Episode 47: Where is the Real Estate Market Headed? Insights From a Massive Operator

 

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[Intro]

00:01 

Welcome to the multi-family millionaire podcast. The show that interviews multi-millionaire real estate investors and top producers in the real estate industry. If you’re looking to create passive income and achieve financial freedom so that you can do what you want whenever you want, you’re in the right place. Our goal is to simplify and make real estate investing easy for you. For more information, you can find us at www.JLM.realestate.

Jason Lee: All right, welcome back to the show. Before this week’s episode, I just wanted to mention real quick that if you haven’t seen it yet, in my show notes, I have a free underwriting analyzer that you can use to underwrite any deal that you find in real estate. I use it every single day for my brokerage business and for my real estate investment business. So, if you haven’t checked that out yet, make sure to go check it out. But this week I have a super cool guest, his name’s Cody Littlewood. He runs a huge real estate private equity fund, and he comes from the software industry and he’s doing some big things in real estate.

 

He’s got a lot of good nuggets to talk to you about, and also some of the topics are pretty high level. So, if you have any questions about the show, feel free to reach out to me and ask me any sort of questions you have happy to answer and accommodate anything that you want to know about real estate on the show. So other than that, let’s jump right into the show. Cody, how you doing today?

 

01:27 

Cody Littlewood: I’m well, thanks for having me, Jason.

 

01:29 

Jason Lee: Yeah, yeah, of course. Pleasures all mine. To kick off the show, would you mind telling the audience more about who you are and what you do?

 

01:37 

Cody Littlewood: Yeah, sure. So, my name’s Cody Littlewood. I’m one of three key principles at curated investments. So, we are a real estate private equity firm focused on value, add multi-family in the Carolinas, Georgia, and Florida. We generally buy like 120 to 125-to-200-unit apartment complexes. Generally, in like the B minus you know, B minus asset space. And we’re generally doing a value add to bring them up to like solid B pluses, looking for great boned buildings in you know, buildings with good bones in solid neighborhoods that we can kind of execute on the renovations and bring them up to the competitive market set.

 

02:27 

Jason Lee: Very cool. Tell us more about your story before real estate. We were talking before we started recording and I thought it was really interesting.

 

02:36 

Cody Littlewood: Yeah, so I’m an ex-software guy. I built a well, now has turned into 70%, 75% software firm that focuses on building software for the commercial real estate space. So, lots of customers like Avison Young and JLL and you know, other property radar and other companies that are specifically targeted in commercial real. So certainly, no stranger to it, but I, you know, about four or five years ago, I was getting a little burned out on software was just kind of a little bit intangible. And I really enjoy things that I can touch and bricks and sticks. I really was pretty drawn to, and I also felt like the cash flows from a business are a little more fleeting than cash flows from you know, from real estate, you know, and from assets.

And so, I mean, a business is an asset that you own as well, but certainly the permanence of you know, of shelter and people’s need for shelter, I did feel like the cash flows from that were a little more permanent and I wanted to diversify away from just owning, you know, a software business. And so, I struck out and started to buy small multifamily here in south Florida. I met a partner who had been doing it for a decade and was buying during the last crash. And he kind of took me under his wing and we started working together and then a couple years back, we joined forces with another partner who had a ton of experience, you know, he bought and sold thousands of apartments. But he wanted to be buying in the Southeast. It was largely buying a Chicagoland. And so, we teamed up and joined forces and built what is now curated real estate investments. 

 

So we are, it’s been a fun journey. I think last year we did 500 doors in acquisitions, and you know, this year we have a goal of 800 to 1000 doors.

 

04:33 

Jason Lee: Very cool. Can you talk about, more about what your day to day looks like in your business today?

04:40 

Cody Littlewood: Yeah, so we implemented, you know, for those of you that have read the book traction by Genome Wickman or rocket fuel. So, we implemented EOS. And so recently, probably about six months ago, we kind of further defined our sets of the business. My focus is on investor relations, investor communication and equity stack, and Michael Julio’s another partner of mine, super sharp guy, ex fixed income guy and senior partner at our firm. He’s largely focused on acquisitions and capital markets, so debt, and then third partners Stephan [05:18 inaudible], he’s largely focused on asset management. So, asset and construction, asset, and construction management. 

