@Russell Brazil I understand the concept but who is buying at these low returns? You can get into stocks with these returns
Well Im certainly buying and continue to grow rich in doing so. However I wouldnt be buying in all cash. The greatest aspect of real estate investing is using leverage to purchase it. Your return is artificially low in purchasing in all cash.
@Shane H. That’s what I was thinking but some are pending!! Couldn’t believe it.
Are the pending at 5 percent though? Who offers asking price? And maybe they have an option to increase those returns. Like I do snow removal, so when I look at snow removal costs on a commercial property I immediately adjust it to my rates and know that the RE company is going to pay my snow removal company for that service which means I'm increasing profits of that business as well. Just one example. Any contractor is going to have a way lower maintenance expense than joe Schmoe. By taking on the rental repairs you're increasing your other companies book of business. Knock a few thousand off the price, pick up some profits in your repair business. Find a better quote on insurance. Get the taxes reduced. Next thing you know that 5 percent you're running is 11 for someone else...
There are a number of reasons why people are still buying, some good, some not so good.
1) Funds with cash - they are incentivized to deploy cash since holding cash will drag down overall returns
3) People who have access to deals whether they are just very good at finding off-market deals or they have already done so many deals that they are getting better deals from brokers
4) Whilst some markets are very hot, others are less so. If you are local you likely have an advantage and this can help you to find good deals
5) People who haven’t been through a real estate cycle and are less risk averse than others that have
At the end of the day it is impossible to time the market, I know this because I used to trade financial derivatives for a living, I spent my life on a trading floor and I have worked with numerous hedge funds. Even the best of the best are unable to consistently predict market cycles. It is also very expensive staying out of the market in the hope that your timing will be perfect enough to get a deal that offsets the lost returns. In my opinion it’s better to deploy a defensive strategy if you believe that the market is overvalued so that you can stay invested but with lower risk.
Here is a 12 step program to reduce your risk
1. Focus on the right asset – multifamily real estate is popular during times of uncertainty because people have a preference for renting during these times and because it is valued intrinsically it is less prone to large swings in sentiment which can impact the value of single family homes.
2. Invest in real estate - it represents diversity in your overall portfolio so if you are taking cash out of equities to invest in real estate then you are potentially building yourself a portfolio that is positioned for excess returns with lower volatility. For a real life example take a look at the Yale Endowment portfolio.
3. Pick the right market – not all housing markets were impacted in the same way during the last recession. If you select a market with population growth, jobs and wage growth, a balance between supply and demand and a diverse range of employers you will do just fine. If you invest in a stagnant market with just one big employer then you will be exposed
4. Buy for cashflow, not appreciation – this is a cardinal rule of real estate investing. If you have a cash flowing asset you can hold onto it indefinitely, if you have negative cashflow and are hoping for appreciation you will end up being a forced seller in a down market. We can create equity in multifamily real estate by investing in our assets to grow rent, improve vacancies and by cutting expenses
5. Avoid high end real estate – high end real estate always gets hit first in any downturn as people migrate from more expensive to less expensive homes. By focusing on class B/C properties we expect to see an increase in demand and in rental rates during any downturn
6. Lock in long term financing – lack of available credit was the downfall of many homeowners and investors during the last recession. By locking in our funding we can eliminate one source of potential distress and we can also 'fix' one of our major expenses by locking in the financing rate
7. Increase your cash position – there will be opportunities to buy distressed assets from people who were not prepared, but you will need cash
8. Reduce Leverage – leverage can be used to provide higher cash on cash returns however along with leverage comes greater sensitivity to any loss of income. If we reduce leverage we may get lower cash returns however we do increase our ability to 'stay in the game' and not be forced sellers should rental rates decrease or vacancies rise. Being a distressed seller during a downturn is not where you want to be
9. Be more conservative underwriting – multifamily properties are priced based off their current financial performance only. When we are underwriting deals we can plan for a downturn in our assumptions e.g. increase expected vacancy and decrease rents to avoid overpaying
10. Dispose of weakest assets – this is simple portfolio management, it's key to let go of underperforming assets to free up cash and credit required to buy better performing assets. Don't wait until the recession arrives to sell underperforming assets
11. Increase cash reserves – whilst this can decrease returns it is all about being able to weather the storm, cash is king!
