Phase 2 - Real Estate 101 (How to or one big idea)

Podcast - Economic Analysis Of Real Estate, Part 1

Adam Hooper
August 29, 2021
Podcast - Economic Analysis Of Real Estate, Part 1

Michael Madsen, Economics Director at RealSource, provides analysis on how current economic trends are impacting real estate property investments.
Michael Madsen, a Client Services representative since 2005, has participated in workshops around the nation in the National Association of Real Estate Investors, as well as analyzing multi-family properties and doing market due diligence for RealSource.

RealSource was established in 1989 with the central focus of putting our investor clients in the right place, at the right time, to help insure their maximum profitability. Putting the investor in the right geographical location in the right economic conditions is the heart of location investing and what we call "Prime Time Investing."

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Adam Hooper - Hey Tyler.

Tyler Stewart - Hey Adam, how are you today?

Adam Hooper - I'm doing well. Welcome, RealCrowd listeners, to our latest podcast. Tyler, who do we have on today?

Tyler Stewart - Adam, today we have Mike Madsen on the podcast. Mike is the economics director over at RealSource, a group that many of our listeners will be familiar with.

Adam Hooper - Yeah, we've done, what, seven or eight deals with RealSource now? Very good client of ours,

Tyler Stewart - Yeah.

Adam Hooper - Lot of great success. Mike, as you said, heads up the econometrics forecasting at RealSource. He's been there since 2005. I think one of the most interesting things about Mike is, again, he started really early, which you'll hear about. He's got a passion for real estate that is just infectious. I love how he approaches it, how he puts his heart into it. Tyler, what are some of the takeaways from our podcast today?

Tyler Stewart - Yeah, Adam, there were a lot of takeaways.

Adam Hooper - There were.

Tyler Stewart - From this podcast.

Adam Hooper - It's a dense...

Tyler Stewart - A lot of information.

Adam Hooper - A lot of dense information in there. So actually, listeners out there, we're going to split this one into two, so there'll be two shorter versions because there's so much good information here, we didn't want to overwhelm folks out there.

Tyler Stewart - One takeaway I had from Mike was the importance of job growth and job migration, and the importance of using economic modeling and forecasting to take advantage of the trends you see within the jobs market. RealSource, not only is it important to identify those trends, timing and balancing the idea of wanting to get into those trends early. Is very important for RealSource, and in Mike's words, they want to jump into a market at seven A.M. on the clock. They use six A.M. to confirm their models and their economic forecasting, and they use seven A.M. to execute. And Mike's analogy, he said if you wait till later in the day, until five P.M., when you start hearing about a rising market in the newspaper, you're probably too late to take advantage of that market.

Adam Hooper - They're tracking, roughly 10 to 11,000 different data points,

Tyler Stewart - Yeah.

Adam Hooper - On markets around the country, which is insane. And so they're able to use that data, again, like you said, to get in at seven o'clock on the clock face. Six o'clock, you're going to bottom out, seven o'clock, you get in, you have the value, and then you can ride that market out. So very good information there,

Tyler Stewart - Yeah.

Adam Hooper - How they're able to kind of get ahead of some of those trends in the markets with their heavy reliance on these different data points.

Tyler Stewart - The key fundamental there for them was to capture trends early to minimize risk and maximize reward, and to execute at the right time so as not to fall for a head fake in the market.

Adam Hooper - And lot of good in discussion on the impact of interest rates. You know, we've seen over the last, you know, four or five months since the election, the turmoil, and the rise in interest rates, and how that'll impact things going forward as they look at underwriting deals, and then some of the things investors should look out for in that side of the markets area.

Tyler Stewart - Yeah, yeah, in Mike's view, concern with rising interest rates really depends on the timing and the reason for the rise in interest rates. There can both be a healthy move with rising interest rates, and a non-healthy move. And then for RealSource, what they see is that a single-family home market is really the first market that gets hammered by rising interest rates.

Adam Hooper - Right.

Tyler Stewart - And part of their investing philosophy is to identify markets where they see a housing bubble, because they, in a market where the housing market gets hammered, you'll see rents increase in multi-family, and so they're looking for markets that are nearing a housing bubble, and they start to identify acquisitions in those markets so that they can be ready for the rise in rents.

Adam Hooper - Yeah, and that was, the concept of really parsing out these different sectors of real estate, right?

Tyler Stewart - Yeah.

