How Interest Rates and Inflation Impact Business with Don Wenner

November 19, 2021

How Interest Rates and Inflation Impact Business with Don Wenner

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How Interest Rates and Inflation Impact Business Show Notes

American entrepreneurs are facing a triple threat: rampant inflation, higher interest rates, and higher costs of capital for businesses. There’s less safety in bonds, stocks are likely to fall, and expenses are all but guaranteed to increase. As the saying goes, the only constant in life is change, and there are a lot of economic factors that appear to be changing right now.

To help me dissect these issues, I’m talking with Don Wenner of DLP Capital. Don has made a ton of progress in his business since we last spoke on episode 46 of this podcast. He’s added over 100 members to his team, is on the verge of acquiring a bank, and has made a number of big moves to keep his organization moving forward and best serve his clients. Don’s bestselling book, Building an Elite Organization, explores how to scale high-growth, high-profit businesses.

In this conversation, we dig into the challenges facing business owners in this time, the moves he made in the last 18 months to grow his business in spite of the COVID crisis, the impact that interest rates and skyrocketing values are having on the housing market, and the importance of having real strategies to operate in a recessionary environment.

In this podcast interview, you’ll learn:

  • How Don has dealt with the challenges that inflation poses to his business.
  • Why rents and property values are currently skyrocketing like never before.
  • How the current housing market is impacting both the younger and older generations, and what that means for the rental market.
  • The reasons why Don invests in communities and not just single family or multifamily properties.
  • Why so many people are jumping into the real estate industry despite not knowing what they’re doing.

Inspiring Quotes

  • “A great piece of real estate at one price can be a great investment–at another price, it can be a terrible one.” Don Wenner
  • “We buy deals, not markets.” – Sam Zell

Interview Resources

Interview Transcript



[00:00:08] Dean Barber: Hello, everybody. I’m Dean Barber, Managing Director at Modern Wealth Management, your host of The Guided Retirement Show. Back again, Don Wenner of DLP Capital. He had some really exciting things going on in Episode 46. The guy is on a tier building an organization, hiring hundreds of people, and really doing some amazing things. We’re going to get into some conversations with Don today about how business is going and what he’s done since our last conversation. We’re going to spend a lot of time talking about real estate and investing in real estate. Please enjoy my conversation with Don Wenner.


[00:00:41] Dean Barber: Alright, Don Wenner, DLP Capital, welcome back to The Guided Retirement Show. Such a pleasure to have you back. And if you missed the first episode with Don, it’s Episode 46 of The Guided Retirement Show. Don, how are you doing today?

[00:00:52] Don Wenner: I’m doing awesome, Dean. Thank you so much for having me back once again.

[00:00:56] Dean Barber: And it sounds like you’ve made a ton of progress in your business since our last conversation. So, congratulations on the continued success. Why don’t you tell us a little bit about what’s going on since our last talk?

[00:01:06] Don Wenner: Yeah, thanks, Dean. Yeah, it’s been for many of us, we’re blessed. This has been a great year. So, we’ve been quite busy. And we like to say our 20-mile march and kind of march and forward each day. Last, I think it’s been about three months since we were together. And we’ve added about 100 team members, 100 employees. We went under contract to acquire a bank, which we closed on later this year. And we’re finalizing some other, we like to say, big moves to keep driving the organization forward and serving our clients. So, it’s been a heck of a first almost eight months of the year here.

[00:01:44] Dean Barber: Yeah, cool. Good job, man. Good job. It’s exciting to see young people out there really just killing it and making a difference in the world. Don, I want to talk to you today and I want to get your views as a business owner and a real estate– I’m going to call you a real estate expert and just a serial entrepreneur of some things that we’re hearing that are on the minds of a lot of people out there. And I think you and I can just have a great dialog about this.

So, three things happening right now that I call kind of the triple threat, okay. You’ve got the threat of inflation, which we have not really seen inflation for a long, long time. I was talking with one of my business partners here, and nobody that is in our industry right now has actually experienced what inflation can do because most of the people that are in the industry now, even if they’ve been in it for 40 years, they were in in 1981, and that was when the inflation was ending. And so, we’ve been in a lower inflationary environment now for four decades.

And the second part of that is higher inflation comes with the threat of higher interest rates. Higher interest rates mean a higher cost of capital for businesses. It also means that people can look to fixed income sources instead of stocks, which has been really the only game in town besides real estate where you can make any money. And so, that triple threat could mean, hey, we get higher inflation. Interest rates are going to go up. Stocks are going to fall.

