First – I owe you an apology.
I was forced to skip last week on the blog, and one of you guys called me out on it. So, I am sorry for missing and I am ecstatic that someone would actually miss me on here! Specifically because when I called Brandon on Monday to tell him that I got nothing for him, he said – ‘no one cares…’
Josh probably told him to say that; you think?
And yet the story of why I didn’t publish last week is quite amusing. You see, I generally keep my working copies of everything I write on a jump drive; this way I can simply pop it into any computer at any location and continue working. Well – I took my family to my parent’s home for the weekend, and while there I accidentally sat on my jump drive…yep – I sat on it and cracked it. I lost all of the contents on that drive, including the article I was working on for BiggerPockets!
You know – six months ago this would not have resulted in my absence from the blog; it’s not too hard to re-write an article after all. But, it seems that more and more I’m spending my time on the road looking at deals to syndicate.
And indeed, on Monday of last week, I took a trip about 150 miles around the corner and down the street to walk a 180-unit. Actually, this was my second trip down there in as many weeks – it’s looking very promising; much more so than anything else I’ve seen in the past 4 months. We are a few hundred thousand apart from putting this thing together!
Now is not the time for the juicy stuff, but if you would like to know more, leave a comment below and I may just spill those beans… Suffice it to say that I had a very reasonable excuse for not being able to post last week.
Now – having met and spoken to a lot of brokers in the past 4 months, and having seen the good, the bad, and the ugly…sorry, I take that back – I haven’t seen the good up until this 180-unit; only the bad and the ugly. But having seen all that, I can now clearly define who the buyers are in the multi-family syndication space.
The 3 Categories of Multi-Family Buyers
There are three categories of buyers in the marketplace today:
- Category 1: Ignoramuses
- Category 2: Jerks
- Category 3: The Real Deal
Category 1: Ignoramuses
I’ve got a simple question for you, and it goes like this:
Question: Why do foreclosures exist in the multi-family space?
Answer: Because most buyers are idiots!
Sorry for being blunt, but this is the truth. Most people are buying the kind of stuff that I would not touch with a six-foot pole, and they are structuring it in a way that is certain to cause disaster over time.
What I see a lot, even here on BP, is that most people want to think of and analyze syndicated apartments the same way as any other long-term hold – syndication is not a long-term hold guys! These two models are as different as could be.
Think about it:
What is the first thing capital partners in a syndicate typically want to know, aside of course for how much money we’ll make them? It is – when will I have my money back?
Well, if getting the money back is one of the most consequential elements of the transaction, than what does Cash Flow have to do with the price of borsht…? Cash Flow will never recover capital expeditiously enough to satisfy most investors in the marketplace…see what I mean?
And also, I don’t know about you, but most sophisticated investors that I talk to, accredited or not, evaluate return on equity in terms of IRR. Sure – they do look at CCR (Cash on Cash), but the definitive metric to most of the people I work with is indeed the IRR (Internal Rate of Return).
Guess what, cash flow is not the main driver of IRR – get it? And by the way, if folks you are taking money from only know Cash on Cash and perhaps CAP Rates, then I have this suggestion for you – take it or leave it, but here it is:
Quit taking money from unsophisticated grandmothers, unless you want the SEC to nail your tailbone…
Category 2: Jerks
I spoke to a Marcus & Millichap broker in Columbus Ohio last week, and he told me that there are people coming in from out of town and paying 4.5 CAPs for A-Class product…
Now – there are many potential implications to this, but the most obvious one is this – we are in freaking Ohio – Nowhere, USA!
Sure, it is one of two best markets in this part of the country, but it’s a secondary market we are talking about. Who the hell pays 4.5 CAP for anything in Columbus…?!!
Never mind who; I know who, but that’s beside the point. The real question is WHY?
And the answer is that they are going to bleed the property and then give it back to the bank! They know it. The banks know it. And everyone knows that when this stuff hits the fan the taxpayers will be arm-twisted into…well, you know how this story goes!
This should shed some light on why it is so difficult to syndicate a deal that makes a damn bit of sense…it’s because of these:
Category 3: The Real Deal
There are very few people residing in the neighborhood where I live.
I want to improve property, not bleed it. I really and truly look for deals that will make money for my investors and for me – the honest way.
But, because of the idiots in the first category who’ll pay ridiculously too much since they are too stupid to know better, and the jerks in the second category who’ll pay too much cause it doesn’t matter to them in the long run, I am forced to look for a needle in a haystack!
I got no love for idiots and jerks!
You either loved or hated this one, but either way you know where I stand. Would you agree with my assessment of the marketplace?
Be sure to leave your comments below!