Hello, everybody. It's Sam from the Financial Samurai podcast. And in this episode, I have a special guest with me, Ben Miller, co-founder and current CEO of Fundrise, my favorite private real estate investment platform. Welcome to the show, Ben. Hey, Sam. Thanks for having me. You know, about a year ago or a little bit over a year ago, I think it was early 2022, we had a long hour conversation about the future of inflation and interest rates.

And I clearly remember early 2022, I was thinking to myself, there's no way the average mortgage rate will reach 6% again. And you at the time were adamant that inflation was going to rise beyond 7, 8% and mortgage rates rise beyond 6% over the following 12 months. And you proved to be correct.

Can you go through your thought process now that you have been correct? How did you get into that thought process? And how did you make such a strong determination? Oh, man, it's so hard to put yourself into the seat you were in, like in the past, because you have so much, you know, retrospective knowledge.

So, gosh, early 2022. Yeah, I mean, I had been in the firm camp of hire for longer. Inflation was a serious problem. How did I get there? Because you were spot on. And you had a more bearish outlook, which turned out to be correct as well in 2022 as things softened.

Right, right. No, I mean, it's one of those things like, and I wish I'd doubled down even more into those positions, because I guess much as we were right, I wish we'd even, like captured more of that. Because it's been a rough 18 months for real estate industry and the stock market sort of was rough.

And now it's a sunnier day. So how did I get there? Well, I think it was a combination of two things that I typically do. I'm doing now, I think about the next 12 months. It's a combination of like things on the ground. So sort of microeconomics, stuff we're seeing firsthand.

And then I look at the history. Like I always say, like to understand the future, I look at the past. And so, you know, at the time, on the ground, we were seeing I think 20% rent growth, something just, you know, stratospheric, like typically rent growth is 3%. We saw rent growth explode starting May 2021.

So that was like some on the ground, like sort of obvious, like, well, how does that not translate into huge inflation? And then the historical side of it, you know, I went back and read some books from the 70s. And, and there's a really good book actually called what's it called?

The Secrets of the Temple. Hmm. Never heard of it. Yeah, it's about the Fed in the late 70s and early 80s. And it's basically like a sort of almost, it's not autobiographical, but it's like a deep story from Paul Volcker about sort of what happened. And a lot of the stories we hear now are not exactly what happened back then.

And so you sort of put these pieces together. I want to last on the last piece, the third piece of my, my model, my mental model, is I look at what people want to believe, especially the stock market. And, and if you see the market really resisting information, that's typically a tell that, that like, eventually, like sort of hope will not triumph over experience.

Mm hmm. Well, well, you were proven spot on correct on terms of inflation and the mortgage rate. And just to rewind a little bit for new listeners who don't understand or know what Fundrise is, can you just provide a brief history and description of your company? Yeah, okay. Well, let me start with me just so because I, I, so I, I come out of college in the late 90s.

And I work in real estate, private equity, and then get the bug, do work in tech. So I work in tech during the tech bubble. So 99, 99 to oh two, I worked in tech, maybe even 98 to 02. And so I really saw that world. I was a financial analyst at a startup and we raised money.

And then I went and that obviously everything blew up and I went into real estate. I was in real estate till, you know, through a real estate blew up. And then in 2012, I started co-founded Fundrise, sort of combining some of my, my background in tech and real estate.

And in real estate, I worked at a, I was a president of a large real estate development company. We're doing large mixed use complex real estate projects. Like we built this like $350 million development in downtown DC and this urban development was complicated and advancing and in '08, my capital partners, my big, you know, $300 million, $300 billion capital partners went bankrupt.

Wow. Just like that over leveraged? Yeah. My, so my, the biggest partner was coming called GMAC Commercial, General Motors, Sepsons Corporation, and they had spun themselves off and they got bought by KKR, Goldman and Square Mile, I think. And the three of them over levered it. And, and I had a half a billion dollars with GMAC.

They changed their name to Katmarc and then they went bankrupt in 2008. Sure. Okay. So you were, it was a scarring experience. Definitely. 2008 made me such a, such a skeptical, jaundiced person. Like people, people, you're so, you're just, somebody see even like pessimistic, but I would just say more like really, really, really skeptical, especially like the, the more, the bigger the institution, the more I like, wow, I behind the scenes, I don't believe it.

So anyways, I came out of that being like, well, this is just, this is just terrible. The system, '08, people who weren't to go through '08 don't realize like how, how much the system just became, Emperor's no clothes. You know, it's just, it was a deep distrust of institutions.

I mean, a little bit what happened with sort of American government probably the last few years, like absolute loss of faith in the system. Right? You were there. I mean. Oh, I was in the front lines. I was on the training floor at Credit Suisse, which ended up going under this year by taken out by UBS.

And it was unbelievable. I remember Friday betting with my buddy sitting next to me that Lehman wouldn't go under because I thought the government would save the company. And so I bought shares and I bet him a hundred bucks and then went under and then I lost everything. So I was right there and it was more devastating than I have ever experienced.

Even the pandemic, that was only like one, two months of scariness going down, but then we rebounded. But the financial crisis was three years of pain and wondering what the hell would happen to us next. Yeah. That's what people don't realize. And this is also like, I feel like I like to read history that it's like you, it's really hard to put yourself into the historical events and that '08 really was in many ways worse than the pandemic, worse than 2020 financially, like no question.

And like the way to think about it, maybe it's like, if you weren't there, it's a little bit what happened with Silicon Valley Bank. Like, oh, it's every bank going to go to zero. And then basically all my savings go to zero and stock market went down, had gone down 50%.

Everything was all that you would sort of take for granted from a financial economic point of view just went away. Yeah. And so the financial crisis, 2008, 2009, 2010, things started getting better in 2011, 2012. How did you say, well, after all that scarring and the destruction in housing, because over lending and over leverage, you say, I'm going to start Fundrise.