 

And so, my day, a lot of my days is really working on our equity pipeline. So, it’s, you know, when we get a deal through the door and we’re starting to size it up. I mean, I participate in all the investor committee meetings. So, in investor committee meeting couple deals come down the pipeline, really interesting. We read the investor memos, usually have our investor committee meetings weekly, every Tuesday, talk about a deal, you know, after it hits a certain point and we’ve all looked at it and we like it, and it’s gone through a certain amount of underwriting and we’ve had boots on the ground, asset management and acquisitions have both been on the ground. Then it kind of comes up to me to you know, the sized out the debt and, you know, kind of what the equity need is. 

 

Then it kind of comes to me. We kind of make sure that we have either that we invest with a couple equity partners, which are largely just family offices. So, we have some family offices that where we know that are, you know, the deals in, within their specific buy box. And so, I spend a lot of time talking with you know, CIOs of different family offices, as well as you know, other equity partners to kind of understand like what’s in their buy box. And so, when we have a deal and we’re trying to figure out, okay, is there, you know, we like this deal. We think this is a, you know, we think this is a winner. What’s kind of the equity strategy there. I’ll spend a fair amount of time on that. Once we’ve kind of worked that through and the deal’s getting closer and closer to contract and more due diligence is being done. I’ll work with my team to start to kind of work on a you know, the investor deck, you know, making sure the model that I have all the questions answered for the model. Make sure that, you know, we’ve gone through all kind of general frequently asked questions you know, all set up a lot of the stuff on the well I’ll work with my team to kind of set up a lot of the stuff on the you know, equity platform.

 

I’ll do depending on the partner, right? If we’re raising individually, so we’re going out and we’re raising with a lot of investors. I’ll probably do some sort of webinar. I’ll have probably a lot of follow up calls and questions and just kind of answering, getting investors the information that they need to make the decision. And yeah, and then, I mean, after we close the deal, a lot of my you know, a lot of the work that I’m doing are keeping investors updated. So, working through investor communications you know, providing them monthly updates on the deal, how’s the deal performing, how’s it in line with projections, how’s it in line with budget, you know, and kind of giving them a, a good sense of where we are.

 

I also absorb a lot of the data from the acquisitions team and provide kind of investor memos of where we’re, what we’re seeing in the marketplace. You know, what we’re thinking about, what our kind of strategy is, etc. So, all of that kind of makes up a very, very full-time job. I feel like I’m in back-to-back meetings quite often. So, talking with one person or another, but that’s kind of what my day to day looks like from my side of the house. I mean, you know, the acquisitions team or the asset management team have a very different day in the life of, but that’s what my job looks like.

 

08:31 

Jason Lee: Very cool for those of who might not know, what does EOS mean in business?

 

08:38 

Cody Littlewood: Oh yeah. So, EOS is like an operating system for your business. And so, there’s a very clear one of the processes that you go when you implement EOS is a very clear accountability chart and making sure that you only have one person accountable for each area of the business, or at least for each set of accountability items. That’s you know, as our firm was maturing, we were becoming not just a handful of investors that were doing this for fun. We were becoming a proper, you know, now we’re running a proper business. We had to kind of set up those lines where you’re responsible and accountable for this you’re responsible accountable for this you’re responsible and accountable for this. And so that’s what I was referring to when I said, and we started to, we implemented EOS and started to have those pretty clear lines.

 

09:28 

Jason Lee: Yeah. I mean, it doesn’t really make sense of, you know, two or more people are doing the same job, right? When you could be dividing and conquering doing your own thing that you’re best at or enjoy the moment.

 

09:37 

Cody Littlewood: Yeah, absolutely. Everyone has a great skillset. I mean, the other thing is too, is, you know, that you learn is that if multiple people for are accountable for one thing, no one really is right? Because you get a lot of, like, I don’t know either you don’t either, you think the other person has it and they don’t really have it, or you could get some finger pointing. There’s all sorts of issues that pop up when you have multiple people accountable for the same item.

10:01 
Jason Lee: Definitely. And I also wanted to mention for the show, we were talking about kind of what topics we wanted to go over. And you were talking about the current market today and, and how you’re navigating, you know, a change in market that we’re going through. Just wanted to see what your thoughts were, and insights were on that topic.

 

10:18 

Cody Littlewood: Yeah. So, I mean, as I mentioned, you know, we’re, can’t remember if I mentioned in the interview or before, when we were talking, but we have probably we’re underwriting, maybe 200, 300 deals a month. So, we have a team of analysts that are underwriting a lot of deals, at least that like top level, right? Like it’s the pipeline. So, we’re looking at a lot of deals at the top level, we’re getting a lot of looks. And then as we get more and more serious, it kind of moves down the pipeline as the deal looks better. But, you know, at the top level, we’re underwriting hundreds of deals. And, you know, we are making probably, you know, 20 to 30 offers a week. So, we’re seeing a lot you know, I do feel like we have pretty good market data.