Adam Hooper - That was another thing that Mike mentioned, was people say, you know, how's the real estate market right now? You really got to look deeper than that, right? The single-family market is very different than the multi-family market, which is very different than office and retail industrial. And so being able to get granular with those different models and different forecasts and things you're tracking. That was a pretty interesting look at how they, they view these things.

Tyler Stewart - Yeah, and that's one of the advantages of partnering with sponsors with experience, is they both know those general strategies that every investor in real estate has a handle on. And then they know when to break from those strategies when certain factors in the market have sponsors utilize different strategies. And in the case of RealSource, while they said the jobs market was the most important factor for them and job migration, there are times in the market where either factors become important. Mike gave us a little nugget as it relates to RealSource and their strategy, and right now, they're keying in more on rising household income. Moreso than jobs market. And that's the value of partnering with a sponsor, is they have experience to see when to break from general strategies.

Adam Hooper - Tyler, that's a really good summary of the stuff we talked about today with Mike. As a reminder, Tyler and I will be in the Seattle area April 19th and 20th. Coming up here. If you're in the area, we'd love to connect with you. We'll be doing a little investor event. But if you can't make it to that, we'd love to see you anyhow and maybe grab a cup of coffee.

Tyler Stewart - Absolutely, let us know, it would be fun to meet some of our listeners while we're in Seattle.

Adam Hooper - So if you're interested in connecting with us, or if you have any other comments or feedback on the podcast here, please send us a note to And with that, let's get to it.

RealCrowd - This podcast is brought to you by RealCrowd, the leader in online real estate investing. Visit to learn more about how we provide our members with direct access to commercial real estate investments. Don't forget to subscribe to the podcast in iTunes, Google Music, or SoundCloud. RealCrowd, invest smarter.

Adam Hooper - Alright, Mike, good morning. Thanks for joining us here. You're coming to us from Salt Lake City today, correct?

Mike Madsen - Correct, Salt Lake City, out of the heart of the Rocky Mountains.

Adam Hooper - Very nice, it's beautiful, beautiful country out that way for sure, been there many times and love it out that way.

Mike Madsen - Yes.

Adam Hooper - Good, so Mike, tell us a little bit about your background. You know, in our conversation before, we know you came from a real estate family, and you got started pretty early, didn't you?

Mike Madsen - Yeah, I did. I came from kind of a blue-collar family like most people, where both my parents went to college, both my parents worked full-time jobs. And along the way, it was actually my grandpa had told me that, you know, 75% of millionaires make their money in real estate. And I kind of had heard that, and it really stuck out to me. I've heard stories of how, you know, my grandpa had owned 20 units in Provo, Utah, that were all paid off and, you know, the kids with you, a lot of the caretaking and painting and turning the over the units. And he did very well, bought it for his family, and actually, coincidentally, later on in his life, he, you know, was also, worked for State Farm, State Farm agent, and somewhere along the road, they said, hey, you know, you want to continue on and be our local State Farm agent, you got to sell your apartment. So they actually kind of forced him into selling 'em, and you know, later in his life, before he passed, we were able to talk, and he basically told me that, you know, it was kind of one of his eight biggest regrets. He always had some real estate and always kind of stayed in the game, but I think it was about later in his life, he kind of realized that if we wouldn't have sold that 20-unit complex, that would have been worth a lot more. So kind of as a young man, you know, hungry and ambitious to, you know, provide for myself and learn how to work hard and to make money, it really stood out to me. And so I bought a house when I was 19.

Adam Hooper - Wow.

Mike Madsen - Rented some of the rooms to my roommates as I was going to school, I kind of made it an income property. And that was about 12 years ago. I started working for RealSource in my early 20s. I think I was about, I was 21, and now I'm 33 and been here 12 years, and I've always being glad that I learned that lesson early in life and realized that I wanted to get into real estate, specifically real estate investing, Early on in my life, and that's kind of been a goal, and been passionate about it, but really glad to have been able to work here at RealSource for so many years, and learn so much from these guys and gather some good experience.

Adam Hooper - And now, and so at RealSource, you're focused more on, and what we're excited about to talk with you today, on the economic modeling and forecasting. And I know you went to business school and you wrote a pretty interesting thesis that I hope we would have a little bit of a chance to dig in here a little bit later. You can kind of talk about current role at RealSource, how you came into that, your mentor, and then with the transition from business school, and now what you're up to.

