Starting Out

User Stats

4
Posts
9
Votes
Ross Kline
  • New to Real Estate
  • Frankfort, KY
9
Votes |
4
Posts

Is Losing Money Normal In the Beginning?

Ross Kline
  • New to Real Estate
  • Frankfort, KY
Posted Nov 1 2022, 14:23

I've been analyzing deals for a couple weeks now. A mix of single-family, small multi-family, BRRRR, and even a 20-unit apartment.

I'm a numbers guy, so I've done my research and believe I am using accurate numbers when calculating NOI and cap rates.

What I've found is that on-market deals typically have a cap rate of 5% or less, and after debt service cash flow is often negative, especially at current loan rates.

So do investors just have the income and cash to buy and wait for spreads to widen as rents increase?

Would love to hear your thoughts!!

User Stats

2,753
Posts
1,404
Votes
Wale Lawal
  • Real Estate Agent
  • Houston | Austin | Dallas, TX
1,404
Votes |
2,753
Posts
Wale Lawal
  • Real Estate Agent
  • Houston | Austin | Dallas, TX
Replied Nov 3 2022, 12:40

@Ross Kline

Multifamily deal analysis has lot of things to be factored in along with NOI and Cap rates.

Understanding the potential rental growth and expenses is very important too.

Get as much knowledge and experience as possible.

Get in touch with a local agent or investor and shorten your learning curve and save you a lot of headaches as they tend to understand the market better.

All the best!

Real Estate Agent Texas (#736740)

User Stats

4,209
Posts
4,821
Votes
Dan Heuschele
  • Investor
  • Poway, CA
4,821
Votes |
4,209
Posts
Dan Heuschele
  • Investor
  • Poway, CA
Replied Nov 3 2022, 14:41
Quote from @Carlos Ptriawan:
Quote from @Dan Heuschele:
Quote from @Carlos Ptriawan:
Quote from @Dan Heuschele:

>Is Losing Money Normal In the Beginning

If the experienced RE investors are not purchasing the properties that are losing money, it implies that the less experienced RE investors *those in the beginning of their REI journey) are buying these properties and losing money (at least until rents increase enough that they are not cash flow negative or the RE has appreciated enough that the appreciation surpasses the cumulative negative cash flow).

Good luck



For me, it has nothing to do with experienced/non-experienced. But of course, the experienced know the algorithm a bit better. 

For example, every city in USA has its own HIDDEN default cap rate (you could subscribe to Crexi intelligence to figure it out).

Now, those cap rate is moving lower every year due to appreciation (which is a good thing).

So the first variable that we know is that, we could only invest if cap rate is higher than X%, right. Lets say this number is 8%.
NOw that 8% cap rate, could only be achieved in this city of x1,x2,x3 ; with mortgage leverage ratio of 1:5 and sub 3% interest rate, in the year 2015 for example this calculation is still making sense.

But now since those cap rate is feeling more compression and compression, and crazy high mortgage rate, it's no longer making sense to invest in the old way. 

Even now we know the GP level syndication has a big problem as the cost of financing is so large it doesn't make sense to invest except with a cash position only like someone described above.


Another note: I kept thinking about whether there's a price ceiling in the real estate market, and after so much research on this, I found the answer is yes. A negative cap rate has existed for years in Asia now. Now in 2022, some zip code in the USA has experienced the same, the last time I checked, there are some zip code where the sold price in the last 5 months is gratifying with the price of 2017-2020 level. It seems in this area, there would be 0 appreciation for decades.

Which also means this area is the worst for investment as it has a negative yield.

 Is it your belief that experienced syndicators are going to do poorly?   The syndicators that I invest in have sophisticated value adds (value adds in excess of simple rehab) and in recent years hit max GP profit share every time. These are experienced, sophisticated RE investors.  There are some syndicators that even in the Great Recession did not loose their LPs’ money (they did not provide decent return, but at least did not lose money).  Do not invest with a syndicator that is doing a significantly larger or different offering than any they have accomplished previously.  Do not invest with a syndicator that only has a few completed syndications.  In this market, there will likely be some syndications that lose LP money.

