Chad Musgrove


Episode 40.

Chad Musgrove, Senior Vice President of M&T Realty Corporation

00:00:10 – 00:04:05

You’re listening to the real estate of things podcast. It is always a blast having friends on the podcast. Chad Must Grove, Senior Vice President of Mt Realty Corporation, joins me on today’s episode. He and I ran into each other at a conference a couple months ago. We were on a panel. Had An absolute blast today. Inflation, the Fed Rate Hikes, oh my. We dive into the opportunities that are present, though, even with all the dark sentiment that’s cruising around. I’m Dalton Elliott. This is the real estate of things. Chad Must Grove, my buddy. You were Senior Vice President of MT Realty Capital Corporation. I’ve known you for a while. We met on the conference circuit years ago through a colleague of mine and a mutual friend of ours, Courtney Newmans. Courtney knows everybody everywhere I’ve ever been with him, so he’s he’s a great networker, connects people. I think probably half the people in this podcast in some way have a Courtney Newman’s relationships. So He’s brought you and me together here today to put out a podcast episode which you know. We’ll see how it sucks up against corneys. I’m sure you’re a smart Fella. So and we have some fun topics today to do. Human Gloom? Is that the name of the episode that this is good, hey man, let’sten. I don’t know if we want to make it that, but you listen. I you know, I think the market places in a very it’s a very unique time and a unique position, right, and I look, I don’t think it’s all doing gloom. You’re still seeing a ton of transactions take place and, at the end of the day, right, people are in this business because, you know, they think they know what they’re doing when it comes to real estate, right, and a majority of the professionals and transactions that you see take place, or I won’t say a majority, but I’ll see a good fair amount of them, or people have been in this business for a while, right, and this business happens in cycles, you know. So we’re just we’re a different point in the cycle and that’s it. And you know there will be there will be some losers, because in order for someone to lose, someone else has to win, right. So if you’re, you know, taking that in the literal sense, it can mean that someone effectively loses capital and a transaction workuld be in the sense that you know, someone sold a deal, made some money and they feel like they lost because the next guy sold it for a higher price. Right, but is that a bad thing? Yeah, it depends on which side of the transaction your own. Right. And Yeah, it’s you know, we lean one capital, so plugged into what’s going on. This is both of us live in the lending world. It’s our day job, so constantly plugged in, trying to read the t leaves on what’s going to happen twelve, thirty, six months down the road. Yeah, it’s like choppy waters. I think the general sentiment I get from talking with people out on the road executive leadership here at our company is that there’s, you know, rocky waters are here. Yeah, and, like you said, they’re going to be some winners and losers. And what do you think? What do you think one of the first things to crack is, is it lenders who have had a little too aggressive ltvs LTC’s? What’s what do you think the first Chink in the armor is going to be related to our space on the not on occupied investment lending side? Well, I mean, look, it’s a couple things. Right, let’s let’s think about it in this perspective. When, when the lender made that loan, was that loan too aggressive at that time? Right? Was that? Was the LTV, you know, too high at that time? I mean, we got to understand valuations are where they are in the market place because someone truly believes that…

00:04:05 – 00:08:03

…that’s the value. Right, when it comes down to a purchase, you’re willing to purchase an asset because you believe in that price. You believe you can, you know, add value to it and further, you know, create or enhanced the the subject property in some way that’s going to then allow you to achieve any even higher valuation. So I can’t, you can’t say for certain that, you know, the lender was wrong to provide x, you know, LTV on this transaction, because the fundamentals, or we would assume one. Right, they have fundamentals and that there. You know, analysis was evidence base right. Did Dalton purchase the property down the street for the same amount of money? You know, did? Did Courtney purchase the next property down the street for, you know, a similar amount of money? Right? is their capital still flowing into that specific area of business? You know, our jobs being created, you know, both of us or in the multi family space, right, so, or they’re safe schools nearby, you know where the grocery stores essentially all the market drivers that you think of that makes a community great, right or at the same token, typically people are looking for value. So they’re going into markets that made, you know, quote unquote, beyond the friend or, you know, be tertiary or secondary, but they’ve got some demand drivers which have people thinking that hey, this is going to be a market that may change in the near future and I’m going to realize, you know, a certain return for my equity. So this is why I’m investing here. So to say that a lender made the wrong choice at you know, my question that I have to ask to that is, well, why do they make that decision? Again? Was it evidence space? You know, what else did they see? Is there analysis rooted in the data? You know that I can’t really say yeah, yeah, let’s I think the only certain thing is it’s going to be interesting and there’s going to be a lot of curveballs the next six, twelve, eighteen months and let’s let’s let’s bounce from from fun topic to fun topic. Inflation. You and I were chatting about that a little bit beforehand. I didn’t. I’m understanding. I’m twenty nine years old. I’m understanding that I didn’t fully appreciate and I don’t think I do at this point. But I didn’t really appreciate inflation up until this point in my life because there has not been much inflation to appreciate. And Oh my yeah, there’s plenty of it right now. So what in the world is going on? How does that affect our SAS yes, and if you can get some stuff right, you still have supply chain issues with everything, everything, everything, everything. So not only is it hard to find something, even if you have the cash want to buy it, but then it’s more expensive, way more expensive. So what in the World Chad fix this? I mean, listen, if I had the secret SAWS, dumb that, I don’t think we’d be sitting here on this poke as we you know, we’d probably be taken my butt out. So we’re down to the keys. I differy conversation, right, but Um, I mean look, bottom line, right, too much capital would chase into few goods of services, you’re going to have inflation. So when you couple that with, you know, a pandemic that you know had taken place and you know, by some measure people so argue that, you know, we’re quote UNQUOTE, may still be in it or at the tell end of it. You have a reduction in the supply chain. Yet businesses closed. You had some businesses that went away. So inherently, you know, inflations just going to be higher because not only is there a limited supply of those goods, there’s a limited a limited number and or should I…

