How do people make large real estate profitable?

Commercial Real Estate Investing

How do people make large real estate profitable?

FL · Member since 2016 · 912 posts · 107 votes

I just can't seem to make the numbers work to make any sort of ROI that compares to the 100+% you can get with residential rehabs. I realize you can get infinite ROI with BRRRR, but I don't think that's what the big players do. I'm asking about people that construct or purchase large apartment complexes, condominiums, commercial buildings, hotels, etc.

How do they make them cash flow in an amount that is worth all the trouble it takes to build and manage them?

For example, I was looking at a condo complex nearby, and they're selling for about $108/sq. ft. That is less than a quote I got on residential construction.

I have no problem sticking with residential rehabs if that's the best ROI, but if I could do a condo conversion, etc. that would be cool, too.

Just as an example, I've attached a picture of a building I watched being constructed from ground up over the last couple years. Now, it is being rented out. How do these investors make the numbers work?

https://www.dropbox.com/s/21pv5k60gtuwa17/0416180617a.jpg?dl=0

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Investor · North Richland Hills, TX · Member since 2013 · 1k+ posts · 1k+ votes

You are looking at this from a wrong perspective.

Initial NOI is important but almost irrelevant in the long run. When you buy an apartment complex you look for ways to increase that NOI which in turn increases the value of the property (AKA forced appreciation).

Once the property value increases sufficiently you either refinance or sell. In case of refinance, it is not unusual to get all of the initial capital out. This is essentially the same BRRRR strategy.

Virtually nobody holds these properties for 30 years with an intent to pay it off. 5 to 10 years is the usual hold time.

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Dan MahoneyPro Member
Financial Advisor · Atlanta, GA · Member since 2016 · 256 posts · 350 votes
8y
@Storm S. I guess the other perspective is that while ROI/IRR is important, so is profit in total dollars. A lot of investors (especially institutions) will prefer a deal with $10 million expected profit at a 9% IRR to a deal with $100,000 expected profit and a 30% IRR. Same goes for deal sponsors - between the fees they earn and their cut of the profits from the deal, they typically earn more dollars investing other people's money in larger, lower-ROI projects than they'd earn investing their own money in smaller, higher-ROI projects. Dollars feed families, not IRR.
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Account Closed
Investor · LOUISVILLE, KY · Member since 2017 · 41 posts · 24 votes
8y
I understood the broad question you ask is more or less, How do the "big players" make it work, ie-cash flow? and why?
Institutional investors, pension funds, REITs, family offices, HNW wealth managers, insurance companies et al., these clients primarily seek preservation of wealth and mitigation of risk. Appreciation and growth is usually a secondary consideration, preferring security.
Often content with seemingly low returns, big money may have longer time horizons and consider the tax benefit as the big win.
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Joe SplitrockPro Member
Moderator
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
8y
Everyone talks about forced appreciation and raising rents, then selling. My question is who is buying these properties after forced appreciation and making money? I see stuff all the time sell quickly for really low cap rates. Who is buying this stuff and what is their strategy? I also see new construction that sits half empty for a year. It almost seems like these large companies don't even care if it makes money the first few years.
Again, I get the value add strategy, but after that who is making money? If there is no value add, then why go through all the hassle versus easier places to invest.
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Michael Le
Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
8y
Originally posted by @Joe Splitrock:
Everyone talks about forced appreciation and raising rents, then selling. My question is who is buying these properties after forced appreciation and making money? I see stuff all the time sell quickly for really low cap rates. Who is buying this stuff and what is their strategy? I also see new construction that sits half empty for a year. It almost seems like these large companies don't even care if it makes money the first few years.
Again, I get the value add strategy, but after that who is making money? If there is no value add, then why go through all the hassle versus easier places to invest.
It could be a few reasons.
1. They've implemented their business plan but it's been 5 years and the market has changed. The area has gentrified a bit more and now resurfaced counter tops are not enough to compete anymore as their competitors are getting granite. So they sell and the buyers have a chance to take the upgrades up to the next level.
2. It's only been a couple of years and they have implemented only part of their initial plan but the cap rates compressed, allowing them to sell sooner than they originally thought. The new buyer has a chance to finish out their business plan.
3. They've taken an unstabilized property and stabilized it. Investors more interested in stable yield and tax depreciation come into the picture.
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Eric James
Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes
8y
Originally posted by @Mike Dymski:

