Broker to me: "Your expectations are too high"

Multi-Family and Apartment Investing
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Broker to me: "Your expectations are too high"

Mark Neiger
Investor · Port Saint Lucie, FL · Member since 2014 · 82 posts · 7 votes

So I've been painstakingly analyzing multi-family properties for over a year now. It's obviously difficult in this hot market to find anything worth giving a second look. The few properties that have seemed promising to me have sold so quickly and at such ridiculous prices that I wonder if I should even be spending my time in MF right now. The last building that I was recently interested in sold at a 5 CAP at full asking price, 25% vacant and had multiple offers at that price. I've seen hundreds of properties sell in my market and none of them have been anywhere close to my underwriting criteria. Who's buying these places and what returns are they looking for? How and how long can they hold on to these places? When I asked the listing broker why I can't compete with others he told me that my expectations were too high. "Mark, rents have been increasing 10% per year for the past 5 years." OK. How long can that continue and when will interest rates start to go up? How do I deal with that kind of mentality? He makes me feel like an idiot.

He's obviously loving life right now because he's making a killing on his commissions. I had friends in the previous market run-up who were mortgage brokers that were making tons of money too and were cocky about it. They all ended up unemployed and broke when the bubble burst. 

Maybe the MFR market is just too heated right now for a newbie like me. (I currently own SFR) Maybe my focus market is the problem. (Orlando and Central Florida) Many on these forums/blogs/podcasts suggest investing in your own back yard and that's the area I know well but maybe I need to look into other areas.

I've also been guided by many on here that there are certain benchmarks I should aim for; CAP rate 8%, ROI of 12% and DCR of 1.6. The only properties I can find in my market with those kinds of numbers are D class in bad neighborhoods and I don't see any exit strategy.

I really want to expand my portfolio and have the capital to do so but I'm really having a hard time finding anything. Should I try my own marketing rather than brokers? Or should I change focus back to SFR or maybe just hold off on buying anything right now. It just burns me up to have money sitting in mutual funds going nowhere right now and I'm feeling pressure in my 40's to get my financial situation in a better place.

Anyone have any words of encouragement or caution?

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Darrell Shepherd
Rehabber · Smyrna, GA · Member since 2013 · 864 posts · 510 votes
10y

Wow, not sure I agree with much of whats been said here.  Reminds me of the .com bubble "its a new market, get with the program".  I tend to share your views, sometimes the best investment is to not invest.

As a rehabber I was on the sidelines much of 2014 because nothing would hit my numbers.  People were saying the same thing, but buying at 75% less repairs is not something I'm willing to do.  

You can build in some appreciation, but that's really speculation, not investing.  Call me crazy, but cash flow investing should be based on cash flow IMO.

If it were me I'd look at less competitive markets or less competitive property types (self storage, etc).  There's big money flowing into multis you just cant compete with.  The hedge funds came in and drove prices through the roof in Atlanta in 2013.  They pretty much made the market that gave them their equity.  Anyway, those guys can borrow at 1%, so they can pay way more than we can for the property and make out.  Plus they have economies of scale.  Just hard to compete with the big guys and apartments are the soup de jour right now.

You can miss some markets being cautious, of course. I had several guys I worked with go into mortgages at the start of the refi boom and I was like "how much more can interest rates go down?"  They were at 7%...that crap lasted like 7 years and they crushed it.  Then got whacked, of course, but no more than I did with what I was doing.

As a newbie, you need to be cautious.  Your agent is right, you may have too high expectations for your market, but that doesn't mean you buy dumb just because everyone else is.

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  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y

    Understand your market.  Adhering to fake rules of thumb will ensure that you buy crap in crap markets.  If you don't know the rent growth rate and appreciation rate of your market then you need LUCK to be successful. 

    Why do you think a 8% cap rate is good, cause you read it on the internet! ROI of 12 %, is that with 20% down or 50%? Do you know how to even calculate it?

    What makes you think YOU are the smart investor in this market? 

    8Reply
  • Leigh C
    Brooksville, FL · Member since 2012 · 429 posts · 220 votes
    10y

    @Mark Neiger


    1.   You know the answer already.   If hundreds of properties are selling at prices higher than you are willing to pay, then yes you are not being realistic for the market.    It happened to me in 2007 when i first got my license and was looking to invest my money.    I didn't buy anything till early 2009.   

    2.    Your 2nd paragraph was a complete waste of time to write and for us to read.  This is your frustration talking.

    3.   Paragraph 3, odds are as someone somewhat new to the field you should only be looking at your backyard.   Moving outside it may allow you to find something "better" but really it's just you don't realize the mischief you are getting yourself into.    Each area is very different.   