And if interest rates are going up from the 10-year treasury, as we record this, at 1.3%, you’re not going to get safety in bonds, and so, I want to have some conversations with you as a business owner, guy that’s just buying a bank. You do lending. How do you see all this playing out, Don? What do you think the risks are? And then we’ll talk about how to mitigate some of those risks.

[00:03:36] Don Wenner: Yeah, that’s a big topic there for sure. So, I have maybe a couple of things to start with, and we can interact through it. So, now, I want to think about the world of investments or making an investment, in my mind, there are two things that are always most important or two things that you evaluate. One is management. So, the quality of the management, and then two is the strategy.

And I always think about it. In any market, in any economy, in any cycle, there are always managers who outperform other people in their sector, in the asset class, etc. So, it’s really, really critical that you’re investing with the best managers, and then two is strategy. And it’s really critical that the strategy makes sense over the life of how long you plan to have this investment and with what’s going on in the economy, such as higher interest rates and inflation and so forth. So, that’s how I think about investments. And I also always…

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[00:04:43] Dean Barber: Alright, hold on. Hang on, Don, because you make an excellent point, but on the flip side of that, you’ve got John Bogle of the Vanguard funds telling you that there’s an easy button, right? There’s an easy button, and it’s cheap. And all you got to do is put some money in my Vanguard real estate fund, put some money in my Vanguard total stock market fund, put some money in my Vanguard bond fund, and that’s going to take care of all of it.

So, that removes any of the strategy or the management that you just talked about. How has our industry gotten to a point, in your opinion, where people just want to say, “Oh, it’s that simple”? And if that’s the strategy that somebody decides to employ over the next decade, I think they’re going to be in for a rude awakening because I don’t think you’re going to see the same types of performance out of those types of investments over the next decade that we’ve seen over the last 20 years.

[00:05:41] Don Wenner: It’s a great point. Again, my world is mainly, as you said earlier, it’s mainly around real estate, more specifically housing. We invest in that asset class as a lender and as an owner. I think I remember the great Sam Zell, who was one of the best real estate investors of all time, always says, “We buy deals, not markets.” And so, great managers are able to find deals and opportunities that are against the trend of what everybody else is doing. A piece of real estate can be a great piece of real estate at one price can be a great investment and another price can be a terrible investment or not so good of an investment.

As an example, when COVID hit, we found a lot of student housing operators struggled, especially in the beginning when the schools were shut down, and a lot of them defaulted on loans because they didn’t have occupancy in a lot of areas. So, we went after an approach, we said, “Hey, there’s an opportunity here” because a lot of these student housing communities are built just the same as multifamily, but the ownership only knows how to run it as a student asset. And the loan was set up to be a student asset. So, we went. We’ve bought now three communities, about a thousand apartments in the last year, which were always student housing communities.

We bought them at big discounts. When the market’s been so hot for multifamily, very few were thinking about student housing opportunities. And we’ve converted those to just being market units available to all families as well as students. We’re not against students, but we’re opening up the market to all residents looking for good, affordable housing, right? That simple thought, very few took that approach. We were able to pick up some really phenomenal opportunities.

That’s the thing when there’s volatility in the market, and everything you’re talking about, higher interest rates, inflation, value change, that’s volatility, right? When there’s volatility, active management becomes really important. The ability to be able to pay attention to the trends and what’s going on and see opportunities. And for people like us, we invest in some level of distress and opportunity. So, when volatility comes about in higher interest rates, changes in tax codes, inflation, all these things create fear. They create people who make a change that creates opportunities.

And that’s where the second part that becomes really valuable is the strategy. Do you have a strategy that makes sense in an environment where interest rates go up? Do you have a strategy that makes sense in an environment where inflation happens? Is there a strategy that makes sense if we go into a recessionary environment and values are down? And that’s why we’re in two main strategies.

When you think about our business, we do short-term bridge lending. So, we make 6 to 12-month loans to real estate investors. Well, guess what happens if interest rates go up? My returns go up on a lender, right? And I’m not making long-term loans. I’m only locking in my interest rates usually for six to nine months. So, if rates went up a ton, that would be a great thing for me and a great thing for my investors.

In addition, if our interest rates go up on the portfolio where we own the real estate, we lock in our interest rates for 10 to 30 years. So, we’re going to lock in our interest rates where our debt isn’t going to go up, yet are generally, if we’re in an inflationary environment where interest rates go up, that means rents are going to keep going up. So, my income is going to go up, but my debt is going to stay flat, right?

