About two years ago, I had a training program for people with the top of their career in real estate, primarily real estate professionals, or insecurities itself, who wanted to make the leap into real estate syndication. So these were your a level players who wanted to be the a level players in real estate syndication and real estate funds. So I put together this video, this is one of our rapid implementation calls, again, it’s about two years ago. But it what it walks you through is the market analysis that goes through and I’m talking about the market cycles, not individual markets themselves, but about some of the thought processes that went on and what’s going on at the macro time. At that point, you’ll see some my predictions were completely true. And occasionally, they were not didn’t come quite as true as I had thought they would. But certainly, the information is valid. What’s important here is not what that specific information was at that time. But it’s the thought process that went into how we look at the market cycle and where we’re at at the market cycle. To begin with, when we’re making predictions about the future, which is what we’re doing in securities, when we’re doing when we put together an investment vehicle is we’re trying to make a prediction about what’s going to happen in the future. So that there’s some sort of gain for our investors, and ultimately, for us as well. So this is part of that thought process. So I hope you find this video useful, because this is how I think about things in terms of what’s important when it comes to money where we’re at in any sort of market cycle. And I know you’ll find it useful.

So there are four stages in any market cycle. And they can be drawn as a circle, or they can be drawn as they can be drawn linearly like this. For our purposes, though, I’m going to draw it as a circle, because that’s the way I am used to it. So we have a market cycle. And there are four distinct phases within that cycle. So we have this period here, which is our recovery. And so everything here, by the way, is going this way.

So we’re going that way. So recovery. So after the Great Recession, things were stable for a while, they were pretty low, and then they slowly slowly rebuilding up. And then we went into this expansion stage. And then after a point, it expands and expands and expands. And what happens if you like blow up a balloon too much. It just can’t expand any more. Enter hyper supply. In the after that that phase of the market, we finally if I press play, it starts going down, right, because there’s too much and we enter a recession. I’m not going with the technical definition of a recession. Because if you look at a technical definition of a recession, we’ve been in a recession for a while. So recession is where GDP does not match inflation, it’s negative. And I would argue that by any reasonable measure of inflation, not the ones currently being used, we probably have been in recession for a while. And so we just keep pumping money in so we’re in this weird sort of recessionary, expansionary phase right now, of the market. So what happens in these in this part of the market? Well, let’s talk about what happens kind of here. And the expansion stage so we have rents rising. rents go up, and construction levels go up

just click on this because I can’t see. There we go. Alright, rents go up, construction levels go up. At some point in that cycle. We start getting this high rent in a tight market. Sound familiar? Because I said we’re in a recession But we’re also in this expansion stage. And I don’t think we’re quite into hyper supply yet, but I think many markets are, are are seeing it. Now new construction takes place everywhere from here on all the way over to here in general because the cycle of building takes so long, so the smart developers started developing early on down here. But then their projects may not have gotten approved until over here. And so suddenly, now they’re in hyper supply, they still need to deliver that building. But it’s been difficult in this phase, so let me just back up a little bit.

Alright, so that’s what happens during an expansion period. Now what happens during the hyper supply period is we start seeing positive rent growth, but declining… Right, so that steeps that’s going down now this is all as it relates to commercial real estate and I’m gonna make an argument a little bit in just a little bit that this also applies equally to residential real estate and kind of all markets as well. What happens in a recession? Oh, we have way increasing vacancy. Competition goes way up. And by this we mean it’s either a renters market. Actually, let’s just renters is kind of vague. So let’s put tenants market or it’s a buyers market and what happens in a expansion stage is it is definitely a landlord market and a seller’s market.

All right, so after vacancy goes up, competition go is going up. Finally, we enter this new phase of the recovery. And so finally we are vacancy reaches its maximum here. And let’s call this max occupancy. And somewhere in here is probably the point at which its maximum rent, probably somewhere around here. And then, in the maximum, you can see this is the lowest trends.

Alright, during that recovery phase, we have a, we have increasing big I’m sorry, we have a declining vacancy. No new construction, right? No new construction is taking place. They’re declining vacancy, but rents stay fairly stable.

I really don’t start increasing until that vacancy factor here drives down to such a level that there’s enough demand in the market in order to create in order to charge higher rents. So why this is hot on my mind right now is last week on you and I decided that we it just doesn’t make sense at this point to move to North Carolina. which bothers me greatly. I wish it weren’t true. Because I really really was looking forward to going number one sec. Okay. So why did we make that decision? Well, it’s because of this it It’s because of this market cycle. So if you look at the market cycle, we are in this really strange period. And I’m sure you’ve noticed this, that we’re in this period where there’s definitely some recession going on. And I’ll prove that in just a minute. And then there is definitely this weird kind of expansion. Because where do those, those two interact? Like, if you looked at a Venn diagram, it’s actually this weird interaction point.

