✂️ The Fed finally cut rates. Now what?

👋 Hello, Best Ever Community!

In this week’s newsletter, the Fed (finally) cuts interest rates, a hotel conversion cuts crime by 50%, and passive investors have more ways than ever to invest in real estate.

Today’s edition is brought to you by HotelSHIFT Capital, which is revitalizing communities by converting old hotels into affordable housing, providing exceptional returns to investors in the process.

Let’s CRE!

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CRE HEADLINES

📉 Property Insurance Declines: The average U.S. property insurance rate decreased 0.94% in Q2 from a year earlier, following several periods of softening increases over the past year. It's the first time rates have decreased since Q3 2017.

💵 Bottom Dollar Stores: Dollar General and Dollar Tree, the nation’s largest dollar-store chains, are together on track to open more than 1,300 new locations this fiscal year despite slowing sales and weaker earnings. Executives believe new stores are the key to juicing sales and capturing market share.

💰 Banking Dry Powder: Chicago-based firm Waterton has closed its latest fund with $1.73 billion in commitments from institutional investors. The firm describes it as one of the largest value-add multifamily funds in the country set to capitalize on “pricing disruption” in the multifamily market.

🏀 Office Rebound?: Office leasing has surpassed pre-pandemic levels, with 3,166 leases signed in the first half of 2023, compared to an average of 3,136 in the same periods of 2018 and 2019. Activity is expected to increase further as economic confidence grows among occupiers.

🏨 The Tony Robbins Experience: Tony Robbins has teamed up with hotelier Sam Nazarian to launch The Estate Hotels & Residences, a new wellness-focused luxury hospitality concept that aims to be the largest ecosystem of preventative medicine and longevity in the world.

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THE FED FINALLY CUT RATES. NOW WHAT?

In case you hadn’t heard … the Federal Reserve cut interest rates Wednesday by half a percentage point. It also hinted at further cuts in 2025 and into 2026, a welcome change after raising rates 11 times from early 2022 to mid-2023 to cool inflation.

While it’s a relief and a positive sign for CRE investors, John Chang, senior vice president of research services for Marcus & Millichap, says there are two sides to consider in the wake of the cuts:

• The rate cut will reduce the risk of CRE distress by placing downward pressure on interest rates, Chang said, supporting the refinance of properties with debt coming due. Lower rates should also bolster the CRE transaction market by easing the cost of debt capital and reducing investor caution.

• However, Chang cautions, the rate cut could be a sign that the economy may be weaker than believed. While the economy appears sound, rising unemployment and slowing job creation could point to a broader economic slowdown. Still, Powell reiterated that the move is, in part, to sustain economic growth and achieve a soft landing.

In the multifamily sector, construction pros believe the rate cuts could encourage new project starts, while the cuts will certainly aid multifamily owners in refinancing distressed properties. The cuts won’t, however, fix the affordability crisis or rising inflation-driven expenses, some of which continue to rise.

Could rate cuts eventually help revive the stalled CRE market? Sure. But in the short term, the impact might be more psychological than physical. The cuts are a positive sign that may boost investor confidence, mobilize would-be buyers, and push sellers to update their valuations to get properties ready for market. Eventually, it might spark broader economic stability by breaking the market's standstill.

The next few months, especially post-election, are the ones to watch. With further rate cuts expected in November and December and into 2025, CBRE expects a 15–20% increase in transaction activity next year compared with this year.

WHAT IT ALL MEANS

The rate cuts signal relief and will likely impact investor sentiment more than it will have a tangible impact on CRE markets. Construction could benefit in the short term, as it’s so highly predicated on borrowing costs. Office will still struggle because banks don’t want that asset as collateral, no matter the rate, and dry powder will slowly begin to mobilize, especially in multifamily. But it’s the next rate cuts between now and the end of the year that will set the table for a likely surge in dealmaking to kick off 2025.

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HELPING COMMUNITIES AND INVESTORS THRIVE

Do you remember recent Best Ever podcast guests Alex Cartwright and Ryan Sudeck?

Well, their hotel conversion projects have been making news for the positive impact they’ve had on local communities. In fact, at one of Sudeck’s recent projects in Tacoma, Wa., the crime rate within a 10-block radius of the complex dropped a whopping 50%. Local authorities attribute the drop primarily to Sudeck’s team converting a problematic old hotel into affordable housing.