Mike Madsen - Yeah, early on working for RealSource, I worked more on client-investor relations, which is good because I've had a chance to have many long, good conversations with many experienced real estate investors from all across the country, and some From outside the country. And, you know, the longer I was here, the more interested I became in the economics, and kind of realized that that was what made us different. And I'd seen the success we'd had in market timing, and just always kind of was curious and wanted to know more. And at the time, we had a Ph.D by the name of Eric Krauss, who has a Ph.D in economics, who kind of came in and ran our economic department. I became really good friends, he ended up kind of recruiting me to a business program at Westminster College here in town. And so I spent a lot of time learning stuff from him as well as kind of our founder here at RealSource, Michael Anderson. He's obviously been at the company since the beginning and always kind of led the economic research, so between the two of them, that kind of mentored me along the way, and a few years ago, they kind of handed those reins over to me to where I did primarily the day-to-day. I worked under Michael Anderson, and it's been a good experience, and I will take what we had and grow and mold it and do a whole bunch of new and different things that they haven't done, and it's just worked out really well. And kind of, you know, on top of the economics, the ambitious, entrepreneurial side of me, I'm also involved in the acquisitions and actually going out and opening up these new markets, and developing relationships, and meeting kind of who the key, biggest and best brokers are, kind of finding a few smaller, little hungry brokers that like to find off-market deals. You know, working with, you know, the local tax assessor's office, the economic development team, and kind of really going in and helping us do some research and establish relationships and see if it's a good market for us to try to get traction, And so, I kind of, I kind of wear two hats here, one on the economic side and one on the acquisitions and underwriting side, and I just enjoy both sides of the business and probably spend, you know, 60% of my time on the acquisitions and 40% of my time kind of leading our economic team.

Adam Hooper - Good. Now, RealSource has done... we've done maybe six or seven deals, maybe more now, on RealCrowd together, but a lot of our investors probably don't know how RealSource got started, and the emphasis on this econometric model. Can you take us a little bit back to RealSource in the early days and how this, you know, kind of forecasting model has really come to guide what you guys do at RealSource?

Mike Madsen - RealSource started as just a small group of investors in the Salt Lake market who had done well with apartments and income property, and had kind of seen the market go up and down and ridden through a couple of cycles, and eventually kind of was realizing the market was turning, and it was maybe time to sell and go somewhere else. And they kind of took the leap of faith and said, okay, we're going to sell most of our stuff here, and we're going to go buy some stuff in Boise, Idaho, and Denver, Colorado. And they went to all those cities and timed it right and did well, and I think once they started, you know, making money and realizing that they could kind of follow some basic fundamental trends and patterns to kind of afford... time to get into a local market and when the time to get out is. And that's when kind of the research brokerage side of it started, and more and more people, friends, family of those people that have had success in these markets, were finding out and asking about it and saying, hey, you know, I want to be a part of this, and it kind of organically grew from there as a network of like-minded individuals that are out there trying to get as much knowledge and information and insight as they can to make money, and make sure they're investing in an emerging market and getting out before it hits too far under expansion, and also just kind of realizing that even if you, once you've identified a target market, you got to go in there and find, you know, well, where's the best submarkets, you know, What part of town do you want to stay away from, what part of town is trending up, are people buying single-family houses, where do people want to live, and things like that. So we've been really good at kind of recognizing that, you know, the power of a network and a group of people, and different people have different strengths and expertises. Once you kind of put the group and the crowd together, you know that the power of the group is pretty awesome. When everybody's sharing information and working together and saying, oh, you know, I had to get rid of this property manager in this city, and these guys, they're doing a great job, you should look at these guys too. But really, just kind of a group of people that are working together, and, you know, you can imagine back in the day when information wasn't quite as available, how it was nice to be able to pick up the phone and talk to somebody else. That owned an apartment in the same neighborhood or across town, and what kind of things they were doing that was working, what wasn't working, and things like that. So we really kind of have a roots in our company, the roots of our company is founded in people. That's kind of one thing we've always focused on, is, you know, if we can surround ourselves with good people, like-minded people that, good things will happen for everybody.

Adam Hooper - Good, and so now, with that kind of early start with the emphasis on tracking these different property metrics and different econometric models, can you tell us just a little bit, obviously, you know, without getting into too much of the secret sauce, but when you guys are looking at building these forecasts and these models, can you give us just a quick overview of some of the things that you guys are looking at and how you build and forecast and try to identify some of these new markets to explore?

