Why Real Estate Investors Should Stop Chasing Yield In Today’s Market

Jack Mullen (00:00)
And one of the things I said in this environment, it’s not an environment to be a tourist. You know, the tourists are the people that have difficulty. They’re going to have losses and then they’re going to get, you know, and have problems. This is an environment where if you’re an LP investor or an investor,

making sure that the horse you’re backing, you do your own diligence, you understand their track record, you understand the sponsor, you understand your basis, what’s the basis of my investment. Number three, you think about what’s my exit, how do I get repaid?

Dylan Silver (01:59)
Hey folks, welcome back to the show. Today on the show, we are joined by Jack Mullen, the founder of Summer Street Advisors, a real estate investment firm. He focuses on identifying and executing strategic investments across multiple asset classes. Jack, thanks for taking the time today.

Jack Mullen (02:17)
Appreciate it. Thank you.

Dylan Silver (02:18)
Now, operating across multiple asset classes, right, you’ve got options. How do you determine where capital should be flowing, especially when there’s some changing market conditions?

Jack Mullen (02:31)
One thing you know, and I’ve been doing this stuff for a while, I’ve got the gray hair and so a lot of experience doing this as both a institutional lender and investor and running a firm here. I think there’s always options. I think there’s never been a shortage of options and people to find look returns. And I mean, it’s like if you have a stock portfolio or things like that, it’s a lot of like, think about a lot in the same regard.

You really, what’s appropriate for you? What are your risk tolerances? What are you looking for? And I would just tell you, certain types of securities, real estate is fundamentally in a liquid investment, in terms of it’s not something you typically can trade as you can trade a stock. It’s if you come in as an LP, you identify an apartment complex, you like the opportunity, you like their sponsor, you like the story.

You know, they’re telling you, you got a nice 15%, 20 % IRR on a three year hold. Well, sounds great. Unfortunately, as we all know, things change. You have things like COVID. You have things where interest rates blow out 200 bits. That initial investment that you thought was a rock solid, can’t go sideways, now is worth 20%, 30 % less, right? The market rents they’re trying to achieve aren’t happening. And the GP investor is asking you to put more money in as an LP.

And that’s where, you know, those are the types of things you’re gonna think about, at least as we think about, yeah.

Dylan Silver (03:47)
Yeah. Something,

something that I’ve seen happening, especially in the sunbelt, I’m in Texas in particular, is it seems like there was a lot of syndicators in particular in the multifamily space who were doing development and they maybe had been

seeing the success from 2014 to 2020, where people were hitting their exits in like half the time and things were almost, you couldn’t buy a deal wrong in many cases. And then you pivot from 2020 to today and it’s an entirely different circumstance. That was a difficult time for a lot of people in the multifamily space.

Jack Mullen (04:27)
It’s a great point. I’ll tell you this, and I’ve been doing this stuff for, like I said, for a bit. And I think we’ve had a lot of cap rate compression. I whatever you bought made money, right? It was relatively easy. I know we had the GFC and whatever, but I don’t know, a of runway where people have, you buy a complex, you do some renovation, it’s worth, it’s already worth 23 % less than six months. That’s where, that’s the capital markets part of this business. And I’ll tell you right now, the things that we’re seeing.

You know, we’ve seen a tremendous, everyone loves housing, loves multifamily, and thematically you like it. The challenge that you see in right now is there has, over the last couple of years, has been a tremendous supply. Austin, where I know you’re from, there’s been a lot of apartments

And if you’re an investor or owner of one of those apartment complexes, you’re not hitting your, you’re getting concessions, one to two months rent, you’re seeing negative to flat rent growth. So that initial home run,

investment, it’ll look like a home run.

I can’t lose type of thing is now not doing so well. So I guess the thing I always say to people when you’re looking at things, this is an environment. there are opportunities, but it’s really coming back to understanding the sponsor, meaning the person that owns the project or the company that has their track record, understanding what the exit might be thinking about that and having an understanding of basis. Cause you know, we all know one of the things about in life is a, you know, I like to price.

Dylan Silver (06:12)
Yeah.

Jack Mullen (06:36)
direction and think about things like that. I’m swimming for the buoy, but sometimes I find myself a little this way, a little that way with life and things. And I just want to, I just don’t, I don’t like the band to be too tight, you know, because, because then you can pivot and you can kind of make adjustments and still make money and still your investments still make sense.

