How do the numbers make sense?
Real Estate Agent · Worcester, MA · Member since 2023 · 88 posts · 52 votes
As an agent, I have been seeing insane numbers being offered on properties where there is no way the rents can possibly make sense.
I'm curious how people are spending so much on multi-family properties, especially in the current rate environment. What is the mindset or strategy when the offers are out of range from the absolute top ranges of rent that could be charged? Is it a hope that rates decline and then it makes sense? But how much damage will be done by hoping for the unknown and operating at a loss? Will rates come down enough to make sense? Are we hoping for appreciation in these situations? There are still deals to be had and things may not make sense for a couple of years at best, but some of these numbers just do not add up. Would love to hear some perspective on this!
Run the numbers.
1. 1031 exchange.
2. Newby investor doesn’t factor in maintenance, capex, turn over costs, vacancy costs the same as another investor. They are paying more to be educated.
3. Interest rate- what does it take to make this a good deal. If rates go from 8 to 6% what are the cash flow numbers? How will the market and buying pressure revalue the house at 6%?
4. REI type- from rental to MTR, higher cash stream impact on valuation.
5. Higher rent- We have had 10 to ?? Million people added recently. They can pay more at 4 to 8 occupants per rental unit. That in turn drives up other units.
6. Airbnb- house go off the market for housing. Drives up housing rates.
Is there anything specific about your town and area market? New industry coming in? Resort town? Etc.
The math works for that buyer. Just a different approach.
Run the numbers.
1. 1031 exchange.
2. Newby investor doesn’t factor in maintenance, capex, turn over costs, vacancy costs the same as another investor. They are paying more to be educated.
3. Interest rate- what does it take to make this a good deal. If rates go from 8 to 6% what are the cash flow numbers? How will the market and buying pressure revalue the house at 6%?
4. REI type- from rental to MTR, higher cash stream impact on valuation.
5. Higher rent- We have had 10 to ?? Million people added recently. They can pay more at 4 to 8 occupants per rental unit. That in turn drives up other units.
6. Airbnb- house go off the market for housing. Drives up housing rates.
Is there anything specific about your town and area market? New industry coming in? Resort town? Etc.
The math works for that buyer. Just a different approach.
In order to underwrite successfully you gotta' know the numbers and have experience. Lots of newbies don't have much of either. They are told to borrow and buy by gurus and the media no matter what. "Hope for the best" does not work, this can be a cruel and crushing business with expensive lessons! "Get more OPM and leverage"!
Don’t forget. Paying cash and/or saving their own rent. Or an extended family that wants their own space. Or smart enough to look at how the deal works in a couple years at lower rates but don’t want to pay those higher prices that come with lower rates. Or they own neighboring properties and don’t want a stranger screwing up their area.
They aren’t you. I’ve seen people buy “overpriced” properties at over a million dollars. First thing they do? Tear them down. These weren’t traditional “tear downs”. They were in model home condition.
Can you imagine getting outbid by a couple hundred thousand on your dream home. And then you see it torn down? Your dream home lowered the value of the property to that buyer.
Don’t forget. Paying cash and/or saving their own rent. Or an extended family that wants their own space. Or smart enough to look at how the deal works in a couple years at lower rates but don’t want to pay those higher prices that come with lower rates. Or they own neighboring properties and don’t want a stranger screwing up their area.
They aren’t you. I’ve seen people buy “overpriced” properties at over a million dollars. First thing they do? Tear them down. These weren’t traditional “tear downs”. They were in model home condition.
Can you imagine getting outbid by a couple hundred thousand on your dream home. And then you see it torn down? Your dream home lowered the value of the property to that buyer.
I'd expect cash buyers to be lower, not higher in most scenarios but I see what you mean. I have actually seen someone buy a multi-million dollar home just to tear it down, so I understand the sentiment on infinite money in some cases, this is more of the 3 unit building near the city at an outrageous price compared to properties almost 1.5x as large. There could always be infinite reasons why people would do it, more curious if there is a strategy that people are using in these cases if the intention is "conventional" investing, Henry offered a few ideas that would most likely fit.
Helpful to look at for people trying to understand different ideas for sure!
Thanks for sharing.
In order to underwrite successfully you gotta' know the numbers and have experience. Lots of newbies don't have much of either. They are told to borrow and buy by gurus and the media no matter what. "Hope for the best" does not work, this can be a cruel and crushing business with expensive lessons! "Get more OPM and leverage"!
The guru's always plentiful, you'd think at some point even with a guru that someone would say "yikes that's a lot of money, what's the return look like" but they are usually convincing enough to where I could see someone hoping for get rich quick to overlook things like that.