Most of the value add B and C class apartment deals I see generate a 25+% total deal IRR...and that is split between the sponsor and the investors. The big players definitely BRRRR...they just do it on a 250 unit community and have professional management handle it rather than doing it on 250 individual homes. It's significantly less trouble and easier to manage.
This kind of large scale BRRR definitely makes sense to me. Much better than trying to BRRR or flip 200-300 SFH. What still doesn't make sense to me is tying up my money in a small multifamily (e.g. <50 units) for 4 or 5 years until I could refinance or sell.
1 Reply
Michael Le
Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
8y
Originally posted by @Eric James:

Originally posted by @Mike Dymski:
Most of the value add B and C class apartment deals I see generate a 25+% total deal IRR...and that is split between the sponsor and the investors. The big players definitely BRRRR...they just do it on a 250 unit community and have professional management handle it rather than doing it on 250 individual homes. It's significantly less trouble and easier to manage.
This kind of large scale BRRR definitely makes sense to me. Much better than trying to BRRR or flip 200-300 SFH. What still doesn't make sense to me is tying up my money in a small multifamily (e.g. <50 units) for 4 or 5 years until I could refinance or sell.
Why doesn't that make sense to you? There is a lot of potential profit in those deals too. It does take more work than larger deals but larger deals are also harder to find.
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Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
8y
Originally posted by @Eric James:
Originally posted by @Mike Dymski:

Most of the value add B and C class apartment deals I see generate a 25+% total deal IRR...and that is split between the sponsor and the investors. The big players definitely BRRRR...they just do it on a 250 unit community and have professional management handle it rather than doing it on 250 individual homes. It's significantly less trouble and easier to manage.
This kind of large scale BRRR definitely makes sense to me. Much better than trying to BRRR or flip 200-300 SFH. What still doesn't make sense to me is tying up my money in a small multifamily (e.g. <50 units) for 4 or 5 years until I could refinance or sell.
@Michael Le what Eric is saying is that he does not want XX properties of capital tied up while the units are turning over during the course of 1-2 years. Fair observation...he wants to recycle the capital sooner...unit by unit...maximum IRR. Many apartment investors prefer to turn units as they become vacant because the property cash flows well but you can turn units as fast as you like. And having XXX units lined up in the same location for re-positioning is a pretty efficient use of capital. It's one of the primary drivers of why value add apartment syndication is successful...maximizes IRR.
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Eric James
Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes
8y
Originally posted by @Mike Dymski:

Originally posted by @Eric James:

Originally posted by @Mike Dymski:
Most of the value add B and C class apartment deals I see generate a 25+% total deal IRR...and that is split between the sponsor and the investors. The big players definitely BRRRR...they just do it on a 250 unit community and have professional management handle it rather than doing it on 250 individual homes. It's significantly less trouble and easier to manage.
This kind of large scale BRRR definitely makes sense to me. Much better than trying to BRRR or flip 200-300 SFH. What still doesn't make sense to me is tying up my money in a small multifamily (e.g. <50 units) for 4 or 5 years until I could refinance or sell.
Exactly. On a previous thread I asked about the time to refinance or sell a value-add multifamily, and was given a general timeline of 1-2 years to renovate and raise rents, followed by another 2-3 years to stabilize the property. That's quite a while to have money tied up, at least for myself as I don't have half a million $ or more to throw around.
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Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
8y
Originally posted by @Eric James:

Originally posted by @Mike Dymski:
Originally posted by @Eric James:
Originally posted by @Mike Dymski:

Most of the value add B and C class apartment deals I see generate a 25+% total deal IRR...and that is split between the sponsor and the investors. The big players definitely BRRRR...they just do it on a 250 unit community and have professional management handle it rather than doing it on 250 individual homes. It's significantly less trouble and easier to manage.
This kind of large scale BRRR definitely makes sense to me. Much better than trying to BRRR or flip 200-300 SFH. What still doesn't make sense to me is tying up my money in a small multifamily (e.g. <50 units) for 4 or 5 years until I could refinance or sell.
Exactly. On a previous thread I asked about the time to refinance or sell a value-add multifamily, and was given a general timeline of 1-2 years to renovate and raise rents, followed by another 2-3 years to stabilize the property. That's quite a while to have money tied up, at least for myself as I don't have half a million $ or more to throw around.
Stabilizing the property happens towards the end of the re-positioning period and the refinance (or sale) can happen in years 2 and 3...small MF even faster.
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Michael Le
Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
8y
Originally posted by @Eric James:

Originally posted by @Mike Dymski:
Originally posted by @Eric James:
Originally posted by @Mike Dymski:

Most of the value add B and C class apartment deals I see generate a 25+% total deal IRR...and that is split between the sponsor and the investors. The big players definitely BRRRR...they just do it on a 250 unit community and have professional management handle it rather than doing it on 250 individual homes. It's significantly less trouble and easier to manage.
This kind of large scale BRRR definitely makes sense to me. Much better than trying to BRRR or flip 200-300 SFH. What still doesn't make sense to me is tying up my money in a small multifamily (e.g. <50 units) for 4 or 5 years until I could refinance or sell.
Exactly. On a previous thread I asked about the time to refinance or sell a value-add multifamily, and was given a general timeline of 1-2 years to renovate and raise rents, followed by another 2-3 years to stabilize the property. That's quite a while to have money tied up, at least for myself as I don't have half a million $ or more to throw around.
You can always go with a heavier value add deal, something at 60-70% occupancy. You will have a lot more units upfront that you can renovate and turn and bring the income up quickly instead of waiting for tenants to leave. There is higher risk and you'll have to go with a bridge loan but when you refinance you can pull money out of the property just like a traditional BRRRR.
0 Reply
John CasmonPro Member
Cincinnati, OH · Member since 2013 · 1k+ posts · 1k+ votes
8y
Originally posted by @Michael Le:
Originally posted by @Eric James:

Originally posted by @Mike Dymski:
Originally posted by @Eric James:
Originally posted by @Mike Dymski:

Most of the value add B and C class apartment deals I see generate a 25+% total deal IRR...and that is split between the sponsor and the investors. The big players definitely BRRRR...they just do it on a 250 unit community and have professional management handle it rather than doing it on 250 individual homes. It's significantly less trouble and easier to manage.
This kind of large scale BRRR definitely makes sense to me. Much better than trying to BRRR or flip 200-300 SFH. What still doesn't make sense to me is tying up my money in a small multifamily (e.g. <50 units) for 4 or 5 years until I could refinance or sell.
Exactly. On a previous thread I asked about the time to refinance or sell a value-add multifamily, and was given a general timeline of 1-2 years to renovate and raise rents, followed by another 2-3 years to stabilize the property. That's quite a while to have money tied up, at least for myself as I don't have half a million $ or more to throw around.
You can always go with a heavier value add deal, something at 60-70% occupancy. You will have a lot more units upfront that you can renovate and turn and bring the income up quickly instead of waiting for tenants to leave. There is higher risk and you'll have to go with a bridge loan but when you refinance you can pull money out of the property just like a traditional BRRRR.
As Michael pointed out, you don't necessarily have to wait 3 years to pull out equity, but you will need to find lenders who will allow you to pull it out quicker. Another option is to add supplemental financing to a deal once stabilized and keep the original financing in place.
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