So I came out of that experience, again, skeptical and not really wanting to go back into institutional world, like not looking at institutional world as like, oh, like I wasn't enamored by it or somehow impressed by it. And so when I was looking at buying a city block in Washington, DC for $4 million, which is a really good deal in 2010.

The whole block? Huh? The whole block? The whole block. The whole block. Sounds like a great deal. Okay. It sounded like a great deal. And it was in this emerging neighborhood, which at the time, anybody who was young, everybody went there. You knew it was just blowing up, right?

Just absolutely blowing up. And I went to raise money for institutions and they're like, oh, I don't really know where that neighborhood is. Back then, real estate was still very suburban. And also they're like, well, $4 million is too small. It's just too small. We'll do $50 million. Okay.

I was like, what are you talking about? And so I was talking to a lot of people who were in the neighborhood and people who were my age and people who were like basically got it and they're like, oh, I can't believe you're buying that. What a steal. I wish I could invest in it.

And I was like, wait a second. Why can't they? Like, why can't ... I sort of skipped this institutional middleman who's to me basically flawed and probably not nearly as smart as they say they are. And so that was like the genesis of like trying to just connect the dots between like what I was seeing in real life and how the world used to work and how the world I thought should work.

No, that makes a lot of sense. And maybe you can talk about your family's background because I feel you come from a family of real estate investors. Your father has a long history in investing in the DC area. My father's a real estate developer. It's what makes me understand real estate developers who are a handful.

And so he's built tons of real estate, mostly retail. He built malls back when malls were like ... everybody building. He was building malls in like the 70s and 60s. And so it's actually one huge benefit of that other than obviously getting a decent amount of exposure to real estate was I was in ...

was I in high school? Maybe I was in high school, early high school when the SNL crisis happened. And the SNL crisis, I mean so many things are different back then. But the 1992 savings and loans crisis, that was actually the worst real estate crisis in American history. Maybe worse than the depression, up there, way worse than '08.

Most people today don't know anything about it. It's not like a part of history that most people in business or finance know about. And I'll just give you some sense of it. Something like half the real estate in America I got foreclosed on. Wow. Yeah. Just like really just crazy numbers.

And your father was right into it, right in it. Well, back then this was so ... I mean there's so many differences and people don't even know what a savings and loan is. And I've wanted to do a whole ... almost like produce content around this era. It's such a fascinating period because what happened is the SNL crisis was this sort of cleansing.

It destroyed the financial industry, real estate industry. And then it got rebuilt. Everything we take for granted as normal today, REITs, public REITs, and private equity funds, and securitization market, all of those were birthed like a phoenix in the 1992 SNL crisis. So yeah, and so basically I feel like I have a longer view, the long view in a way because of that, my sort of family background.

And then how did your ... did your father survive? I mean, I guess he must have lost a lot of money during that time, but how did he phoenix recover it? It's actually funny. I was just with this real estate dinner two nights ago and it's like something similar is happening.

So what happened was ... so back then, this is going to blow people's mind if you're in finance, but back then most loans were demand loans. What does that mean? So if you had a hundred million dollar loan from a bank, whatever, this is going to be a large one, they would just call it.

They would just demand their money back. Money back, but what if you can't pay the money back? Oh, then you're in big trouble. Well, isn't there that saying, something like if I borrow a thousand bucks, it's my problem, but if I borrow a hundred million dollars, it's the bank's problem?

Yeah, so what the banks did, because the banks basically were going bankrupt, I think 8,000 banks went bankrupt in that period, is they would call the best loans. So what happened was the better the borrower, the more liquidity crisis they had because they had their loans called, the bad loans.

They didn't call the bad loans. What's the point? You can't get it back anyway. You can't get it back. So that's why a lot of these big real estate portfolios, mostly owned by families, ended up going public in order to get liquidity to pay off the banks. So that's happening now because basically if you have an office building, the bank's not going to foreclose.

Okay. Because they're like, "Well, I don't want this office building. If I foreclose, then it's my problem." So they're actually starting to work with the borrowers on office because it's so bad. Which is good. If you have a good asset, they actually will foreclose. So it's like, yeah, there's this weird whatever the opposite of adverse selection is.

The worse your property is, the nicer they are to you. Interesting. So you have basically about 31 years of experience, collective experience in real estate trauma, ups and downs. But over time, over that 31-year period, things have moved upward. So I think that's really important for listeners to understand that your background forces you to look at things in a much more critical eye than I have seen any other CEO or real estate investor look at who is in your field.

So that's a really good competitive advantage. On the downside, I would say is that maybe you might be more too risk-averse in going after those home runs. So how do you balance that more cynical outlook with the desire to grow your company and make returns for your investors? Yeah.

I mean, I feel like what happened in the last 15 years, I was scarred from '08. Yeah. I feel like my lesson is when it gets good, it gets better than you thought it could get. Because my other lesson was when it gets bad, it gets worse than you thought.

So I had really seen it gets worse. But I'd previously in my career really never seen it gets better than you could imagine. And so I started Fundrise 2012. We grew from whatever, three people to 300 people. We have like 20,000 residential units. We have $3.3 billion of equity, $6, $7 billion real estate.

We have 400,000 active investors, 2 million users, blah, blah, blah, blah. That's great. All this stuff. So it's just insane. So the sun does rise again. I mean, anybody listening to those statistics going from basically nothing in 2012 to 10, 11 years later would say that's a huge success.

And does the cynicism decline over time? I would say it's a team. I did this. I was a small part of that success. I guess I exist often at the margins, both good and bad. So whether it's the team, I'm pushing them actually out to be more ambitious, more risky, so to the extreme.

And also on the negative, sometimes I'm pushing them to be more conservative. Because what happens is mostly organizations sit in the middle. There's an organizational bias towards this middle position. And again, I said sometimes it gets way better than you imagine. Sometimes it gets way worse. So of a 15-year run we just had, mostly it was better.