    2Reply
  • Brandi Carballo
    Investor · Independence, OR · Member since 2015 · 70 posts · 26 votes
    10y

    You already know that what you are doing isn't working. You have to decide for yourself whether to change your criteria or change your strategy. Maybe a different location, maybe focus on SFR. Don't worry about what other people are doing. Decide what numbers you are comfortable with, what types of properties you want to buy, and where you want to buy. If there is nothing available that meets your criteria then reevaluate your criteria. What you are happy with may make other investors cringe. What works for one person, or in one area may not work for you.

    I own several SFR and MFR properties, all rented. I have a 100% occupancy rate at the top of the markets in each area. I bought all but one of my properties right off the MLS. I didn't consider Cap rates when I bought my properties and I don't even know what my ROI is because I don't care about those numbers. I have very little cash into my investments and am very happy with my cashflow. This is what I do full time, and I make a living at it. I do what works for me. I also educate myself. I network with other investors. I read. I listen to podcasts. But that doesn't mean I follow the "standard" formulas.

    4Reply
  • Michaelina Stathakos
    Real Estate Investor · Houston, TX · Member since 2015 · 24 posts · 16 votes
    10y

    If you are buying the rental property to hold it the don't worry about the "numbers". Just make sure you can afford it, can afford to keep it, can maintain it and can sell it if you need to get out from under it. If people are buying them the day they go on the market thats great, it means you are looking at the right properties, the ones all the others want. If you plan to keep the property it doesn't matter what you pay for it, property value will always increase. We looked and looked and looked and looked and like you if it was something we wanted to buy they were either under contract the day they went on the market or our offer was over bid. Finally we found one we loved the day it went on the market and we offered full price and got the contract. But we knew we could afford it, afford to keep it, afford to maintain it and already have 2 offers to sell it! It is 100% occupied and making the mortgage plus! 

    4Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    10y

    @Mark Neiger, unlike @Leigh C, I am glad that you reminded us in paragraph two what can happen to "cocky" Agents!

    Mark, only you can decide your strategy, but in a too-hot market, my thoughts would concur with yours when you wrote: "Maybe my focus market is the problem. (Orlando and Central Florida) Many on these forums/blogs/podcasts suggest investing in your own back yard and that's the area I know well but MAYBE I NEED TO LOOK INTO OTHER AREAS" (my emphasis). Cheers...

    1Reply
  • Chiagozie Fawole
    Syracuse, NY · Member since 2015 · 100 posts · 87 votes
    10y

    My understanding was that you used the cap rates of recently sold comparable properties in the area to calculate the value, and deductively, your offer. Ignoring the numbers is not a good idea, but understanding the numbers applicable to your locale is key. Here in NY I would love to find a property with 8% CAP rate. I see the cap rates tend to run at about 5%- at least in the areas I've looked.

    1Reply
  • Darrell Shepherd
    Rehabber · Smyrna, GA · Member since 2013 · 864 posts · 510 votes
    10y

    Wow, not sure I agree with much of whats been said here.  Reminds me of the .com bubble "its a new market, get with the program".  I tend to share your views, sometimes the best investment is to not invest.

    As a rehabber I was on the sidelines much of 2014 because nothing would hit my numbers.  People were saying the same thing, but buying at 75% less repairs is not something I'm willing to do.  

    You can build in some appreciation, but that's really speculation, not investing.  Call me crazy, but cash flow investing should be based on cash flow IMO.

    If it were me I'd look at less competitive markets or less competitive property types (self storage, etc).  There's big money flowing into multis you just cant compete with.  The hedge funds came in and drove prices through the roof in Atlanta in 2013.  They pretty much made the market that gave them their equity.  Anyway, those guys can borrow at 1%, so they can pay way more than we can for the property and make out.  Plus they have economies of scale.  Just hard to compete with the big guys and apartments are the soup de jour right now.

    You can miss some markets being cautious, of course. I had several guys I worked with go into mortgages at the start of the refi boom and I was like "how much more can interest rates go down?"  They were at 7%...that crap lasted like 7 years and they crushed it.  Then got whacked, of course, but no more than I did with what I was doing.

    As a newbie, you need to be cautious.  Your agent is right, you may have too high expectations for your market, but that doesn't mean you buy dumb just because everyone else is.