Dylan Silver (06:53)
Speaking of pivots, Jack, one of the things that I’ve seen is more and more people getting into mobile home parks, getting into RV parks, getting into like tiny home communities, ⁓ whether that’s a manufactured home community or modular, and there’s a distinct difference between those two home types. Do you think this is being driven by some of the losses that people have taken in the multifamily space, or do you think?

that this is completely distinct of that and separate of that.

Jack Mullen (07:24)
That’s interesting mobile home parks. I’ve been involved for a bunch of years. My mobile home parks initially a lot of covered land play. You somebody’s waiting for, you know, the population, the growth to come to an area. So you put a mobile, a great piece of land. You put some mobile home parks, lot done in Florida. But I think again, it’s really being very specific, you know, in terms of you’re going to invest in mobile home park, you know, there’s a lot of things to think about. We could have a very specific discussion around that in terms of park owned homes.

owner owned homes, you know, so when you when you’re investing, are you generally when we finance or I get involved, I want the I’m just paying pad rent. I want the homeowner to own the home is better credit. There’s better resiliency, better performance. The other thing that’s one to thinking about the markets, right? This stuff in the south floor, the Texas, the Arizona and then this stuff in the Midwest and the like. It’s a different market.

You know, and just to think about, for me, it’s a matter of where are the tenants coming from, right? You know, in terms of, you you work at the old GM plant, you know, people been there forever and how do you backfill that, right? That GM plant might be sun setting, whereas you’re in a Florida market, you know, you got the 55A, you got the age restricted, all age, you got 55 plus, you know, and what are the amenities? So for me, it’s really understanding, again, lot of the, really the theme that I would say to…

And this is, just had this, I had an event two weeks ago. had a CRV Litticircle that I host at the Cornell club. I’ve been doing it now for 10 plus years and we bring in investors and clients and different things.

And one of the things I said in this environment, it’s not an environment to be a tourist. You know, the tourists are the people that have difficulty. They’re going to have losses and then they’re going to get, you know, and have problems. This is an environment where if you’re an LP investor or an investor,

making sure that the horse you’re backing, you do your own diligence, you understand their track record, you understand the sponsor, you understand your basis, what’s the basis of my investment. Number three, you think about what’s my exit, how do I get repaid?

And those are the types of things you gotta think about. And I think a lot of times, I don’t care if you look at mobile home parks, or you’re looking at apartments, self storage, whatever it may be, it’s the same basic theme to understand in the resilience of that market.

you know, those types of things.

Dylan Silver (09:37)
Now, when we compare mobile home in particular to some of the other asset classes, one of the things that comes to mind is are mobile homes and are even RV parks, are these a way for people to get into affordable housing where they might be shut out of it in apartments or in homeownership? Are we seeing some type of migration from maybe traditional buyers and renters into these markets?

Jack Mullen (10:39)
100%. I you one other, we just actually were involved just, we just really looked at something last week in the Virginia area, right? Somebody’s buying a park, they’re bringing in homes and doing a bunch of different things. And one of the things that you look at is the, what are the alternatives? It’s a housing play, right? So you’re looking at where can people, people can own a home, they can rent, they can live in an apartment complex, live in a mobile park. I see it as a bridge.

You know, I think in terms of, know, when you have a mobile home park, you know, you know, you got some independence for as of living in a apartment complex, it’d be a garden style, it’d be a mid-rise, high-rise, whatever. But I think especially right now, the mobile home park alternative, you know, living either with its 100-pound park owned homes or home or whatever it may be is a nice alternative, you know, or it’s a nice bridge, if you will.

between apartments and owning a freestyle stick-built type home. I think especially with interest rates going up and the affordability, you know, and I think it’s a nice alternative for people. But again, it’s understanding, you know, there are limitations, you know, in terms of, you know, in terms of when you’re looking at that, you gotta make sure that’s an appropriate investment view. For me, it’s always, I’ll tell you this, especially in the office, people talk about office and where we do a lot in.

Dylan Silver (11:35)
Yeah.

