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

Podcast - An Update On The Multifamily Market

Tyler Stewert
September 14, 2021
Podcast - An Update On The Multifamily Market

Pat Poling joined us again on the Podcast to offer his take on his take on multi-family investing in today’s market.

Pat Poling is the Founder and CEO at Mara Poling.

Mara Poling is a total return real estate investment firm dedicated to helping their Investor Clients Build Lasting Wealth. Headquartered in Dallas, Texas with offices in Northern California, Mara Poling’s principals bring over 60 years of commercial real estate experience to the multi family investment market. Experienced asset managers with a proven track record including acquisition and management of over $1B in assets, $1.5B in annual cash flow, and more than 10,000 acquisitions. Mara Poling has acquired 700+ units $40M in Multi Family assets in the last 15 months


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RealCrowd – All opinions expressed by Adam, Tyler, and podcast guests are solely their own opinions, and do not reflect the opinion of RealCrowd. This podcast is for informational purposes only, and should not be relied upon as a basis for investment decisions. To gain a better understanding of the risks associated with commercial real estate investing, please consult your advisors.

Pat Poling – There’s good opportunities in every market. I think investing in multi-family can be successful anywhere in the country, and I don’t know what the 383rd market was in our survey, but whatever lucky market that was, I’m sure you could go make an investment there.

Adam Hooper – Hey Tyler.

Tyler Stewart – Hey Adam, how are you today?

Adam Hooper – Tyler, it’s good now we’re in the podcast studio so it’s no bad days in here.

Tyler Stewart – Yeah. It’s only good days, 100% good days in here.

Adam Hooper – 100% good days, and that’s our story and we’re sticking to it. Who joined us on this wonderful day?

Tyler Stewart – Today we had Pat Poling, President and CEO of Mara Poling. Third time on the podcast.

Adam Hooper – Third time’s a charm, so really interesting conversation with Pat. He’s been great guest on the podcast before. Another examination of supply and demand drivers for the multi-family asset class.

Tyler Stewart – Yeah, which we talked about with Pat on our first ever episode.

Adam Hooper – Very first.

Tyler Stewart – Thought it’d be a great time now with the market in expansion mode for quite a while now, to hop back into supply and demand and talk about the fundamentals there.

Adam Hooper – Interesting conversation around the kind of demographic shifts like we talked about before, but we kind of dug into, what are the needs of those different groups, in terms of boomers versus millennials, and kind of what they’re looking for in amenities. We talked a little bit about this stage of the market. I was pretty surprised to hear what they’re requiring assets for a few years back and what you have to pay for them today on a per-unit basis, so be sure to listen for that kind of little insight into how deals are a little bit harder to find these days that were as juicy of returns as we saw 2013, 14, 15 for sure.

Tyler Stewart – It was good to hear that update from Pat, and just get an overall feel for how the multi-family space is looking currently in the secondary markets.

Adam Hooper – Yeah and we talked also, again, we kind of, we had him crystal ball, where we’re goin’ next 18, 24 months. But he reiterated, there’s good opportunities in every market– You have to search a little bit harder to find them, but they’re out there if you do the work and you know your markets, and you go find those opportunities. Another really good episode with Pat. Again, really, really happy he was able to join us again today. As always, we appreciate the reviews, the comments. We wanted to also bring up again RealCrowd University. You can head to, and there you can sign up for a free six-week course, kind of best of the best of the content that we put out between the podcasts, e-books, other resources. Got a lot of really good feedback from listeners that have gone and signed up for that, so again, we’d recommend you head to As always, we appreciate those ratings and reviews wherever you find the show. So with that Tyler, let’s get to it.

Adam Hooper – All right Pat, well thanks again for joining us on the show. Happy to have you back and do a quick refresh on supply and demand drivers, and kind of catch up on everything since we last spoke.

Pat Poling – Great, thanks for having us Adam.

Adam Hooper – Why don’t we take a few minutes, and just kind of give us a current snapshot of what you guys are seeing just generally in the multi-family space, and then we can talk a little bit more about the specific supply and demands like we discussed last time.

Pat Poling – Well, we continue to be long on multi-family. It has all the right demographics driving the supply-demand side. We’ll talk about that hopefully today in some detail. There’s still a lot of very good product available for investors out there. Values are up, which is a bit of a double-edged sword. A little harder to find quality deals, but they’re still absolutely out there. Existing product that we’ve already purchased, we’ve seen some very nice increases in our values, and have taken advantage of some of those. It’s been a very positive couple of years. We don’t see that changing, we say, for five to 10 years. We think there’s that kind of runway in front of multi-family. Realistically, it’s probably even stronger than that, but we don’t want to scare anybody when we start talking beyond 10 years, so five to 10 years is a good time-frame to think about having some funds in your portfolio in multi-family.

Adam Hooper – Good, and then we’ve had a couple episodes recently where we’ve been talking about what’s going on in kind of the capital markets with financing, and where are cap rates going? How are they reacting to maybe this lower cost of financing capital? What are some of the dynamics we’re seeing there between availability of capital and cap rates?

Pat Poling – You know, you would really think that with interest rates steeply declining as they have in the last gosh, just few months. I mean who would have thought we’d have sub two treasuries, right? Or LIBOR down where it in the mid ones? But interest rates for debt products haven’t moved a great deal. The agencies have taken advantage of those decreases to pad their pricing a little bit, and we’re still seeing low four rates on Freddie and Fannie. The flexible products, the bridge products, haven’t moved a great deal. Mostly they’re tied to LIBOR, but you’re still in that floating space. Keep in mind, there’s a bit of a downside to lower rates, which is, unfortunately, a lot of people think lower rates are really great for everybody. If you aren’t transacting on a property that has yield maintenance or defeasance on it, those lower rates are going to increase your exit costs, and not enormously, but there’s some upside pressure there.

