I Used to Think All U.S. Markets Were Too High—Until I Started Investing in This City

by | BiggerPockets.com

Do you hear yelling?

The market is too hot. Oh no!

We are at the top. Oh no!

It’s a bubble. Too late to buy. It’s a bubble. Oh nooooo!

Best to wait for the crash…

A few years ago these same voices were yelling:

There is no money. Oh no!

No one is lending. Oh no!

So many good deals, but I can’t get any money. Oh nooooo!

I’ll wait for the market to improve…

Maybe some people are better at yelling than buying, or maybe they just like the sound of their own voice. Or maybe they’ve always known that they lack the intestinal fortitude to act, and all of the above simply make them feel as though they are participants in the marketplace while in reality, they are constantly looking for excuses to stay on the sidelines.

Whatever the reason, the market is never good enough for some.

The thing is, however, that those of us who wanted to buy in 2009 found a way to buy, and those who want to buy in 2018 find a way to buy in 2018.

Related: How I Landed a Solid 4-Plex in Denver, One of the Hottest Markets in the Country

There Is an Obvious Caveat

If no one wants to lend, what kind of deal does it take to attract money? A really freaking good deal.

If the market is hot, what kind of deal should you buy? A really freaking good one!

So, you see, the rules have never really changed. All along, what it takes to play the game is a much better than average deal—the rest of the pieces fall into place. So, perhaps, the loud voices are simply indicative of folks not having enough chutzpah to source a good enough deal.

I Was One of the Naysayers

For a long time, it was truly difficult for me to wrap my head around the pricing. I was in Ohio at the time, but seeing people deploy at a 7% cap rate gave me nightmares. I thought they were stupid.

And then they weren’t stupid. All through 2013, 2014, 2015, 2016, etc., people made a killing.

I like to think of myself as a reasonable person. At some point, seeing the reality on the ground, I realized I was missing something.

So, What Changed My Mind?

Well, for one thing, I relocated from Ohio to Arizona. You’d be amazed how this changed my perspective. Seeing the way things are in the Southwest—the jobs, the infrastructure, the population growth—had an effect. I understood why so many people were so bullish on America, and I understood how that thinking impacted their investment decisions!

Additionally, once I removed myself from the Midwest, I was able to draw parallels, which brought things into focus for me even more. The fact that brokers were telling me that product is moving in Cincinnati, Ohio at a 5.5% cap rate with virtually no value add still amazes me—Cincinnati is a nice town, but it ain’t no Phoenix for many reasons. That kind of thing really makes you think.

That said, I can very happily look at the right kind of 5% cap rate and sleep extremely well at night. In fact, the 98-unit we just bought on in-place financials is indeed a 5% cap rate (on a good month).

S0, where am I getting the peace to deploy millions of partner capital at 5% cap rate?

Related: 5 Strategies for Finding Deals in Today’s Hot Market

1. It’s in a serious growth market.

Phoenix MSA is the number one growth market in the country for two years running, and it’s the fifth largest city now. Mariacopa County is the number one fastest growing county in the country for several years now. Finally, the asset is in the path of serious gentrification and capital improvements.

I wouldn’t do it in the Midwest. I will in Phoenix.

2. It’s value-add.

An important distinction here is that we are not coupon investors—we never, ever buy turnkey. Therefore, we are less concerned with the in-place cap rate and much more concerned with the cap rate after the re-positioning.


3. Market rents are too low.

This is where the benefit of recent exposure to various markets comes into play. According to people who research this stuff, the national average apartment rent in U.S. was over $1,300 in 2017. In Phoenix, it was under $1,000.

So you ask: Why are people paying more to live in Ohio than they are in Arizona? And is this trend sustainable, considering Phoenix population is growing while the Midwest is not?

Under these circumstances, even just reaching the national average constitutes a 25% improvement to the top line, all of which flows through to the NOI. What is currently a 5% cap rate becomes a 6.25% cap rate just by reaching the national average on rents.