 

We’re pretty close to the deals that are getting done. We are seeing some loosening, but I think healthy loosening normally, you know, largely what we’re seeing is we’re seeing the deals that were really tight that just had very little, little margin for air. We’re seeing those repriced 10% you know, or so the deals that were fairly priced that, you know, were kind of within the new debt parameters, we’re seeing tons of demand for us still. And I don’t think that you know, I don’t think that fairly priced deals won’t get done. I think fairly priced deals are absolutely going to get done. And the core fundamentals of the market are still there, you know, housing shortages and rent growth and everything else that we look for really that drive the NOI growth of apartment buildings. That’s still all there, but definitely there was a frothy market when rates were near zero.

 

And so, a lot of that stuff where people were buying stabilized deals with bridge debt, and there was no value-add story or there was trades within margins. I mean that, stuff’s definitely getting repriced a little bit, you know, so we’re seeing 5%, 10% stuff misguidance, but it’s not missing guidance by a bunch. And I don’t think, you know, no one really knows what the market’s going to do. All I can tell you is what it’s doing now. And so, whether it’s, whether it’s a little bit of people watch the S and P dip into a bear market and they’re nervous, or the mixture of, you know, the mixture of debt just being debt cost being a little bit higher. And so those really tight margin deals, those really sliver margin deals like just won’t work. I’m not sure what it is. You know, it, it’s hard to say whether we’ll trade sideways or whether things will kind of start will regain lost ground after you know, after some of the fears gone in the marketplace. So, I’m not really sure, but we are seeing weakness in those like really highly priced days.

 

12:52 

Jason Lee: Gotcha. So, a question I’ve been getting a lot from my listeners is, you know, where do you see interest rates going? What’s your opinion on that topic?

 

13:05 

Cody Littlewood: Yeah. I mean, the fed seems highly committed. We wrote an investor memo the other day, and I think the quote was that, and Powell said until he sees clear and convincing evidence, not just like notional whiffs, that inflation is dipping down, that they have the resolve to continue on. The fed doesn’t have anything, they have nothing in their mandate about markets, right? So, they have nothing in their mandate about maintaining, you know, a high S and P or a high Dow, you know, so I think they’re going to maintain the resolve. You know, you saw a little bit of pressure off of inflation, but it’s anyone’s say, you know, I can tell you that the short end of the curve is largely controlled by the fed, but the long end of the curve is not highly correlated with the fed. The long end of the curve. So, the 10 year which is really where your fixed rates are basing off of. So, when you’re borrowing, you know, you’re getting a fixed rate 10-year mortgage you know, amortized over 30 years is based on the 10 year treasury, right? Usually maybe what? 150 basis points above the treasury, maybe 125 depending on the spread. 

 

And that stuff’s based on long term inflation expectations, as well as population trends and demographic trends and GDP growth. Right? And so, I think the tenure is going to have, it’s hard to predict the future, but, you know, I think the 10 years definitely is going to tap out at some point. And you kind of already saw it start to weaken a little bit. I think it’s hard to say, but interest rates on short-term debt are definitely going to increase. I think, long term debt. It’ll probably increase to a point, you know, maybe we’re there, maybe a little bit more, but then, you know, then it’s going to kind of ease off as, you know, inflation expectations over the long term decrease, you know, everyone has to deal with the demographic and population issues that we have in aging US and GDP growth is not going to be, you know, massive every single year over year for the next 10 years. 

 

And so, we underwrite for increasing rates, all of our models and our underwriting say that rates are going to increase, but you know, so we’re assuming that rates increase and we’re assuming that values go down and we’re relying on our business execution to drive the value of our investments. So, you know, that’s what we’re modeling. I don’t know that that holds, you know, that holds true. But I do think that you should be investing with a long-term timeline and then it matters a lot less, right. 

 

You know, over the course of the next five, seven years, if you’re investing with long-term vision, you’re going to have plenty of opportunities for low rates. And so, what we’re seeing this year is not going to be the same as what we’re seeing in three years from now. I think the secret is to invest with long term vision.

 

15:51 

Jason Lee: Couldn’t agree more. And then for your current underwriting methods, what are some key factors you look for when you’re looking at a deal? Like, why do you pass on so many deals every single month?