Adam Hooper – Why don’t we take a second to explore that a little bit? I don’t know that we’ve taken a deep-dive on yield maintenance for listeners out there yet. Can you explain what that is for listeners, and how that works, and why a decreasing rate environment is actually worse for them?

Pat Poling – Absolutely. One of the things that we all like about commercial real estate is leverage. We can put leverage on product, and by having levered assets, we can increase returns. We use modest leverage. We’re probably in the 70 to 75% range on a purchase price basis. In the 60s on loan-to-cost, and then those decrease fairly rapidly as the values grow. When you’re putting that kind of debt in place, it’s non-recourse debt, and we really like the fact that it’s non-recourse, essentially meaning that if there’s an issue that arises, and there’s a default, the lender, with a couple of exceptions, basically can come take the property. That’s what they get. They can’t come after anything more than that. The price of admission for all of that, is the lender needs to get what they’re going to get. If we are going to sell the property early and pay that loan off, then the lender needs to get paid the balance of what they would have seen over the life of that loan. And the way that that’s done, whether it’s yield maintenance or defeasance, those are the two versions of this that are out there, is essentially, there’s money set aside to purchase replacement investment, replacement bonds, that are going to generate that income for the lender so that they are paid whole over that period of time. Yield maintenance is a slightly different version of that, but essentially the same kind of idea. Well, if interest rates are going up on bonds, which is not where we are now, but if they were going up,

Pat Poling – you don’t have to buy as many bonds to generate that same kind of income for the lender. Your defeasance and yield-maintenance costs would go down. Conversely, if interest rates drop, which is what has just happened to us, then you’ve got to buy more of that replacement product in order to make up the difference that the lender’s going to experience. None of these are huge. They’re not going to change your strategy in terms of whether you’d sell an asset or not. If it’s really that close, it’s maybe not a good time to sell that asset anyway. But it is an interesting impact that everybody gets excited when rates come down, and there is a back side to that.

Adam Hooper – Perfect, than you for that. Sorry, we kind of sidetracked you there, but we can get back to the prior bit about kind of what you guys are seeing in multi-family with good opportunities out there, but maybe a little more difficult to find right now with some of the increasing values we’re seeing these days.

Pat Poling – I’ll give you an example. In the markets we’re active in, and this is primarily in Texas. We like the Texas markets. Our annual survey still comes up with about 25 or 30 markets that look like they make sense to invest in, and half of those are in Texas. That’s the markets we play in. When we’re looking there, it wasn’t that long ago, four, five, six years ago, we were buying good, quality B product for about $50,000 a door. We’re not transacting both selling and buying at 100, maybe just below, a little above, which is great for all the assets that we bought at 50 a door. That’s been a really positive experience. As prices go up, you’ve got to flip over more rocks, and you’ve got to work a little harder to find the opportunities that make sense. It still comes down to having a solid underwrite, which is what’ll work anytime you’re in the cycle, whether it’s in the peak or the trough of the cycle. If you’ve got a solid underwrite, it’s going to help you weed out the assets that don’t make sense. There’s always sellers that are trying to sell for too much wherever you are in the market cycle, and there’s always going to be good deals out there for a variety of different reasons.

Adam Hooper – Perfect, and still focused on more kind of class B multi-family. I know we spent a lot of time talking about the differences with class A new construction, versus more kind of class B workforce housing type of a opportunity. Is what where you guys are still focused, in that class B, or are you seeing any opportunities in the other quality of product types out there?

Pat Poling – We continue to like class B. Our focus is on lowering risk. We’re looking to make secure stable investments, and then optimize cash flow, and equity growth, and tax advantages. If you’re looking for security and stability, commercial real estate’s a great place to look. We think multi-family is a very good place inside there to focus, and class B is really the cream of the crop in our mind, in terms of security, stability. We’re insulated by the As and the Cs as we move through the entirety of the economic cycle. Doesn’t mean there won’t be some movement, just won’t be as dramatic as what you see in those other market segments. There’s a ton of product out there. We’re still focused on that 80s vintage, and in the 80s we were building six and 700,000 units a year in the country, which is astounding when you consider we’re only building about 300,000 today. There’s a lot of good quality product out there. Some of it’s been improved already, so they’re a little more of a momentum investment. Some haven’t been improved, or they’ve been improved maybe 10 or 15 year ago, and they’re due for a fresh cycle. So yeah, we continue to see class B as that Goldilocks balanced return investment space.

Adam Hooper – Perfect, I think that’s a good segue to start talking about, again, some of these supply-and-demand drivers. You mentioned 80s building almost two x the amount of inventory that we’re building in current cycle. What are some of the supply drivers that you guys see in the multi-family space and maybe how has that changed since we spoke last year about where that supply pipeline’s looking?

Pat Poling – You’re absolutely right. It’s raw numbers. We’re building about half as many units nationally as we built in the 80s. Percentage-wise, we’re actually building a quarter of the units, because there were only about 20 million units in service in the 80s. We’ve got north of 40 million in place today, so we’re building half as many raw numbers on a base that’s twice the size. While we’re excited that there’s 300,000 new units a year coming online, it’s really insignificant when you look at what we did back in the 80s, which is really something. The other thing, by the way, that we just pointed out about the 80s, because folks will get concerned at times about movements in interest rates. We like lower rates, defeasance aside. We like lower rates and when they go up it’s not the end of the world. Just look at what the rates were back in the 80s, and somehow the industry figured out a way to build hundreds of thousands of units. So interest rates are a factor, but not ultimately determinant. We continue to see the same issue that we saw a few years ago in the new supply, and that is that it’s heavily concentrated in the A space. New construction costs are significantly higher still than what we can buy existing B product at, and for that reason, it’s very difficult without government subsidy, to build a market unit in the B space. So you’re going to build an A instead, where you’ve got a chance to make that return. Out of the 330,000 units that were added last year, the vast majority were As. In the markets we’re active in,