And then we'll probably have a couple years where it's way worse. We had it in 2020. And so what is sort of like a little bit dispositionally, but also the role you end up in as a senior executive is to be pushing on the margins. When I used to work in other organizations, that wasn't my job.

Essentially, that's the work I have to do is to drive change. How is the investment decision decided in terms of is there an investment committee? Is there unilateral decision making? If you identify a choice piece of property in, I don't know, Mobile, Alabama, how do you decide whether this is the property that's going into a particular fundraise fund?

Well, it's changed over time as we've grown. So we have an investment committee. We always had a committee. You always want a team. A good team always beats an individual. And so I have phenomenal people I work with, people so much smarter than me. It's just awesome. Working with people smarter than yourself, it's just such a joy.

And so in the beginning, it was a small investment committee. And basically the mistake we made was not taking enough risk in 2012, '13, '14. Yeah, it was bottom of the market 2012, yeah. Yeah, we did a lot of MES, preferred equity. So like I have a great deal example.

So we had this deal, Bend, Oregon, 2013, '14. It comes to us. They go, "Okay, we're going to buy this apartment building. We need $4 million equity. We'll put up one, you put up three." And we said, "Nah, I don't know. Bend, Oregon, apartments. How about this? We'll put in one, you put in three, and we'll lend it to you.

We'll get a 12% current return." And anything above, we'll be senior. We'll be like MES. Okay. They said, "Okay, so you'll put in a million and get 12 on the downside, but also 12 on the upside." Okay. More or less. And I was like, "Yeah, let's just do that." It's capped, yeah.

Yeah, cap return. But you know, capped, but more protection on the downside. And we did 40 of those types of deals. We did 40 MES preferred equity deals before we changed in late 2015, '16, we started doing equity. But that deal in Bend, Oregon, we put in one, you put in three, so four total.

They sold it, I think 24 months later, for $20 million. $20 million? Oh my God. So your 12% is like whatever compared to the- So they made $16 million plus three. So they made $19 million on three and we made 12%. So that's the downside of being too risk averse.

So we started investing in equity and that was one of the reasons we started going heavily into multifamily back then. But they did buy us a bottle of wine. They came to DC just to basically rub it in our face and take us to dinner. Well you know, it's interesting as, let's say, individual retail investors, I personally struggle with this as well in terms of investing to improve and then to sell as a flip or to just buy and hold and just generate the cash flow.

Because for me, I left my job in 2012 and I needed cash flow to pay for my living expenses and I needed to grow my cash flow as my living expenses increased with the increase in the number of family members I had. So in the long term, it seems like real estate has outpaced inflation by 1% or 2% and in 10, 20 years, your value of your real estate holdings is going to be greater than it is now.

It's almost like a war of attrition. So how do you think about doing that flip or the improvement or just buying and holding forever? Yeah, so that's a great question. So I have another mental model. I call them like operating principles. And so I always like to think of things like from top down and then I think of things from the bottom up.

So like top down, you'd say, okay, like real estate, that's a decision because you also could be in tech or stocks or something else. So the real estate, that's an allocation decision. Underneath real estate, you really are picking geographies and you're picking asset classes. And that's might be like, we've been huge investors in residential and the Sunbelt.

Now you're multiple levels down from where most people are making decisions. And then inside of that, you're making like the very tactical decisions of like which apartment building in Tampa, what's the basis, what kind of operating expertise can you bring to bear and what kind of leverage. And so from the top down, I believe that's 80% of returns is like all these are allocation decisions.

If you think about like the counterfactual, if you'd gone real estate, office, San Francisco, it doesn't matter how good your tactical decisions, your operations were, you're wiped. You're wiped out. And that was my 2008 experience. Like the big, big things, the big decisions are basically like 80% or 100% of outcomes and they sort of operational excellence like that.

That matters. Obviously you want that to be true. But man, if you don't get the big things right, it doesn't matter. Small things don't matter. No, that's really true. And it's sometimes hard to get the big things right. I mean, I guess long-term, the big thing is there will always be inflation.

Generally there will always be population growth. Wait a second. Well, global, I'm talking about the world. The global population growth is inevitability. Now, I don't know about America's population growth given the replacement rate is what, one and a half? It's like under? No, it's plummeted. Right. But yeah, investing in long-term trends is definitely, I agree with that.

I wrote a post about that, invest in long-term trends and then like the minutiae stuff, it's not as important. So in terms of the long-term trend of investing in the Sunbelt, I believe in that because we're work from home, telecommuting, technology, the acceptance of work from home. And I talked about that in 2016, which is why I started focusing more and more on Sunbelt and Fundrise.

But what do you say to the people who say, well, one of the downsides of the Sunbelt and the Midwest region is that there's endless supply. Whereas if you invest in the coastal cities of New York City, San Francisco, Seattle, whatever, there's just limited supply. It's really hard to build.

Right. Right. Well, so like to invest in the right long-term trends, you sort of skip the question of, well, how do you do that? And so I took this great class years ago about the sort of the five major like fundamental drivers of society. So you're talking about when you're talking big, really big, major drivers are technology, demographics, war, disease, and I think the last one, globalization, where those were the five.

And you might throw like culture in there, which you can really, it's a little more squishy because like culture Japan, not in the culture of America. And it's, you know, if you take those five, right, all five of those hit in the last 36 months. Right. War, disease, globalization, demographics, and technology.

I mean, those are the, it's just, it's uncanny how much those are the fundamental drivers of long-term trends. And so if you just sort of parse that, like, you know, so yeah, real estate, you can think of real estate as like a levered return on GDP. And so, and so where the GDP growth of, of like Youngstown, Ohio is like negative.

Okay. And the GDP growth of like, of Dallas is, is way above our national average. So by doing, by picking the right region, what you can do is take US GDP growth and then get the top end of it, right? Hopefully top quartile of it. And that's, and that happens, that happens to be, you know, these Sunbelt cities, but we, if you'd asked me this 10 years ago, I would have said New York, San Francisco, LA.

