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87. Investing Across Asset Classes and The Current and Future Markets

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In this episode, we're joined by Timothy J. Wallen, CEO of MLG Capital. MLG is a real estate investment company diversified across many markets and asset classes including multifamily, office, retail, and industrial properties. Today we discuss with Tim his journey from a Tax Manager at a Big 4 to CEO of MLG Capital, his thoughts on office and retail spaces, where we are in the current market cycle, the future, tax strategies, the two ways to invest with MLG, and much more.

Asset Classes

For MLG, real estate investment is about the basics of the balance between supply and demand. In private real estate investing, the space is more fragmented. There is more room for human error, so MLG likes to find opportunities for improvement here, where an asset's performance could be greatly improved with better, more structured management.

While MLG is diversified, and diversification is important, different asset classes are not necessarily the drivers for acquisition. It's ultimately about finding opportunities where MLG believes they can grow the operating income of an asset.

Each asset class presents different challenges and opportunities. For example, industrial has close to 95% occupancy but it's very difficult to find deals here. MLG likes to focus on existing assets with existing cash flows - this usually involves avoiding the risks that come with development.

Office and Retail

On the office side there is about 90% occupancy - lower than multifamily and industrial (95%-96%). In general, there seems to be a systemic higher supply than demand. New office developments aren't always out of necessity, often new buildings are constructed because of desire. It can be difficult to make money in the office space because of the high CapEx, though it's definitely possible, especially if you purchase your investment when it has a low occupancy. With remote work and other flex/shared office trends rising, the average square foot of office space per employee has been dropping. This is a demand negative overall, but mixed-use and coworking environments are on the rise.

In retail, there is about 95% occupancy, but this asset class is undergoing change. There isn't much supply growth, or new development. The needs of tenants are changing dramatically, so you may have high turnover costs. For retail, MLG likes to look at the great locations first, regardless of occupancy, and add value immediately to fill up vacancies.

Current Market Cycle and the Future of Real Estate

Real estate has obviously had a big run over the last seven years. We are in a fully mature market. The easy money investments of the last decade have now become stable in their valuations. Overall, the market is very stable. You must be very disciplined in investing in this current market. Managing risk and leverage is increasingly important too. You can't expect 20% IRR, it's more realistic to be at 12%-14% (which is still good!). You must be diligent in analyzing deals.

How is MLG underwriting deals for the future? Are you taking into account a higher cap rate upon exit in the future?

MLG likes to incorporate a cushion for an increased cap rate in the future. Tim notes that cap rates are mostly driven by debt constants, meaning combinations of interest and principal payments. As long as debt is plentiful, cap rates can likely maintain low levels. Interest rates and the availability of debt drive cap rates. Tim believes we are in a systemic multi-decade scenario of lower rates. The "boogeyman" for real estate investment and the economy as a whole is deflation. Since governments have some of the largest amounts of debt in the world, they will likely do everything in their power to keep interest rates low, avoiding deflation.

Investing with MLG

MLG offers a traditional private equity fund structure, where you're investing as an LP and receiving a form K-1. If you're in one of the highest tax brackets, you may be better off in this LLC fund structure. This will give you the maximum tax benefits when investing in private real estate due to the inherent structure of the entity. The downside is that you will have investments in multiple states, so you must be investing enough money to overcome the tax burden and filing fees associated with multi-state investments.

You can also invest with MLG through dividend funds, where you're receiving a 1099-DIV. This is a non-traded REIT, it's not public. The REIT is placed between the fund and the investor. This converts rental income into dividend income, so you avoid UBTI and multi-state filing.

Learn more about Timothy and MLG Capital:

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Hall CPA PLLC, real estate CPAs and advisors, helped me save $37,818 on taxes by recommending and assisting with a cost segregation study. With strategic multifamily rehab and the $2,500 de minimus safe harbor plus cost segregation, taxes on my real estate have been non-existent for a few years (and that includes offsetting large capital gains from the sale of property).

Mike Dymski - Business Owner