00:08:03 – 00:12:01

…back up and say that there’s fewer actual supply yours and the market place right. So that just makes her this perfect storm that you’re you know, you’re seeing today. So I mean look the how a crystal ball and say one will the inflation, and I mean is it, you know, going to come from the FAG continue to push raids? Is it going to be at some point once, you know, businesses or either able to, you know, optimize in the fashion to keep up with demand, or do they open up production elsewhere at you know, those things we can’t answer. You know, we can continue to look at sales and services, are different businesses, and see what you know, see what they’re doing to catch up. But you know, I think inflation is just going to be here while to stay here. Your gas is going to cost a little bit more. You know, your groceries are going to hit a little more expensive. Hopefully your wify the listing all it up too much. But look at me and again that that’s a part of the cycle, right. That’s kind of how the cycle in this business goes. And when inflation creeps up, which is why, you know, you tend to see people seek out real estate in order to headshair bets against it. Now, at the same token, one would also argue that if you’re, you know, someone who supports free markets and no hand control in the market place, you know, do you say, Hey, let’s just back up and leave it alone, or do you say we intervene, because at the same time, we intervene when there was a pandemic and before that, when there was a great recession, to you know, artificially reduced rates to stimulate business, and now we’re esscially just at the end result of that. You know, you just you got to remember and this business everything’s always lagging. You know, something you do a couple years before is now going to take effect and be here today, and I think that’s Truis in the sense of what we’re seeing now. Yeah, from from an operator standpoint, right, is the best thing an operator can do right now, if you have some type of value add project or new construction, is it just by as much of what you need as early in the process as you can? Because the smart money is probably on, you know, I continued supply constraint and continued in place and at least, you know, we probably see that through the balance of this year. I mean, listen, at the end of the day, you see, you got to still be a Betan man on that one, right. You know, think about the price of lumber. Came down a little bit from where it was still high historically. You know, if you expect the supply chain to open back up, then know, you know you’re not going to go out and go buy, you know, the a wealth of items and put them in some storage and way to use them. But if you still have real concerns about that being the case and or you know you you have a bead on, you know, specific materials that may still be hard to find, you know, depending on your business to near you buy. So I mean I think the pendulum can swing either way to the question, but at the end of the day as well to what you also have to consider is, you know, speed of execution. You know speed of execution and not only delivering your product, but speed of execution and saying that once I deliver now, how am I going to drive a capital event to return the equity to myself for my investors? Right? So, are you focused on simply just executing at you know now numbers and costs and you couple that with rising interest rates and you let the cards fall where they may be? Or do you say hey, you know what, we expect things to open up a little bit. Folks are going to back doork. You know, productions going in, priests and…