That’s a really good environment to be in. If we’re in a recessionary environment and if high unemployment and companies aren’t starting and so forth, what does that mean? That means that people need affordable places to live. Well, our average rent in our portfolio is a little less than $900 a month. When we’re in tough environments, there’s more demand for $900 apartments than last. I mean, there’s more demand in most parts of the country for $900 apartments when the market’s great as well because we have such an immense undersupply of housing.

And that’s what I always come back to. My last big point here is, Warren Buffett, who many think to be the greatest capitalist in history, but I always think of Warren Buffett as he’s not really a capitalist, as we think about capitalism. If we think about it, a capitalist is somebody who goes out in the free markets and against competition and goes and builds a great company in this open free market. Warren Buffett’s strategy has always been to invest in businesses with very little competition, right?

He always says if you’re investing in a business free of competition, you’re in the wrong business. He wants to invest in a business that has a moat around it, has very limited competition. And so, that’s what we think is why we’re buying a bank right now. Banking is in an industry where regulation is forcing there to be less and less and less banks. It’s a great place to be, a place where you’re not going to have a new competition coming in. You know you’re going to have less competition a year from now or two years from now or three years from now.

So, those are a few of our thoughts that we definitely think that we are in an inflationary environment. We can all see on household goods. I know they change the calculation. Now, certain things that should be part of the inflation calculation are not, in my opinion, but inflation is happening. Look at the cost of living. Rents have gone up on average 12% in America so far this year, right. How is that not an inflationary environment? But that benefits us, interest rates going up benefits us. I don’t think interest rates go up in the next 12 to 24 months in a material way, but if they do, it would benefit the business model that we run over the foreseeable future and…

[00:11:28] Dean Barber: Yeah, I think in order to get interest rates to go up in the short term, Don, that’s probably not a likely scenario because the first thing that’s got to happen is the Fed’s got to stop its bond-buying program that’s known as tapering. So, they’re going to slow that bond-buying until eventually, they can stop it. And it won’t be until after that is completed that you’ll actually see any movement on the Fed funds rate. I was just looking at some economists’ information just before I jumped on here with you today.

And these guys are saying, you might see the Fed funds rate at 2.5% by the beginning of 2024. Okay, so that’s still quite a ways out, and really no movement for the balance of this year and probably no movement, even maybe the fourth quarter of next year. It’s going to be slow, but the markets will react, real estate will react. We’ve seen just an amazing run in the prices of real estate. Now, I can tell you on the single-family homes what we’ve seen, talk to us about what’s happened in the multifamily area. And before you do that, go back and tell me what kind of a deal you got on that student housing.

[00:12:38] Don Wenner: Yeah, absolutely. Yes, we bought student housing in Kutztown, Pennsylvania, which is actually in Pennsylvania where my wife graduated from. So, the community sold last for $170,000 per apartment. We paid $102,000. Then, we bought another community in Oxford, Mississippi, actually, both these communities, oddly enough, were built in 2009, built in 2009 about 200 units, last sold for about $150,000 door. We paid $71,000 a door in a market where, as you just said, property values are soaring. So, finding distressed opportunities that you’re paying a discount from the last time it sold is extremely rare in housing today.

And to your point, yeah, I mean, it’s unbelievable what’s happened with property values, and a piece of real estate goes on the open market with a decent real estate agent. It is unreal, both on the single-family side and the multifamily side how much values have gone up. Now, we bought a community in August of 2020, just one year ago, for $60 million. We have offers on it right now for over $80 million, a 25% higher price one year later, right? And when you think about the leveraged returns, it would work out to be a 400% to 500% return in a year, I mean, unbelievable, right? So, certainly, there’s been compression to cap rates, meaning people are willing to accept lower yields on properties. So, that’s certainly true. And partially, the reason people are able to do that is that interest rates are so incredibly low.

[00:14:21] Dean Barber: Right. You’re borrowing money at a lot lower cost, right? So, you’re willing to pay a little bit more.

[00:14:25] Don Wenner: We’re buying in a portfolio right now, 4,000 apartments, about a $520 million acquisition that we close on next month. And we’re locking in our interest rate for 10 years at 2.71% interest rate for 10 years locked in. So, those kind of rates really, of course, help. That’s a big part of why values have gone up, but the bigger, even more important reason why values have gone up is because the rents have soared. I have four areas of impact I’m focused on personally, and then my organization is our platform.

And the most obvious one is workforce housing. So, we’re working incredibly hard, finding ways to create workforce housing that is affordable for the local workforce, and that’s becoming harder and harder and harder to do. A year ago, rents have gone up 70% in the past decade. So from 2010 to 2020, rents went up 70% in America, while incomes went up 6% to 8%, depending on how you look at it.