Jack Mullen (11:54)
that sector and the restructuring part of it and thinking about it. And people always talk about, for love to throw our own numbers around, hey, I can make this investment. It’s 50 % replacement cost or 25 % replacement cost. I can tell you, I can sell you a building right here today, 25 % replacement cost. And you’re like, oh man, let’s go. Let’s go and we’ll make money on this and that. Hartford, Connecticut. Hartford, Connecticut, it’s not, I’m in Connecticut, another part of the state, no demand. Those buildings, probably 200.

50, 300 bucks a square foot to build today at minimum. Those things, you you can’t, you know, there’s no demand. There’s no demand for the space. So fun, but one of the things I always look at as an institutional investor or investor is who’s the next buyer? Tell me if, you need to, when you want to sell something, you know, who’s out there? Cause I can, I can sell you land and trust me, we’ve done a lot of restructuring and closed down banks and all these other things.

And when you look at a going concern, orderly sale, got plenty of time, that value is that. But if you say you need to sell that thing tomorrow, generally you’re to get at least a 20%, 30 % discount relative to that. So my point around that is understanding the resilience of your market, the depth of that market, and you as an investor. just, for me again, it’s just like I the things that I keep banging at the drum here.

Dylan Silver (12:57)
Right.

Jack Mullen (13:10)
Sponsorship, understand the sponsorship, understand your basis and understand your exit.

Dylan Silver (13:14)
Now, there’s a lot of interest in folks who are going from that multifamily sector or even single family into some of these land plays. And as they’re getting started, they’re realizing there’s some hurdles. And then in some cases, it may be.

easier frankly than some of the obstacles that they face, right? So managing a mobile home park or an RV park has its complexities, but you’re not doing ground up stick built development. And you know, for someone who may be used to that or flippers that that may be a different task. When you’re doing value add in those capacities in the mobile homes parks in the RV park space, what is the the main ways where value can be added in those circumstances?

Jack Mullen (13:57)
Now,

I’ll tell you this, and I always look at it. We all, you know, we have a car, right? Put new tires on their cars, is worth more? A lot of cases, not. So we’ve seen a lot of difficulty, especially last couple of years, a lot of investors came in, institutional investors, whatever family office groups bought 70s, 80s vintage multi, you know, and this is assuming that they’re not just aggregators, right? Or these guys that you really, they had really no expertise other than raising money.

You know, so my point around this is just we’ve seen a lot of cases where, you know, that they spend 10 grand a unit, you put new kitchens and bathrooms, you do a new clubhouse and have been able to achieve the rents. How many of them choose the business plan? That’s assuming they have competence around doing that, right? There’s still the properties is still 230%, 20, 30 % less than they, when they bought it. And the debt’s 200 bits wider. They did bridge debt to do this work. Now it’s worth less.

Dylan Silver (14:40)
Right.

Jack Mullen (14:51)
It’s worth less and guess what? The financing initially was done four and a half, now it’s six and a half, right? And the equity that you initially had in the property of 30 % is gone. So that’s what happens and I had a dentist friend of

was an LP investor on a project out in Arizona, apartment complex, 80s vintage. The aggregator had raised a bunch of money and did a bunch of talk to good game. He basically now is coming back to the investor saying, hey guys,

I want you everybody to kick in another 150 grand a piece, whatever the number was, right? And I said, hey, time out. Let’s look at kind of where we are. And then you look at the prospect of can we achieve the plan? know, cause again, it was a three year hold 50. think it was an 18 IRR promised or return. Now we’re re looking at it and we’re like, and I just told them, said, no, mas, I said, yes, stop the bleeding. I had somebody once tell me if you want you in a hole, you’re in a hole, stop digging.

Dylan Silver (16:21)
That’s right.

Jack Mullen (16:21)
Right? So sometimes

it’s hard to do that. We have all been get emotionally involved sometimes with this stuff, but I guess to your point though, is like I said, just really for me, it’s really understanding what you’re comfortable with. I’m always careful. And I always caution people about chasing yield, chasing yield, chasing return. Don’t invest in things you don’t understand and you’re not comfortable with. I’m always just, I’d rather, you know,

You’ve got to the risk tolerance, you know, and that’s, I’ll tell you, and one thing we talked a little before, we do a lot or no within the private credit world, especially the blue owls. And again, a lot of people, had a bit like a, my round table, we talked a bunch about this with, you know, the blue owls and the think, guess what people looking at? They looked at the volatility, look at the volatility chart. Oh, it’s right here. It’s half of what a comparable investment be. And you’re looking at a 9 % return. However, it’s real estate.

right? it’s a lick and it’s liquid and you got redemption restrictions. So people like, you got a bunch of retail investors of, you know, again, like a lot of people who are watching this program, say, Hey, man, look at this, I got relatively low risk. Look at the return 9 % right? Relatively short window. And what happens is that investment is you can’t go, you know, there’s quarterly redemptions and you can’t, you know, it’s, you know, potential redemptions. They don’t know what they don’t always fulfill it. You’re stuck.