The question becomes: Is it reasonable to believe that Phoenix is capable of reaching the national averages as it relates to rents? A different way of asking this question could be: If you had to pay $1,300 for rent in Cincinnati or Phoenix, which would you choose?

If you don’t say Phoenix, I’ve got nothing more to say to you.

Well, anyhow, while some may disagree, more agree, which is why our population growth is what it is.

4. But seriously, it’s value-add.

Superimpose on top of the previous paragraphs a 25% value-add program, and you go from a 5% cap rate in Y1 to a 8.3% cap rate in Y3.

That delta is where we make money, ladies and gents. Because even after we inflate cap rates in the future, which we should do, there is still enough meat on the bone for yours truly to sleep well at night.

5. The market will never again be where it was.

Well, I don’t know much, but I do know this: While 2009 through 2013 were fabulous, we are not going to see that type of an environment again in our lifetimes. It took me a couple of years to realize this, but I firmly believe this—waiting for the return of that pricing is futile.

One Last Thing

Let’s say you are not convinced. Let’s say you’ve decided that the market is too high and you need to sit out, wait for a correction, and step into the game once prices come down.

Who is going to let you in that game?

Brokers representing sellers who need to get out in a recessionary environment will call those buyers who have a track record of closing deals. That’s not you—you haven’t been closing.

I realized this in about 2015. Prior to that, the last deal I bought was in 2013, and back then I already thought the prices seemed too high.

So I sat on the sidelines, and then I realized, if I stay on the sidelines until the next recession, I may not be able to find my way back into the game. Which meant I needed to sharpen the sword!


We’ll talk more in coming articles. But fundamentally, here are the bullet points:

  • I am bullish on America, specifically the Southwest!
  • I want to be ready to deploy big when the recession does happen, and it will happen. That means I have to be a buyer today!
  • Deals that are worth doing have always been better than average deals. Sharpen your sword! You can still find deals.
  • Some markets are better than others.

Talk soon.

What do you think? Are you hesitant to buy now or are you finding good deals?

Comment below!

About Author

Ben Leybovich

Ben has been investing in multifamily residential real estate for over a decade. An expert in creative financing, he has been a guest on numerous real estate-related podcasts, including the BiggerPockets Podcast. He was also featured on the cover of REI Wealth Monthly and is a public speaker at events across the country. Most recently, he invested $20 million along with a partner into 215 units spread over two apartment communities in Phoenix. Ben is the creator of Cash Flow Freedom University and the author of House Hacking. Learn more about him at JustAskBenWhy.com.


  1. Vitaliy Volpov

    Nice post, Ben!

    For future deals, are you only looking in Phoenix or other parts of Arizona or other Southwestern states? I can’t imagine that there are that many deals in Phoenix that fit the value-add criteria you mentioned… Or are there?


    P.S.: if you talk to @Brandon Turner any time soon, can you ask him to hit me back? I messaged him twice by e-mail, but probably got relegated to his spam folder… 🙁 Tell him I’m your Belorussian brother from another mother, maybe he’ll respond!

    • Ben Leybovich

      Hah Just spoke to Brandon for the first time in 2 months, and only because I told him that if he didn’t call it was razvod i devechia familia. We used to talk every day. You’re on your own, baby…

      As to deals, about to make an offer on one nowhere near Phoenix. Off-makret lead from a student that we are following up on, and it looks very promising from where I stand today. We shall see…

  2. Anthony Wick

    People have been saying the same things about the stock market for the past 5 years. “It’s gonna crash. I’m waiting to get in on the low end.” Meanwhile, a lot of us have enjoyed the ride of the longest bull market in the history of the country. Which is why, after some years on the sidelines of real estate (ok, I got a divorce) I jumped back in with all the effort a part time real estate investor with a day job could muster. And I sure am not stopping now. Although I have been outbid on the last 6 properties I’ve tried to acquire.

  3. Christopher Smith

    I have recently come to the same revelation, sometimes (if the facts are there) you need to buy more even when things have appreciated fairly dramatically. I’ve experienced that in the stock market more than real estate. I bought FB at 22 and BABA at 58 and was always very reluctant to buy more after that because I knew I would very likely never be able to achieve those entry prices again.

