Tom Barrack was on CNBC last week to talk about real estate with the traders. Great TB quote to open the show: “It’s always great to be the slowest guy on Fast Money”. There’s more wisdom in that statement than any of the show’s regulars understood.
A couple bullet points but definitely worth watching the video. The link on the image below goes to the Colony website where they edited the three segments together (commercial free too):
- Housing [of all types] is the best opportunity. Today there might be a Fed bubble but there isn’t a housing bubble.
- The rise in interest rates while not big and still low historically speaking, will hit entry level housing. 100bp (basis point, where 100bp = 1%) rise in interest rates will cost a borrower an extra $150+/- a month on their mortgage payment for a $200,000 home. That will keep more people renting.
- Tom says the amount of pent up demand for new homes, existing homes, rentals and apartments is ‘exponential’ and even all the new construction starting up will barely make a dent in it. He thinks there is enough demand for all types without cannibalizing each other to grow.
- Barrack thinks there are still six million (6,000,000) more houses to go through the foreclosure process now that the
banksters got off scot freelenders are through litigation. - The new home builders biggest issue is finding finished lots to build on. They’ve pretty much burnt through their existing inventory and it can be a four or five year process to entitle and permit land. Plus, no one is lending on dirt these days so acquisition has to come out of builder’s equity.
- Pulled the IPO of his single family REIT because the market turned ugly. Tom paints a moving and beautiful picture of how his baby was going to get beat up, that is how to
spintell a story. - His fallback is that the single family is an appreciation play but I wonder how long his private equity clients will be happy waiting. Other PE firms (who are clients of ours) have run the numbers on the REO to Rentals business model and found that it doesn’t clear the IRR return hurdles for private equity investors, which is why the REIT IPO exit was choice #1. Stay tuned for the next episode…
Despite becoming a regular on CNBC Tom is one of the smartest real estate guys alive and this story has three important takeaways:
- Buy when everyone is selling; you can’t get a more distressed market than when you’re picking up properties wholesale from the banks.
- Have multiple exit strategies mapped out before you buy; Tom’s home run was the REIT IPO but his fallback plan is a nice RBI single or double.
- Buy at such a good price that even a mediocre sale will give good results; Sometimes I think Tom Barrack is Warren Buffett’s real estate alter ego but the real truth is that real estate investment is just Value Investing applied to dirt… or… Value Investing is just Real Estate Investing applied to business!