Pat Poling – the studies show us that they were 100% As, with the exception, as I said, of some government subsidized units. And, the other piece of supply to keep in mind, it’s often forgotten, is there’s units taken out of service every year. Sometimes they’re deconstructed and replaced. Somebody will buy a covered land play, scrape it, put an A up in its place. You’re taking maybe a higher density space out, you’re taking 200 units out, and replacing it with 100 units. There’s a net decrease, actually, in supply. Sometimes it’s a scrape that ends up with non multi-family property on it. Could end up going commercial, retail, mixed-use, potentially residential. Could be new homes, condominiums, something like that. We estimate that there’s about 100,000 units a year, and I think that’s conservative, that come out of service. So while we’re building 300, we’re losing about 100. Net-net we’re probably gaining a couple hundred thousand a year, essentially, clustered in that A space.

Adam Hooper – And that’s been the story for years now, right? It just financially just is not feasible to build and get an acceptable return in the class B, right? It all is going to class A. Do you see that changing anytime soon? What are some of those inputs that would have to shift to see class B penciled?

Pat Poling – We’re absolutely getting closer. We’re absolutely getting closer. As I said, we’re buying new units in the markets we’re active in for 100,000 a door so obviously we’re a lot closer to what the replacement cost would be than we were when we were paying 50, 60, 70 thousand a door. We still see construction costs in the $150,000-ish range, and I say it that way, as a range, because we really don’t know what it costs to build a B, because nobody’s built them.

Adam Hooper – No one’s done it.

Pat Poling – You know, people are spending instead, $200,000 plus on A space, with these lavish bathrooms, and beautiful kitchens, and $10,000 appliance packages, and they’re wonderful, but it’s very hard to look at that, and then get a sense of what it would cost for us to replicate our space, other than it’s higher and construction costs have continued to increase. Over the last several years, that’s not held steady. One of the factors we look at when we’ll do an acquisition, is we’ll look at the delta on A rents versus B rents in market, and we want to see not only a healthy space there, but we’re lookin’ to see how consistent that’s been. Because if it’s closing, if the gap’s closing, then that tells us something about new supply, and potentially some issues that might arise, and we’ve just not seen that in the markets, I said, that we’re active in. I think you’ve got to set the more active and coastal markets aside in this analysis. San Francisco, Southern California, the Northeast Atlantic Corridor. Those are markets where I think this analysis might break down, and you very much could see construction that could impose on the high-end B space.

Adam Hooper – Are you seeing much of an opportunity in taking the class C and increasing that to a class B or B plus, or is it mostly taking the class B and making it a better B, or trying to transition from B to A. Where do those opportunities exist within that product spectrum?

Pat Poling – That’s a great question, Adam, and the challenge in repositioning Cs, because we look at it, right? That would be a great way to augment deal flow, would be to have Cs that could be repositioned, is the overwhelming majority of Cs have structural issues that impose on them being able to be repositioned. By that I mean the basic infrastructure, so not just flat roofs, because there’s quality flat roof product out there. You can take a roof and improve it to the point where the fact that it’s flat’s not a big issue, but if you’ve got boilers and chillers or wall-mounted AC units and heat, it’s very expensive to put central heat in and to retro-fit, and by the time you’ve done all that, again, you’re almost pricing yourself out, because you’re going to buy that C product, and that C product’s kind of replace the Bs in that $50,000 range. That’s roughly where they’re trading now, 50, 60, or so. You’re going to pay 50 or $60,000, and then you’re going to put $30,000 in to do all these upgrades, and if it’s a C in a C sub market, well, now you’ve made it a B in a C sub market, it really isn’t going to move. What you can do, and we’ve had success with this, is there are older Bs, so in other words, older assets that have modern infrastructure, so central heat and air, they don’t have chillers, pitched roofs, those sorts of things, and they’re all on garden space. That’s the other issue about Cs is most Cs are on essentially asphalt. So there’s a building and there’s a bunch of asphalt around it. Maybe there’s a strip of grass between some units,

Pat Poling – but that’s about it. But there are Bs that have essentially been run as Cs, and so they’re actively operating in that space, and they can be repositioned back into the B world. Bu that’s about it, and we’re just, I don’t think that’s going to change, as I said, simply because it’s going to continue to be expensive to make those structural changes.

Adam Hooper – And now let’s switch a little bit to the demand side. As we talked, a lot of it, population growth, job growth. Anything changed on what’s driving demand for multi-family units these days?

Pat Poling – A little bit, although not in any dramatic way. We continue to see rental rates among retiring boomers holding consistent. It’s that 20% kind of number. Again, they’re not renting in greater percentages than their past generations, there’s just more of ’em. There’s 80, although, well 78 million now. 78 million boomers out there, so we’re talking about, incremental, a couple million in demand, and the youngest boomers are still in their mid-50s, so we’ve got 10 years of that demand coming through. Echo boomers, millennials, whatever the term is you want to call them, are 20 and 30 year olds that would typically have purchased homes by now, are still renting. Whether it’s student loan debt, just the income that they’ve been able to generate off of their educational background out of college, or high school diploma, it’s just been very difficult for them to qualify for home values, especially since home values have recovered so significantly since the great recession. So both of those are pushing heavily. The home ownership numbers have kind of stabilized. We don’t see continued drops there. In the urban markets, they’re much closer to 50/50. Nationally, it’s still still roughly in that kind of one third rental two third home ownership space. That hasn’t really moderated much. Our growth continues to be, as a population, from immigration, and birth rates and death rates in the US are relatively flat. There’s maybe a 10 million percent increase over the next 30 years in the base population,

Pat Poling – and immigrants, when they come to the country rent. It takes about a generation before they move into the home ownership space at the same rate as the base population. That’s why when we say it’s a good five to 10 year runway in front of multi-family, there’s data that supports it being much stronger than that, for a much longer period of time. But if someone’s looking at making an investment in multi-family today, and they’re thinking five, 10 years or so, multi-family should absolutely be on their list for those reasons.