    After reading Buffet and Peter Lynch books, I saw the folly in that very limiting mindset. Should have bought more of these very rare dominate market player activities as they rose. I did force myself to a little more FB recently at 170 after the recent big dip from 215. I think long term I will be substantially ahead because of it.

    BTW – I picked up a lot of rental properties in the 2010 to 2013 time frame, then one more in 2016. Been total killers all of them, but I am a essentially turnkey type buyer so its going to be hard at current prices to justify anything more in real estate absent something truly extraordinary coming along. Not that things can’t still be good long term deals, but rental properties are not really my primary game so that nice comfy cushion that once existed is gone for me.

  4. Cindy Larsen


    I completely agree that waiting for the perfect deal instead of acting is foolish. Just as foolish as acting without analyzing the deals, and finding a good one. i believe in making a plan and then doing your best to execute it. Growing your business inevitably involves learning things that cause you to adjust your plans. Some of those lessons are not fun. But, if you let stumbling blocks stop you, you will never reach your goals. you have to find a path that goes where you want to be. I coild find good deals in medium sized multifamilies, and couldn’t buy large multifamilies due to not having a track record in that area, so, I found a 6 plex, on two contiguous tax parcels, that I could convince the banks to give me loans for. And my new strategy was to buy lots of small multifamilies instead on one bigger multifamily.

    I’ve bought 6 tax parcels this year, all small multifamily, bringing my total number of units from 2 to 18. I did this because I had the cash for downpayments, And I had a plan to invest as soon as I found good deals, trying to buy before the interest rates went up too much. I spent LOTS of time analyzing deals, offering on deals, and getting better at both of those. I started out looking for only great deals. The market was hot, multifamily deals of any kind were scarce. I ended up buying good deals, but not great ones, which were noplace to be found.

    I have 5 mortgages now, with almost 1.5 million in debt. That is a frightening amount of debt. But, by this time next year, after remodeling some units, and raising rents on all units, it will all be cash flowing beautifully. And, in less than 10 years, I plan to have paid off one of those mortgages.

    My last deal was probably at the top of the market in my area for this year. I paid full asking price, because
    1. the analysis said it would cash flow at that price, even with below market rents
    2. It was the only way to get the deal, and the property was attractive both financially and in terms of location, curb apeal, and condition. And a good thing I offered full price less than 24 hours after it hit the mls. I beat the (higher) backup offer by just a few hours.

    I don’t know if I will buy more next year: probably not, if the interest rates kepp going up, and the prices keep going up, even a little. I remember paying 10% interest rate on my first condo in the eighties. It was really hard to build equity. I may invest in notes next. In any case, I won’t just sit on the sidelines and wait for the perfect opportunity.

  5. Bryan Zuetel

    Interesting article Ben. Thanks. I’m a real estate attorney and investor from Southern California eyeing Phoenix for multifamily properties for all your given reasons and more. I look forward to hearing more about this property or others in the future.

  6. Johnny McKeon

    Mr. Leybovich,

    You commented “we are less concerned with the in-place cap rate and much more concerned with the cap rate after the re-positioning”. I thought the lower your cap rate is, the higher your paying for that stream of income, future appreciation/upside, loan pay-down, tax benefits. and if you’re paying a lower cap rate and higher price, will that not affect your exit strategy or return? You are not the only one I’ve heard say “entry cap rates aren’t as important”. I’m not saying your wrong, I just don’t understand. Can you please explain this rationale?

    You mentioned “A 25% improvement to the top line, all of which flows through to the NOI. What is currently a 5% cap rate becomes a 6.25% cap rate just by reaching the national average on rents.” Can you please explain the math on how a 5% cap rate instantly becomes 6.25% cap rate and why you want a higher cap rate while you own a deal?

    Also, in your example, you said “a 25% value-add program, and you go from a 5% cap rate in Y1 to a 8.3% cap rate in Y3” How did you calculate the cap rate for each year?