00:12:01 – 00:16:00

…you know we’re just going to have to kind of take our best where interest race maybe, because in the foreseeable near term, you know there’s an expectation that race will continue to rise, you know, at least another seventy five minutes from the fat. So what you have to I think the question is too fold because you have to consider that coupled with your earlier question, in that you know the lenders, you know, overextend themselves, etc. And the reason why my answer was what it was because as rates rise, we all know what’s going to happen. I mean it’s a function of the math. You only going to be able to borrow so much money as interest race rise. So it’s really I don’t think there’s one quick solution for it. I think it’s more so do you want the chicken or do you want the egg? Right? So, yeah, it’s just our our conversation is indicative of the time right, like it’s it’s just such a guessing game. I think the one the one thing I come back to when I go down that pathway of real estate guessing game is that there’s such a supply and balance right, like we’re still way behind the a ball on just housing supply and that’s something that’s not something that’s going away and normalizing and the next six, twelve months, maybe eighteen months from now, depending on how everything goes. But that’s a that’s a relatively deep medium term problem that’s being worked on and that’s something that I look to as could of a beacon of light through everything else. You have inflation, you have supply chain issues going down the line those things, but but in terms of you know, tail winds for the industry, that supply issue, which just naturally happened because of underbuilding, post great recession and you just had a snap back to new construction that had stopped and then it was a slow creep back up. And think whenever we had the pandemic, we were still below, you know, POA building levels and just a supply issue just hasn’t hasn’t gone away. So when I look at that, it’s like you have a supply demanding balance which, from a housing health standpoint, isn’t you know, it’s not problematic and you would argue from a Linder standpoint, from an operator standpoint, like the creates opportunity. So that’s one thing I look too. As you know, a positive tail wind and it’s a, you know, mutually beneficial thing for everyone, like the more renovation and creation we have around housing, the more opportunity you have for renters, on your occupants, investors all down the line. Yeah, no, a hundred percent. I may look being when you know, one thing used to typically say, which was very important right, that we’ve underbuilt for some time now. I’d honestly have to go back to check the statistic to make sure I’m a hundred percent accurate, but you know, last I looked at me and we were talking, you know, six, seven million units that we were short of, you know, quote unquote, affordable housing, right, and we’re talking about someone just simply not having to pay fifty percent, you know, their monthly income towards their rent. Think about that number. Fifty percent of what you take home to simply go to one expense. Right. So you couple that with inflation and you couple that with svatal chain and and other issues. So now, as an operator, you know, I really think that, you know, we’re going to be in a period and we’re moving towards the period in the time where, you know, the really good operators are going to be the ones who are going to be successful because they can do that further calculation to say, okay, well, this person’s…

00:16:00 – 00:20:00

…already spending forty, forty, fifty percent of their income on their rent. You know, now what happens? You know, when their gas is you know, forty percent. What happens when the groceries are up? You know, fifteen percent. And how can I still incrementally, you know, create some type of values? And so now maybe your your rents don’t move, you know, a hundred and fifty bucks, right, maybe they only move sixty bucks, you know, or something like that. And so again, I just I think you’re moving into that period where really being an operators going to be, you know, very important, versus having a you know, blanket solution, the saying okay, at you know, all of my properties, we’re going to, you know, reduce runtal rates by ten percent. Right. That may not work for a certain market where you know the tenants at your property spent an hour and twenty minutes commuting both ways. Right, that may work at, you know, a property where someone’s hopping on the train or using public transportation just because you know their transit card is ten or fifteen percent more expensive. But you know, if that person’s got to get in the car driving, already get the work a day, you know they got to drop your kid off that day care, they still got to get groceries, you know, they still got to go pick up medication or it souter, run to a doctor’s appointment, etc. You know, these are real life experiences that are now becoming a bit more, you know, cumbersome, just because you simply got a factor in how much more money you’re spending going gas. You know, where you got a factor in how much money, how much more money you’re spending on food, you know. So, I mean, yeah, I think we’re you know, we’re an interesting time in the market place. Where you look, those are still getting done. There’s there, you know, their lenders out there that still will make transactions happen, and you know that. The question and becomes, though, does the fundamental underwriting, coupled with the pricing, allow you to borrow the money that you need in order to execute your returns for your investors? So now that may not be able to pay you that, you know, twenty percent return or sixteen percent return. You might get a ten now or, you know, and a I might only pay you, you know, three percent cash on cash. Right. So then what happens that investors is hey, I’m not an operator, you know, I was just looking to get this in turn, but now I can go get that, you know, in some other asset class. Right. So, you know, going to be challenges for sure, but again I think that goes back to, you know, where you’re the owner operator. You really going to find now that fine balance to executing a business plan and making sure of successful for your investors? Yeah, just have to be more calf careful than ever before. You and I were at a conference a couple months ago and Texas and that was that was a big topic on the panel. Of like you need to have, you know, you can’t have loose assumptions. They’re right, like now is the time that you need to really stress test every deal using some unfavorable assumptions, because there’s a decent chance that there’s unfavorable assumptions pan out and you do not want to be underwriting, you know, for your own potential, will deal like like just this cushy cozy everything’s going to keep going like it has gone the last twenty four months, because that is absolutely I mean, look at it makes me sick to my stomach. Look at the market, look at I give plenty of red everywhere. Like you. This is this is different from the last couple of years. And so to keep keep your assumptions fixed from two thousand and twenty two thousand and twenty one, two thousand and twenty two, it’s just far too dynamic of a world right now and far…

