$50,000/door for '60es Junk!

21 Replies

It is absolute comedy out there. The last several apartment communities that have come across my screen in Ohio and Indiana were being marketed as "value-ad" at $50,000 to $60,000/door - these were all 1,960es construction...

I have to laugh. These are trophy asset prices for 60es junk with rents of of $650/month - NUTS!

And what would be the value-ad proposition when you're starting out at the absolute top of the market?

I just laugh...

General Anthony McAuliffe couldn't have said it any better.

I do get nervous from time to time nowadays. I get some familiar vibes to circa 2006-2007. I guess we'll see how things go.

I can bend my mind enough to understand why some are paying $40/door for something only worth $35,000. Ooooo - economy is picking up, unemployment is down, at least according to the news, family formation is up, etc. There are some fundamentals for why apartments have some wind in the sail...

But, c'mon - $50,000 for 60es buildings. This is Mid-West - hello?! We are not particularly creating tons of jobs here. Oour property taxes are not exactly low. Our populations aren't particularly growing.

I know that the interest rates are 4% on 10-year non-recourse GSE debt, and I know that on paper a 7 cap creates a 3% delta, but damn - it's a 1960es building in freaking Ohio. In what world is that 7 cap real? 

I understand buying A Class stuff for the delta, but this is just comedy!

Well @Ben Leybovich I guess 1031 money feels like free money for some people. What happens if they abolish or limit the 1031 exchange? In my market master metered junk where utilities are up to 15% of GOI (with no chance of RUBS) are selling for $50k per door. Seems like $50k per door is becoming the norm around the country. All you have to do is show 90%+ occupancy and a nice pro forma and the money follows. Just sit back and patiently wait for it to come back to you. This is the part of the cycle where we sit back and watch, build relationships and wait for the desperate call to take this junk off my hands. Sucks if you your just starting out and trying to build some cash flow but great if your holding quality assets. Two sides to every story.

i agree it is ridiculous...if you think it is bad in the midwest, let me invite you to waterless southern california - Class C junk marketed as Class B and priced under a 4 cap....shameless!!

The reality is that the purchasers are foreign nationals who are simply parking money here.  They have a completely different return profile than we do.  

Then there are folks like me who profit off these folks but need to find a 1031 exchange (otherwise get hosed by Uncle Sam), so they are in the hunt too.  

Originally posted by @Brent Seehusen :

If everybody is overpaying for apartments right now, then are you guys thinking about selling your holdings?  @Ben Leybovich @Serge S.

 Hahaha - @Serge S., you wanna take this? hahaha

Originally posted by @Ben Leybovich :
Originally posted by @Brent Seehusen:

If everybody is overpaying for apartments right now, then are you guys thinking about selling your holdings?  @Ben Leybovich @Serge S.

 Hahaha - @Serge S., you wanna take this? hahaha

 Well ... the answer is long. I've had offers on some of my assets and decided not to sell even with a large capital gain. The problem is replacement. I cannot replace the stable income lost without a lot of risk and headache. Can't speak for others but this is the issue I am hearing from most.

Originally posted by @Serge S. :
Originally posted by @Ben Leybovich:
Originally posted by @Brent Seehusen:

If everybody is overpaying for apartments right now, then are you guys thinking about selling your holdings?  @Ben Leybovich @Serge S.

 Hahaha - @Serge S., you wanna take this? hahaha

 Well ... the answer is long. I've had offers on some of my assets and decided not to sell even with a large capital gain. The problem is replacement. I cannot replace the stable income lost without a lot of risk and headache. Can't speak for others but this is the issue I am hearing from most.

 In other words, Brent, you're gonna have to pry those units out of his hands, and to do that you'll have to kill him first hahaha 

How do you replace proven CF that one can live comfortably on in this market? 

I have sold over 100 units and moved the money into other commercial assets.  The problem now is that the retail and office markets are getting too hot also.

What to do.... what to do..?

Like Serge said.  Now is a good time to hold assets but it is real tough to buy.  I have looked to the point that I am about ready to give up.

That makes sense @Serge S. . So I guess the moral of the story is the bigger you get the harder it can be to trade up, especially when the whole world is chasing yield. I'm operating in the 2-4 unit space right now so it's much easier to find the occasional mispriced asset that the "big money" is overlooking. I'm not competing with foreign investors, syndicates, insurance companies, or pension funds. And yet a lot of small time retail investors seem to be more focused on SFR's for whatever reason. Either I've found the sweet spot or I'm missing something that everybody else knows.

Originally posted by @Brent Seehusen :

That makes sense @Serge S. .  So I guess the moral of the story is the bigger you get the harder it can be to trade up, especially when the whole world is chasing yield. 

 Not true at all.  The moral of the story is to play the cycles aggressively.  Go "all in" on the down cycles!

Originally posted by @Steve Olafson :
Originally posted by @Brent Seehusen:

That makes sense @Serge S. .  So I guess the moral of the story is the bigger you get the harder it can be to trade up, especially when the whole world is chasing yield. 

 Not true at all.  The moral of the story is to play the cycles aggressively.  Go "all in" on the down cycles!

I completely agree with you there.  My reason for jumping into this thread was because I thought selling near the top was also part of playing the cycle, but I can see now how that can be difficult.  

My strategy right now is to load up on cash flow assets while debt is cheap and shift back to "appreciation" assets when coastal CA has its next downturn.  A lot of people are talking like RE will never go down again and 2009-2012 was the one and only opportunity to invest.  I don't buy it.  California has a downturn about once every 10-12 years.  I'll have my powder ready, but in the meantime I intend to acquire cash flowing assets.

@Brent Seehusen

There is more that one way to play the cycles.  I am still holding assets for cashflow.  I am also refinancing those on 10 year money as we speak.  But I did sell off a number of properties and did not place all of that money.  So, I am sitting on cashflow AND cash.  What could be better?

The risk of course is that the market could keep going up and I would lose out on some returns. 

Lots of choices.  Not all of them will be the most efficient.

@Steve Olafson what happened? 

Steve hit the nail on the head. If RE investors can hone just one skill, it would be the ability to recognize where we are in the cycle and move accordingly. You want to accumulate heavy buying the best assets with as much debt as possible irrelevant of rates, naysayers and the doom and gloom around you. Once the cycle peaks we shift sideways via 1031 to either other asset classes that have yet recovered (SFR, retail, MF, Office, whatever) while holding the true quality cash flow which at that point becomes irreplaceable. By that point you should know exactly what you are holding. If everything you are holding is a homerun then at that point its time to consider deleveraging or accumulating cash for the next cycles.

These cycles take a long time and can be hard to see if you have not been through a few. These cycles will wipe out the weak that jumped in when risk was seemingly low (positive employment, RE in the news and uncles buying SFRs) while those that accumulating will be moving sideways growing their balance sheet preparing to buy from those that missed all the signs. Stay disciplined and staying patient is the name of the game.

Originally posted by @Serge S. :

@Steve Olafsonwhat happened? 

 Just not enough return. The seller would not bend on anything. @Joel Owens is helping me find something better.  :) 

@Ben Leybovich

$50K ... we got folks here peddling similar stuff - ok, some if it as young as 35-40years - who think $85 - $100K/unit is reasonable.

I'll just keep putting away capital waiting and patiently wait for the downhill train.

@Roy N.

We are all just sitting around hoping this economy implodes again :)

It's these kinds of threads that reassure me that I'm not on the wrong track with my assessment of the market. Just wait until these yield chasers realize that they have bad management six months too late when their income statements are dripping red.

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