[00:15:29] Dean Barber: Wow.

[00:15:30] Don Wenner: Rents in the last year have gone up greater in the last year than any point in recorded history. So, they’ve only soared through COVID. And we’re seeing in many markets, in Jacksonville, which I live in St. Augustine, just south of Jacksonville, the average one-bedroom apartment is up 35% year over year, I mean, just unbelievable growth and rents. That’s not a good thing for the average family, the average person trying to find good, reasonable, safe, affordable housing, but as investors, the incomes, and the expected continued growth and incomes support the values.

That’s the crazy thing. It’s not just that people are buying housing that doesn’t make any sense, there are incomes that support it. People are generating strong cash flow based on today’s rents. And odds are great. We don’t model it this way, but the odds are great that rents will keep growing at 6%, 7%, 8%, 9%, 10% a year, which makes it almost, frankly, impossible to do wrong if that continues to happen. We don’t assume that, but if rents keep going up at that point, everything makes sense to buy in the world of housing.

[00:16:35] Dean Barber: So, what kind of rentership do you have? What’s your occupancy rate on these places? I mean, is it a forced “Hey, man, there are so many people that want into this place. We’re going to keep jacking up the prices because even if you don’t want it, somebody else will. Is that what’s happening?

[00:16:51] Don Wenner: Pretty much, I mean, that’s not the way we like to position, and we’re really big on keeping our housing affordable, so we’re not always stretching to get the top dollar. We’re much more about keeping our residents in our properties, but with that said, right now, today, in our portfolio, we have the vast majority of our assets ranging between 94% to 98% physical occupancy at any given day. And then, since COVID, we’ve averaged across our portfolio. Right now, we’re about 4.5% delinquency. So, the challenge with COVID is for the first time in American history, as far as I know, the government said you can’t evict the tenant if they don’t pay their rent. I mean, unheard of government reach.

[00:17:37] Dean Barber: How long do you think that’s going to go on?

[00:17:39] Don Wenner: Keep thinking it’s going to end this month. So, they keep extending it. I do think it will end certainly by the end of this year, but on the positive side, I’ll give the government credit, the positive side is through the CARES Act. There have been incredible unemployment benefits. There’s been a lot of state funding for rental assistance. So, there’s been a lot of positives that I’d say sort of have evened out in terms for us as landlords if you managed well, but the reality is in a normal environment, somebody can’t pay their rent because we’re in a recessionary environment or whatever the case is going on, we can get them out in 30 to 40 days.

And as fast as we can have an apartment ready to rent, it’s rented. I mean, there’s no problem at any of our communities. We own communities in 22 states. We don’t have a single community where if we have an apartment ready to rent, there’s not somebody ready to move in.

[00:18:32] Dean Barber: That’s crazy. So, are you looking at communities all across the country, Don? Or are you focused on certain areas where you know it’s better?

[00:18:40] Don Wenner: Like, probably, most businesses today, we’re very, very bullish on the Sun Belt, warmer climates inshore is where people are moving, pro-business states or favorite area is the southeast – North Carolina, South Carolina, Georgia, Florida. We have offices in Western Carolinas and here in Northeast Florida. Everything in between there is our current favorite area, but unfortunately, everyone else has realized that, too. And so, lots of people are investing there.

So, we own a lot in Mississippi, Alabama, Arkansas, Louisiana. We own in Kansas, Kentucky, Oklahoma, Texas. So, mainly throughout the southern half of the country, the southeast is our kind of main area of focus, but really, at the end of the day, you’re going to do well if you’re in markets that have good population growth, strong job markets, you’re going to do well. And that’s what most of the south has, even the smaller markets, good, solid population and job growth.

[00:19:47] Dean Barber: So, when you first started in your real estate acquisitions, we talked about this back on Episode 46, and if any of you didn’t listen to that, you should go back and relisten to it because you started out as a real estate agent and decided, hey, there’s a better way to do this. And you started out buying single-family homes. So, do you still have a focus on single-family homes? Or is it primarily on the multifamily?

[00:20:13] Don Wenner: So, a lot of people, for a good reason, historically, people think about investing as single-family or multifamily is two different things. And historically, the way I think about it is you invested in scattered assets, individual homes all over the place, or in a community of rental units, right? That’s kind of the way people often think of in multifamily is a community of a bunch of renters and a single-family home is one individual renter. Especially over the last couple of years, but over the last decade, those lines are becoming a lot more blurred, and more and more now, today, the hottest asset class in probably real estate today is what people refer to as build-to-rent, which is building houses for rent.