Similar, I have not found an MLS listed property with only a rehab as the value add that meets my expected profit expectation in a long time because there are people willing to accept smaller profits than I am or investors who are very aggressive (or uneducated) in their pro formas. These, for the most part, are not experienced RE investors (experienced RE investors have purchased a small percentage of their investments from the MLS in the last few years). These novice RE investors that are purchasing these investments off the MLS with thin profit margins (or often negative cash flow) have done well because in the recent times virtually every deal has done well due to property and rent appreciation. I suspect that there will not be significant property appreciation in most markets for the next couple of years.

Are you referring to a negative commercial residential cap rate?   What market do you believe has a negative cap rate and on what category of RE?  I guess I could see it as a possibility in low class (think war zone), declining population, commercial residential but i have not heard of it.



Some of the current syndicators are losing money, some deals are selling 20% from projection.  

The negative cap rate is in residential also, in the highest appreciation area in the country. Price in the last 12 months never breaks any more new records, it's just gratifying between the last 4-year prices. The moral of the story is any investor should be extremely careful investing at current climate, as there's a possibility that we will have no growth in the next few years with declined rent growth and fantastic mortgage payment. Not saying we'll have price decline like in other thread but some CA market is showing stagnant appreciation now.

I recognized there are two interpretations of beginning: 1) new, beginning investors 2) in the beginning of the just purchased investment. New investors are losing money in the beginning. All it takes is any Residential RE calculator to realize that at high LTV most properties are cash flow negative. Experienced investors are largely buying off market, often with value adds,sometimes with sophisticated value adds.

There have always been syndicators that do poorly.  Investing with a syndicator has requirements on the investor for this reason.  I suspect the majority of JPs on these syndications that do poorly have not invested in many syndications.  

I would like you to indicate a market with negative residential cap rate for class c or above.  san Fran is the highest appreciation large city in country for last 10 years, 20 years and 30 years (source Core logic).  They do not have negative cap rate (low, but not negative).

San Diego market (my market) is down ~10% and one source indicates down 2.5% last month.  I would be very surprised if we are the worse market in Ca.  So more than stagnate, some CA RE markets have already declined fairly significantly.  

However the experienced RE investors I know in San Diego (even though the market has declined ~10%) are still making money or sitting on the sidelines (they are not losing money).  They are using more sophisticated value adds than simple rehab of units.  

It is mostly the inexperienced RE investors that are making purchases (typically off the MLS) that are resulting in loosing money in the short term. if they hold long enough there is a good chance they will do fine. To hold long enough they have to be able to absorb the negative cash flow and tolerate it. Negative cash flow gets old fast even if you can afford it.

User Stats

2,562
Posts
1,489
Votes
Replied Nov 3 2022, 14:57
Quote from @Dan Heuschele:
Quote from @Carlos Ptriawan:
Quote from @Dan Heuschele:
Quote from @Carlos Ptriawan:
Quote from @Dan Heuschele:

>Is Losing Money Normal In the Beginning

If the experienced RE investors are not purchasing the properties that are losing money, it implies that the less experienced RE investors *those in the beginning of their REI journey) are buying these properties and losing money (at least until rents increase enough that they are not cash flow negative or the RE has appreciated enough that the appreciation surpasses the cumulative negative cash flow).

Good luck



For me, it has nothing to do with experienced/non-experienced. But of course, the experienced know the algorithm a bit better. 

For example, every city in USA has its own HIDDEN default cap rate (you could subscribe to Crexi intelligence to figure it out).

Now, those cap rate is moving lower every year due to appreciation (which is a good thing).

So the first variable that we know is that, we could only invest if cap rate is higher than X%, right. Lets say this number is 8%.
NOw that 8% cap rate, could only be achieved in this city of x1,x2,x3 ; with mortgage leverage ratio of 1:5 and sub 3% interest rate, in the year 2015 for example this calculation is still making sense.

But now since those cap rate is feeling more compression and compression, and crazy high mortgage rate, it's no longer making sense to invest in the old way. 

Even now we know the GP level syndication has a big problem as the cost of financing is so large it doesn't make sense to invest except with a cash position only like someone described above.