In order to underwrite successfully you gotta' know the numbers and have experience. Lots of newbies don't have much of either. They are told to borrow and buy by gurus and the media no matter what. "Hope for the best" does not work, this can be a cruel and crushing business with expensive lessons! "Get more OPM and leverage"!
The guru's always plentiful, you'd think at some point even with a guru that someone would say "yikes that's a lot of money, what's the return look like" but they are usually convincing enough to where I could see someone hoping for get rich quick to overlook things like that.
Many guru's have introduced REI to people who have made legitimate millions, who might have otherwise been stuck in a much lesser life. Hat's off to them!
REI is definitely not get rich quick. Being taught by a pro can be a great accellerator whether it is REI, baseball or skiing.
For me, you can advance yourself greatly by paying attention at BP threads and applying lessons learned.
Run the numbers.
1. 1031 exchange.
2. Newby investor doesn’t factor in maintenance, capex, turn over costs, vacancy costs the same as another investor. They are paying more to be educated.
3. Interest rate- what does it take to make this a good deal. If rates go from 8 to 6% what are the cash flow numbers? How will the market and buying pressure revalue the house at 6%?
4. REI type- from rental to MTR, higher cash stream impact on valuation.
5. Higher rent- We have had 10 to ?? Million people added recently. They can pay more at 4 to 8 occupants per rental unit. That in turn drives up other units.
6. Airbnb- house go off the market for housing. Drives up housing rates.
Is there anything specific about your town and area market? New industry coming in? Resort town? Etc.
The math works for that buyer. Just a different approach.
Thanks for sharing Henry,
Always interesting to cover the different angles, it'd be interesting to go through each of them for a specific building to see how different they are. I'd say the MTR would make the most sense being close to some hospitals in this case with the higher offer price but like you presented it could be a variety.
In order to underwrite successfully you gotta' know the numbers and have experience. Lots of newbies don't have much of either. They are told to borrow and buy by gurus and the media no matter what. "Hope for the best" does not work, this can be a cruel and crushing business with expensive lessons! "Get more OPM and leverage"!
The guru's always plentiful, you'd think at some point even with a guru that someone would say "yikes that's a lot of money, what's the return look like" but they are usually convincing enough to where I could see someone hoping for get rich quick to overlook things like that.
Many guru's have introduced REI to people who have made legitimate millions, who might have otherwise been stuck in a much lesser life. Hat's off to them!
REI is definitely not get rich quick. Being taught by a pro can be a great accellerator whether it is REI, baseball or skiing.
For me, you can advance yourself greatly by paying attention at BP threads and applying lessons learned.
Run the numbers.
1. 1031 exchange.
2. Newby investor doesn’t factor in maintenance, capex, turn over costs, vacancy costs the same as another investor. They are paying more to be educated.
3. Interest rate- what does it take to make this a good deal. If rates go from 8 to 6% what are the cash flow numbers? How will the market and buying pressure revalue the house at 6%?
4. REI type- from rental to MTR, higher cash stream impact on valuation.
5. Higher rent- We have had 10 to ?? Million people added recently. They can pay more at 4 to 8 occupants per rental unit. That in turn drives up other units.
6. Airbnb- house go off the market for housing. Drives up housing rates.
Is there anything specific about your town and area market? New industry coming in? Resort town? Etc.
The math works for that buyer. Just a different approach.
I think Henry did a great job summarizing it. All of these factors are going on right now. There's been so much interest in real estate investing and the success stories on podcasts and in books - most of which were achieved over the last decade - give people the real estate "bug" and they often over pay either because they don't know how to run the numbers or because they're just so anxious to get in. I also see a lot of people buying banking on two things: appreciation and future lower interest rates. And less often talked about but definitely happening is people buying because they (probably correctly) assume it's only going to get more expensive to buy in the future. FOMO.
I do want to give a nod to @Matthew Gentile for bringing this up and acknowledging it. It's refreshing to hear a Realtor say "what the heck are people doing??" because so often it's the Realtor who is pushing a "cash cow" either disingenuously or because they just don't know how to run the numbers.
@Bill B. Exactly. Great point! Get in the game and get going!
Run the numbers.
1. 1031 exchange.
2. Newby investor doesn’t factor in maintenance, capex, turn over costs, vacancy costs the same as another investor. They are paying more to be educated.
3. Interest rate- what does it take to make this a good deal. If rates go from 8 to 6% what are the cash flow numbers? How will the market and buying pressure revalue the house at 6%?
4. REI type- from rental to MTR, higher cash stream impact on valuation.
5. Higher rent- We have had 10 to ?? Million people added recently. They can pay more at 4 to 8 occupants per rental unit. That in turn drives up other units.