    You wrote “Because even after we inflate cap rates in the future, which we should do”. Why would you want to inflate your future cap rate when you’re strategy has to do with exiting this investment. Don’t you want to exit at a lower cap rate to realize a higher disposition price?

    “That delta is where we make money” I’ve heard “delta” being used before but I don’t understand even after googling and the examples that were given had to do with stocks and options. What does delta in the real estate investment world mean?

    Thank you for taking your most valuable asset, which is time, to respond! I hope others will benefit from my questions.

    • Ben Leybovich


      I likely won’t be able to answer your questions in due specificity. You might want to reach out to me. You are missing some pretty bug fundamental understanding of what we do, and we need to catch you up.

      That said:

      1. Cap rate on itself is not a metric of investment return relative to a particular acquisition. It is a metric of market appetite for specific asset classes in specific locations. The cap rate at the purchase doesn’t matter because it’s not measuring the value-add. It’s just juxtaposing the supposed NOI to the price I am willing to pay, which means almost nothing because I am not buying the in-place NOI, but rather what it’s going to be after I am done. Therefore we don’t make the buy decision on cap rates on the way in, but rather the IRR.

      2. If you start out with a market cap rate of 5% at your investment basis, and inflate it by 25% what you get is that on the same investment basis your cap rate is now 5% + 25% more which is about 6.25%.

      3. If the NOI grows by 25% then at the same investment basis the cap rate now becomes about 8,3% in our case.

      4. Because we don’t control cap rates. Cap Rate is a metric we back into based on what we know about how much buyers are willing to pay for certain NOI. Cap rate is a market metric. Therefore, I am simply saying that I expect cap rates to eventually climb from where they currently are, and therefore I am pricing my exit accordingly.

      5. Delta is a word used in mathematics which simply means difference. What I mean to say is that the money is the difference between how we buy versus how we sell/rent. Entrance cap rate is one piece of that, and it’s the smaller piece.

      I realize that all of this may still be rather cryptic. I’ll try to tackle some of these concepts in future articles. For now, feel free to reach out.

  7. Blake Denman

    “I want to be ready to deploy big when the recession does happen, and it will happen. That means I have to be a buyer today!”

    This is exactly the conclusion I’ve come to – I can’t wait until the market gets good for buyers again, I’ve got to be active now to be able to fully capitalize in the future!

  8. Sam Manoo

    Great post, Ben. What I’d like to know – and I don’t believe it’s been asked or addressed here – is how you and your group implement the value-add strategies, specifically for interior renovations. Assuming you acquire a value-add multifamily deal with market-level vacancy, are you instantly raising all rents at or close to market rates for existing tenants, or do you renovate units as they become vacant? If it’s the former method, are you dealing with unruly tenants who are dissatisfied with the sudden rental increase? Do you offer to renovate their unit in exchange for the higher rent?

    Thanks in advance for the input!

    • Ben Leybovich

      Sam, if we are buying the property, then 2 things are true:

      1. There exists an in-place LTL
      2. A value-add program can push rents.

      This varies with the market, but if we are going to stabilize blended rents in the range of $850 – $900, which is the Class C bread and butter, then I need to typically see a minimum of $300 per door swing all in. Otherwise, the IRR doesn’t validate.

      For example, in the latest project (you cdan find a big ‘ole thread in the forums about the Silver Tree 98-unit), we are leasing after-reno 1×1 at $350 bump and 2×2 and $450 bump to in-place rents. This captures both the LTL and the value-add bump.

      Strategy-wise – too long for a comment. But, get a good PM!

  9. Brett Chemaly

    Interesting perspective Ben. I don’t disagree with anything you say on our local market. Given the positive trends, it’s still bewildering that infrastructure here is not keeping pace. For one, Sky Harbor seems to be stuck in the dark ages when it comes to international routes ( we have 2 direct international flights) which is an embarrassment for a city supposed to be the 5’th largest in the country ! Sky Harbor is constantly overlooked by all the major international carriers . So my gripe is not strictly relevant to RE but you have to wonder if they got their act together here how thelat could positively influence the trends you mention

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