And we were, that's where we were investing. We were heavily invested. We were not invested in the Sunbelt before 2016. And that was because the levered GDP growth was in those cities and the cities were having huge population growth. So, so like, okay, follow people that's demographics. The second is technology and technology is, I mean, so obvious in retrospect, but man, is it, people seem to miss it.

I actually think people miss the big things more than the small things. And so you look at like e-commerce, cause you and I basically watched e-commerce go from nothing to basically dominant. And it was so obvious that in retrospect, retail would get destroyed by e-commerce and industrial would then of course, like rise.

Nevertheless, like, and I, my, my father was a retail developer. He built malls. Yeah. Right. It was like, it was invisible to the retail industry for sure. Real estate industry. And but it's been, you know, the biggest or top three biggest drivers of real estate growth and returns or losses in the last 20 years.

So that's a mega trend. I think remote work is sort of the next it's obvious, but I, again, I was at this dinner with like 10, you know, big real estate people and they're like going on and on how to go back to the office and the office is more productive.

And, you know, they're just, I mean, and they're all basically, I mean, it's in tech, I go in the room and I'm the oldest person and in real estate, I go in the room and I'm the youngest person. So look at all these people who are, you know, I mean, they're older than me.

Right. So like there, I'm like, well, I don't think you know very much about the future maybe because what you're up against, what I think the pattern they're missing is that e-commerce in 1997 is nothing like e-commerce in 2017. Like the technology improved enormously. And so it's not like you're competing with the technology of the present, you're competing with the technology of the future.

And so I think remote work technology is like, it's just getting started. And between VR and God knows what else in AI and other things they invent, like the office industry is fighting, fighting technology industry now, like head to head. I'm like, well, I have a firm opinion who's going to win that.

And that's technology. So these mega trends, I think of the mega trends and when I go read about it and I like, and you think about these really basic, big frames, because it's easy to get lost in the details. And that's like, I once said I was going to write a book.

If I write a book about the companies I've been involved with, I was going to call it Into the Weeds. Because everybody just goes straight into the weeds. And for lots of reasons. And it's so easy to miss then. Well, you're like, here I am in 2008 and I'm working on getting sure that this wall is properly positioned so that the apartment unit is going to be really efficient.

And in the meantime, everybody in the world is going bankrupt. Like it's, you know, these small things like they matter, but they just they if you don't get the big stuff, right. You get wiped out. Right, right. You get wiped out. And we're trying to avoid the wipeouts here, folks, the 35% to 50% declines.

And these trends that you talk about, they sound I hear a bullish bullishness in your voice in terms of investing in the Sunbelt, residential, industrial, driven by technology, work from home, demographic changes, and so forth. So that's why it's actually particularly fascinating when I hear your bearish outlook on a potential recession on the horizon.

On the one hand, I think a lot of us have been talking about a recession for the past 12 months, because of the inverted yield curve, which has always preceded a recession. On the other hand, we're seeing June CPI come in at 3% below expectations, PPI coming in below expectations.

It seems like the labor market is still very strong, real wage growth is declining. So it could be there's a greater and greater chance that the Fed will engineer a soft landing. And it won't be as catastrophic as it once was during the global financial crisis. So I'd love for you to share with listeners your view on why we could go to that catastrophic level once again.

Okay, well, so I do think there'll be a recession, but I don't think it'll be catastrophic. I'm saying sort of halfway between a soft landing in 2008. So exactly what does that mean for people like what is a recession? Partly we we debate debate, whether or not we'll have one we have to have definition of terms.

And so like somebody when I heard somebody say like a recession, it's a soft landing when your neighbor loses your job, their job is a hard landing when you lose your job. So so like, let me here's my argument why I think we'll have a recession, it's going to be a recession, it won't be as bad.

Oh, wait, not even close. But it's going to be a real recession. Is that like, it's almost like the argument has to be that this time is different, because all of the fundamental pieces that lead to a recession are in place. Right? So like, I've done this analysis and saying, you've probably heard it, but like, just to give sort of some of the main parts of it is that, so every recession in the last 70 years since 1954 was preceded by interest rate hikes.

So you have nine recessions, and every one had interest rates go up significantly, you know, so this time, we went from zero to five and a quarter, approximately right, like, like, in 2005, went from one to five and a quarter, right, and that led to the 2008 financial crisis.

So, okay, so there's, they're always preceded by interest rate hikes. And then the part that I think is tricking everybody is that there's always a long lag from the interest rate hikes to a recession. And the lag is like, you know, two years, basically, it's, it's, it takes a long time for those high interest rates to basically kill economic activity.

But they, they do and they are, I mean, I'm seeing it on the ground, there's no question that, you know, Fed fund rates at five and a quarter, which means you're borrowing at seven, 8% is, is just putting a halt to a lot of activity, a lot of activity, and also draining liquidity from the system.

And so like, so the lag of 24 months, or on average, it's 10 month lag from peak interest rates. So as average, so like, if peak interest rates are July, let's just say the Fed says we're going to stop raising rates in July, which I think 2023. Yeah, next month, I think there's a good chance of that could be they go a little higher, they could go higher.

I don't think that's like, I don't know how to call that. But like, let's say, let's say July, August, September, somewhere at peak, 10 months from there, basically, almost a year is a year from now. So you're basically a year from now having a recession. And that's why that matters is that if that happens, that's the 30 4050% loss.

Right? So if you care more about the wipeouts, then about the incremental short term gains, then you worry about that 30 4050% loss, you know, if you focus on the long term, you don't lose, say the long term, because there's a lot of like, excitement in the short term about AI or, you know, a soft landing.

