TIP516: Navigating A Real Estate Market On The Brink w/ Patrick Carroll

Patrick Carroll, CEO of a real estate investment firm, sees similarities between today’s real estate market and the 2008 Great Financial Crisis. The increase in interest expense and debt has caused a disconnect in pricing properties, and nobody knows where interest rates are headed, in turn causing the market to freeze. While multi-family housing is performing well, job growth is still happening, and there hasn't been a major contraction in the economy, single family home mortgages could cause a downturn. Although a potential for a very sideways market in real estate exists, people with good loans on property will stay put until a panic arises or the paper starts printing reports about home prices dropping.

The rapid increase in interest rates is causing lenders to freeze in pricing their debt, leading to a market freeze and potential distress for property owners and developers. While there was no one big failure that caused this, the market freezing may cause a downturn with short-term loans going underwater and the inability to refinance properties. Every sector, including the national government, is affected by interest rates, which are like gravity. In the event of a further decline, speculation in rental properties, like what's happening in China, can lead to cascading effects such as margin calls and vast liquidations. Investment properties are easier to walk away from than primary residences.

The capital markets and debt shocks are the major reasons behind every downturn that we face. With the current situation, if 25% of people with home loans stop paying, it will have a huge impact. Even though banks are being held to the SLR, they are not giving quotes, financing anything, and restricting themselves due to which people are withdrawing from the savings account. Debt funds, non-traded reaches, mortgage companies that drop their underwriting for volume, and Shadow banking are not being held to the SLR, and they are facing troubles. Initially, people are trying to avoid foreclosing, but eventually, they can't make capital calls, and the banks will become in trouble, which can cause a market crash.

In times of economic uncertainty, it's important not to freeze up, but rather to look for creative ways to stay active. One strategy is to lend capital on good properties where borrowers have gotten into trouble, providing rescue capital. Another is to consider buying companies or property management companies to diversify investments. While the market remains strong for rental housing, delinquencies are starting to tick up due to financial strains like job loss, higher credit card bills, and rising costs. It's a scary situation for all asset classes, but with record low interest rates, demand for rental housing is likely to continue, especially as it's nearly impossible for many people to buy homes right now.

During a market downturn, it is important to remain calm and avoid panicking. This allows you to identify opportunities that others miss. Patrick Carroll's success in selling off his portfolio at peak pricing was due to good timing and intuition. He focuses on multi-family real estate as it offers affordable housing and workforce housing, which is always in high demand. Although markets in the Sunbelt region may seem overvalued, investor capital will continue to flock there due to its long-term viability and job-friendly reputation. To succeed in real estate investment, one should underwrite properties as if buying them and then lend on them. Combining a buyer's and lender's perspective yields higher success rates.

The real estate market is changing, with prices coming down and a shift towards buying rather than building. In a downturn, it's better to focus on buying properties with high cash flow and below replacement costs to mitigate risk. Starting out in the industry, Patrick Carroll faced hurdles such as a lack of credibility due to not having a college degree or a long track record. He embraced humility and worked incredibly hard to prove himself, telling potential investors that he wouldn't rest until he earned his position in the business. He partnered with institutions such as Blackstone and Starwood, who helped him get started, and remains humble in the face of the smart, hungry, and aggressive people also in the industry.

To succeed in business, you need to be willing to constantly reinvent yourself and adapt to the changing market. Lack of credibility is a common challenge, especially for young entrepreneurs, and you need to overcome it by proving yourself and constantly learning. To grow a business, access to capital is critical, which means you need to work hard to find it and maintain your credibility. When leading a large company, it is important to hire self-starters who are hungry and willing to learn. However, there will always be some people who resist change and don't want to learn new things, and being firm is necessary to make necessary changes. Adaptation with the right strategy and being willing to trim the fat are key to success.

The speaker believes in making rational decisions to maintain morale in business. He mentions the fortunate rehiring of people during a market upturn. The trend of working from home has given rise to a new real estate economy; Tampa and Miami impress the speaker as booming and business-friendly, attracting professionals and companies and pushing up property prices. The focus is on cities with low regulations and taxes. The rise in interest rates makes it less affordable for people to buy homes and they end up staying in rented apartments longer, which could impact single-family markets. However, the trend of multi-generational households staying together for longer periods of time could potentially offset this.

The middle market is the main target for apartments as young people with great jobs in technology or finance may not be able to afford high-end or luxury homes. The Great Wealth Transfer may have a varying effect on the real estate market as millennials may sell or inherit high-end homes. The company focuses on submarkets within submarkets with great schools and employment and buys properties below replacement cost that need improvement. Undervalued or underperforming properties in defensible locations are preferred to those that lead the market. Overall, the strategy relies on indicators such as cap rate, replacement cost, price per square foot, and property performance.

In the real estate industry, while opportunity zones may seem like a great tax-saving opportunity, investors need to exercise caution and study the location before investing. Relying solely on tax savings can result in foolish decisions. Patrick Carroll emphasizes the importance of soft skills like marketing, attention to detail, and building relationships in addition to technical skills like deal-making while hiring the right people and compensating them well. He suggests hiring talented people from established companies by promising them the number one position in his company and a chance to make a lot of money. He emphasizes his company's marketing efforts in becoming a well-known name in the industry by touting their successes and building their brand.

Staying on the top of everybody's mind is important in business and putting out information is a good strategy. It helps people have access to valuable information and gives back to the next generation. Finding mentors is best done by offering value and being humble. It's important to keep the relationship going by checking in on them periodically. Having a good presence in the media can lead to bigger opportunities and the ability to reach people in need. This is exemplified by the Berkshire strategy of making oneself available for those in financial struggle.

Building a strong brand presence through social media, television and philanthropy is an important way to grow a business and attract new talent. By being well-known and respected in the industry, potential employees will be drawn to the company. In addition to raising brand awareness, philanthropy can also be a key part of a company's overall strategy, providing opportunities to give back and help underprivileged communities. For Patrick Carroll, founder of Carroll Organization, giving away financially and sharing information is a big focus and a way to make a difference. Through his work with underprivileged children, he saw the impact of giving on both the recipients and the giver and hopes to inspire others to give back.