Mike Madsen - Sure. A lot of them are pretty obvious things that everybody tracks. You know, one of the biggest obviously being job growth and job migration, you know, where are people moving, whether they're moving there for jobs, where are business leaving, they're coming or going. We track trends in occupancies, new supply, we track single-family housing market, the affordability of that, and also track the affordability in rents. How, extents what we call real source affordability index that tracks probably about 10 different metrics that are just tied to affordability in each market, so,

Adam Hooper - In how many markets do you guys track?

Mike Madsen - We track 275 markets.

Adam Hooper - Wow.

Mike Madsen - We probably track about 35 to 45 different metrics in each of those markets, and most, a lot of those metrics, we actually will trend year to year, so you can go look at any one of those 35 key metrics and say, okay, well, where, do at five years, so what's the three-year long-term average, or what's the five-year long-term average, and, so it's really a good matrix to kind of when trends are changing and know kind of before it happens, so to speak. A lot of this business is kind of staying ahead of the herd and staying ahead of the competition, and you've really got to be on top of the dot, and really got to know which metrics, which variables, to keep an eye on to know when things are turning or changing. By the time it's in the newspaper, everybody knows about it. So a lot of, actually, what's in our secret sauce, what's made us successful, is learning how to kind of change how we rate each one of these key measurables. We have kind of a science direct formula. It's just all data, all numbers, that it spits out our rankings every six months, that we track, and then from there we kind of take our dot-only rankings and apply our relationships and experience and knowledge to come up with what we call the RealSource adjustments. Each year is different. Certainly, you know, what we're worried about right now is very different than what we were worried about five years ago. And you know, playing a little bit more defense than we were five years ago, so a lot of it, the key is learning how to adjust these metrics and measurables to, how you weighed them year to year. To kind of give me the best indication, not just when to get into a market, but maybe when to get out as well.

Adam Hooper - That's a lot of data points, right? You're talking about 10 or 11,000 different data points across these markets that you guys are tracking, and in our prior episode, the podcast with Paul Kaseberg, you know, we talked a little bit about how having a network within a market can affect pricing, it can affect the deals you might get access to. And that's, you know, I think that's probably more in reference to, if you're going to parachute into a market without any depth there, it might be a little bit harder as a new buyer to get access to these deals, but if you guys are looking at 11,000 pieces, 10,000 different pieces of data, you don't just arbitrarily make a decision to parachute into a market, right? It's probably something that you guys have been tracking for some time, you know the trends, you know the models, and something in your forecast says, okay guys, this is the market that's, you know, it's going to be the next one, let's get there before, again, somebody else reads about it in the newspaper, right? Is that kind of how you guys look at, at these models and forecasts to choose where you're going to go with next acquisitions?

Mike Madsen - Yeah, definitely. We like to see the market take a turn and start to shape up and do well before we get in there. You know, kind of if you relate the cycle to, kind of, just, the clock, you know, we want to get in about seven o'clock, and you know, we may be looking at a market at six o'clock and say, okay, everything it says, this, this market's kind of bottoming right here, it should turn around, and we're seeing all these different signs of things you see as the market starts to turn, but we really kind of wait till it's about seven o'clock, and then we'll go in and buy, cause we'll want to be sure, there's a lot of more external factors and forces outside of our apartment industry that we've got to wait and look out and watch and be careful with too. But, you know, a lot of the problem with going into a new market sometimes is, you know, even if you, as a company, you know, believe in the market and see all the evidence that the market's going to turn, it doesn't really matter if the investment world, investors don't see it or believe in it. Kind of, one example is, back in about 2011, we really wanted to buy as much as we could in Texas. And so did a lot of other people. And we spent a lot of time bidding on deals and competing with institutional firms that could, put up big time money day one, and, you know, close in 60 days, and we're kind of more of a boutique shop, kind of competing in this institutional guise. And we kind of spun our wheels in Texas a little bit in 2010 and 11, and finally said, you know what, Oklahoma City's got the same fundamentals, you know, their bottoms, they're seeing a good recovery. At the time, you know, the oil market was really kind of pushing it into a strong recovery. So we went to Oklahoma City, and we found a good kind of distressed asset in a good location. And, you know, it wasn't the best looking property on the block by any means, but, you know what, we saw a lot of potential to go in and fix it up and, and turn the community around and give it some proper management. And we ended up, you know, buying an apartment for about 16 million, and then selling it two and a half years later for 29 million.