Tyler Stewart – Hey Pat, when you’re building a property or upgrading a B, and you’re looking at satisfying the needs of boomers and millennials, how are you doing that? Are those separate properties, or are you meeting the needs of both generations through the same property?

Pat Poling – You can meet the needs of both. There certainly are boomers that are looking for an urban environment, active lifestyle, all the higher end B, B plus amenities. At the same time, the 55 and up investment space continues to be really strong. We’re looking at a 55 and up property right now, and it’s a really solid investment. They perform a little differently in that rent movement is a little more modest over time, because you move it a little differently, but occupancy and bad debt, I mean, those numbers are fantastic. That’s a really good product if you want to focus just in that space. You can absolutely build and acquire assets that will work for both. We tend to look for properties that are predominantly two bedroom with some one bedroom support. We stay away from the 80% one bedrooms with a handful of two bedrooms. Those skew much younger, have higher turnover rates. Those are great investments, don’t get us wrong. They’re not necessarily the least risky, which is the space again that we’re trying to occupy.

Adam Hooper – Yeah and I think to further a little bit on Tyler’s question there is, I guess, what are you seeing as the primary asset class that these different demographics are searching for? So are millennials mostly looking for, and you mentioned even some boomers, are looking for more urban. Are the boomers looking for more? are they looking for class A, class B, like how do those different demographics look for? What are they looking for in spaces that’s may be similar or different from one another?

Pat Poling – The younger cohort, right, 20, 30 year olds, more urban environments, higher walkability scores, night life, easy access to amenities, the on-site amenities, pools, fitness centers, those things, those are all very attractive. As you age that group a little bit, you start getting in a little more of a family-orientation. This is where the two bedroom, three bedroom properties tend to skew. There you’re driven almost exclusively by schools and safety. Good neighborhood scores on those two fronts, and they don’t have to be the best schools in town, but you’re talkin’ about mid quartile schools, and that’s one of the big draws in that space, especially when you’re drawing from C tenants, is families would like to have a safer neighborhood for their kids and better schools for them to go to. There’s a very solid group out there in the middle, right in-between the boomers, the two sets of boomers, the boomers and the echo boomers, that are in their 30s and 40s, that they’re renters. They’re not going to own a home, that’s the lifestyle they have, and they want to have a product that is very homelike. We have some properties that are very much like that. These have attached garages, and playgrounds, good neighborhoods, but also have additional security features. As you age to the 55 and up group, flats, right? So single story units. Single stories in a multi-story building possibly, but flats predominantly. Adjacent to assigned parking. If you just think about, what are the things that would make your life

Pat Poling – easier as you age from that standpoint? Some green space, community centers. So maybe less a fitness center and a pool, although those are nice amenities to have. But more common area rooms, great rooms, again a community environment opportunity. And those are real generalities. There’s a awful lot of seniors that are in the properties we have that you might think would be a little more skewed young and vice versa. There really isn’t, I thin, a hard and fast rule, but those are some general thoughts.

Adam Hooper – And then how much are you looking at these trends or demographics? How much of that is a, or how much insight are you getting from more national level data and statistics versus what you’re doing actually at the market or even sub market level?

Pat Poling – Great question. Annually we do a survey of a whole host of data. One, we do our market survey, 383 markets across the country, 17 different criteria we benchmark against, and we end up with about 25 or 30 markets every year that meet the base criteria, and as we said about half of those are in Texas, which is one of the reason for our focus there, but that’s national level data. That’s wonderful to know, but you don’t invest nationally. You invest in markets and you invest, really, in sub markets. That dive into what the market looks like, again, meaningfully sized markets. We’d be talking about at least a few hundred thousand on the smaller end. And then really a good hard look at the sub market, to understand what the demographics are, to get that data on age of the population, educational backgrounds, the employment sectors. We continue to really like health care, and I don’t think that’s changed since the last time that we spoke. And looking at that historically, plus whatever forecasts there are. Generally speaking, most of these markets they’ll be data we can access that gives us a five year view forward of what job growth looks like, what income growth looks like, what the population looks like over that period of time. It’s a forecast like anything else, but it gives us at least some indication of what we think might be happening in that particular market, because while nationally these numbers look very robust, I’m certain there are markets out there where populations are continuing to decline,

Pat Poling – where jobs are stagnant if not shrinking, where incomes continue to stay steady as opposed to grow. And you could probably make money investing in those, there’s just a different risk profile as we head into the next phase of the economic cycle.

Adam Hooper – And a couple follow-up questions on that. Are there any of those factors that are, I guess, greater importance or if you see a certain factor that that’s immediately checked off the list, using that you mentioned whether population’s declining, whether jobs are declining. Are there still opportunities to be had in those markets, or what is it that you said has changed is the risk profile, but maybe there’s still good opportunities there?