Another note: I kept thinking about whether there's a price ceiling in the real estate market, and after so much research on this, I found the answer is yes. A negative cap rate has existed for years in Asia now. Now in 2022, some zip code in the USA has experienced the same, the last time I checked, there are some zip code where the sold price in the last 5 months is gratifying with the price of 2017-2020 level. It seems in this area, there would be 0 appreciation for decades.

Which also means this area is the worst for investment as it has a negative yield.

 Is it your belief that experienced syndicators are going to do poorly?   The syndicators that I invest in have sophisticated value adds (value adds in excess of simple rehab) and in recent years hit max GP profit share every time. These are experienced, sophisticated RE investors.  There are some syndicators that even in the Great Recession did not loose their LPs’ money (they did not provide decent return, but at least did not lose money).  Do not invest with a syndicator that is doing a significantly larger or different offering than any they have accomplished previously.  Do not invest with a syndicator that only has a few completed syndications.  In this market, there will likely be some syndications that lose LP money.

Similar, I have not found an MLS listed property with only a rehab as the value add that meets my expected profit expectation in a long time because there are people willing to accept smaller profits than I am or investors who are very aggressive (or uneducated) in their pro formas. These, for the most part, are not experienced RE investors (experienced RE investors have purchased a small percentage of their investments from the MLS in the last few years). These novice RE investors that are purchasing these investments off the MLS with thin profit margins (or often negative cash flow) have done well because in the recent times virtually every deal has done well due to property and rent appreciation. I suspect that there will not be significant property appreciation in most markets for the next couple of years.

Are you referring to a negative commercial residential cap rate?   What market do you believe has a negative cap rate and on what category of RE?  I guess I could see it as a possibility in low class (think war zone), declining population, commercial residential but i have not heard of it.



Some of the current syndicators are losing money, some deals are selling 20% from projection.  

The negative cap rate is in residential also, in the highest appreciation area in the country. Price in the last 12 months never breaks any more new records, it's just gratifying between the last 4-year prices. The moral of the story is any investor should be extremely careful investing at current climate, as there's a possibility that we will have no growth in the next few years with declined rent growth and fantastic mortgage payment. Not saying we'll have price decline like in other thread but some CA market is showing stagnant appreciation now.

I recognized there are two interpretations of beginning: 1) new, beginning investors 2) in the beginning of the just purchased investment. New investors are losing money in the beginning. All it takes is any Residential RE calculator to realize that at high LTV most properties are cash flow negative. Experienced investors are largely buying off market, often with value adds,sometimes with sophisticated value adds.

There have always been syndicators that do poorly.  Investing with a syndicator has requirements on the investor for this reason.  I suspect the majority of JPs on these syndications that do poorly have not invested in many syndications.  

I would like you to indicate a market with negative residential cap rate for class c or above.  san Fran is the highest appreciation large city in country for last 10 years, 20 years and 30 years (source Core logic).  They do not have negative cap rate (low, but not negative).

San Diego market (my market) is down ~10% and one source indicates down 2.5% last month.  I would be very surprised if we are the worse market in Ca.  So more than stagnate, some CA RE markets have already declined fairly significantly.  

However the experienced RE investors I know in San Diego (even though the market has declined ~10%) are still making money or sitting on the sidelines (they are not losing money).  They are using more sophisticated value adds than simple rehab of units.  

It is mostly the inexperienced RE investors that are making purchases (typically off the MLS) that are resulting in loosing money in the short term. if they hold long enough there is a good chance they will do fine. To hold long enough they have to be able to absorb the negative cash flow and tolerate it. Negative cash flow gets old fast even if you can afford it.


 Not sure where to start :
- the general consensus of syndication deal falling thru is what I read from the biggest syndicators statement in the country where they stated the cost of financing is no longer making sense to continue a deal and they think if the condition persists for another 12 months, many would not survive. They currently could survive the current environment only because their debt maturity is not within the next 24 months.

- the negative cap rate that I mentioned in class A+ neighborhood, where 1990ish price is around 400-500k for SF, and 2022 price is about $3mil for the same house. House in these neighborhoods no longer appreciated. For C Class there seems still be some room to grow. 

- So your comment about "purchase via MLS"--> but this is the most common way for "regular joe" investors to invest. I meant in some zip codes, the cap rate is touching 1-2%. I guess in those zip codes, long-term rent doesn't make sense anymore. sub 3% mortgage could cover the rent, but 7% mortgage, forget about it. I bet the only place where it's still possible to see growth and appreciation is only mid-cap rate market like the South or midwest.