And a lot of those investments, my point is, my point is I’m getting very specific and probably more than I need to. But my point is that just be careful of the shiny new penny. I don’t even make pennies anymore. get that to be careful of the, you know, the shiny new toy, the, know, go with what you’re comfortable. If you’re an investor, walk the market, you know, go see mobile home park, go see the apartment complex.

Dylan Silver (17:36)
You are.

Jack Mullen (18:01)
self storage, whatever it is that you’re thinking about, meet the investor or meet the GP, the owner. Again, that’s kind of what we, or at least have an advisor or somebody that you work with like yourself or whoever it may be that offers you that counsel and gives you that comfort.

Dylan Silver (18:19)
Now, what do you think about simply having more conservative numbers for returns and expected returns and also longer time horizons? Like instead of three to five years, if folks were looking at seven to 10 and instead of 20 % returns, how about match what they could get in an index fund, right? 11 to 12%.

Jack Mullen (18:42)
I think it’s a great idea. I think the reality is we always do sensitivities. I think in terms of, I think that real estate being illiquid, I think, or you got to be mindful. And I would say, I guess the thing I’m always careful about is chasing return. That’s the thing I’m always super careful about, being comfortable with the investment, being comfortable with that strategy. And that’s how I would caution somebody. said, we can run all the scenarios in the world. I can run a…

you know, a note growth, I can do all sorts of things, but it’s understanding, you know, the particular asset class that you’re comfortable with, you know, and I’ll tell you, I got, I had a conversation with somebody two days ago, ⁓ that wants to play in the office sector, you know, and specifically cause it’s high, high juice, high return. And you bet again, you got, it’s the, it’s the risk tolerance. And I’ll tell you, if you really want to make money, you know, it’s a, you know, and I’ll tell you this, I can’t take credit for this. I heard this, somebody say this, how to really make money office.

I’d probably do okay as multi, how to really get torched data centers. You know, it’s cause I know that’s kind of the, cause again, it’s the tech, it’s, it’s kind of the new frontier. Just gotta be careful. I’m always, I said, I’m always super careful in, you know, understanding the market you’re investing in. Miami’s great. A lot of blow and go, same thing with Arizona. A lot of these places with the fast run-ups and things like that. Sure thing. Can’t, can’t miss. Guess what? Things happen. You know, you have things like COVID happen.

You have problems, and you talk about land. Land, one thing I love, one thing that’s great about land is it’s, you don’t have to make any improvements. But sometimes when you’re doing people that, but again, there’s no cashflow. Taking entitlement risk. You’re subject to a municipality and whatever they may want, right? You know, in terms of it’s gonna take a period of time here up in the New York or this area, it’s maybe, who knows? Whereas some places you gotta understand that market. Tell me about the entitlement process. I got this piece of land.

Or we want to build it, we’ll it set for apartments or whatever it is. Tell me the process. How long is it going to take? Because you got to think about it. That property is not generating cash flow. That property is not generating cash flow till you got something built on it, whatever it may be. Could be a McDonald’s, could be an apartment complex, whatever it may be.

Dylan Silver (20:41)
No, absolutely.

We are coming up on time here, Jack. Any new projects that you’re working on or anything you’d like to say directly to our audience.

Jack Mullen (20:51)
You know, mean, hey, this has been a first of all, this has been a great, great, I always love to talk about real estate, you know, and obviously you can tell it’s it’s a passion. I started this firm 17 years ago, I believe GE Capital being a banker, you know, so I would just say to you as a, you were a solution provider out there with a lot of work with lot of different folks on the debt and equity side. And if people need help or advice or counsel want to just talk about real estate, reach out.

Dylan Silver (21:14)
Jack, thank you so much for joining us today. Thanks for your time.