Well, what do you say to skeptics of that 30 to 50% potential loss in the second half of 2024? Who say, well, let's say job growth is still good, unemployment rate goes to 4%, from three and a half percent. But the mortgage rates, so the demand for Treasury bonds goes up, mortgage rates go down, the 10 year Treasury bond yield goes to two and a half 3%.

So barring costs go down to five, five and a half percent. Doesn't that bring in demand and keep things kind of alive? So I Yeah, so I say to you two points, we take them in part. So first was unemployment, unemployment is low 3.7%. Last I checked, but every recession, there's unemployment starts out really low, it was 3.9%.

In 2007. Right? Yeah. And so that was seems pretty similar in there. And it moved a ton went to like, seven and a half percent or something in 2010. So so there's, there's, unemployment basically the lagging indicator is not leading indicator or coincidental, coincident indicators happening at the same time.

So unemployment basically is, I think, doesn't prevent a recession. And then, you know, if they drop rates, you know, let's say late next year, that's has a lagging effect on economic activity. And so it was, it's going to take time to to basically get the engine started again. And if you look historically, they were already dropping rates in '07.

I mean, rates started coming down August of '07. And they had come down from 5.25 to 2.25 when Lehman went bankrupt, September '08. So they are already dropping rates. They were also already dropping rates. In year 2000. They started dropping rates in around, I think, I think it was March around March when stock markets are falling and started dropping rates.

And they dropped rates all the way through and it still didn't stop a recession then either. So the Fed, the Fed is a lagging interest rates, and unemployment are lagging indicators. So they, and they, so they just will not prevent a recession if they are acting like, you know, essentially at the time of recession is too late.

So it would it be fair to say that the Fed is not doing their job well, then because you would presumably think these well educated, very wealthy individuals who see the data and who know that there is a lag would then be more proactive in managing those rate hikes and cuts because of those lags.

So what would you give the Fed in terms of a grade score? Yeah, it's a mystery to me because you and I could have looked back in 24 months ago, or when inflation went from zero to 9% in a month or something, right in May 2021. May 2021, interest rates started, it was the, it was a pandemic back to reality, right back to normal life in May 2021.

People started going back to restaurants, they started back to start renting and rents and all sorts of inflation indicators started skyrocketing May 2021. That was when the pandemic ended. And there was an enormous inflation indicator starting May 2021. They didn't start raising rates till May 2023. Two years later.

No, no, sorry. May 2022. Sorry, it's my fault. May 2022. Yeah, so one year. So there was tons and tons and tons of obvious indicators. Interest rates shouldn't be at zero. Interest rates were at zero. They had zero at the same time that inflation was just like, it went to three, then it went to five, then it went to nine.

So why did the Fed react so slowly? And I'm saying that's just how the Fed behaves. They always do, they always have. And I know if you go look at the, you go read like the secrets of the temple and other things, there's all sorts of reasons why, but the idea that the Fed is going to be ahead of the curve.

I think that's not likely because they normally don't institutionally, they're not, they're not likely to do that. They haven't been at least. And then also in this case, they really want to bring inflation down. So they're likely to wait till inflation is clearly down before they start raising again.

Sorry, before they start lowering again. They're more worried about inflation than they are about a recession, according to their own words. Yeah. I mean, it's kind of fascinating because I've railed against the Fed all the time, but I wonder if I'm like the armchair quarterback after the Seattle Seahawks throw a pass instead of running Marshawn Lynch into the end zone, whether we're just kind of missing something.

I mean, we're not, they've got to see something that we don't see. I have to imagine that. I don't think so. I think it's not, it's not the people, it's the institution. If we were in the institution, we'd end up doing exactly the same thing. Just like you can be a president, you can be a nominee running for president, you get in that seat and you're captive of the institutions as well.

So the institutional bias of the Fed and the political pressures of the Fed, I think are more dominant than the individual actors in the Fed. It's fascinating. It's kind of another knock against government and big government in terms of efficiency versus, you know, just being a solopreneur, a private company.

I mean, it's just hard. 350 million person country. It's got a lot of political crosswinds. I think it's just hard to manage anything that large. I mean, we have 300 people in the company. I was like, Oh my God, I barely have control of this organization. Well, hopefully you have good lieutenants who are managing down and well.

In terms of opportunity, because you launched an opportunistic credit fund. Can you tell the listeners what that is and where's that opportunity? So we have three strategies. We have a real estate strategy, we have a credit strategy, and we launched a tech strategy at Fundrise. And the credit strategy is something we've been doing a long time.

As I said, back in 2013, 14, we were doing this MES. So we've done 87 MES deals like that. 87 different lending to other families. A ton over more than a decade. And we basically had stopped doing that starting around 2020, 1920. Because what had happened was, 2014, you could lend at 14% interest rate.

And as the market got hotter and hotter, the need for that kind of funding went away. The banks actually sort of would fund it instead. So a bank would lend 75% or 80% when in 2014, they were only going to lend 55%. So there was a gap. And so there was a need for this capital and that need went away in 2019 and 2020.

Or you could do it at ridiculous risk, ridiculous low rates. And so we stopped doing it. And then basically, in the last 12 months, the need and the opportunity came back. Roaring. And so there's this gap now in the market. The banks have pulled back. And you can get 13%, 14% interest rates again for this MES position.

It's straight out of the playbook. It's so funny how it's just completely repeated, gone full cycle. And I expect basically there'll be a window to do this for three to five years and probably closes again because the market gets better. In the meantime, especially ahead of this recession, I think there's a recession.

We can debate it. No one's arguing 100% there won't be a recession. There's more risk on the downside than the upside. So it seems like a good time to be taking that 13%, 14% yield. And back when I made the wrong bet in 2014 with that Bend Oregon deal, we were on the other side of the recession.

So that's when there was upside. The risk was on the upside and not the downside. So right now, I think it's no question in my mind, if you can get that debt-like risk, I feel like you bank it, you sleep. Let's help the listeners understand why a sponsor or a property developer would pay that 12% to 13%.