User Stats

4,209
Posts
4,821
Votes
Dan Heuschele
  • Investor
  • Poway, CA
4,821
Votes |
4,209
Posts
Dan Heuschele
  • Investor
  • Poway, CA
Replied Nov 3 2022, 15:13
Quote from @Carlos Ptriawan:
Quote from @Dan Heuschele:
Quote from @Carlos Ptriawan:
Quote from @Dan Heuschele:
Quote from @Carlos Ptriawan:
Quote from @Dan Heuschele:

>Is Losing Money Normal In the Beginning

If the experienced RE investors are not purchasing the properties that are losing money, it implies that the less experienced RE investors *those in the beginning of their REI journey) are buying these properties and losing money (at least until rents increase enough that they are not cash flow negative or the RE has appreciated enough that the appreciation surpasses the cumulative negative cash flow).

Good luck



For me, it has nothing to do with experienced/non-experienced. But of course, the experienced know the algorithm a bit better. 

For example, every city in USA has its own HIDDEN default cap rate (you could subscribe to Crexi intelligence to figure it out).

Now, those cap rate is moving lower every year due to appreciation (which is a good thing).

So the first variable that we know is that, we could only invest if cap rate is higher than X%, right. Lets say this number is 8%.
NOw that 8% cap rate, could only be achieved in this city of x1,x2,x3 ; with mortgage leverage ratio of 1:5 and sub 3% interest rate, in the year 2015 for example this calculation is still making sense.

But now since those cap rate is feeling more compression and compression, and crazy high mortgage rate, it's no longer making sense to invest in the old way. 

Even now we know the GP level syndication has a big problem as the cost of financing is so large it doesn't make sense to invest except with a cash position only like someone described above.


Another note: I kept thinking about whether there's a price ceiling in the real estate market, and after so much research on this, I found the answer is yes. A negative cap rate has existed for years in Asia now. Now in 2022, some zip code in the USA has experienced the same, the last time I checked, there are some zip code where the sold price in the last 5 months is gratifying with the price of 2017-2020 level. It seems in this area, there would be 0 appreciation for decades.

Which also means this area is the worst for investment as it has a negative yield.

 Is it your belief that experienced syndicators are going to do poorly?   The syndicators that I invest in have sophisticated value adds (value adds in excess of simple rehab) and in recent years hit max GP profit share every time. These are experienced, sophisticated RE investors.  There are some syndicators that even in the Great Recession did not loose their LPs’ money (they did not provide decent return, but at least did not lose money).  Do not invest with a syndicator that is doing a significantly larger or different offering than any they have accomplished previously.  Do not invest with a syndicator that only has a few completed syndications.  In this market, there will likely be some syndications that lose LP money.

Similar, I have not found an MLS listed property with only a rehab as the value add that meets my expected profit expectation in a long time because there are people willing to accept smaller profits than I am or investors who are very aggressive (or uneducated) in their pro formas. These, for the most part, are not experienced RE investors (experienced RE investors have purchased a small percentage of their investments from the MLS in the last few years). These novice RE investors that are purchasing these investments off the MLS with thin profit margins (or often negative cash flow) have done well because in the recent times virtually every deal has done well due to property and rent appreciation. I suspect that there will not be significant property appreciation in most markets for the next couple of years.

Are you referring to a negative commercial residential cap rate?   What market do you believe has a negative cap rate and on what category of RE?  I guess I could see it as a possibility in low class (think war zone), declining population, commercial residential but i have not heard of it.



Some of the current syndicators are losing money, some deals are selling 20% from projection.  

The negative cap rate is in residential also, in the highest appreciation area in the country. Price in the last 12 months never breaks any more new records, it's just gratifying between the last 4-year prices. The moral of the story is any investor should be extremely careful investing at current climate, as there's a possibility that we will have no growth in the next few years with declined rent growth and fantastic mortgage payment. Not saying we'll have price decline like in other thread but some CA market is showing stagnant appreciation now.