And so, we’ve built townhome communities, a whole community of townhomes that are all for rent. We’ve built communities of single-family detached homes, all for rent. So, I think there’s not an asset class that’s going to have a greater demand than a single-family detached home for rent. The tough thing with buying an individual home on one street and that surrounded by homeowners, and then you own a home down across the street or another side of town, is management.

This is an intensive industry, and managing turnover and maintenance requests, and I think if you got one house, and I got a neighbor to the left and behind me, to the right, to the back, I got four sets of neighbors, I’ve got a set of tax bills by three tax bills for that one property. I’ve got everything separate. When I have a community together, I can control the experience for the residents, the safety, the curb appeal, everything much more than I can control an individual home.

So, we focus on, we like to call is communities. We invest in communities. So, whether that single-family or multifamily, a mix of both, detached, attached, single-story, four-story, high-rise, we want to invest in communities where we can control delivering a great experience. We invest heavily in our communities to help them improve as people. We want to help them across the eight F’s of life that we call it to help people, from Faith, Family, Friends, Freedom, Fun, Fulfillment, Fitness, Finance. It’s hard to do when they’re scattered. We have a community and we have a clubhouse and a pool and we can do community programs and get-togethers and create connections and relationships.

They say today in America, we have the highest rate of unhappiness in history right now. We have the highest rates of depression in history right now in America. I believe that the number one reason for that is a lack of real connection. First and foremost, lack of connection with the Lord, but also a real connection with other people. We try to really invest in that in our communities. It’s hard to do when they’re scattered.

[00:23:05] Dean Barber: That’s fascinating, Don. So, I didn’t even realize until a couple of years ago that these build-to-rent communities were out there. My father- and mother-in-law were thinking about moving. And so, we went and visited one of these areas and a beautiful area. I thought these places were for sale. And they’re like, “No, these are all for rent. Everything. And they’re just building one after another.” Happens to be on a great golf course here in Kansas City where you would think these are homeowners, but no, they’re renters. And so, I’m like, “Wow. Who would do that? Who would rent that when they could actually buy it?” So, help me understand, and maybe, anybody watching on YouTube or listening, help us understand how do you get that appeal? Or is that just out there and people would rather do that than buy?

[00:24:03] Don Wenner: Yeah, it’s a phenomenal question. And the reality is I’m going to put COVID aside for a second. I’m going to bring COVID into the picture, but without COVID, we have an aging population, and people in their 60s and 70s and 80s don’t want to deal with the maintenance of owning a home and the work and so forth. So, we’re finding the biggest growth of renters in general by far is the baby boomer generation. By far, that’s the biggest growth in rentership is from baby boomers.

[00:24:33] Dean Barber: But they don’t want an apartment. They want that community that you’re talking about, the house-to-rent.

[00:24:38] Don Wenner: Exactly. And don’t get me wrong. They do move into apartments, walks a lot of markets that’s all there is, but yeah, they want to go into a rental where they don’t have to manage everything anymore. So, the older people want to be renters. We all have probably heard the stats that people are starting their families much later in life and people are then, in turn, staying renters much longer. And then, we all know that people change careers five, six times actual career paths, let alone jobs every four or five years today. So, because we’re more transient as a society today, we’re not staying hooked to one job, one career, more and more people like the flexibility of not being tied down to owning a home.

Another thing that has increased the amount of people who want to be renters is that a lot of younger generation came of age during the last Great Recession. And so, they have all the foreclosures and whatnot. So, the odds, the kind of American dream of homeownership has declined a lot for the current generations that’s not considered part of the dream. When you think about how we’re in a society today, Uber and so forth, it’s not about owning anymore, it’s about borrowing, using somebody else’s things that less and less of young people want to own cars anymore, even, right?

So, there’s no doubt, the younger generation and the older generation are becoming renters. And then, the average, I call it just family, or those in their 30s and 40s and 50s, some are staying renters because they have any other choice that they can’t get financing. It’s not as easy as it once was, or they have some damage from past mistakes, or the cost of housing has gone up. So, all those reasons have helped continue to grow rentership.

And then, COVID came along, and more and more people, and it’s not nearly as dramatic as I think the news likes to make it sound like the whole world’s not going to go work virtual, especially younger people need to get back in the office and need to build relationships with their peers to be able to really move up in their career, but there’s no doubt that we’ve sped up the process of the percentage of people working from home.