6. Airbnb- house go off the market for housing. Drives up housing rates.
Is there anything specific about your town and area market? New industry coming in? Resort town? Etc.
The math works for that buyer. Just a different approach.
I think Henry did a great job summarizing it. All of these factors are going on right now. There's been so much interest in real estate investing and the success stories on podcasts and in books - most of which were achieved over the last decade - give people the real estate "bug" and they often over pay either because they don't know how to run the numbers or because they're just so anxious to get in. I also see a lot of people buying banking on two things: appreciation and future lower interest rates. And less often talked about but definitely happening is people buying because they (probably correctly) assume it's only going to get more expensive to buy in the future. FOMO.
I do want to give a nod to @Matthew Gentile for bringing this up and acknowledging it. It's refreshing to hear a Realtor say "what the heck are people doing??" because so often it's the Realtor who is pushing a "cash cow" either disingenuously or because they just don't know how to run the numbers.
Appreciate the shoutout Bonnie! I like to think of myself as more of an investor than an agent and I like to treat my clients the same way I run my own numbers (which is extremely conservative, I like to sleep at night). Part of the reason I still work my W2 part time is so I'm not reliant on the commission which allows me to advocate the better deal and not try to bump my numbers 1k or 2k here at the expense of my client on the scale of tens of thousands. Realtors already have a bad rep in most cases, being transparent and honest takes me a whole lot further. Agents advocating waived inspections blows my mind unless your client is a contractor themselves. Couldn't imagine sending a first time or even experienced investor into a situation blind at these price tags. My opinion anyway! Honored to be trusted to serve folks looking to evolve their situations by investing and working hard.
Run the numbers.
1. 1031 exchange.
2. Newby investor doesn’t factor in maintenance, capex, turn over costs, vacancy costs the same as another investor. They are paying more to be educated.
3. Interest rate- what does it take to make this a good deal. If rates go from 8 to 6% what are the cash flow numbers? How will the market and buying pressure revalue the house at 6%?
4. REI type- from rental to MTR, higher cash stream impact on valuation.
5. Higher rent- We have had 10 to ?? Million people added recently. They can pay more at 4 to 8 occupants per rental unit. That in turn drives up other units.
6. Airbnb- house go off the market for housing. Drives up housing rates.
Is there anything specific about your town and area market? New industry coming in? Resort town? Etc.
The math works for that buyer. Just a different approach.
I think Henry did a great job summarizing it. All of these factors are going on right now. There's been so much interest in real estate investing and the success stories on podcasts and in books - most of which were achieved over the last decade - give people the real estate "bug" and they often over pay either because they don't know how to run the numbers or because they're just so anxious to get in. I also see a lot of people buying banking on two things: appreciation and future lower interest rates. And less often talked about but definitely happening is people buying because they (probably correctly) assume it's only going to get more expensive to buy in the future. FOMO.
I do want to give a nod to @Matthew Gentile for bringing this up and acknowledging it. It's refreshing to hear a Realtor say "what the heck are people doing??" because so often it's the Realtor who is pushing a "cash cow" either disingenuously or because they just don't know how to run the numbers.
And to your point. I think FOMO is enormous with the increase of the Tiktok, instagram gurus etc. I've seen clickbait real estate get rich quick videos with 2million views on them so to say people aren't absolutely running with that thinking if I don't do this I'll miss out it must be easy. Definitely agree with you that one is huge, we've seen clients fresh out of school coming to us wanted to buy multis with 5k to their name. Not that its impossible to get creative financing or that its bad to start investing I'm not saying that by any means at all the earlier the better but the safety blanket is small with no reserves for an expensive learning experience which in this industry is likely.
Thanks for sharing!
A number of reasons that others have mentioned. The more common one I'm seeing is just pure speculation that the value will continue skyward in the future. Buying a SFH to live in doesn't cashflow at all but if you think the house will be worth 3x in 15 years then it's a no brainer. This same logic has been extending toward multifamily.
It is interesting to weigh the skyward appreciation model at these levels. I'm probably too conservatively minded to use that model myself, but then again my goals are consistent cash-flow and stabilized equity building properties. I'm not looking for crazy appreciation or overwhelming concerned in the event of a downturn because everything is structured in protection for and against. Does that limit me somewhat absolutely. But my drive is stability not making infinite money (not against it at all! Would love infinite money) but cash-flow to the degree my wife can work if and when she wants to is good enough for me for now. Happily take the appreciation if it happens but don't want to rely on it too much.