    9Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    10y

    If these multi's are 4 units and under, they do not trade on cap rates.   So looking at cap rates is just going to get you in trouble.  Commercial properties are the only ones you should be looking at cap rates for.  A 4 unit is just an owner occupant trying to get some of their mortgage paid for by the other 3 units.  In fact if you are looking at cap rates, in almost any market you will see a huge jump in cap rate going from a 4 unit to a 5 unit.  A strategy I have even seen employed is someone taking a 5 unit property, combining 2 of the units to bring it down to a 4 unit in order to unlock value on the sell side, since it is more valuable as a 4 unit than a 5 unit.

    One other consideration is the time value of investing in real estate.  For the first 5 years you own the property, you will pay down the mortgage about 10% of the value of the property.  Many new investors ignore the part of the equation that is debt pay down.  I am actually at a place where cash flow is only my #3 concern with investing. #1 being appreciation, and #2 being debt pay down.  Cash flow may be how you pay your bills, but appreciation is how you build wealth.

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  • Rich Nickel
    Real Estate Investor · Houston, TX · Member since 2014 · 40 posts · 11 votes
    10y

    @Mark Neiger  Lots going on here.  The property you mentioned that sold at a 5 cap 25% vacant.  How many units is it?  Whats the cap rate at a 10% vacancy?  Were the rents below market when you were looking it?

    Rich

    1Reply
  • Mike R.
    Investor · PO, WA · Member since 2015 · 197 posts · 95 votes
    10y

    Remember brokers only make money when properties sell so their interest is to get you to buy/sell. If that means they have to convince you that your expectations are out of line then they will do it. Bottom line is that prices today are too high regardless if you are a flipper or a buy/hold.  Why buy a prop at a cap rate less than 6 when you can buy muni bonds and get a tax equal yield that is close to 6 and you don't have to do tenant screening, maintainence, etc.   

    Work on improving your current holdings so you can increase the rent and just wait.  Wait for interest rates to increase, new bees to start selling when the decide this isn't what they want to do, etc.  prices will fall and better deals will be had.  

    0Reply
  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    10y

    @Mark Neiger

    Actually, even though I don't deal directly in the Pt St Lucie market, other investors seem to flock to there, for cash flow reasons, from the West Palm market. Perhaps look more in your true own back yard. I know the SFR prices are crazy cheap compared to here.

    0Reply
  • Mark Neiger
    OP
    Investor · Port Saint Lucie, FL · Member since 2014 · 82 posts · 7 votes
    10y

    More info. 8 unit building, current market rents, 3 empty units. Sold for $800,000 / $100,000 per unit. C class unit in an up and coming B neighborhood. Needs some light upgrades to the units and a face lift to the exterior. This is just one example I've looked at. Market CAP comparables are selling between 5 and 7. Rent has been increasing 10% per year, I know because I have rentals in this area already. Appreciation is also rising here.

    My statement about the mortgage guys was to make the point that I don't want to get too lax and just bet the farm that rents and appreciation will continue to rise so quickly. We all know what happened last time.

    I want to be able to make a decent return and put down 20-25% of my own money. With the prices others are paying I don't feel there would be enough meat on the bone for me and I want to be conservative and have a buffer if and when rates increase and the market stagnates. It just seems too risky. 

    I don't think I'm the smart investor in the area. That's why I'm on here. I just wonder if the other investors are the dumb ones.

    Yes, I know how to calculate it! I purchased a very well written spreadsheet that I use to analyze with and of course I know all the formulas for NOI, CAP, value, and how to figure ROI and IRR. My mentor made me analyze 200 properties before he would work further with me. That's not the issue.

    Those general rule of thumb numbers are just that; general. Those come from coaching from Dave Lindahl and Chris Urso at Multi-Family Partners as well as others on here like Michael Blank and Joe Fairless. They are the ones who are setting my expectations where they are. 

    I just don't want to join the herd and do what everyone else is doing because maybe they're all wrong and just following each other off the cliff. I want to be conservative and safe. Maybe I should stay on the sidelines for now. Maybe I will have to take more risk to get in the game. Maybe a different market. 

    I've put so much time and effort into learning this niche and I will succeed. I will not give up. I just wanted some other opinions. Thank you to all of you for your responses and please keep them coming.

    0Reply
  • Mark Neiger
    OP
    Investor · Port Saint Lucie, FL · Member since 2014 · 82 posts · 7 votes
    10y
    Originally posted by @Wayne Brooks:

    @Mark Neiger

    Actually, even though I don't deal directly in the Pt St Lucie market, other investors seem to flock to there, for cash flow reasons, from the West Palm market. Perhaps look more in your true own back yard. I know the SFR prices are crazy cheap compared to here.