Let's just set up a scenario where I guess things were going well and then the banks have pulled back and their loan is coming due. Are most of these loans variable? Is that why? They're like, "Uh-oh." How does that work from the buyer's point of view? I've done a lot of it, so I have a pretty good idea.

There's two actual sub-executions. One is a construction loan and one is a refinance. And so I'm going to do each because what's happened is the phase we're in is actually about construction loans and the next phase will be refinancing. So what happened was if you're a real estate developer and you're building a 300-unit apartment building in Tampa and you've basically been working on it for probably two years, maybe three years to get your permits, you've got your architectural drawings, you've got your lender lined up, you've probably spent millions on it, you're a breaking ground.

The lender comes to you at the closing table and says, "I know I was going to lend you 72% but now I'll lend you 52% or 55% or 60%." Where do you come up with that shortfall of 20%? You have a shortfall. It's a shortfall, say 15% of that project and that's maybe a $10 million hole.

And you just don't want to go back and raise that money. You go back to investors and say, "Actually, I need twice as much money." And so a lot of investing is about actually understanding where somebody's got momentum. Knowing what they know at the moment, they probably wouldn't have even started the project but they've got to carry it to the term.

And so they'll come to us and basically that's where we'll go. We'll go in this up to 72% or something like that in the loan to cost. You think about that as like, "Okay, this building may cost $200,000 a unit to build and I can be in this building for whatever $135,000 a unit.

I feel super good about that. I couldn't buy that in my dreams if I were on the market and I can lend into it. So I feel really good about the basis. I know the sponsor. We've done a lot of deals with the same sponsors over and over again, repeat sponsors over a decade.

So that's the first and that's the most common today. We've done six deals like that in the last 90 days. How did you source those deals? Was it like a blast email saying, "Guys, we've got $100 million for you to vent," or did they come to you? Typically, you're already known.

You already work with these people. You have relationships. Part of it is just you know it and then there's brokers who know you do it. It's always brokered. Everybody just uses capital brokers. There's only maybe 20 brokers in the country that do 80% of all of the financing for this stuff and they know you and they say, "Oh, we do this deal," and typically we're like, "No, we're not going to do that deal." So it's very informal.

The real estate industry is such an inefficient market still, how people find money, how people raise money. It's a broker transaction. A broker is like, you know, it's not a rigorous process. Interesting. So once you get sourced that deal, how long does it take for you guys to analyze the deal and say yes or no?

Or to say yes, I guess. Yeah, I mean that process, it's weeks and weeks and weeks. From the first time they touch us to when we're closing, I mean you're talking about like two to three months. We can get the yes pretty fast. Basically, you want to get to a signed term sheet.

You want to lock up the deal. The funny thing about deals, I think it's true with most deals, is you can know right away. It can know within five minutes. It's so funny. Where is it? Who is it? How much do they need? Why do they need it? What's going on?

Okay, that's a good deal. That comes from experience. Yeah. I mean I'm sure it does, but I always talk to people and I'm like, "Yeah, but look, so obvious. Look at this. It's where it's like you have to sharpen your pencils or you're like, "Just don't do it. Don't bother." Sharpening it, you're like, "Oh, it's this new sponsor.

They just left a big firm. They had friends and family, they need more money." It's like, "Ah, forget it. Just no way. Just too hairy." On this one, this is actually the lesson, probably not as intuitive. The risk is on the sponsor, not the asset. Okay. Right? The basis we're in at and the type of asset, multifamily, it's not the asset.

It's just the sponsor is dishonest, is incompetent, gets over their skis, whenever they get in a fight with their partners. It's always been for us on the 100 plus, whatever, 90 plus deals we've done, it's the sponsor, the real estate developer. That's the one. And real estate developers are a handful.

Yes. They're a handful. Sure. So that's actually, that is experience. I've had team members bring me deals, like, "This is a great deal." I'm like, "Tell me about the sponsor." "Great sponsor. They have 5,000 units." "Well, where'd they come from?" "Oh, he was the biggest originator of subprime mortgage in 2008 or 2007.

And then it blew up because the mortgage business blew up." Yeah. "And he was the biggest originator of subprime mortgage in California in 2007." Yeah. "Don't do the deal." Why? What do you mean? Maybe he learned from it. Maybe he learned from his blow up. No. Don't do it.

No? No. Okay. And they're like, "Okay, fine. Then get a hold of his lenders from 2007." "How do I do that?" "Just find them." And weeks go by, they're like, "I still can't find them." "Then we're not doing the deal." Okay. It's not worth it. And they finally, finally found the guy.

They're like, "I got a hold of this person. I called him five times. He finally called me back." And he said, "I wasn't going to call you back, but I felt so bad for you. So I'm telling you, don't do this deal." The lender of this guy is like, "We foreclosed on this subprime mortgage originator.

Literally, his computers were at the bottom of the pool." Oh my gosh. All right. Don't do the deal. Don't do the deal. A little too shady. Too shady. Yeah. Yeah. There's lots of things that shady people do. And that's where if they have a trust and the investor is a trust rather than a person, that's often a bad sign because they're trying to shield the person.

Issues. I had a person that did a deal where Mark Anthony was the equity. Mark Anthony, the singer. Okay. Singer. Yeah. And the sponsor I was going to trust. And I was like, "Hmm." After a little bit of digging, sponsor, been in jail, insider trading. Okay. So why risk that?

Yeah. But Starwood was the lender. Well, it's tier one. Yeah. It's amazing to me how many of the big private equity funds will look past that stuff actually. Interesting. Interesting. So I cut you off there. You were talking about two lending scenarios like the construction and refinance. And the other one, refinance.

Yeah. So that's the wave coming. The wave coming. Yeah. Where basically all these deals were essentially bridging. They're all waiting for interest rates to come down. And interest rates were basically 3%, let's say, 0% plus 250. So maybe interest rate previously were at 3%. Now they're at 8%, 7%, 8%.