I recognized there are two interpretations of beginning: 1) new, beginning investors 2) in the beginning of the just purchased investment. New investors are losing money in the beginning. All it takes is any Residential RE calculator to realize that at high LTV most properties are cash flow negative. Experienced investors are largely buying off market, often with value adds,sometimes with sophisticated value adds.

There have always been syndicators that do poorly.  Investing with a syndicator has requirements on the investor for this reason.  I suspect the majority of JPs on these syndications that do poorly have not invested in many syndications.  

I would like you to indicate a market with negative residential cap rate for class c or above.  san Fran is the highest appreciation large city in country for last 10 years, 20 years and 30 years (source Core logic).  They do not have negative cap rate (low, but not negative).

San Diego market (my market) is down ~10% and one source indicates down 2.5% last month.  I would be very surprised if we are the worse market in Ca.  So more than stagnate, some CA RE markets have already declined fairly significantly.  

However the experienced RE investors I know in San Diego (even though the market has declined ~10%) are still making money or sitting on the sidelines (they are not losing money).  They are using more sophisticated value adds than simple rehab of units.  

It is mostly the inexperienced RE investors that are making purchases (typically off the MLS) that are resulting in loosing money in the short term. if they hold long enough there is a good chance they will do fine. To hold long enough they have to be able to absorb the negative cash flow and tolerate it. Negative cash flow gets old fast even if you can afford it.


 Not sure where to start :
- the general consensus of syndication deal falling thru is what I read from the biggest syndicators statement in the country where they stated the cost of financing is no longer making sense to continue a deal and they think if the condition persists for another 12 months, many would not survive. They currently could survive the current environment only because their debt maturity is not within the next 24 months.

- the negative cap rate that I mentioned in class A+ neighborhood, where 1990ish price is around 400-500k for SF, and 2022 price is about $3mil for the same house. House in these neighborhoods no longer appreciated. For C Class there seems still be some room to grow. 

- So your comment about "purchase via MLS"--> but this is the most common way for "regular joe" investors to invest. I meant in some zip codes, the cap rate is touching 1-2%. I guess in those zip codes, long-term rent doesn't make sense anymore. sub 3% mortgage could cover the rent, but 7% mortgage, forget about it. I bet the only place where it's still possible to see growth and appreciation is only mid-cap rate market like the South or midwest.


 I can see syndicators where their value add was limited to improving asset management or rehab of units being heavily impacted by rates.  More sophisticated value adds are increasing the value so significant compared to the money invested that they are minimally impacted by the rates. Investing in syndications requires a high level of due diligence including recognizing impact of current rates and impact of projected exit time rates. Also recognize projected exit time can be impacted by the rates and longer holds typically dilute the annualized return of the value add.

My source lists class A San Francisco residential apartment cap rates in the 4s (Oct 2022).  Like large cities, metro is lower than suburban.  

What market are you seeing’s rates below 2?  

User Stats

1,390
Posts
1,892
Votes
Henry Lazerow
  • Real Estate Agent
  • Chicago, IL
1,892
Votes |
1,390
Posts
Henry Lazerow
  • Real Estate Agent
  • Chicago, IL
Replied Nov 3 2022, 15:20

MLS deals often have HIGHER cashflow if you look hard as these realtors are much less educated on what they can get for investment properties. The commercial broker deals are all set up to be mass marketed to sophisticated buyers who will bid price up to where it does not cashflow with significant debt. These buyers go cash or low LTV loans with better rates then small investors can even get. Off Market I have not seen much good stuff but I am sure it's out there especially in markets that have lower demand, in my high demand market the only time something is off market is when it's overpriced and realtors don't even want to list or has some major issue like structural couldn't sell on market, city lawsuit etc.

I agree many syndicators will flop if rates stay up. I predict some crowdfunding platforms will either have to waive their fees or start to cut dividend payouts on their funds.

User Stats

2,562
Posts
1,489
Votes
Replied Nov 3 2022, 15:25

 I can see syndicators where their value add was limited to improving asset management or rehab of units being heavily impacted by rates.  More sophisticated value adds are increasing the value so significant compared to the money invested that they are minimally impacted by the rates. Investing in syndications requires a high level of due diligence including recognizing impact of current rates and impact of projected exit time rates. Also recognize projected exit time can be impacted by the rates and longer holds typically dilute the annualized return of the value add.

dude the syndicator that I'm referring to here is multi-million dollar syndicator that built property for A+ apartments, not garden apartment C class somewhere in new mexico. So even with "good rehabs" there's still a ceiling for rent growth, with liquidity is drying for financing the CRE project, if current environment continues, many of them may collapse.

