In a recent episode of the Passive Investing from Left Field podcast, host Chad Ackerman engaged in an insightful conversation with Mike “Big Mike” Zlotnik, CEO of TF Management Group LLC. With over two decades of real estate investing experience, Big Mike offered a nuanced perspective on the current market conditions, investment strategies, and the challenges facing passive investors in 2024.
Market Overview and Investment Strategies
Big Mike began by acknowledging the difficult economic environment, drawing parallels to the 2008 financial crisis. However, he emphasized that current conditions also present unique opportunities for astute investors. He identified significant potential in providing mezzanine financing or “rescue capital” to existing projects facing challenges. This strategy can offer equity-like returns with lower risk, typically yielding high teens to low twenties percentage returns after fees.
For new acquisitions, Big Mike noted a growing need for capital to fill the gap between conservative bank lending and equity. This presents an opportunity for investors to step in with bridge debt or preferred equity. He also highlighted emerging opportunities in distressed assets, particularly from REITs needing to sell assets or bank foreclosures. However, he cautioned that these require careful underwriting and a strong understanding of local market dynamics.
Investment Cycles and Asset Classes
The podcast delved into the four phases of real estate investment cycles: recovery, expansion, hyper-supply, and recession. Big Mike provided a comprehensive overview of where different asset classes currently sit within these cycles. Office spaces are in deep recession, facing significant challenges. Multifamily properties are also in recession, with valuation corrections averaging 20-25%. Industrial real estate, benefiting from de-globalization trends, is in late expansion or early hyper-supply phase. Interestingly, open-air retail is performing well due to limited supply and evolving retailer strategies. Storage facilities vary by market, with some areas facing oversupply.
Conversion Projects and Their Challenges
While discussing the trend of converting assets (e.g., hotels to apartments), Big Mike offered a balanced view. He noted the potential in these projects but highlighted significant challenges, including floating rate debt pressures, potential oversupply in certain markets, and the critical importance of buying at the right price. He emphasized the uncertainty in achieving target rents post-conversion, underscoring the need for thorough market analysis.
Advice for Passive Investors
Big Mike stressed the importance of thorough due diligence when vetting operators and their strategies. He advised investors to understand the risk-return profile of each investment, noting that higher returns should compensate for increased risk. In the current environment, he emphasized paying close attention to debt structure, as the choice between fixed and variable rates can significantly impact returns.
Focusing on local market dynamics rather than broad national trends is crucial, as real estate remains a highly localized business. Big Mike cautioned against chasing past losses by investing more capital into struggling deals, advising instead to evaluate new opportunities on their own merits. For value-add or opportunistic deals in the current market, he suggested looking for projected returns in the high 20s to 30s to justify the risk.
Challenges and Considerations
Big Mike didn’t shy away from discussing the challenges in the current market. These include difficulty in accurate valuations due to market volatility, rising costs across the board (construction, insurance, labor), uncertainty around interest rates and their long-term impact, and the potential for oversupply in certain asset classes and markets.
While the real estate market in 2024 presents significant challenges, it also offers opportunities for well-informed and cautious investors. Big Mike Zlotnik’s insights underscore the importance of thorough due diligence, understanding market cycles, and being selective with investments. As the market continues to evolve, passive investors who prioritize education, networking, and partnering with experienced operators may find success even in these turbulent times.
For those interested in diving deeper into these topics, Big Mike recommends the Freedom Dentist Blueprint podcast by David Phelps, which offers valuable insights for passive investors across various professions
Take Your Investing to the Next Level
The LFI community provides unmatched education, expert insights, tailored investment opportunities, and enduring support. It will take your investing to the next level.
With extensive resources, exclusive deal flow, and a network of experienced professionals at your fingertips, you have everything needed to invest wisely.
Become an LFI Infielder now to get on the inside track. Expand your knowledge through members-only content and webinars with industry experts. Gain exposure to off-market investment deals not available anywhere else. And know fellow community members have your back each step of the way.
Become part of a dynamic Community that will support you as you learn and start your journey in passive investing. Click here to learn more.
This article is for educational purposes only and is not to be relied upon as the basis for entering into any transaction or advisory relationship or making any investment decision. All investments involve the risk of loss, including the loss of principal. Past performance, and any performance results reflected in this article, is not an indication of future results.