And they need to get to, they're waiting for it to get to somewhere in the middle, like 5%. Yeah. Right. So they're bridging it. And there's just like trillion dollars on bridge loans today. But the problem is that when they get to the other side and they say, "Okay, now we can go perm it out, go put it on stabilized long-term financing." They have too much leverage.

They have to de-lever their loan. And so they need MES, preferred equity, recap. And that's going to be a multi-hundred billion dollar demand. But nobody wants that money today because nobody wants to perm out their loan yet. They want to wait till- Nobody as in the companies borrowing the money.

The borrowers, the sponsors, the real estate companies. They're kicking the can. They're waiting for interest rates to fall. Yes. I'm waiting too. That's where they go perm out, put permanent financing on it. And when they do, they're going to have to raise more money. That's their thinking. And they're just thinking, "If I kick the can, I'm better off." Right.

Until they can't. Until they're, right? I mean, it's not a marginal- Until they can't. But that's not in their business plan. Okay. And so let's say they borrow from you guys at, I don't know, 8%. No, no. No. What would they borrow? What rate would you charge them? Okay.

This is a little complicated, but I'm going to try to give you the math so that I think it's easier to really understand what's happening. So let's say you have a deal that has $5 million of income. Let's say an apartment building because that's probably the cleanest, lowest risk deal.

So it only gets more risky and worse from here. But let's do apartment building, $5 million of income. So you thought that was worth $120 million because at a 4 cap, a 4% interest rate, that would have been $120 million. Now it's a 5 cap, so it's worth $100 million.

You'd previously borrowed, maybe it cost you $100 million to build. You thought you were going to sell it for $120 million. We're only going to sell it for $100 million, so you're going to break even. And you previously borrowed 75% against that. So that's a $75 million loan. You put in $25 million of equity.

Now the perm lender is going to say to you, "I want a nine yield on my debt." That's what Fannie and Freddie today are saying. "I want a nine yield on the debt." That's not the interest rate they're going to charge. They're going to charge whatever today, probably close to six, but they want to size the loan based on a nine yield on debt.

So a nine yield on a $5 million is a $55 million loan. I was trying to do the math because I feel like it helps people understand. So the best lender in the world is Fannie and Freddie. They're one of the cheapest rates. They're going to size the loan based on a 9% constant.

And that means it's a $55 million perm. They previously borrowed $75 million, so they're short $20 million. So they at some point need $20 million when they go do permanent financing. And that's basically the opportunity that's coming probably a year or so, within a year, I think that happens.

Right. And what rate would Fundrise charge? And how do you calculate that rate? I mean, it ends up being very market driven. So it probably ends up being 12%. I think that's where I bet. Wow, 12%. And is it callable or not callable? If the sponsor or developer finds that cash, that $20 million, can they just say, "Here's the $20 million back.

I don't want to pay your 12%"? What's the penalty and how does that work? It depends on the deal. A lot of lenders, like a lot of MES lenders will actually put like basically different kinds of call protections on it. It's typically a minimum multiple, say a minimum one and a half times multiple or something.

And we usually don't. We usually win the deal by saying, "You can prepay us anytime." I'd rather have a 12% that's prepaid than lose a deal because someone else bid 11.5%. Yeah, right. Because my bet is on a portfolio basis, most people aren't coming up with the cash. Right.

Overall, right. It's just overall. And that's been my... If the market comes back as red hot, maybe three, five years from now, you start getting called. But I think across the portfolio, it's really unlikely. Sponsors typically, if they can get more money, do another deal. They won't go back and use that new equity to recap an old deal.

They want to be in motion. They're like sharks. They have to be in motion. Interesting. So it's really unusual. The only way they really take you out is with more debt, not with more equity. Wow. What is the average duration of these opportunistic credit fund deals? Well, so the development deals are short.

I mean, they're probably four years. And people like the idea they're short, but I love the long. So you can get 13%, 14% for three to four years, or you can get 12% for 10 years. I'd get 12% 10 years all day. I would invest all my money for 12% for 10 years.

Yeah. And so we still have tons of those deals from 2016, where we just say, we went in and we went... Because typically a perm is going to be long duration money. And the funny thing is most private equity funds hate that. They hate the long duration because their fund doesn't have the life.

Their fund life is usually five to seven years. Oh, but they raise another fund. And so there's actually not that much money out there available for a 10 year, 12%. It's a bizarre inefficiency in the market that we've been sort of harvesting for years. Yeah. For our investors, most of our investors would...

Our investors are definitely a 12% 10 year investor. I mean, I would happily do that. So I guess in this scenario, let's say in two years, 2025, 2026, let's say mortgage rates are down two and a half percent, 3%. If I'm the developer, I'm not paying 12% though anymore.

I don't want to pay that if I can borrow at 7%. No, because you can't refinance the senior. Okay. You're just locked in? The senior is locked in and for you to refinance me, you have to refinance them. And they will have... I mean, the prepayment penalty on a 10 year loan that was at 6% or 5% mortgage now is at 3 is going to be 10 million bucks.

It's going to be huge. So basically the senior is sort of blocks an easy refinance. Okay. Well, I'm excited about this fund now. So for listeners who want to invest in this fund, what are the criteria for them to invest in this fund? This strategy, we have two funds investing in it.

We have the income fund, which is open to everybody. And basically we take as much of these deals as we can now. And then we have the opportunistic credit fund, which is a credit investor fund. So both funds invest in this strategy now. And I would say that at the moment, just generally in the world, there's way more opportunities than there are dollars.

We're not dollar constrained. We're not opportunity constrained. We're dollar constrained. We have tons more of these deals we could do because there's just so many borrowers need this money. And most investors, I'd say we still have, I mean, we still, we, we invested $400 million in the last six months.