Pat Poling – There’s good opportunities in every market. I think investing in multi-family can be successful anywhere in the country. I don’t know what the 383rd market was in our survey, but whatever lucky market that was, I’m sure you could go make an investment there. You’d have a slightly different investment profile, in terms of what it would look like. You might have to structure it a little bit differently, and there’d be more risk involved in what was going on there, but there’s certainly going to be some kind of an opportunity there. If you’re looking to take risk off the table, especially as we head into a recession. Now whether it’s six months from now, or two years from now, and I’m sure if you go back and play some of our prior conversations, I probably said this at those times, we’re going to have one soon. It’s the next step in the cycle. And when that occurs, markets that have had consistent job growth and consistent income growth, and that’s really the two factors I think we’re going to focus on more. Population growth is certainly important, but job growth and income growth. If those have been fairly consistent and steady over a period of time, five years or more, and are forecasted with some reasonable, positive trend to them, those markets are going to perform better during a downturn. Now that doesn’t mean they’re going to continue to grow. It might be that jobs hold steady in those markets during the downturn, as opposed to declining, which they reasonably would in some other markets. I’ll give you an example. We purchased a property earlier this year

Pat Poling – in San Antonio, Texas. We love San Antonio. Hi to all the folks in San Antonio out there. Nobody is going to call San Antonio a hot market. It is a Steady Eddie market. It has been for many years. Job growth’s been really solid for quite some time, likewise income growth. It continues to be forecasted that way, and when the downturn hits, San Antonio will feel it, just not as much as potentially other markets around the country. And so if you’re lookin’ for that risk-averse investment profile, those would be the markets to focus on.

Adam Hooper – What you’re getting to there is measuring basically the volatility of that employment base of that population base, and again, we’ve seen, we know I started my commercial real-estate industry, I was in Bend, Oregon, which in the run-up, before the recession, was National Publication’s hottest market in the world. Just insane growth in prices, but as soon as that turned off, man did it turn off. That was a very, very volatile market, which is just a different risk profile than a market that’s maybe had steadier growth, maybe it’s not going to see those 10, 12, 15% annual increases in any of those statistics, but it’s probably not going to see the 10, 15, 20% down tick in those measures as well.

Pat Poling – Right, one of the things that I always enjoy reading, as somebody, and there’s a lot of great folks in the industry that publish this kind of data. Somebody will come out with one of these top 10 lists. Here’s the top 10 hardest markets in the country for multi-family, get your money here, right? And I’m very proud that none of our markets are ever on that list, ’cause we don’t really want to be in a boom-or-bust cycle for what we do. Now, if we were making two-year investments in properties where we were maybe doing rehabs, putting 30,000 a door in, and lookin’ to move swiftly to make significant returns, then those markets actually might make a lot of sense for us to be in. But that’s not what we do. And there’s really good folks that do that kind of investing out there, and obviously you have some of them on your platform.

Adam Hooper – Well now, what are some of the resources that listeners might be able to turn to. When you guys are looking at these statistic, is it mostly employment numbers from BLS, is it from other industry reports. What are some of the resources, and we can put some links in the show notes that listeners might be able to check and kind of look at these statistics on their own in some of these markets that they see opportunities in?

Pat Poling – Yeah, absolutely. We like government data. Not that industry data is not valuable, it’s just industry data. It comes from us. So we like something that’s got as much independence to it as possible. We go to the census and the department of commerce to draw a lot of our material. The other, and honestly, this is probably one of the best places to go is the Fed, the Federal Reserve. So everybody thinks about the Fed as the guys that have those meetings every so often and they come out and say something about interest rates and the market goes crazy one way or the other. And they do that stuff. Maybe that’s their real job, but their part-time job is gathering a lot of data on the economy, so that they can make those decisions as intelligently as possible. At least that’s the story, right? So there’s a lot of great data that the Fed tracks on all of these factors. From home ownership to income growth, job growth, at the market level, at regional levels, at state levels, with great histories. You can sit there and you can run a report that’ll look five years back, 10 years back, 20 years back, and really get a good sense of what that market looks like. So we draw on those and then some industry studies. The one that is probably the most valuable is the Harvard study that comes out every year. We really appreciate the hard work those folks do, and then Freddie Mac has a annual and semi-annual outlook that pretty well mirrors the Harvard study in terms of their conclusions. And basically everything we’ve walked through here, the data around supply and demand,

Pat Poling – the movement on prices, the drivers in terms of job growth, and income growth, and the like. It’s not like we dreamed all this up. It seems logical to us, but it’s from those data sources. Those are the conclusions that they’ve come to and that the data supports.

Adam Hooper – Perfect and we’ll put some links down the show notes for all the listeners there.

Tyler Stewart – Pat, when you’re looking at these data sources, how far back in time are you going to determine whether a specific market has more of a long-term consistent outlook versus a market that might be more momentum-based, more volatile?

Pat Poling – 10 years. We like to see a good steady performance over a 10 year timeframe. For a while there, 10 years spanned that great recession period, so you got to see what a market looked like when it went through that, and that probably skewed some markets unfairly one way or the other. We’re on the other side of that now, in terms of the 10 year look back, so we’ll look back 10 and then ahead five. And that’s one of those 17 criteria that we look at is over that time frame. So there might be a market that has above-average job growth, above-average income growth, above-average population growth, reasonable regulation, relatively stable cap rates that aren’t overly compressed, all those things that sound good, but it’s had those for three years. And before that it may have been significantly higher or significantly lower, and those, it’s not so much that we’re looking for them to be positive or negative numbers, it’s we’re looking for stability. That’s the piece that drives our modeling. So if it was a hot market and it’s kind of cooled off a little bit, we aren’t going to be as interested in that market as one that’s had job growth, that’s been 70 basis points above the US average for 10 years, and it’s forecasted to continue. That sounds like a nice boring place to buy a property that’s going to kind of hum along, and that’s hopefully what we’ll find.

Adam Hooper – I know we had Glenn Miller come on a while ago, another really, really fantastic episode talking about market cycles, and we’re kind of getting into that segment here of markets cyclig’ and you mentioned it’s not if we have a recession, it’s when. Some very distinct stages: recovery, expansion, hyper supply, recession. Why don’t we start first with, how does that supply and demand dynamic create market cycles, or does that supply and demand dynamic react to market cycles?