And so, think about it, if all of a sudden, your home went from just being the place you came to at night, to now being where you work all day, to maybe even where your kids go to school all day, you need more space. So, the need for additional space when your home is where you are, most of the time has led to this tremendous growth and people not being OK in the 800 square foot apartment, needing some more space so they get a room to turn into an office and so forth. So, all these factors have led to rentership as a whole, but certainly, larger rentals like single-family homes being really, really desirable.

[00:27:18] Dean Barber: That’s fascinating. That really is. I didn’t know that those communities were that prevalent throughout the country, but it makes sense what you’re saying. It really does.

[00:27:27] Don Wenner: It’s still a small percentage of the market, but it’s going to grow tremendously. Most of the big hedge funds out there that own single-family rentals that you hear about, like BlackRock and American Homes 4 Rent, they’re putting most of their focus around building rental communities now.

[00:27:42] Dean Barber: Wow. Well, they’re going to have to keep up with you, though. So, let’s talk about, you talked about the good stuff that’s out there, the opportunities that are out there. Are there areas in the real estate market today that are less attractive and perhaps should even be avoided?

[00:28:02] Don Wenner: So, I’ll start saying, I think as much as internally with peers and my investment team, we often say, “Wow, it’s unbelievable what the prices are for things.” And every time we see a new property sale and we say, “Wow, it went for that much.” We think this is crazy, but we all agree. Everybody I talk to, who’s doing this all day like I am, we all agree that the odds are much, much higher that two years from now, where we’re sitting here in August, September 2023 and we’ll be saying, “Do you remember back in 2021 when you could buy real estate for that price?”

Because the odds are much greater that property values are going to be significantly higher two years from today than they are today. There are not many people, despite kind of feeling in disbelief about where property values are going. There are very few “experts” who really believe that a year or two, property values are going to be lower.

So, I want to start with saying that when it comes to housing. That doesn’t mean going and just paying any price for an asset make sense. And being the highest price to buy an asset is not usually what you want to a greater strategy, and what people often forget about is why I said, in the beginning, what matters is management and strategy. Managing housing is hard. It’s not an easy business. So, yes, you buy a property at today’s price and you’re really good at managing and you can keep it occupied at 94%. You can keep your delinquency down and you can keep your operating expenses down. Yeah, it can do really well, but those aren’t easy things to do.

And because values just keep going up, up, up, there are many people out there who are jumping into this industry who don’t actually know how to execute and manage. And that’s usually when problems arise, less that they paid too much or bought a bad deal or the market changed that they struggled to manage it, they struggled to execute. So, that would be my caution investing in spaces that management is really, really important. When you’re dealing with toilets and people, it’s hard.

In terms of other asset classes, I’m far from an expert, but I would always encourage, and I know some people doing really great in office. Well, they’re doing great in office because they’re buying at major, major discounts or buying the best office building in a market at a crazy discount because everybody thinks office is terrible, I mean, it’s kind of like having the best manager. If you own the best office building in a market, even if there’s more supply than there is demand, given the best product and you can be competitive on rent because you paid a great price, you’re going to still do fine.

There are people doing really great in retail strategy. So, as a general rule, yeah, retail is going to struggle. Office is going to struggle. Hospitality is going to be volatile. All these other asset classes don’t have the consistency of housing does, especially in the recessionary environment, but with a great manager and a great strategy and purchased at excellent prices, they can be great places to be.

And so, I would just say it, and we’re not in any of those asset classes, but I just say they can be really phenomenal because everybody thinks housing is great today. It is part of the anybody today. Ten years ago, people thought housing was riskier, and office was the place to be, right?

[00:31:16] Dean Barber: Right.

[00:31:17] Don Wenner: All the big institutions wanted you to be in office, and that was the safe bet. Now, office is thought negatively upon, and everybody’s realized the stability that comes from housing. So, I would just say that, I’d be careful. I mean, is the Amazon effect real? For sure it is. Does that mean that no retail businesses are going to do well? Of course not. Does that mean that destination malls are going to struggle? Probably, right, but everything’s location dependent and management dependent.

[00:31:41] Dean Barber: Right. Okay, so let’s talk about something that occurred in 2000 to 2007 and 2008, and it has to do with the real estate market getting extremely overleveraged, which means people had way too much debt. I can remember the ads on the radio, in the newspapers, “Hey, if you got a home or loan, you have up to 120% of the value of your home. And it was a scenario that was just an accident waiting to happen. And when that thing imploded, it killed the real estate market for several years.