Between the two that that makes us puts us right here in this weird middle space, and that middles weird middle space is inflation. Right, because if we look at the pure definition of recession, not the not the one that I’m using here, but if we look at the pure definition, where we’ve got we are in a recession. Recession if if GDP is less than quantity of GDP.

I’m sorry, I did read that backwards. If GDP is I totally botched that if GDP minus recession minus inflation is greater than a backwards sign is greater than zero. Right. So why do I think that the inflation is greater than zero right now? So the Raleigh market kinda capitalizes on it. But you’ve noticed it too. One of the main expenditures in most families between 30% and 50% of their annual income is their house is their housing right now. Well, rents right now are extremely high. And new home prices are extremely high. Right? They’re big, big expenses. The cost of goods right now is really, really high. goods.

Goods costs are really, really high. They’re way higher than they were before. Just a you know, just a silly example. A candle. A very boring candle was on that was available last year, that on your bought and liked was was $19. The same candle is now $29. Does that make sense? On the on the on the cost of a new home. So a home that that is comparable to what we are looking at. Wood was going for $174 a square foot in March. This was when we were last in Raleigh. Right. And it it’s sold in March for $174. Unfortunately, we weren’t the ones that bought it. Because it was a great house and we should have bought it. But that $174 in March is now completely shot. And now the market is over $350 a square foot that’s a symbol for square foot $350 a square foot. I mean it’s doubled the cost. Now, when you’ve got something that looks like a spike. I mean, you’ve got this arrow right here makes sense. So you’ve got this graph here and here you’ve got price per square foot and you’re taking into account 2% rent growth annually. So we’re taking In the Account 2%, nothing crazy. Right? If you look at at the trendline, it looks like boom, it looks like that. Now, does that make any sense at all? Or does that look like an unstable market? I would posit that that is such so irrational, that we have long since left this expansionary period. Even though we’ve got high rents still, we’re in that tight market. I think that this kind of right here, that cannot last. That means that we’ve got this period where we’ve got this declining coming really, really soon. Because there’s also this inflation that’s pulling everything down. In there’s nothing that we mortals can do about it. Inflation is pulling everything down, and the bottom is got to fall out. And now why is it possible that this can happen? So I don’t, as you have probably noticed, I don’t make political comments here. But I can make a political comment about both parties, both major parties. And I don’t have any problem doing that. Because, as a side note, my typical, what people when they asked me what my political affiliation is, I typically say whatever my clients affiliation, that’s, that’s, that’s typically my answer. So I keep that private and to myself, but we’ve got when you’ve got this, you’ve got the Fed, who clearly cannot be scoffing at the at the value of what inflation currently is. Right? So they are seeing they’ve got excellent data sources, they see this inflation that’s happening in this country, and their mandate isn’t neutral unemployment.

The United States neutral unemployment is not relevant to what the Fed is trying to do. The Fed only job its mandate by its what how it was called out was to have a stable growth and decrease with minimal inflation. So instead, what is the Fed doing the Fed points out the fact well, but we’ve got this COVID situation that’s going on for some time. And so we really need to just keep pumping money and money and money into the system. I mean, the loan on our house right now is 3.5% on a 30 year fixed. A building that that I know of that’s owned, is now at as seven years commercial building, seven years on it, and its rent is 3.75% which is way below the cost of inflation.