Pat Poling – Well it’s a product of the market cycles and we believe that it’s driven in large part, not so much from the investment side of the world, but from the debt side of the world. As we get to that place where we’re in hyper supply, and you’ve seen that in a number of markets on the A space, and you really do need to look at these cycles by asset class, because they don’t necessarily move in complete lock step with each other. There are lenders that just aren’t lending on new A product in certain markets. They see that it’s getting or is over built, and they’re simply not going to put their money at risk, keeping in mind that in any one of these deals that we all do, generally speaking, the lender’s writing the biggest check. And so the due diligence they put into the deal is something everybody ought to pay attention to. By the way, we like lenders. We think they’re great people. We don’t think they’re a hurdle to get past. We think they’re a great partner in the process, because if they’ve got a concern, it’s a concern we ought to share, and we’d like to hear what that is. So there’s a bit of a break there, we think, that pulls back, that keeps people from getting into that full hyper supply space, although if you’re building for cash, and there’s certainly money out there that can do that, if you’re building for cash, then you can kind of throw caution to the wind, and do what it is you’d like to do.

Adam Hooper – And so with some of the markets that you guys are looking at right now, I mean again, it’s hard to paint a general picture of what stage of the market, the cycle that we’re in, because it can be so locally market-driven. Generally, I guess though, where would you feel the class B multi-family space as a whole, what segment of the cycle do you think we’re in right now in terms of those supply and demand?

Pat Poling – Well if there was a way to build new supply we’d be in an expansion, right? If their economics supported it, there’d be a lot of class B new construction going on, because so much of the demand is focused in this piece of the marketplace. The fact that there isn’t, is why value adds been so popular. If you think about it, value add is essentially the supply answer to class B. Take and old tire, class B, that isn’t really able to compete with some newer product, and instead of building brand new, we take that and we make a modest investment, five or $10,000 a door, those kind of numbers, and we end up with, for all intents and purposes, a brand new asset that we’re able to market in that way. If we could build new B, if it was economically feasible, we’d absolutely be doing that right now. And while the economic cycle which moves slightly differently than the real estate market cycle, while the economic market cycle is going to take us into a recession here, at some point in time, and there’ll be some pull back, that recession is not going to keep boomers from getting older. They’re still going to age. The recession isn’t going to cause 20 and 30 year olds to buy more homes. It’s going to have the opposite effect. The recession isn’t going to cause home ownership rates to go up, it’s going to cause them to stay flat or go down, and all of those create more rental households. So, as we move into the recession, there’ll be greater demand than what we see today. So there’ll be a bit of a spike there,

Pat Poling – and there’ll be some movement in the market place as tenants realign. Bs move out and move to Cs or move in with family or do something different or leave that market to go somewhere else, As move down to Bs, and so on.

Adam Hooper – So the demand metrics right now, you would see more aligned with what we would consider an expansionary phase, but it’s really supply-constrained, the terms of the ability to accommodate that demand through new product.

Pat Poling – Absolutely. We’re not developers, at least in this space. We’ve been developers in the past, but we’re not developers in the multi-family space. If you could build a B without government subsidy, and I’ve said that a couple of times. There is new B construction that goes on. It’s not market-rate product. This is built with government support, and that puts some strings on it. So you’ve got some minimum rents that you need just to make the tenant base work, but you’ve got caps, which means you’ve got a really narrow range in which you can play in the market. Generally that doesn’t have a lot of impact on the overall class B space. So we’ve got a demand that’s expanding, we’ve got supply that’s constraining that. I think that’s possibly what we’ve seen drive some of these value increases. And you know, you’re 50K a door a few years back, now you’re 100K a door. What will change that going forward, again, is it a macro economic thing of, if we see that recession, will that, I mean, does it sound like, in your opinion, dampens demand?

Adam Hooper – What causes this to change, or will that demand continue to be such that we just can’t fill it with enough supply, kind of insulating that class B from some of the, I guess, the major down cycle stuff that we saw in the recession last?

Pat Poling – So what you’ve just described is one of the reasons we like Bs. That’s that dynamic that’s there. That doesn’t mean Bs won’t be affected, right? So in a recession, there’s going to be some tenant movement, as I said. The issue that potentially that is a little more of a challenge for the B space on a macro level, is the recovery. The number one reason tenants move out of a B property, is to go buy a home. So when we get to a recovery, and hopefully for all of us this is a real recovery. The recovery we’re in has been a very long recovery, which has been great, but it’s been very modest in terms of the size of the growth. If this next recovery is more typical of the recoveries we’ve had with stronger growth, then we could see a number of tenants look to move out, which would be great because we have a housing shortage in the country. This is not just about investors being able to make money investing in this multi-family space and in class B in particular. There are hundreds of thousands of households that aren’t able to rent a quality home because they’re simply not available to them. And so there’ll be some alleviation of that. The real solution is going to be that values will continue to grow until we get close enough to replacement costs, that we can afford to build new product, and I don’t know when that’s going to happen. I know this. Investments we’re making today at 90 and 100,000, and 110,000 a door, if they have to grow to be 150,000 a door, or 170, and that’s where we get to a place

Pat Poling – where you can start to build in this space, so be it. That’ll help balance the supply, but we’ll also have made a really nice return on the investments we’re making today. And that’s the whole logic behind it. It’s very difficult to imagine a situation where we would have an over-abundance of B product, simply because we’re so short today. Now, could that happen 20 years from now? Sure it could. My crystal ball doesn’t work that far out. That’s why we think a five to 10 year time frame is very reasonable to be looking at multi-family.

Adam Hooper – Now how have the class B markets reacted, and maybe again, with this last recession, of eight, nine, 10. Hopefully we don’t see anything quite to that magnitude again. How did the class B space react to that? I guess, I don’t know, if you have any stats on whether occupancy dropped X percent, or rental rates dropped X percent, but how does that product react in recessionary periods?