User Stats

22
Posts
16
Votes
Daniel Shuler
  • New to Real Estate
16
Votes |
22
Posts
Daniel Shuler
  • New to Real Estate
Replied Nov 3 2022, 15:36
Quote from @Carlos Ptriawan:
Quote from @Daniel Shuler:
This is something I've been seeing a lot of lately that leaves me scratching my head. Sometimes I feel like "Am I missing something here?". What I'm seeing are numerous multifamily properties, brand new, old, updated, not updated, that are listed that even after a 20% down payment, with today's interest rates, wouldn't even cover the mortgage, let alone all of the other things you may need to account for like CapEx, PM, etc.
How are these sellers/realtors coming up with their prices when the numbers don't seem to jive for an investor?

 because you use the 20% down - a 2009 environment number ; in year 2022. It's that simple.

the logic you guys using fo not calculating all the appreciation dynamics that happened since 2008-2009. 

So what’s the 2022 environment number then?

User Stats

4,209
Posts
4,821
Votes
Dan Heuschele
  • Investor
  • Poway, CA
4,821
Votes |
4,209
Posts
Dan Heuschele
  • Investor
  • Poway, CA
Replied Nov 3 2022, 15:39
Quote from @Carlos Ptriawan:

 I can see syndicators where their value add was limited to improving asset management or rehab of units being heavily impacted by rates.  More sophisticated value adds are increasing the value so significant compared to the money invested that they are minimally impacted by the rates. Investing in syndications requires a high level of due diligence including recognizing impact of current rates and impact of projected exit time rates. Also recognize projected exit time can be impacted by the rates and longer holds typically dilute the annualized return of the value add.

dude the syndicator that I'm referring to here is multi-million dollar syndicator that built property for A+ apartments, not garden apartment C class somewhere in new mexico. So even with "good rehabs" there's still a ceiling for rent growth, with liquidity is drying for financing the CRE project, if current environment continues, many of them may collapse.

 A rehab is not a sophisticated value add.  I hope you do not think that as a sophisticated value add.  Sophisticated value adds can have cost versus value add in different league than rehabs.  Development is getting more sophisticated than rehabs, but the risk is higher than I usually find comfortable.

The sophisticated value adds have pro forma that is conservative in the rent increases (I hope this is true for all syndications).  Their return is primarily via the sophisticated value add, rent growth is the icing other cake. 

There were syndicators that survived the Great Recession (some on this site) without loosing any investor money.  This rate increase may weed out some of the syndicators that were primarily succeeding due to the RE economy (appreciation and rent growth).  Time will tell.  However, i am confident that many syndicators doing sophisticated value adds will come out of this fine.  

Good luck

User Stats

2,562
Posts
1,489
Votes
Replied Nov 3 2022, 16:01
Quote from @Daniel Shuler:
Quote from @Carlos Ptriawan:
Quote from @Daniel Shuler:
This is something I've been seeing a lot of lately that leaves me scratching my head. Sometimes I feel like "Am I missing something here?". What I'm seeing are numerous multifamily properties, brand new, old, updated, not updated, that are listed that even after a 20% down payment, with today's interest rates, wouldn't even cover the mortgage, let alone all of the other things you may need to account for like CapEx, PM, etc.
How are these sellers/realtors coming up with their prices when the numbers don't seem to jive for an investor?

 because you use the 20% down - a 2009 environment number ; in year 2022. It's that simple.

the logic you guys using fo not calculating all the appreciation dynamics that happened since 2008-2009. 

So what’s the 2022 environment number then?
My assumption now:
Inflation 4-5%.  min. 45-50% min. downpayment depending on the location. Estimated IRR: 4-5%. 
I prefer STVR currently to LTR.

Needs to be extremely careful, especially when estimating price growth and rent growth. If we see slow growth for the next decade, even if the purchase price is correct, the repair cost would take much of the revenue.  