    Wayne I lived in Orlando for 15 years so I know it well. Been here in PSL for 3 years. While houses are cheaper there isn't much in the way of multi-family. I'm trying to get away from SFR. You also have to be careful because there is a fine line between nice PSL and horrible Fort Pierce.

    0Reply
  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    10y

    Agreed, yes I know there are some really Bad areas in PSL, and I personally would be hesitant to pick the right areas, without some serious research.

    0Reply
  • Mark Neiger
    OP
    Investor · Port Saint Lucie, FL · Member since 2014 · 82 posts · 7 votes
    10y
    Originally posted by @Mike R.:

    Remember brokers only make money when properties sell so their interest is to get you to buy/sell. If that means they have to convince you that your expectations are out of line then they will do it. Bottom line is that prices today are too high regardless if you are a flipper or a buy/hold.  Why buy a prop at a cap rate less than 6 when you can buy muni bonds and get a tax equal yield that is close to 6 and you don't have to do tenant screening, maintainence, etc.   

    Work on improving your current holdings so you can increase the rent and just wait.  Wait for interest rates to increase, new bees to start selling when the decide this isn't what they want to do, etc.  prices will fall and better deals will be had.  

     That's kinda what I was trying to get at with my original post. I feel like the brokers are trying to convince me to buy high because they make more money. What do they care if I buy poorly and lose my shirt down the road.

    Again, just following what the market and others are doing sounds like gambling , not investing.

    It's a sellers market for sure. 

    Yes, I'll continue to work my other rentals. They have been performing beautifully.

    0Reply
  • William Hochstedler
    Broker · Logan, UT · Member since 2013 · 1k+ posts · 1k+ votes
    10y

    @Mark Neiger

    Buck up.  We, too, are getting outbid on over 95% of our offers.

    I agree with the people here who say that you need to change your strategy, but don't think you need to look to other markets (unless we are talking about SFR instead of Multi's). You know your geographic area best and there are deals in every area.

    If you're sitting back watching the MLS, deals are going to be very few and far between. You should be developing strategies to get in front of owners/sellers directly.

    As far as who these buyers are, this entire year has seen a lot of cash move into real estate:

    1. 1031's finally able to get a fair price for their relinquished properties
    2. Flight from the inflated stock market
    3. Race to lock in the fleeting historically low interest rates
    4. People seeking tax benefits of real estate not available in other assets
    5. Foreigners sick of the abysmal returns on treasury notes

    The good news is that very few of these buyers are talking to the owner of the fourplex down the street and establishing a rapport for a property that is not on the market.

    Good luck.

    5Reply
  • Mark Neiger
    OP
    Investor · Port Saint Lucie, FL · Member since 2014 · 82 posts · 7 votes
    10y

    @William Hochstedler, That has been where my thinking is going recently. I've never done a mail campaign or contacted owners directly but that might be my best bet. Anything that a broker sends to me is being looked at by thousands of other eyes. I know my focus market very well and just did a drive around last week to write down addresses I was interested in. Now I just have to figure out how to look up the info I need to contact people. Do you have any experience with that? Any advice?

    1Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    10y

    Mark you have to go where others aren't to unlock value.................... : )

    I have  a commercial property right now I am looking at with 1 million upside. It is from my direct mailers to owners.

    I typically like to know reason for selling but it doesn't matter as much if I hit my numbers. Many posters on here are giving opinions based on various experience levels and particular strategies they have found success with and see value in.

    Someone making 300k a year isn't living off of the investment cash flow. They are holding for a forced savings plan account that outpaces inflation. That is a different situation from someone trying to grow cash flow and maybe quit their job etc.

    I do not buy rents will keep going up at XX per year and vacancy is low. Historically the numbers will not be that over the long term. The property you mentioned at a 5 cap on current income the key would be what is causing the 25% vacancy?

    Does the property have maintenance issues but a good area? Are the rents simply to high even in a rising market? If the rents are below market and then you can lease up the property further and initiate cost savings in other ways then you can create high cash flow.

    Some markets or asset classes have already surpassed pre-2007 levels. There are still deals out there but you have to hunt for them. Don't buy just for the sake of buying. I disagree with others who say to do this strategy and if you are holding for the long term everything will be okay.

    That's just hogwash. Any number of things can happen with the property, area, or your life circumstances that dictates a sale at a non-optimal time. The better you purchase something with more room in the deal the more exits you have down the road if dynamics change.