Communities aren’t the only ones benefitting from hotel conversions. Investors are, too. The strategy Cartwright’s HotelSHIFT Capital and Sudeck’s Sage Investment Group deploy allows them to buy properties at hotel cap rates — which are in the mid-teens — convert them to apartments, then refinance them at lower multifamily cap rates, providing exceptional returns to investors.

Now, HotelSHIFT Capital and Sage Investment Group are teaming up to co-sponsor multiple upcoming projects. 

To learn more about opportunities with HotelSHIFT Capital and Sage Investment Group, register for their five-part webinar series, or click the button below to schedule an introductory call.

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6 WAYS TO PASSIVELY INVEST IN REAL ESTATE

Most people have false assumptions about what passively investing in real estate means. Most people think REITs, syndications, or crowdfunding. Sure, those are examples of passive investments. But they only make up the tip of the proverbial iceberg. 

Brian Davis of Spark Rental writes on six ways to passively invest in real estate, beyond REITs:

🥂 Private Partnerships: Co-investing lets you partner silently with active real estate investors. Our Co-Investing Club recently funded a Michigan house-flipping company's projects for a 25% profit share. With 70-90 flips yearly and a 95% success rate, plus a guaranteed 8% minimum return, it's a low-risk opportunity for potentially high returns.

📝 Private Notes: Instead of equity investing, consider lending against real estate with private notes, which offer fixed interest rates and customizable terms. Risk depends on the borrower’s experience and the loan-to-value ratio. Our Co-Investing Club has successfully lent to a Michigan investor, securing a first-position lien under 50% LTV with guarantees.

💸 Real Estate Syndications: Real estate syndications allow you to invest as a silent partner in large properties, with the general partner handling management. Typically requiring a minimum investment of $50-100K and a commitment of three to seven years, these investments carry risks. However, strategic deals can yield high returns, as seen in our recent affordable housing project.

💰 Real Estate Equity Funds: You can invest with operators who manage multiple deals. For example, our investment club is vetting a land fund where the operator buys undervalued land parcels and adds value through minor subdivisions. His flips average 16% annual returns with minimal risk, as he raises funds from passive investors like us.

🏦 Secured Debt Funds: You can invest in funds that own various notes and loans, often secured by real property. For instance, 7e Investments buys non-performing mortgage notes at a discount, helping borrowers get back on track. With an average loan cost of $195K versus $500K property value, it offers strong downside protection and pays 8-10% fixed interest monthly.

💵 Real Estate Crowdfunding: I've personally invested in major real estate crowdfunding platforms to better understand them. While they offer easy access to passive investment strategies and lower minimums for participation, don’t expect the high returns you might find independently. Crowdfunding often comes with fees and marketing costs, which can impact overall returns.

To further reduce risk, consider teaming up with like-minded investors for passive real estate investments. This allows you to split minimum investments, diversify across markets and sponsors, and benefit from collective analysis. In our Co-Investing Club, we discuss investments monthly, enhancing vetting. I invest $5K monthly, prioritizing consistency over market timing.

👉 Read the full blog post here.

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FILLING A VACANT RETAIL PROPERTY WITH NATIONAL TENANTS AND ADDING $3 MILLION IN VALUE

Brian Ferguson and his team at Altunas Capital filled this vacant retail property with national tenants in under 12 months and expect to add nearly $3 million in value by the time of sale. Here's how they're doing it 👇

🏢 Property Details: The 11,823 sqft commercial retail property was purchased in March of 2023. It was completely vacant and attached to large anchor tenants (Kohl’s and Academy Sports).

💸 Finances: The property was purchased for $1,715,000 with $70,000 of capital raised. The team secured a $1,922,500 loan with 7.75% fixed interest, 24 months IO, 25-year amortization, and a five-year term.

💼 Business Plan: The property had originally been vacant for years, so a $715,000 CapEx budget was allocated for light upgrades (exterior modernization and cleanup, updated landscaping, and LED fixtures) and tenant allowance. The plan was to fill all vacant spaces with smaller local businesses and be fully occupied with build-out complete in 18 months.

🍾 Results: The team achieved full occupancy in just under 12 months and secured mostly national tenants instead of local businesses. They expect to refinance in the next few months with a property valuation of $3.15 million and exit at $4.5 million in year five or six. At that time, they project an LP equity multiple of 2.23x, IRR of 18.6%, and cash on cash of 9%+.

If you have a deal you'd like us to feature, share it with us!

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FREE DOCUMENT DOWNLOAD

Converting Apartments to Condos

Considering converting apartments to condos? Here is a list of everything you need to consider before doing so from hiring an attorney and hidden costs to vacating the property and approaching the sales process.