Adam Hooper - Wow, that's a good, that's a good turnaround.

Mike Madsen - Yeah, absolutely, I mean, that's, got a lot of clients making a lot of money in a short time there, and you know, but the problem was they actually, at the time, had problem with investors and getting them to believe in Oklahoma City. You know, everybody was a little nervous. And still fresh from the downturn, and, you know, unless you really understood how cyclical apartments and real estate was, you're kind of sitting there going, okay, well is there going to be another big drop, or is this the bottom, this, we clearly knew it was the bottom in 2011.

Adam Hooper - Yes.

Mike Madsen - Trying to buy as much as we could by 2012, but, so sometimes you see these markets, you know, in maybe like Grand Rapids, Michigan, right now, that all they got is looking really good. Like the are saying now, this is a great place to buy, but maybe it has a or lack of confidence from investors, and sometimes that's frustrating, but we got to kind of deal with that and realize that that's one of the pieces of the puzzles here.

RealCrowd - Thanks again for listening to the RealCrowd podcast. If you like what you're hearing, please visit to learn more and subscribe to iTunes, Google Music, and SoundCloud. RealCrowd, invest smarter.

Adam Hooper - You mentioned, a little bit ago, you're forecasting and you're taking a little bit more of a defensive stance today than you might have been five years ago. One of the things that we're always trying to help educate listeners and investors on RealCrowd is, you know, how to look at some of these risks in the market that we're seeing. And what would you say, from a risk perspective, should investors be aware of or cognizant of today versus the last three, four years that we've had a pretty good run-up in the market. Some of the things that have changed recently, you know, the interest rate environment has changed, I know you've done some work on that. Bigger picture, you know, what are some of the things that you guys are looking at from a risk perspective today that might have been different than the last three, four, five years?

Mike Madsen - That's a good question, and, you know, obviously in different times, underwriters, investors, you get stung by different fundamental stresses, like rising vacancies, kind of supply and demand. But also, you know, other factors or threats outside of the real estate or housing industry, come into effect, and probably now more than five years ago, we're kind of tracking more of these outside threats. These kind of things we can't control. When the apartment market is full and things are near 90 to 95% full, there's kind of only one way to go. Right. But also, we're at a good point, because that's when the market naturally, supply and demand will raise rents, which is, you know, good for investors, and a lot of these late recovering markets need that to happen, but you know, at this time, there's definitely some unknowns in kind of the macro-national picture. with the election last year. All anybody wanted to talk about was the election, and, you know, how are things going to change, if so-and-so wins, what's going to happen versus if so-and-so wins, so there was so much unknown. I think most people would agree that there were two very different tracks that we could have gone down, and no doubt about it, plus it can affect real estate investors. I think one of the biggest things I think everybody in the business is sort of looking at right now is kind of this tax reform. Is it going to happen, or isn't it? When's it going to happen, and then how long is the lag before it starts to reflect in GDP, job growth, and income, things like that. But there's certainly, you know, some very key threats outside our industry that we're keeping an eye on. One is certainly interest rates. I think we all know interest rates are going to rise. I think a lot of us have spent the last 15, 20 years watching interest rates slowly decline, and I think a lot of people are recognizing that we're probably going to spend the next 10, 15 years watching interest rates, mortgage rates kind of slowly increase. And, you know, you may have a time to where they turn it down to try to fix things short-term, stimulate the economy, but you know, one key thing that people forget on interest rates, is, you know, rates can rise for good reasons, meaning that people's expectations for inflation or business activity have picked up, so investors will move their money from fixed income or bond markets into the equities, stocks, and real estate, and that will naturally push up rates for a good reason. As you know, lenders expect more of a return and higher inflationary environment. But interest rates can also rise for bad reasons, such as, you know, turmoil in the bond market, or to see issues in pensions and sovereign debt. And, you know, talking with some of the economists at, you know, CoStar, Axiometrics, or some of these other key firms that have a team of people that track this stuff and watch it carefully, and have a chance to break it down for a few of their economists to see, How worried are you on interest rates rising, how fast. But I think everybody's definitely kind of watching what's happening in Europe. You know, we live in this globalized economy and business world, and things that happen on one side of the world, will affect the other side, kind of like a rainforest effect. If you have trouble in some of these other markets, or trouble in the bond markets, and there's a sudden rush of, you know, maybe all of a sudden everybody's rushing to the exit at the same time, it can create a fast rise in interest rates. That's probably the biggest threat out there, it's that rates move fast,

Adam Hooper - And now...