 

15:59 

Cody Littlewood: Yeah. I mean we’re looking at several things, right? I mean, a large part of what we’re looking for is the ability to drive rents. So, we’re looking at rent comparable. We want to be, you know, we want to have good renewals, so we want the ability to renew at much higher rents, right? So even if we don’t drive, you know, over 200 units, it’s probably going to take 24 months to turn 200 units. If you’re moving a good clip. And so, some of those are going to be renewals. So, we want the ability to drive strong income growth from renewals over the short-term base. But we also want the ability to drive increases in revenue through renovations. And so, we’re really a lot of what we’re looking at is rental comps, right? We’re looking at the market, strong market, good population, you know, population growth, job growth, all those core things, you know, good unemployment, good job diversity, economic diversity.

 

So that’s kind of our initial pass, but we’re not looking at things that are not, you know, markets that have that anyways. So, the next pass, you know, a lot of it’s going to come down to pricing. Lots of things have spent too high, highly priced for us to do deals. The basis was too high. We couldn’t you know; we couldn’t justify the exit. You know, we couldn’t justify exiting at, or, you know, refinance rates. And so, you know, I mean, a lot of it was that, or maybe the broker or maybe the seller, you know, depending on whether it’s on market or off market, maybe they were telling us the rents, we could get X, but we look at the rental comps and we’re like, you know what? We think conservatively, if we’re staying conservative, we’re not going to be able to get that.

 

You know, we’re going to be able to get, we’re confident we can hit this. And when, if we hit that, then we look at the numbers and it doesn’t work. It has to hit our hurdles. You know, we want to achieve a 6.5 stabilized cap over, you know, once it’s stabilized and full rents are achieved, if better than that, great. You know, we want to be doing 8%, 10% cash on cash before the refinance and or near it. And then after the refinance, you know, we want to be able to return 50%, 60% of our equity with a 10 year hold of like 15% IRR. So, you know, we’re looking for average cash or cash returns in the mid-teens, IRR over a 10 year hold of you know, mid-teens as well. And so that’s, if it doesn’t meet those and a lot of deals just don’t because of pricing, you know, that wasn’t the case a few years ago, but it is the case today.

 

18:20 

Jason Lee: And what I find fascinating about you is you’re seeing so many deals come through your desk every single month. How is your deal flow so strong?

 

18:27 

Cody Littlewood: Yeah. Well, we have a lot of broker relationships. That’s really key. We’re also, you know, we’re also doing stuff like we’re picking target properties, and we’re sending a lot of unsolicited offers.

 

18:41  

Jason Lee: Oh, really? Gotcha. Cool. Any advice for a beginner real estate investor? Is it going to maybe grow their business or dip into the field?

 

18:51 

Cody Littlewood: Well, I guess the biggest advice I would say is that I think that sometimes in real estate we’re sold that it’s a passive income. I think it’s passive for my lps, right? So, for the people investing with me, it’s very passive, right. You know, they collect a check in the mailbox. Well, actually it’s ACH these days, but for active investors for people like me and you, it’s not a passive business at all. I don’t think it can be ran well like a passive business. And so, I would just say really understand what you want, if what you really want is passive income. I would say find a, you know, find a great team to invest in. That’s willing to do the hustling and if you want to build the business, that’s great. But just understand it is a business that you’re building. You know, it’s not a real estate when you’re investing for on behalf of investors. And behalf of your own capital is not passive. 

 

I haven’t figured out a way to make it passive and I’m not really trying, but real estate can be passive, but it needs to have the right structure. And certainly, owning your own stuff or investing on behalf of other people is certainly not passive. So, expect to build a business. It’s a business that needs to be built.

 

20:02 

Jason Lee: Well said last but not least. How can our listeners go learn more about you if they’re interested?

 

20:05 
Cody Littlewood: Yeah. So, I’m on Twitter at Cody Littlewood. I’m also you can go more and read more about us at www.investwithcurated.com. It’s www.investwithcurated.com and you can sign up there to hear about deals. If you’re a credit investor, you can also email me at cody@curatedrei or Cody@investwithcurated.com. It is actually easier. It’s just Cody@witinvestwithcurated.com and I’m happy to add you to our list and let you know when we have deals and add you to our newsletters as well. And you can read our current thoughts on the market.

 

20:43 

Jason Lee: Awesome. Thanks Cody. Great Having you on the show and hope you have a great rest of your day.

 

20:47 

Cody Littlewood: Thanks, Jason. Take care, man.

 

20:49 

Thank you for joining us on the multifamily millionaire podcast. The show that interviews, multimillionaire real estate investors and top producers in the real estate industry. We’re here to help you create passive income and achieve financial freedom so that you can do what you want whenever you want. We’ll catch you next time on the multifamily millionaire.

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