User Stats

2,562
Posts
1,489
Votes
Replied Nov 3 2022, 16:11
Quote from @Dan Heuschele:
Quote from @Carlos Ptriawan:

There were syndicators that survived the Great Recession (some on this site) without loosing any investor money.  This rate increase may weed out some of the syndicators that were primarily succeeding due to the RE economy (appreciation and rent growth).  Time will tell.  However, i am confident that many syndicators doing sophisticated value adds will come out of this fine.  

I'm only sharing what the largest syndicator telling about the actual condition, basically, they can't survive in an environment where the cost of financing is 7% and cap rate is 2-3% *AND* the rent is near the ceiling top. It has nothing to do with rehab/no rehab. It is not a bigger pocket level syndicator. It's much bigger syndicators. 


User Stats

4,209
Posts
4,821
Votes
Dan Heuschele
  • Investor
  • Poway, CA
4,821
Votes |
4,209
Posts
Dan Heuschele
  • Investor
  • Poway, CA
Replied Nov 3 2022, 19:57
Quote from @Carlos Ptriawan:
Quote from @Dan Heuschele:
Quote from @Carlos Ptriawan:

There were syndicators that survived the Great Recession (some on this site) without loosing any investor money.  This rate increase may weed out some of the syndicators that were primarily succeeding due to the RE economy (appreciation and rent growth).  Time will tell.  However, i am confident that many syndicators doing sophisticated value adds will come out of this fine.  

I'm only sharing what the largest syndicator telling about the actual condition, basically, they can't survive in an environment where the cost of financing is 7% and cap rate is 2-3% *AND* the rent is near the ceiling top. It has nothing to do with rehab/no rehab. It is not a bigger pocket level syndicator. It's much bigger syndicators. 



I believe that if their value add was along the lines of rehabbing units to increase NOI or to improve management. Note these types of syndication could have done great in recent times. These type of syndications may need to pivot to other categories of value add in the current environment.

If a value add increases the NOI significantly compared to the cost of the value add and the hold is short, the interest rate has minimal impact. Similar, a slight increase of cap rate could only marginally affect the return.

Search out syndications that high rates have minimal impact on return and that factor in cap rate increases.  



User Stats

1
Posts
0
Votes
Jdy Zapata
  • Realtor
  • Palm Beach Florida
0
Votes |
1
Posts
Jdy Zapata
  • Realtor
  • Palm Beach Florida
Replied Nov 4 2022, 05:33

@Ross Kline

This home should be able to return minimum $4,500. In rents monthly; that would cover your morgage and you would probably need to do your own management to save money.

The problem is that one must not fall in love with the property, but first the numbers criteria, and based on those numbers look for a property, stick with the numbers and look for 100 properties if is necessary until you find the one that fit that analysis.

User Stats

4,501
Posts
2,871
Votes
David Dachtera
  • Rental Property Investor
  • Yorkville, IL
2,871
Votes |
4,501
Posts
David Dachtera
  • Rental Property Investor
  • Yorkville, IL
Replied Nov 4 2022, 06:10

@Ross Kline,

For people starting out with no REI education, yes - losses are quite common. Even some BP Podcasters tell stories about the money they lost on their first deals. Some of them could have paid for their education four or five times with their financial losses and not only could have avoided those losses but could actually have profited enough to pay off their education with their first deal.

"Learn by doing" and "School of Hard Knocks" are by far the most expensive education out there.

My $0.02...

User Stats

1,673
Posts
1,521
Votes
Henry Clark#2 Commercial Real Estate Investing Contributor
  • Developer
1,521
Votes |
1,673
Posts
Henry Clark#2 Commercial Real Estate Investing Contributor
  • Developer
Replied Nov 4 2022, 08:20

@Ross Kline

Couple of items:

1.  As you and others have noted.  Once you have analyzed a deal make an offer at your price that works for you.  

2.  Frankfort looks like a great city to live in.  On interstate between Lexington and Louisville.  On a river.  State capital.  This is a great market and your property and rental rates aren’t that high. There should be lots of deals there

3.  Your analysis shows $600 per unit.  Most of your market is in the $700 to $1,100 range.  Realize you need to get to apples to apples, but something is off with your rate

4.  316 Wapping street.  Check out the ugly or not obvious properties. You don’t have to follow the herd. 