Now, you came out of that shining like a star because you saw the opportunities and started making acquisitions during that period of time. My question to you is, since you’re on the lending side of things as well, Don, what are you seeing happening on the leveraged side of things in the industry as a whole? And then, what are you guys doing at DLP Capital? And how much leverage are you putting on properties?

[00:32:38] Don Wenner: Yeah, great question. So, I’ll answer that first from the lending side. So, I think what you’re referencing is mainly what most people think about in 2007, 2008 is homeowners taking out mortgages on their home at crazy leverage points and doing the negative amortizing loans where they only pay the interests, not even all the interests or the principal goes up every month. And the mirror test was the mortgage lending test, right?

If you could follow the mirror, you were approved for a loan. And all of that subprime type of lending that happens, I can tell you, say, with confidence that’s not happening. That has not come back. Certainly, don’t get me wrong. Guidelines are looser today than they were in 2015, but in general, no banks and lenders have held to much more, I’ll just say normal credit guidelines than what we experienced in the 70s. That hasn’t happened. That’s a big reason why we were able to weather what happened last March in this country.

And we have had really, really low default rates and mortgages for a long time now. And so, those guidelines have stayed reasonably tight. My world of lending, I don’t lend to homeowners. I actually only lend to full-time professional real estate investors. And that industry has definitely–people have gotten looser in guidelines and are doing higher leverage to your point. We’ve stayed on average for the last eight years.

We’ve averaged 27% down payment by our borrowers, 27% of the purchase price, plus 27% of all the costs of renovating the property, and that significant skin in the game, I believe, the number 1 criteria. So, I used to tell this a lot to my investors, back when people used to worry about that when it was closed for people with short memories, but when people used to remember a lot about 2007 and 2008, I tell people, alright, so there were 10 million homes that went into foreclosure in 2007, 2008, 2009. Take a guess at what percentage of those 10 million, let’s call it the people put down 20% down payment.

[00:34:41] Dean Barber: Zero.

[00:34:42] Don Wenner: Almost zero, right, exactly, but any season credit officer/lender knows that the number 1 criteria of loan repayment is skin in the game. So, what we’ve stayed really disciplined on in all our years of lending is skin in the game. We’ve always required a lot of skin in the game, and that’s what’s going to ensure repayment even in recessionary environments. It’s why over our thousand loans we have in our portfolio, we’ve had one borrower go 30 days delinquent since COVID started, one, so we really focus on our average loan to value, and our portfolio is 54 percent.

[00:35:17] Dean Barber: Crazy. That’s incredible and conservative.

[00:35:20] Don Wenner: Exactly. So, we’ve stayed that course through the craziness of the last number of years. And that’s why we’ve had such great performance consistently. So, I believe very much in the foundational kind of rules of credit, and skin in the game is always number 1. So, in general, I don’t think we’re going to have that kind of problem that we had in 2007, 2008, again, number 1, because in 2007, 2008, what people forget is we had the greatest oversupply of housing we ever had. Today, we have the greatest undersupply. In addition, we’re not having these loose credit guidelines that we had back then.

And then, lastly, which is an interesting point, I think is back in 2007, 2008, there was one way to sell a single-family home essentially back then. You sold to another homeowner, right? Today, a huge percentage of the market, depending on the part of the country, anywhere from 10% to 40% of the market is now owned by investors who then rent those homes out. So, the fact that there’s this underlying investor market that would love for property values to go down to buy up more houses, I think that’s going to help buoy property values even in a recessionary environment because there’s so much capital as I realize, single-family is a real investable asset class.

[00:36:32] Dean Barber: Yeah, that’s fascinating. I think you’re making really good points there. And it kind of gets back to, I did a show here recently on debt, and we looked at since 2000, household debt has increased by 240%, yet debt service as a percentage of household income has declined by 19%. And so, the natural thing that we see there and what we understand is that while there is more debt out there, the actual cost of that debt is much lower.

So, the debt service as a percentage of household income has declined. And so, it almost makes that additional debt that everybody’s trying to make a big deal of kind of irrelevant, not totally irrelevant, but it’s not as big of a deal as the headlines would make you believe, “Oh, look at how much debt American households are in today. Gosh, they’re in worse shape than they’ve ever been before,” but the reality is, when you look at the debt service as a percentage of household income, they’re in better shape than they’ve been in a long, long time.