Mike Madsen - Especially world.

Adam Hooper - You know a thing or two about that, right? I mean, that was what you wrote your master's thesis on, correct? It was the impact of a, interest rates rising very quickly? Is that correct?

Mike Madsen - Yeah, exactly.

Adam Hooper - Yeah.

Mike Madsen - I just put my whole life into this business, and have a lot at stake in how our properties and how apartments and how the real estate world function and does well. And so I spend a lot of time kind of identifying, you know, what's the biggest threat out there. You know, what's the one main thing that come back to bite all of us, and it's definitely, you know, rising interest rates. I'm a little less worried about it right now than maybe a year ago, I think. Everybody talks about real estate as just a general term, but right now's a time in the macro cycle to where you really have to focus on the sector. A lot of times, you hear people just talk about real estate in general, it's like, okay, maybe they don't, aren't really savvy to what's going on. Because single-family is different than multi-family, you know. Office space is different than land. And there's no doubt about it, that if interest rates rise quicker than people expect and rise faster than people expect, that's it's going to affect the single-family housing market much faster than it affects the multi-family market. In fact, a quick burst up in interest rates probably have a positive effect on things like occupants and rents for apartments. But, you know, most people, when they go to buy a house, they've got pretty limited income and a limited budget. And when a young family sits down to buy their first home or second home, they say, okay, this is how much money we make, this is how much money we can spend on a mortgage, and all of a sudden, if you were to see mortgage rates kind of take off and jump up 25, 35% or more, then all of a sudden, you're going to have, you're going to see the value of homes go way down. Because the pool of buyers is going to shrink, and what people can buy is going to be less. So you can see this contraction in the single-family housing market. Those of us that remember the days of 2008 and what caused that, where it all stemmed from, a lot of it was single-family market and the mortgage, the mortgage industry. So we can't forget how big an impact the single-family market and the mortgage industry can have on apartments. So one thing we definitely are tracking is, okay, well which single-family markets are closer to a bubble than others, which ones are going to get hit the hardest if rates do jump up, and which ones are going to be fine. And we track how long does a single-family house stay on the market in each city. You're kind of interviewing Axiometrics and a few of these other guys that give kind of their forecast for rent growth. I say, like, ask them, you know, why did you miss this robust rent growth in 2015? You had a national average between five and six percent of rent growth, nobody forecasted it. They weren't just off, they were off by, some of these big firms were off 40, 50%.

Adam Hooper - Wow.

Mike Madsen - And it was kind of interesting to kind of just ask them in a private conversation, just, hey guys, just trying to learn, can you share with me what you missed. But one interesting thing they said was that the single-family housing market got really tight, really competitive, To where even people that wanted to go and buy homes, were kind of forced or pushed into renting longer because they couldn't find a home. You know, for example, I've got a good buddy from college who's a mortgage broker in Dallas, and he's telling me about how he wants to be in a certain area and a certain submarket neighborhood, and every time he finds a home he wants, he'll go in and he'll put a full price offer in, and he'll have to compete against 10 other people

Adam Hooper - Wow.

Mike Madsen - That are doing things like writing the homeowner's letters. Hey, this is why you should let my family buy this house from you. Some markets, single-family market is now a hot map, that competitive, and that's actually pushing rents up in the multi-family market as well. So supply and demand is a big driver. A lot of these key target markets we're focused on right now don't just have job growth and migration growth, but also, you know, are pretty affordable markets. For example, in Salt Lake City or in Dallas, people will look at those markets for housing and say, well, I want to move there and get that job because housing's affordable. So there's a few of these markets out there where a single-family market's affordable, and there's a lot of people trying to buy. Then you've got other markets to where the prices have ran away so much in the last five years that you're finally getting kind of pushed back from the market in affordability. People seeing houses sit on the market a lot longer. So, not to go off on too big a tangent there, but there are these, couple of these factors that we're really, really focused on right now. We're kind of, back to regards of the interest rates, I think it's a little bit of a storm coming, or whatever you want to call it, kind of re-normalizing interest rates, and we think people should be pretty careful in letting that mature in 2018, 19, time frame. We could get this time in the market to where interest rates go up, but we don't see heavy inflation, which could frustrate a lot of investors short-term because you're having to, pricing that rise in the interest rates, but we can't really underwrite or count on the inflation so,