Right, it’s below the value of inflation, and it’s below the cost of it’s below the predicted growth of our economy. So what’s below that mark? So yet, the bank is the Fed is encouraging banks to keep pumping money into the economy to keep this rent low to keep these mortgages low, but it isn’t working because rents are sky high, because the money is low, so landlords drive them as high as they can. And then home prices are sky high. Because the Fed keeps pumping money into the system and keeping prices low, which is driving up inflation. All right. So it doesn’t make any sense where things are at. So when we had originally thought, okay, perfect, we can go from you know, a place that I, I’m would rather like to leave called California, where we’ve got what’s going to be fairly soon a 16% state income tax. And we’ve got a standard of living that is less than good. We can talk about that offline if anyone wants to. So we got a less than great standard of living, we have. And all for what, and we have earthquakes, all for all for what? And, but then I look over at. And we have really high prices, right. So our price per square foot is somewhere around $750 a square foot right now. And residential. And I’m sorry, this has turned into a discussion on residential real estate. But it’s what’s on my mind right now. And it all relates to exactly what you’re doing. Because you got to find opportunities. And but if you don’t know why the market is, and aren’t paying attention to where the market is, it’s going to be difficult to find opportunities. So and we’ve got North Carolina here, which has about a 5% income tax, in some ways, a better standard of living. Well, but we’ve got real estate here. That’s two times where it was just six months ago. Is that right? Six, yeah, six months ago. Versus here where it’s a ridiculous steal 10%, where it was six months ago? Well, let’s think about what’s going to happen when the bottom falls out. This is a lot more stable, because our house really isn’t that much more. It’s not two times what we bought it for, at this point. It’s just not. And that’s over a period, we’ve lived in that house for about six years, maybe almost seven years. I guess it’s about seven years today. So so this is in seven years, it’s gone up a fair amount. But in six months, this has gone up 2%. So the market kind of adjust that the fair market value of California real estate right now. It’s not too far off, right? So if you look at it like a like whether it’s stable or not, it kind of looks like this. Not too top heavy. Right? But if we look at at rally right now, it’s like this, it’s incredibly top heavy. And it just needs something to try and push that off. So I just am so concerned if we were to move right now, that that market, what happens when it goes underwater? So say we bought this house? Where to go? What if we bought this house at 100 and at $350 a square foot we bought that house for $350 a square foot and then the market corrects and let’s say it goes down to $250 a square foot well, then we suddenly got this gap here that we’re underwater, not necessarily underwater by in terms of the loan cost depending on how much we put down, right. But the you know, we just lost $100,000 in value of not 100,000 I think we just lost $100 a square foot, much bigger number in value. So what to do, I think the only logical thing is hunkered down hold tight on this kind of real estate. So now where are the opportunities then given this? So the opportunities are here they’re in there in real estate that is is going to hold its value Still is good value good properties out there, there’s properties below the replacement costs that are able to get, there are properties that are have a fairly long, if they have long enough trajectory that you’re planning out, they’re going to be fine. But if you’re planning on a quick flip, it’s just not going to hold. The people who are flipping are already getting in trouble, right? Because the the flippers are right here at the point where they’re paying the maximum number of dollars that they can pay for a unit. And their margins are so narrow right now, it’s just a little tiny switch. And suddenly, every one of them is losing money. I mean, a lot of them have been losing money anyway, we saw this dip that took place, actually, this year for flippers, where they were where if you looked at, like time and margin. I mean, they were doing really, really good. Right, and then it’s sunk. It just became terrible, terrible margins. And a lot of them went out of business and lost a lot of money. And now it’s back up where the margins are back high, where they can where they can do it. I mean, actually, it’s not that high, because the other thing that drives the flipper market is their renovation costs. So their expenses have gone sky high, because not only are they having to buy into the property very high. But fortunately, growth is making it so it’ll still kind of work. But the value of the labor and the materials is just killing any sort of long term prospect in that business.

So while I’m still hot on the markets that we talked about before, Atlanta fee, Phoenix, Seattle, I’m so hot on those markets, I wouldn’t be going in for a short term, I’d be looking for something where its price per square foot is relatively is low compared to the market, that it is something that’s going to be desirable for a very long time. And, and that’s what I would be mostly focused on. So let’s go ahead and turn a little bit to, to financial analysis of the soapbox about the state of the market right now and how frustrating it. But I think you all know what that market is, but don’t let my my procrastinations about the market kind of dissuade that. So again, there are great opportunities out there, it takes some work I’ve got, I subscribe to a bunch of other syndicators and I’m watching every deal they do. I’m seeing deal after deal after deal come out of these guys. So there are deals out there. And they’re not bad deals. And I’ve looked at the numbers, and they all look pretty good. And they look believable, and they’re not making outrageous claims. So there is great opportunity out there plus, you’ve got a huge amount of cash, that still hasn’t been put back into the market yet. So you’ve got cash sitting on both in the form of just general like people who set tend to save a lot, have saved a ton. But there’s also regular people have just saved a lot of money. We’ve also see Wall Street putting in more and more money into buying out companies which creates liquid liquidity events for your investors, which means they’ve got money to put invest into your real estate. So there’s plenty of opportunity right now, that said, Would I want to put all of my eggs in one particular basket? No. But that’s why it’s indication so great, because I can not only buy something in California and Raleigh, I can buy something in Ohio and Atlanta, and Charlotte and Texas and Florida and around. Right I can, Colorado is a great market, I can put those that money in to use is that would be much, much smarter and better. And so there’s tons of upside on syndication. There’s a lot of opportunity still to find great deals, and there’s going to always be opportunity. Because no matter what’s going on, there’s always I’m just talking right now about the big picture that Mike the macrocosm, of what’s going on in the economy. But really, real estate is a micro game, right? So every property is a little bit different. Some properties do really really well all the time. Some do great in recession, some do great in and big markets. You know, it’s just finding the right thing, and something that matches your fit, getting it done and syndicated. So that’s how I look at a general market cycle and where we’re at at any given point. Again, this video is two years old, but the information is still valid and it’s definitely you can see a very methodical thought process. If I can help you put together your syndication, whether it’s for real estate for your business, private equity, anything like that, we’d be happy to help. My name is Tilden Moschetti. I focus exclusively on Regulation D, Rule 506b and 506c syndications. My name again is Tilden Moschetti of the Moschetti Syndication Law Group.