[00:37:33] Don Wenner: And that’s the crazy thing is when you think about the home prices, everybody talks about home prices are going up so much, and they are– I mean, it’s unbelievable, but the average cost of a mortgage today to your point is less than it was in 2006. It’s been at almost any point in the last 20 years what the average payment is, which is how most people unfortunately live is based on payments, is actually down. I think the interesting thing, and I know you kind of started your triple threat kind of comment about stock values plummeting or going down a lot where the debt has grown tremendously.

And I’m not the expert in this space, but I’ve read some great literature from Howard Marks’ Oaktree, and he’s put together some of his, I forgot what he calls them, but his thoughts on this and corporate debt has skyrocketed. So, obviously, government debt has grown probably the greatest percentage, and then right behind that is corporate debt. Household debt has been significantly more modest in terms of real growth, but corporate debt has skyrocketed, and not only are valuations at an all-time high but corporate debts at an all-time high.

[00:38:38] Dean Barber: Yeah. And the corporate debt deal is another whole phenomenon. And it’s a balance sheet deal, right? So, a lot of the corporate debt that’s been taken on has been for the stock buyback program. So, they’re issuing bonds and buying back shares. And the little secret is out there that you can boost your earnings per share if you have fewer outstanding shares. So, let’s go out and buy some of our shares back and make our earnings look better on a per-share basis, but then we just took on the debt to do that. Financially, that’s been great for corporate America over the last decade for sure. There’s zero question that, but that’s one of the things that’s helped buoy the market, and the low-interest rates have helped buoy the market, too, so…

[00:39:22] Don Wenner: I’d say that’s the opposite of what we want, though, in terms if we rather have these companies investing in growth and infrastructure and hiring people instead of buying back around on stock.

[00:39:30] Dean Barber: Right. There’s a lot of them that are doing that, but it is a shell game kind of, if you really don’t understand what’s going on behind the scenes, you think that, wow, this company just keeps earning more and more and more. And the reality is they just have fewer shares outstanding, so their earnings per share increase.

[00:39:45] Don Wenner: Yep.

[00:39:46] Dean Barber: Part of their forecasting, right?

[00:39:47] Don Wenner: Yep.

[00:39:48] Dean Barber: Alright. So, let’s talk about that book you have out. I know that it doesn’t necessarily pertain to what we’re talking about here today. You sent me a copy of that book. It’s fascinating. It’s all about how to build an amazing company. So, if there’s anybody out there listening or watching that’s got an entrepreneurial spirit, they can learn a lot from what you’ve done there, Don, which is just super impressive. We’ll also put a link to your website in the show, notes and a link to a spot where people can go and buy that book. So, tell us a little bit more about the book, how it’s selling, and are you getting any feedback from it?

[00:40:22] Don Wenner: Think you. I actually would say the book actually does highlight into what we’re talking about in a way. So, the book is called Building an Elite Organization. Kind of the subtitle is The Blueprint to Scaling a High-Growth, High-Profit Business. Really what it is doing today is it’s a book on how to run a company, how to manage a company. As I said, kind of on my own set, what’s really important investment is great management and a strategy that makes sense for where we’re at in the investment cycle, etc., right?

So, great management is about disciplined execution. And the great Jim Collins wrote a phenomenal book called Great by Choice, and he studied all these big, huge, giant companies like Southwest Airlines and so forth. And what really made them so great and what he came down to at the end of the day, what his conclusion was after four years of research was, in essence, what my book is about, which is running a disciplined operating system, what he called the 20-Mile March, which is one of our core values.

So, it is really, really critical that any company investing and is running a disciplined organization, but certainly anybody listening, looking to scale an organization as a CEO or as a leader executive of an organization, you get some value out of it. It’s been phenomenal. I launched the book in April, being number 4 on USA Today, number 5 on Wall Street Journal, number 1 in all of Amazon’s. We’ve had some pretty great sales and phenomenal feedback from it. And it’s been a humbling experience for sure, especially hearing feedback from people putting it into action. It’s been pretty awesome.

[00:41:55] Dean Barber: Well, amazing. Congratulations. Again, Don Wenner, he’s the owner, creator, founder of DLP Capital. It’s such a pleasure to have you back on here to The Guided Retirement Show. Again, a link in the show notes to Don’s website, as well as a way to buy his book. And I encourage people that are of the entrepreneurial spirit to read it, check out all the things that Don’s done. It’s an inspiration for really the American way of life here, Don. So, thanks for being here, and I hope you have a great day.

[00:42:22] Don Wenner: Thank you, Dean. It had been a pleasure.


[00:42:23] Dean Barber: If you’re listening to us on a podcast, make sure and subscribe to the podcast and share the podcast with your friends.


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