Pat Poling – Yes, we do have data on that. What a surprise. So not only on a market basis. That’ll be one of the items we’ll look at is how a market in general. For example, DFW, we’ll look, we have data that’ll show us how DFW performed over that time frame, so that’s looking maybe a 15 year span, is what we’ll look back, but then we drill down to the individual sub market, and hopefully down to that asset. We’re interested in looking at peaks, peak vacancies. And what’s very typical, if you look back over a long period of time, at the performance of Bs, and that’s what we have focused on, so that’s where I can really share some data that makes sense, it’s very typical that you’ll see a B, maybe it’s humming along at eight percent vacancy, and I can tell you when the recession hits, because there’s a spike, it’ll spike. It goes to 10, or 11, or 12, or some number like that, but it’s a spike. It’s very short-term in nature and then it recovers. And in almost every instance, it recovers back down to that eight percent and then keeps moving along. I say almost because that’s not what happened in the great recession. Properties that were at eight percent spiked, and they did recover, but they didn’t recover to eight percent, they recovered to six percent, and it’s because we had such a realignment of housing in the country. We were close to 70% home ownership rate going in, by the time we came out we were down in the low 60s. Somethin’ in the neighborhood of five to six million households shifted from ownership to renting. That’s pretty substantial.

Pat Poling – And we’re still probably not in a position where we have fully addressed that in terms of supply to take care of that. But that’s very typical. We see a spike, and then what’s interesting is there’s another spike in the curve that you can see that tells you when the recovery starts. It’s a smaller spike, but it’s another spike in vacancy. So you’re renting at six, you’ll spike up to eight or nine and then it drops back down right away, and that’s the effect of the recovery, of the tenants that, now they’ve got some extra cash flow, they’ve decided they’re going to buy a home, maybe they’ve moved to a new market because they got a better job somewhere else, and so we see some movement. Over a long period of time, though, you see a very steady performance in this class B space. Again, that’s what’s attractive about it. We think part of that is because we are insulated from some of this activity from the As and the Cs. So in that spike during the recession, and we know that we’ll have one coming up, there are going to be folks in the class A space that don’t necessarily lose their job. Hard to imagine somebody paying $2,000 a month in rent that loses their job, although maybe there’ll be some out there. But what will happen is they’ll know folks that’ll lose their job, and that’ll give them pause to say, “Well, maybe I shouldn’t be spending $2,000 a month on an apartment. There’s a really nice $1,300 a month place right down the street. I’m going to go move there.” And so those As move down, and then when the recovery happens, and some of our Bs move out ’cause they buy homes,

Pat Poling – which we’re very happy for them if they do that, again, you’ve got those class C folks that would like a better school for their kids and a safer neighborhood, and they move in right behind ’em. So you get those twin spikes. We look at the spikes for a very specific reason. When we underwrite properties, and we encourage everyone to have this mentality, we want to make sure that our properties are able to be cash-flow positive with a substantial buffer between that peak vacancy and what it takes for us to be cash-flow positive. Something in the neighborhood of a 50 to a 100% coverage. So again, if it’s spiked at 12%, we want to be able to handle 18 to 24% vacancy and still be cash-flow positive. That helps everybody that’s involved sleep well at night. You tend to see that if you’re meeting lender-debt cover, you’re probably meeting that same kind of parameter, so they’re driven by the same factors. And again, that’s one of the places that we look to lenders to help us with those decisions.

Tyler Stewart – How long do these spikes typically last?

Pat Poling – Six months, nine months. When you look at the data, they’ll be running right along, and then, and it’s almost always, not only the property spikes, but the sub market spikes and the overall market does. You see this big run up for everybody in the B space, and then it pulls right back. When you’re looking at the underwriting, one, you underwrite for vacancies to spike to, you said 18% or more. Do you also look on the time frame scale to these spikes lasting longer than six to nine months? Right, so you could absolutely be in a position where they run longer. So that would be part of the sensitivity analysis in the underwrite. And not just with vacancy, which, and we’re talking right now physical vacancy, but we’re also looking at total vacancy. So we’re including in there concessions that would need to be in place, and bad debt issues and the like. All of those come into play there. So not only sensitivity on that, but you’ve got to look at sensitivity of rent growth. So if we’re underwriting three percent rent growth,

Pat Poling – and we’ve got a period of time where we’re going to end up basically holding rents flat, in order to maintain some occupancy, what’s that do to us? And all of those inputs have got to be moderated through that time frame. That doesn’t mean, obviously, that you’re still going to cash flow the same. If you’re cash flowing eight percent heading into a recession, you’re not going to cash flow eight percent during the recession. The key is that we’re not having to dip into any reserves. And we structure, our products are not structured with capital calls. So we don’t put ourselves in a position where we’re going to pick up the phone and call investors and say, hey, you got to send me another check. They’re structured to be able to run without any of those issues, and if we ever had an issue, which again, we hope we’ve girded against, we’ve got reserves that are set aside to get us through those periods of time.

Adam Hooper – Perfect, and now I guess, as we kind of start to round out conversation, given where we’re at in this recovery, and the likelihood of some kind of a correctional event in the next call it six to 12, or 18 to 24 months, whatever that might be, how can listeners start to think about that, or should they be looking at different metrics? Should they be looking at different factors when they’re exploring markets? How should their view of how they’re reviewing these opportunities change or are there new things they should be looking at as we enter what, again, we’ve been talking about for a while now. It hasn’t come yet, is likely to be some kind of a correction event?