00:20:00 – 00:24:03

…too much uncertainty. That, being on the conservative side, is absolutely one hundred percent the way to go. Yeah, well, I mean, look, I think one thing we can be certain about right interest rates are up they’re up from where they were. That being said, you know they still are lower than where they’ve been, you know, historically. Right. Yeah, I’ve been in this business over a decade now, so you know, having seen things kind of come full circle. I mean look, you know today in the agency were array. I mean we’re, you know, we’re quote and deals and you were from the low to mid advice, you know, depending on product type, size, deal, location, etc. Depending on leverage. You know where that that’s, you know, higher leverage, I would say if you can get seventy, seventy five percent today, but you know, depending upon you know leverage, lower leverage could be a little bit cheaper than that, but that’s a that’s a far cry away when you know the ten your Treasury is, you know, hovering around three point three percent. been up three four, three five, and that’s a far cry away from, you know, the days where we were at a two and a half percent. You know, ten your treasury. So you know when you when you do the fundamental underwriting good transactions. I think the key and most important part right is to really figure out how you model out the exit structure, because if I’m telling you that, you know a I mean look, even one of the longest term, cheapest financing tools, right, the Hud two twenty three F reefinance product. You know, eighty eighty percent leverage reef nance product. You know, you can quote a deal today at seventy five for that. That, you know, may sound relatively treat to you know, if any may execution. That’s at, you know, five point three, five and a half percent, right, but still a little bit higher than what things have been historically. So it’s going to come down to you, you know, coming up with essentially a return solution for your investors and saying okay, or we conquerable with, you know, taking thirty five years of loan term, but it’s going to take us, you know, longer than sixty days to close the deal, right. So I mean that, you know, part of that reason was actually, you know, my recent job change. You know why I made that move. I mean it’s you want to have, you know, multiple tools and weapons for your clients and be able to really, we give them a, you know, a full service approach, right, because in turn they’ve got to do the same thing for their investors. So when you when you really look at the overall market place, right, it’s really just figuring out how to be service driving and say hey, here’s how we’re going to execute today. You know, this is where we’re going to do to combat inflation, this is what we’re going to do to combat, you know, rise and rates. And then it also comes down to what market place you’re going to play it right. Yeah, product development during these times as always very different than product development, you know, a year ago, whenever, you know, HPA was just up and to the right. It’s like you could as as an operator, like you could, you could be a little bull in a China shop with assumptions and plowing through and like you’ll be okay, like HBA is going to save your tale, banking on that. Now is is becoming more and more perilous. So, but but yeah, like still no shortage of opportunity. American housing and strong. And when you think back to the last drop off, like you had, the core issues of fraud was representation things that just had at the time and unhealthy, although we didn’t realize it. In a lot of ways, housing market, like housing market strong now, and so there’s just some normalization that’s going to happen, like you said, one thing I remind like to remind our sales team about here at Lema. One is that, you know, even relative to when I got here this month of…

00:24:03 – 00:26:45

…seven years at the firm for me and I started underwriting thirty year debt for our rental products. You, we were on. I was doing loans at eight and a half, close to nine percent for thirty year fixed SFARS, and people like we were growing as a company rapidly at that pace. People would give it to me, give it to me and yeah, when you look at when you look at rates through the historical Lens, like we’re fine right now. We’re fine. So yeah, I think ending on that, ending on that truly positive but very real and factual note. That’s what we’re going to do. We started with some smiles. We’re going to endless some smiles. Chad must grow it. CONGRATS. congrats all the new role. By the way, over M andt realty capital, very happy for you. Can’t wait to see you out on the road again. I know you’re a busy family man too, so you’re always holding down the fort the are. So thank you. With everything you have going on your in your life. Thank you so much for sitting down and taking some time with me, my friend. Well, don’t know, I appreciate you have me, man, and it’s truly an honor. You know, love what you and the label folks are doing over there. Loved entire team from the top down right. So you guys are really doing something specially and you’ve grown a great company. So always good to be in the presence of greatness and good company like yourself, man. So anytime, hopefully you have me back one hundred percent. You are the man, Chad. Thank you so much for joining and thanks everybody for listening. Take care. Are you a real estate investor looking for the right lender that can finance all your deals and help you scale? Lima one capital has the best suite of loan products in the industry, barnt. Whether that’s fix and flips, fix and holds, built a new construction or buying rental properties, they have incredible financing solutions for it all. A reliable common since Linder, is one of the most important parts of your investment team, and that’s exactly what you get with Lima one. Let Lima one capital show you how they’ve helped thousands of real estate investor scale and increase their wealth. Check out Lima onecom or call eight hundred two five nine zero five ninety five to speak with the consultant and preparation for your next project. Thank you for joining us today on the real estate of things podcast. Subscribe and tune in weekly for new content from the industry’s best while we continue to unpack the nuances of this dynamic market. Follow US across social media for additional insights and analysis on the topics covered in each episode, and remember to rate, review and share the show.

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