We did invest a decent amount across all of our strategies, but we last year, this time we invested a billion and a quarter. Okay. So like the dollars and most of the dollars we're putting out were dollars where you sat on. Yeah. You and I were, I told you I was conservative a year ago, so I sat on a lot of dollars.

I started putting them out in earnest about six months ago. Yeah. But it's like most people are, I I'm finding is that the most people are on the sidelines, they're in money markets. Yeah. That's not wrong. I'm just, it's, it's constraining though, because I think it's, it's got an exciting time to put money out.

And I think that there's sort of like two investors in the market, the investor on the sideline and the investor in high risk kind of tech. Sure. And you said there's two ways to invest the income fund and the opportunistic credit fund. Is that accredited only or for everyone for that opportunistic credit fund?

The opportunistic credit fund is like a, is a short lived fund. I mean, it should, it's a, one of the things I found is that the operating cost of a, of an evergreen fund, the funds that like our income fund is like $2 million a year. The operating cost.

Okay. Just third party, just dealing with SEC, transfer agent, all the regulatory stuff. So that has to be, so you can't, you can't have a small short lived fund. Okay. That is like, um, that's like then that it doesn't have the regulatory burden or sorry, that does have the regulatory burden.

So it's, so we, we created two ways to do it. One through income fund, it's liquid every quarter, you know, and then the opportunity credit fund is not liquid. It's a five to seven year lock at lockup. Okay. And minimum investment, a hundred thousand on the hundred thousand credit fund and $10 on the income fund.

Right. And you, one would say, is it fair to say the opportunistic credit fund is a hundred percent these type of opportunistic refinance construction loans, whereas the income fund is a, is a small, yeah. Um, and, and we, and we, we were sitting in a lot of cash where we started putting the cash out.

Um, and so that, that was like, you know, see on cash looks smart in retrospect, but at the time when your yield comes down, you're sitting so much cash people not so happy. Right. So, um, you, you mentioned last year you're something, was it around 20% of your assets were in cash?

Something like that. We had a huge, huge amount in cash and we, um, yeah. And now we've been putting that out. It's come down as we basically tried to grab as much of this opportunity as we can. And it's, um, and so it's the bottom, but it's, it's definitely better than it was.

And so how does, how do you reconcile that with your belief in another recession? Because I, and I say another, because first quarter GDP, second quarter GP were declining back to back. So that's a recession in my mind. I think last year there was two consecutive down quarters as well.

So it's almost just kind of like a amorphous word. Um, so I guess it depends on, so you put in the 400 million to work and you're going to put more money into work this year, but then you think there's gonna be a recession in the second half of 2024.

How do you reconcile that? Well, so it's funny because a lot of the real estate we invest in and credit is, um, it's fairly counter cyclical. So, so like rental residential, I think it's going to do pretty well if there's a recession and like a lot of the stuff that's like, you know, driven by earnings will get really hurt.

And so like the time to buy often depending on the asset class is like when there's not enough liquidity in the market. Yeah. I, our operating performance on the, on the, on the ground have been, has been basically, you know, as if their economy is not in recession, their rent growth, their occupancy.

And I, and so, um, the way I think about it is it's, it's actually more around certain kinds of investment activity. You want to be in lower risk. You want to be in credit. You want to be in sort of value. I'm not saying you should, I mean, you can be on the sidelines too, but I was on the sidelines in 22.

We go into value and credit now. And, um, and then like, you know, maybe distress next year, but it's, it's not that you're not active. It just what, what the activity is like, I don't, I don't think you want to be buying risk today. I think you want to be buying value.

Yeah. I mean, there's also a price for everything, right? And you model out and then it depends on how you're, how long you're going to hold and so forth. Well, Ben, this has been a great conversation. I could talk to you for hours. I know maybe your kids or someone are like bugging what's going on dad.

But where, uh, for more information, what, what would you recommend listeners go for? Fundraise find out more. Yeah. I mean we fundraise.com I, uh, I have a podcast, so I try to put my thinking out there, which is called on word. And, um, yeah, if you, if you were to sign up for fundraise, you'd get a lot of, you'd get a lot of emails, you know, good or bad.

We've probably sent a fair amount of content to people. Um, but I, you know, I mean, it's, and I haven't, I even have a Twitter handle, which I think I, I follow you on Twitter for sure. Yeah. Ben Miller eyes. Yeah. Um, and maybe I'd actually just sign up for threads.

So I gotta, I gotta, I can't do that. There's just too, there's too much going. You gotta focus, Ben. I had to sign up. Well, I love to talk again and connect again because we have more things to talk about. Uh, I want to talk to you about the tech fund that you've launched and how that's going.

Uh, but we want to be conscious of the time limit that you have. So thanks so much for spending this hour with me. It's been great to understand your thoughts in the future. I really think, um, your critical thinking and your, your history and your cautious nature of looking at things is really a benefit for investors.

And that's some, that's something that I want to, I want to put my money into someone who's always looking at what are the downside risks? Where can we avoid the huge blowups? Because I, you and me, we're, we're the same age and I've gone through the 2000 bubble 2008 and it's just like, wow, I can't believe I lost 35% of my net worth in six months that took 10 years to build.

And if we can sidestep those blowups, I think we're going to be better longterm. So if you want to sign up for fundrise, you can go to financial samurai.com/fundrise or you can just go to fundrise.com and you can check out onward the podcast and I hope to speak to you again, Ben, maybe we should do this, uh, twice a year.

That'd be great if we can connect. Yeah, we definitely are setting ourselves up to look back and say like, okay, what, what happened? Yeah. What happened? Were we right? Were we wrong? What happened? What was, what were you writing wrong about? Cause we're definitely be wrong on something. Yeah.

Well, I wish we had the recording in early 2022 because you were absolutely right about inflation, about the mortgage rates and let's see if you're right again, uh, over the next 12 months. All right. Thanks a lot. Take care.