12. Have a range of exit strategies – If it isn't a good time to sell then you do have other options with multifamily real estate, provided that it is cash flowing. You could, for example refinance to get your cash out.
@Arthur P., it depends a lot more on the deal than the cap rate for me. One thing that I like about low cap rates is that you can create a lot more equity with a $1 increase in NOI in a low cap rate market than in a high cap rate market.
I live in NYC which has cap rates in the low 3% range and I can assure you that there are plenty of people making money. Cap rate is a very broad measure, intended to enable meaningful comparison between different assets so us it for that only. I would also caution against thinking of it as a measure of absolute risk, the amount of capital currently chasing yield is driving cap rates down, this does not in any way reduce the risk of the deal, it’s the opposite in fact. Good luck!
In my area, Massachusetts, I've noticed most people buying these properties with little to no ROI, are people who are WANNABE investors. They hear that buying a multifamily gets your rich and makes you financially free so they buy a property at above market value.. driving the market up. Quite annoying. Seeing ********s that were once being sold for 200-300k, amazing cashflow, being sold for 600k!!
Dont look just the yields. Ppl are looking at the return they get in bank. I agree might not be the best, but as diversification, its worthy to get a 7% . 4-5% i would be out!
@Syed H. I will never buy on appreciation only. Of course cap matters. What are you talking about?? That’s your return.
Upstate NY is where I found them. 15 and even over 20% a few years ago. They have tripled in value but if I sell can’t find anything better to purchase. Love the cash flow.
A cap rate isn't your return. I don't think you understand the appreciation business model (& the the IRR that it can yield). Which is fine, most regular mom & pop investors don't.
Also upstate NY is very different from the markets I’m talking about. Appreciation models do very well in primary markets. These are markets that have netted people 20+% IRRs. You can’t compare primary to secondary and tertiary markets. There is a reason why high cap rate markets are what they are. You can go buy a 20 cap right now in the middle of nowhere. Those are only meant for the locals who know what their doing.
@Syed H. I bought and heavy. That why it’s hard for me to buy under 10% now. Bought couple last year at that but I can’t go under that
Congrats to you.
But most people weren’t buying. Most people couldn’t. Bank disappeared. Liquidity in the market was gone. The amount of investment properties sold back than is 1/10th of the volume in the past few years in certain markets. You are comparing cap rates from properties that were bought right after the largest crash in 80 years. Not really a fair comparison.
@Syed H. What markets are you talking about? Let me know!
I get appreciation but buying on appreciation I don’t believe is a smart move.
But say you bought based on appreciation and my properties tripled in last few years ok great. Where do I put my money after sale? On a property making 4%? Now that I just said that maybe it is a better move. Have to run the numbers. Where are you investing?
@Arthur P. Me!!!! Doing BRRRR can't really go wrong in any market. Biggest risk is any short term debt during rehab, but my projects are in the 3-6 month range to minimize that risk.
@Russell Brazil I understand the concept but who is buying at these low returns? You can get into stocks with these returns
Syndicators are buying hand over Fist.
I hear accredited investors standards have been lowered. The little boy wants in RE after 200-300% rise in prices.
That to me is the clearest indication that one should either start to pump the brakes on new syndicated investments or truly ramp up their due diligence with high levels of skepticism and standards. Also, with all of the 'new syndicators' that are out there trying to establish themselves, one needs to be extra careful. Personally, I feel much more comfortable with direct ownership of property at this stage of the market cycle. Even during the current great economic run we are having, I've heard of a few investments that are currently expected to result in full principal losses. Just imagine how bad the carnage will be when the economy resets with all of the johnny-come-lately syndicators that have joined the game in recent years?
So to answer the OP's question, I am still actively buying right now. And apparently, based on the number of properties that either went into escrow or sold during the holidays, there are a crapload of other investors here in Los Angeles that are actively buying. Also, please define 'returns'. Are you talking about CoC?, IRR? ROE? IRR of a fourplex I bought last year in South Los Angeles is over 25%...but CoC is just under 8%.
