. So, we’re…
Scott: Right. So that was the value-add?
Randy: That was the value-add. And so we’re not seeing any flattening yet. We haven’t owned them long enough. I would say in our Houston property, which is a class A, I just was on an asset management call before I jumped on this one, and it’s not flattening, but we’re having to work to get rent bumps harder now, but we’re at the high price, too. I mean, this is a 2017 build, and we’re getting like 1,500 bucks for a one-bedroom or something, that’s crazy, or 1,400 bucks. It’s crazy. So, we haven’t cut back, though, at all. We haven’t taken any concessions or anything like that yet. We’re actually seeing tenants staying because they don’t wanna move. I don’t know if it’s property that they’re at is better than the unknown of changing again and going through the whole thing again. So, I hear the same news that you hear, but I haven’t seen it in a significant way nor do I think we’re gonna get double-digit rent gross this year in any of those assets…well, except for the deep value-adds, the value-adds at Tucson and some of the…I would say the Greenville property is gonna be high single-digit rent growth.
Scott: Right. So, basically, what you’re saying is…and you’re not really seeing it but this is a larger macroeconomic story that’s out there. So, I think then it always circles back to what we were talking about earlier and, you know, what’s the asset, what’s the thesis, what’s the market?
Randy: What we know is trees don’t go to the sky, right?
Randy: So, they don’t grow unlimitedly. So, there is a point someplace where it’s gonna taper off, but I don’t know where that is yet.
Scott: Well, and I think, too, Randy, there’s also just this sort of…I don’t know, phenomenon’s not the right word, but we had such intense rental growth certainly as we closed up 2021 and into the beginning of 2022. So, a lot of that, I think if there’s uncertainty or people getting nervous, well, that was just, I would say, unsustainable, like, it was not going to continue to just soar like that. And so now if you’re seeing things slow down, maybe become a bit more normal, or even in some markets just kind of go flat, it can feel like, “Oh, no, is the party over when that’s not necessarily objectively true.”
Randy: I would agree wholeheartedly. And the other thing I would add to is when people talk about rents falling, stabilizing, I think that always begins on the coast, the left and the right coast, the New Yorks, the San Franciscos, the California, and the big New York high-rise apartments where there’s many hundreds and thousands of units. I think that is probably stopping there. And sooner or later, eventually, it’s gonna creep to the South and the Midwest, and etc. But I’m still bullish, to put it that way, I’m still buying. We buy different today. You know, I still think that multi-family is, “Okay, I may not see the huge increases in the double-digit returns, but for the long term, I just haven’t found an asset class I like better between cash flow, appreciation, and tax advantage.”
Scott: Yeah. As you’re going out and you’re looking, I think another piece of this is, you know, we saw so much cap rate compression, we saw prices just going up, up, up, up, up. And I know, you know, over the last several months, there have been some folks looking out there and sellers not wanting to lower prices when it’s like, “Yeah, but the market’s shifted a little bit.” What are you seeing in terms of cap rates and pricing? Are you seeing any kind of dips there, or is it all still kind of holding as well?
Randy: We’ve seen, in those markets I’ve talked about, I wouldn’t say expansion, but it’s certainly not compressing anymore.
Scott: Right. So, again, slowing and kinda stabilizing.
Randy: But I don’t see those high markets like Dallas, Austin, Houston, I don’t see cap rates expanding to 5%. You know, they may have nudged up for a little marginally. But if anything, they’ve stopped condensing, which is good.
Scott: That’s okay.
Randy: I think that’s good for kind of everybody unless you gotta sell right now. But overall, we have not seen major expansion. And I think it’s just that slowing, as we said. And I think we’re just in a calming, everybody’s trying to figure it out. You know, everybody’s listening. And I was doing a couple capital raises in July and August, and investors were jittery. They’re very jittery and understandably so. We were, too. But on that, I think there’s still the fundamentals are there. I said the asset class, if you buy right, and you get some good debt on there, you may hold it seven years versus five or five years versus three or something, but I’m still very bullish.
Scott: Randy, you said the keyword word debt, because that was my next question. You know, we can’t talk about any of this without talking about what interest rates have been doing. And, you know, the fact is we had, you know, a lot of cap rate compression, we had a lot of prices going up, up, up, and folks coming in and some being aggressive with the way they’re approaching debt. How have you seen the impact on interest rates and debt for properties that you’ve been involved with? What’s the impact there? And maybe how has this environment shifted your strategy?
Randy: You ask some difficult questions, Scott, all very valid questions. I mean, obviously, we’re in a rising interest rate environment and inflationary my cycle. I think the good news…there’s a little bit of good news there. I’ve heard and talked about another whole podcast that the supply chain is beginning to equalize out. So, that’s one of the major pluses or risk that we can take away is the supply chain is…well, it’s still there, but it’s not as significant as it was and getting better and improving every day. The other one on interest rates, I mean, we bought a property in February of 2022 here in Houston, and I remember arguing with my partners about, “Do we get a 2% rate cap or a 3% rate cap?” After many discussions, we bought a 2% rate cap insurance, and that was in February. It kicked in in July. So that rate cap insurance kicked in, so that stinks, that rate cap, you know, gone up 2%, 4% on a variable rate or a bridge debt loan.