My niece just passed on a deal for a new Airbnb deal. Went thru a guru program. Last second found out the Property tax estimate they used was wrong. They used the gurus tax rate who is in the neighborhood. Found out the new rate was 2.5 higher. If she had bought it she would have been one of those people who paid to much. Trying to get her into Self Storage so I can be the paid Guru and get a free lunch from her.
As an agent, I have been seeing insane numbers being offered on properties where there is no way the rents can possibly make sense.
I'm curious how people are spending so much on multi-family properties, especially in the current rate environment. What is the mindset or strategy when the offers are out of range from the absolute top ranges of rent that could be charged? Is it a hope that rates decline and then it makes sense? But how much damage will be done by hoping for the unknown and operating at a loss? Will rates come down enough to make sense? Are we hoping for appreciation in these situations? There are still deals to be had and things may not make sense for a couple of years at best, but some of these numbers just do not add up. Would love to hear some perspective on this!
Recency Bias is a hell of an anesthetic for people who don't want to believe it could go the other way =)
My niece just passed on a deal for a new Airbnb deal. Went thru a guru program. Last second found out the Property tax estimate they used was wrong. They used the gurus tax rate who is in the neighborhood. Found out the new rate was 2.5 higher. If she had bought it she would have been one of those people who paid to much. Trying to get her into Self Storage so I can be the paid Guru and get a free lunch from her.
Don’t forget. Paying cash and/or saving their own rent. Or an extended family that wants their own space. Or smart enough to look at how the deal works in a couple years at lower rates but don’t want to pay those higher prices that come with lower rates. Or they own neighboring properties and don’t want a stranger screwing up their area.
They aren’t you. I’ve seen people buy “overpriced” properties at over a million dollars. First thing they do? Tear them down. These weren’t traditional “tear downs”. They were in model home condition.
Can you imagine getting outbid by a couple hundred thousand on your dream home. And then you see it torn down? Your dream home lowered the value of the property to that buyer.
I see this in my town all the time. Pay $1.5 million, tear it down, spend $3 million to build a brand new monster. The pricing on multi families around our area are being priced for owner occupied landlords now.
My niece just passed on a deal for a new Airbnb deal. Went thru a guru program. Last second found out the Property tax estimate they used was wrong. They used the gurus tax rate who is in the neighborhood. Found out the new rate was 2.5 higher. If she had bought it she would have been one of those people who paid to much. Trying to get her into Self Storage so I can be the paid Guru and get a free lunch from her.
I've also been eyeing self storage from a distance. What are the barriers to entry, surprises, pitfalls, etc ?
My niece just passed on a deal for a new Airbnb deal. Went thru a guru program. Last second found out the Property tax estimate they used was wrong. They used the gurus tax rate who is in the neighborhood. Found out the new rate was 2.5 higher. If she had bought it she would have been one of those people who paid to much. Trying to get her into Self Storage so I can be the paid Guru and get a free lunch from her.
I've also been eyeing self storage from a distance. What are the barriers to entry, surprises, pitfalls, etc ?
Join the club. There must be a ton of capital on the sidelines, and investors are putting down more on deals for them to work.
Factor in tax benefits, hedge on inflation, rents still cheaper than buying, and the investment is still compelling to some.
There are deals out there, you just have to create relationships with brokers, and play the long game. The days of buying and exiting in 18 months are past us for a while
Gino
Even before when rates were low class A/B in desirable areas sold at negative cashflow and the buyers made a killing over time from appreciation and rent growth. BiggerPockets type buyers are a tiny tiny minority who focus on day 1 cashflow. Nothing wrong with either strategy but the BiggerPockets way is getting rarer and rarer to work.
Have patience. it's part of the market cycle. We're already seeing deals in our market with the 1% rule. As cap rates continue to decompress, rates stay high, and prices adjust downward, cash flow will come back.
Gino
Absolutely agree, seemingly a ton of capital looking for a home these days. I' 'd be curious to see how much money down would convert a deal from unacceptable into acceptable in this environment. Could be a beneficial analysis to consider for people who are trying to understand these price tags and conditions.
It's fascinating to see the changing market from state to state and city to city. Inventory seems to be ticking up across the board, I wonder if sellers are starting to feel the pressure from higher for longer and looking to maximize an exit at these prices in preparation for a downturn. Would make the most sense in my mind.
Thanks for sharing Gino and Henry
Putting more down is viable, especially if you can wait a couple years to increase value and either refi or sell. Markets are very important, while most rents have slowed, some markets a lot less than others, and the better markets will rebound quicker.
If we go back in time, this song has been played. We just need to learn how to listen to the song and be patiend
Gino