Pat Poling – One of the things that we think makes a lot of sense, to smooth out all of this movement, so not just the impact of recession, but cap rate movement, interest rate movement, and so on, is to go long. Investing in short-term 24 month, 36 month investments, has some real risk associated with it. In particular, as we head into a period of uncertainty, where that correction event as you describe it, Adam, may occur, I won’t be surprised if we end up getting a chance to pick up some assets at some percentage on the dollar, because they were shorter term investments and they got caught in that time frame. Investing long, again, doesn’t mean investing long in an asset. That doesn’t mean get into an investment where that property’s going to be held for 10 years or 15 years, but investing in multi-family in which you’re going to be able to stay in that over time. That’s one of the reasons we developed our fund product the way we did, is it’s a long-term investment vehicle, can run as long as 30 years, but it’s structured for people to be able to stay in for five years, 10 years, and beyond, and while the assets turn over, you’re staying in that space. What that does is, it gives you, and I think people will be familiar with this terminology, it gives you sort of a dollar cost averaging experience in terms of what that investment looks like. It begins to smooth out the peaks and valleys. You’re not making the big money that you can make in a short-term investment, when you’re riding that wave towards the peak, but you’re not also taking that risk of

Pat Poling – potentially getting caught in a trough. It runs much more steadily, and so things like cap rate movement become not quite as critical, same with the interest rates, and so on. Doesn’t mean we don’t pay attention to those things, and investors shouldn’t pay attention to those, but those have less of an issue if you’re investing in thinking about your investments long. It might take ten years to double your money instead of seven, but you’re still going to double your money and get a lot of great tax advantages during that time. And compare that to what you could do if you were in other more typical investments, right? Whether large cap, small cap equities, bonds, whatever it might happen to be. So we advocate taking long positions, and then not worrying a great deal about it. It’s kind of like they tell you with your 401K right? Make your investment, put your money away every month, and then don’t read the stock market, don’t read the pages every day. Don’t be lookin’ a the journal every day. You’re going to worry yourself to death. These are good solid investments, they’re going to perform well. Tenants still need a place to live. They’re going to write their rent checks. We know a certain number of them won’t write those checks. We know a certain number of them will move. That’s all built in to every investment that all of us make, and from that standpoint, we can make them very stable over those periods of time, which is why, as we head into a recession, it’s actually a pretty good place to have some of your cash.

Adam Hooper – Perfect, well we are going to put you on the spot, and get you to crystal ball. I know you said your crystal ball doesn’t go out 20 years, but maybe it goes out 20 months? What is your crystal ball looking like for the next, call it 18 to 24 months?

Pat Poling – Everything looks pretty steady through the end of 2020. There’s nothing we’re getting in the way of feedback from any of our data sources or other entities that we engage with that says it’s here, that this is going to happen. But as you get to the end of 2020, and we go into 2021, very reasonable to expect, as you called it, some type of correction in the market place. We look forward to it. Now we don’t look forward to people losing their jobs or having their hours cut, or any of those things. That’s going to be an unfortunate thing that occurs, but it occurs every time we have a recession, and we are always going to have them. That’s just the way the economy works. We look forward to it from the standpoint that we think there’ll be some really good value opportunities. Some good acquisition opportunities during that time frame, that we haven’t had for eight or nine years. In 2010, 2011, 2012, you could make some really good money with some of the investments you made then, almost to the point where it didn’t matter a great deal how well you executed the plan. You simply made all your money when you bought it. There’s less of that that goes on today, but we think there’ll be some opportunity for that coming up not too far from now. And then we would also think, and you mentioned this Adam, none of the bubble data that was there before seems to be there, in terms of this being a huge drop or a lengthy one. So if you look back it’s pretty common to have a recession every four to eight years,

Pat Poling – and they last six months, nine months, maybe a year. Often the commerce department declares the formal recession after it’s over. Because we finally have the data that says we had two months of decline, or two quarters of decline, and yet we’re actually in the quarter that began the recovery. So we think it’ll look much more typical just based on everything that we’ve seen, and in the markets that we’re in, there’s absolutely none of that big excitement about look at all the money we’re making and we’re the king of the world kind of stuff that you get again in some of those hot markets.

Adam Hooper – Okay, well we’ll be sure to check back in in 2020, and also again in 2021 and see where we’re at.

Pat Poling – Yeah, we’ll have to do that.

Adam Hooper – Perfect, well Pat, why don’t you let listeners know how they can learn a little bit more about what you’re up to, some of the content that you guys are producing. Again, a great resource for us here on the show, and for listeners out there, happy to share any resources, any ways they can get in touch with you guys.

Pat Poling – Absolutely. We really enjoy the relationship with you all at RealCrowd, in particular the educational part of it. We’re very committed to education. We don’t think anybody that does what we do sells these products. That’s just not the way it works. It really isn’t bad educating folks and helping them understand how the multi family space works and how each of these different investment opportunities might fit or not fit in their portfolio. We have a lot of educational product. I’d suggest a couple things. Please visit our website The Learning Center, in particular, at, that’s M-A-R-A-P-O-L-I-N-G dot com. You can always shoot me an email, I chat with folks every week that are interested in learning more about the multi-family space, and while not in competition with the great podcasting product that comes from RealCrowd, we do have a weekly podcast ourselves, Multi-Family Real Estate Investing presented by Mara Poling, in which you get to hear me ramble for 25 or 30 minutes about generally whatever question somebody asked me that week that was kind of interesting. I think this week we’re talking about renewal rates, and what’s the optimal renewal rate, and how do you get there? So always enjoy the opportunity to chat with you folks. We’d love to come back again in the future and see how accurate I was with the crystal ball there.

Adam Hooper – Oh yeah, we’re going to hold you to it.

Pat Poling – Yeah, well, that’ll be good.

Adam Hooper – Perfect, well Pat, thanks again for coming on today. Really appreciate your time, and sharing your thoughts with us.

Pat Poling – You bet, you bet, thanks a lot.

Adam Hooper – Perfect, well listeners, as always, we love your feedback and comments, reviews. Send us a note to with any questions. And with that, we’ll catch you on the next one.

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