But the good news is we had insurance, and the good news is we were lucky to buy in February because that costs us as a partnership about $130,000 to buy that. If you were to buy that today, it’d probably cost you close to a million dollars that same piece of insurance because those prices have just gone through the roof, as you know. So, it’s hit us personally, and it’s hit everybody because there’s been very little purchased in the last two to three years that wasn’t bridge your variable rate debt by almost everybody. It’s crazy because when I got in industry, you know, agency debt was the gold standard and nobody did bridge. And because of the yield maintenance and those other deterrents, I think it’ll come back into vogue. And the other side of it is I say, too, about inflation, you know, that’s rising prices.
So, I really don’t see… We’ve talked about rent growth slowing down, but in the market I’m in, I don’t see declines. And I think that is justification for asking for minor rent bumps, 20, 25, 35, 40 bucks, which is great from a owner perspective. And so inflation allows us to justify some of those rent increases, too, along with the rating we should do. And then the last commentary I’ll say is that I would encourage, not to deter anybody away from your podcast but “The Rate Guy” podcast, JP Conklin, and, you know, I bank on kinda what he says. I listen to him a lot. And he has pointed the fact that the Fed’s first raise was in March of ’22. I think they went up a half point, and they’ve gone up 275 bps since then. And he said, historically, over the 45-plus years, since the inception that they’ve been tracking at the Fed, the time from the first rate increase to the time of the first-rate decrease, in other words, the Fed raises rates and it’s anywheres from 22 to 36 months after that that rates begin to come back down.
So, if you think of that, that if the first rate increase was in March of ’22, so you’re looking at what? May of ’25 through mid-’26 for our rates to begin to start coming back down. And there’s much to be said already that some talking heads that are much smarter than I am say that it’s gonna start to come down late next year in ’23 because the argument is that the Fed looks at historical data only. They don’t look at forward-thinking data. And so when you look at some of the forward-looking data, the supply chain issues, we said we could talk extensively about it on a macro basis, but it’s pretty much been addressed and being fixed for getting flow of it. And there’s some discussion that we’re overcorrecting, and so it’ll come back to a neutral as early as late next year, but history shows mid-’25 at the latest, so.
Scott: Right. You know, Randy, so many good thoughts in there. And I like that thought on, you know, being mindful of, well, when might they rates start coming back down. I think a lot of folks I’ve talked to, there’s a lot of opinion that these increases were overdue, and this should have been done a while ago. And then I think, finally, when things were not seen as just transitory, that kind of forced their hand. And so now, it’s just been this signal of let’s go, let’s go, let’s be as aggressive as possible and go off the playbook, you know, from the ’70s and all of this, and let’s do that. And I think that that’s a good point that, you know, you may see that potential over correction and then kind of walking it back now when that’s gonna be as anybody’s guess. Randy, if you do have a crystal ball, please take it out now. I’ll get my pen.
Randy: Well, I’m just banking out in the history and I’m just banking on history, and everybody that’s, again, much smarter than I talks about Jay Powell has learned from the playbook of Volcker in the ’70s when Volcker waited too long to raise interest rates.
Randy: And had to raise them, you know, into the high teens and the 18%, 19%, 20% to bring it into check-in. And Jay Powell is just adamant that that’s not gonna be on his watch. So, he’s trying to get out in front of it, and the consensus is that, you know, he’s on it, and we’re probably gonna get another 75 bps next month or whenever it is.
Scott: That’s what the thought is. We’ll see. But, yeah.
Randy: It’s almost a lock. And at what point do they start to cool it? And we’ll see, I guess. But I don’t think that… The other side of me says, every time he raises it, he’s just increasing our national debt because, you know, we’re paying ourselves interest on the debt as well. And at some point, it can’t go on for… I’m probably older than you, Scott. My first mortgage was in the mid-’80s. I got an FHA loan at 11% . And my point of it is in that history is that I don’t think we’re gonna see that. I don’t think it’s gonna go that high. Again, I’m just one person, but I don’t think Jay Powell can do that to the economy. That would just shatter the whole economy.
Scott: Right, right. And I think they’re cognizant of that.
Randy: A slowing down or maybe even a mild recession, but is he gonna throw the whole economy into the brink of disaster? I don’t think so.
Scott: I don’t think so. Well, I think we’ve kind of covered everything in terms of class B, class C, and what you guys are doing and the success you’ve had. Randy, I wanna thank you so much for joining me on the show today and offering such great insights. And for folks that are listening, if they wanna find out more, they wanna connect with you, they wanna see what’s going on with InvestArk, where can they do that? Where should they go?
Randy: Well, Scott, let me thank you again, too. It’s been really fun to talk shop and look into our crystal balls. And, I guess, let’s make a point of connecting in about six months and see what…
Scott: See how right we were or where it all landed.
Randy: For how wrong we were. But I appreciate it, you know. And I’d love to talk to your audience. The easiest way to get ahold of me is, one, I’m on social media, LinkedIn, Facebook, Randy Langenderfer. Spelling of that will be in the show notes. But the other one is my webpage is Invest-Ark. That’s I-N-V-E-S-T-A-R-K.com, and there’s a Contact Us page there where I’d love to chat with anybody real estate stuff or anything else as well. So, love to talk to you.
Scott: Absolutely. And yes, we will have links to all of that in our show notes on multifamilyinvestor.com. And be sure to subscribe to us on YouTube if you’re watching this on video or your favorite podcast app, Spotify, Apple Podcasts, etc., etc., and tune in for another episode coming soon. Thanks again, Randy.
Randy: My pleasure. Thanks, Scott.