Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
If you’ve read any of my stuff, you know that I like to look forward and try to figure out what’s going to happen next in the real estate market. One of the ways I do that is to watch what the big money is doing.
And I pay particular attention when Sam Zell speaks.
He recently spoke at an investment conference, and during the conference he gave his take on real estate and the U.S. and world economies. And, unfortunately, he was not optimistic.
Zell, a billionaire Chicago investor, suggested a recession may be on the horizon…
He denounced the demographics of aging Europe, and he also made it clear that he thinks there's not much upside left in commercial real estate. Yet he is still very bullish on Latin America, where he's had more hits than misses investing in real estate.
As the chairman of Equity Group Investments, he covered those topics and many more in a conversation that kicked off the annual Invest for Kids event. The conference, which raises money for kids’ charities, drew about 1,100 people to Downtown Chicago to hear investment ideas from top money managers.
During his talk, it was pointed out that two of Zell's real estate companies, Equity Residential and Equity Commonwealth, have been selling properties while funds led by two other high-profile investors, Jonathan Gray, Blackstone Group's head of real estate, and Barry Sterlicht, of Starwood Capital Group, have been buying.
Zell commented that he wasn’t as optimistic as Blackstone and Starwood, and joked that while they are venture capitalists, he uses his own money.
As I wrote previously, in the midst of a rapidly rising apartment market, Zell’s Chicago-based Equity Residential pulled off its biggest divestiture in January, selling more than 23,000 apartments for $5.4 billion to Starwood.
Many analysts took the sale as a signal that the apartment market might be peaking.
Proceeding with Caution
Since the conference wasn’t focused on real estate, the moderator started the conversation by asking Zell about his non-real estate holdings, which account for about 70% of his portfolio.
She pressed him to explain whether his non-real estate holdings share a “unifying theme.”
His answer: He seeks markets with limited competition or high barriers to entry. “If we can't get a monopoly, we'll settle for an oligopoly,” Zell said.
Outside the U.S., Zell has tried to find markets that are still pioneering but on the verge legitimacy, with growing populations and functioning capital markets. He likes India, Mexico and Colombia, a country his overseas real estate investment firm, Equity International, entered in 2011.
“I'm very optimistic about Latin America and we've been fortunate to move in and out as effectively as we have done,” he said.
Still, he thinks that investing overseas comes with a big trade-off.
"Generally speaking, anytime you leave the United States, you leave the rule of law and you have to get compensated,” he said. “I'm basically making a trade, and the trade is I get growth and I lose the rule of law. It's a tricky trade.”
Zell concluded his talk by offering his opinion on several other subjects:
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On the U.S. economy: “I think it's much more likely that we're going to have some kind of recession, cleansing, market clearing, before this economy can grow.”
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On the European economy: “The demography of Europe is horrific. Maybe Japan is the only country with the demography is worse.”
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On the U.S. presidential election: “The Hobson's choice that we have is pretty awful on all fronts. Hopefully, America will be able to survive it.”
It’s clear that Zell is still a seller of real estate. It will be interesting to see what he does once the real estate market reacts to President-Elect Trump’s administration.
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Dennis Fassett
earned a BS in Economics and followed that up with an MBA in finance. After working and corporate finance and banking for several years, he started buying single family houses, and quickly built a very nice portfolio of cash flowing rentals. When the credit markets started to dry up and he couldn’t get any additional single family mortgages he shifted his focus to apartment buildings. He now has over $3 million in rental real estate. He manages most of it his self and still has a day job. Dennis has even created his own Private Equity fund to buy apartment buildings.