Adam Hooper - Yeah, and that's, you know, the uncertainty is something that we've certainly seen in talking to a bunch of different sponsors that had properties. And I know this was the case with you guys as well, that had properties in a contract pre-election, the interest rate spike happened when it was, what, 40, 50 basis points jump in effective interest rates, borrowing rates, when you look at your mortgage rates. In that uncertainty, like you said, for folks who are trying to underwrite deals, where if you're going to have debt maturing in a year or two years, there's so much uncertainty around what that interest rate environment is going to be. You have to build some buffers into your models, which means you naturally can't pay as much for the assets, right? Can you kind of talk a little bit how that plays into the situation?

Mike Madsen - Yeah.

Adam Hooper - It's with this uncertainty of where interest rates are going, will they normalize, like you said, are they going to continue to tick up?

Mike Madsen - Yeah, absolutely. In the apartment world, when you kind of target a property, or maybe the brokers told you about a property before it's going to go to market. You start doing your research. I mean, often times it can be kind of, five months from when you first find out about the opportunity and start digging in to looking at it, to finding the right fit and it closing, can be, sometimes a five month window. And when you see the interest rates rise so fast in that time, it could definitely screw up your underwriting because, I mean, basically between October of last year and, say, even just late January of this year, I mean we saw, basically, the value of every apartment out there go down about five to ten percent short-term. Not all sellers, aren't, will accept that.

Adam Hooper - You don't want to accept that fact, right?

Mike Madsen - It was just definitely a stressful time, but also a very interesting time. You know, the market had clearly priced in Hillary Clinton then, and the market got surprised when Trump did win. You got a chance to see how the market reacts. And everybody's so focused on, well, the Fed's going to set the interest rate, Fed's going to set the interest rate. You know, the Federal Reserve will set the Fed's fund rate, but they're not going to set all interest rates. It's the market that sets those rates. And what happened after that election was the perfect example of it because, you know, boom, got your result, and then you've got your market reaction, and then the market pushed rates up. You know, we're very savvy to how that works, what drives those changes, but you've really got to be careful in your underwriting. There's certainly some heavy projects that maybe want short-term loan, but anybody going out there and doing a floater rate on an arm, and just buying kind of a stabilized asset, is definitely playing with fire. Hate to see it, if you're finding a property that's maybe been distressed and hasn't had capital in 10 years and just, everything is run-down, you can come in and, you know, fix everything up, but the first six to twelve months will literally add 10%, 15% value to the property in that time. And it makes sense to kind of use different debt structures with shorter-term loans, but for us at RealSource, we're being very conservative, we're being very safe, and even if we think we can be out of a deal in three years, we're often getting a five-year loan just in case. And the other side of it too, is, if interest rates do rise, what will the people expect, and you have a nice 10-year loan at four percent.

Adam Hooper - That's pretty attractive, yeah.

Mike Madsen - Yeah, that's value right there, and even if the next guy assumes and has to take on a second to get to the loan to value ratio they want to get to, that's going to carry value. We definitely could see a period of time to where we see rising interest rates, we see inflation at the same time. And that's probably what we're going to see with this administration, what's on the agendas. We have a president that understands our debt issues, he understands how to restructure debt, he understands that we need a little bit of inflation. He understands that our rising dollars actually can be a big threat, and we could see this time to where we see kind of a rebalancing of our currencies, and it's going to have a big effect on real estate. I'm not, certainly not one out there to forecast there's going to be hyper-inflation, I definitely don't think that's going to be the case, but, you know, a lot of people, and even the market, if you look and see what the 10-year is doing, the market's telling us that investors expect inflation to pick up. In the next three years, I mean, it'll happen next year, but the five-year, 10-year window, people are expecting inflation. And that's when, you know, real estate, but specifically apartments, because of leverage, because people need a place to live, they need shelter, apartments is the best hedge against inflation of almost anything out there.

Tyler Stewart - Hey, listeners, this is Tyler with RealCrowd. Thank you for listening to part one of the economic analysis of the real estate market. We will launch part two next week. Be sure to let us know if you have any questions by emailing Thank you.

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