5.  How tight is the housing market and the rental market?  Go outside of town towards Lexington. Buy 10 to 40 acres and do a subdivision of 2 to 5 acre lots. Pick an ugly piece of property.  Trees on it.  Brush you can clear. Ditches you can put ponds in.  Close to interstate yet in the countryside.  Etc. 

You are in a target rich environment. You need to do the upfront analysis like your doing, but then look at the angles.  

Go around your area and identify 10 rental properties you would like to buy. Get on your GIS map and see who owns the properties. At the bottom they will list all property IDs they own. Pick the owners who have lots of properties. They are REI people. Get to know all you can about them and each of their properties. Meet them and tell them you would like to buy properties from them. As is. Not fixed up. Saves them sales commission. Helps them to control 1031 timing. Gives them an out. They are getting old and their kids don't want the business. Basically give them solutions.

It’s fall in Kentucky.  Leaves are falling.  Snow and ice will be coming.  Drive around town and make a list of every unkept yard after they should have been cleaned up.  Again get the owners off GIS treasurers map. Start calling them every 6 months. 

Look up everyone who has died in the last 3 months.  Look at GIS map and find the owner. Give them a solution. Even if one spouse is still alive.  Help them

Pay for leads.  Yard care, moving people, pool people.  Any people that are moving out.  Or unkept properties. 

Basically don’t do what everyone else is doing. 

You have to have your financing in order to make an offer quick. 

You don’t want to do 

Subject to financing

Subject to appraisal

Subject to home inspection. Do the inspection, but do it quick

Your in a great spot. 

User Stats

473
Posts
516
Votes
Leo Ray#3 General Real Estate Investing Contributor
  • Investor
516
Votes |
473
Posts
Leo Ray#3 General Real Estate Investing Contributor
  • Investor
Replied Nov 4 2022, 09:26
Quote from @Daniel Shuler:
This is something I've been seeing a lot of lately that leaves me scratching my head. Sometimes I feel like "Am I missing something here?". What I'm seeing are numerous multifamily properties, brand new, old, updated, not updated, that are listed that even after a 20% down payment, with today's interest rates, wouldn't even cover the mortgage, let alone all of the other things you may need to account for like CapEx, PM, etc.
How are these sellers/realtors coming up with their prices when the numbers don't seem to jive for an investor?

I was thinking about this same issue last night...   My assumption is that interest rates are increasing much more quickly than the market can react--there's probably going to be a delay between rates increasing, and prices dropping. ...it might take sellers several months to realize the realities of the market, and adjust their prices accordingly.  

...but, nobody knows the future--we'll just have to wait and see...

User Stats

1,473
Posts
1,233
Votes
Paul Moore
  • Commercial Real Estate Fund Manager
  • Lynchburg, VA
1,233
Votes |
1,473
Posts
Paul Moore
  • Commercial Real Estate Fund Manager
  • Lynchburg, VA
Replied Nov 7 2022, 10:16

Hi @Ross Kline! I'm guessing you have a successful financial planning career and you are very smart. As the host of the How to Lose Money podcast, I can tell you that it happens a lot. But it's not normal in the sense it should not happen to you. 

Fortunately, as Mr. Buffett says, investing is a zero-strike called game. You don't have to invest. You can keep analyzing the market and wait for it to turn. Or wait for a better situation. 

If you intend to keep your day job I highly recommend partnering with or investing into someone else's deals. An expert. It could be a syndication or a fund. This will give you the benefits of real estate investing without the liabilities, headaches, debt, toilets, tenants and trash. (It's really not as fun as it looks like on HGTV.)

I've talked to a few thousand investors in the last decade and the common theme I hear from those with a great career is that they wished they had not acquired their own properties and tried to manage them. 

If you agree with my thesis, I would recommend you get @Brian Burke's BP book The Hands-Off Investor. Good luck and happy investing! 

User Stats

4
Posts
9
Votes
Ross Kline
  • New to Real Estate
  • Frankfort, KY
9
Votes |
4
Posts
Ross Kline
  • New to Real Estate
  • Frankfort, KY
Replied Nov 9 2022, 21:05
@Henry Clark

Thank you for that thorough and well written response!