    I see people purchase things all the time that I wouldn't touch. I believe when the next cycle comes especially with people placing short term debt to make the cash flow work that have purchased these properties will be in a lot of pain.

    You could try and find a vacant property in your area and rehab it or maybe build new if land is available. So for example if everything available is a 5 cap but all in you can build new and have an 8 cap for yourself that you can hold or sell then maybe the value lies with that strategy.

    I have some friends that do that in Colorado because prices are trading at stupid levels. 

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  • Mark Neiger
    OP
    Investor · Port Saint Lucie, FL · Member since 2014 · 82 posts · 7 votes
    10y

    @Joel Owens, I always value your opinion. You give level headed advice. Interesting because you're also a broker. I think that's the advice I've been looking for; confirmation that I'm not crazy and being too conservative. Many responses on this thread felt like "meh, lower your expectations and go for it, the market is awesome and will support it". I am not going to lose my arse! I know you broker but it seems to me that I should just not use them as a resource. You obviously do mail campaigns and contact owners directly to get your listing and then pick the best for yourself. Any advice to me on how to best get started down that path. Resources you'd recommend?

    0Reply
  • Mark Neiger
    OP
    Investor · Port Saint Lucie, FL · Member since 2014 · 82 posts · 7 votes
    10y

    Also, @Joel Owens, developing sounds both awesome and very scary at the same time. How did your friends get into that? Seems like it would be another two years of learning something new and I've already put so much into learning to buy existing MF. 

    0Reply
  • William Hochstedler
    Broker · Logan, UT · Member since 2013 · 1k+ posts · 1k+ votes
    10y

    @Mark Neiger

    Hard to give specific advice on strategies without knowing your resources, time availability, and market.

    Poke around on BP for a while as this question has been asked many times.

    The only common denominator I've found with all methods is patience and persistence.

    Good luck.

    0Reply
  • Bryan Hancock
    Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
    10y

    Why are you in love with apartments?  There are other ways to invest.  Maybe you should start from there and work backwards.  

    With interest rates at emergency levels for 7 years now the only way to get something resembling fixed income is to buy property.  Expect for a lot of institutional money to shift back into other asset classes when rates start rising.  Maybe you should evaluate buying properties then and find another home for your cash for now.  I haven't even looked for apartments in Austin for many years now.  There is simply too much institutional money with a lower cost of capital than mine and thus I'm non-competitive.  We have, instead, shifted to development over the last 5 years.  

    You need to know both your farm market and evaluate the national financing market as well.  I think the market is telling you to do something else with your money today.  That doesn't mean that the experience you have gained won't be valuable at some point in the future.  It seems like a low payoff activity from what you have described to continue pursuing it.  I also agree that you need to be finding ways of chasing projects that brokers aren't currently doing to identify good projects for your hard-earned cash.  

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    10y

    Hi Mark,

    Some brokers will sell anything to anyone. Their reasoning is " Who am I to judge if they want to buy this property at this price? ".

    They say they used to care but decided not to anymore many years ago. All you can do is council your clients with your opinion but at the end of the day it's their choice on what to do.

    A lot of this has to do with volume. In commercial some brokers/agents list at lower commissions so they try to do volume to make it up. They will sell any property even if it is an absolute dog. They have 3 agents on a team and have to split 3 ways and on top of that give 50% to the commercial firm.

    So if they are selling a 10 million property they take a crappy 1% fee. 3 agents on the listing side 33k apiece and then 50% goes to the head firm. So they make a whopping 16,500 on a 10 million deal after a split! Some have better splits but you get the idea.

    Me I negotiate for 2% or better on the buyer side and since I am one person and the principal broker I keep the whole 200k plus.

    So 2 schools of thought. One is to list like crazy and make it up on volume and the other is to be more selective on transactions so you make bigger pops of money with less time outlay.

    The big commercial sellers are about list for less as the REIT's and other funds want to drive value to partners/shareholders.

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  • Mark Neiger
    OP
    Investor · Port Saint Lucie, FL · Member since 2014 · 82 posts · 7 votes
    10y

    @Bryan Hancock I like apartments because I already have experience with my SFRs. I've learned a lot about managing and know how the system works at that level. I'd like to take my experience and scale it up into larger rental properties. I know nothing about retail, warehouse or storage. 

    I do need a good place for my capital. I would love to learn more about developing but it seems a very daunting task. I know there is a lot of development going on here in Florida in all aspects of commercial but it seems like the big boys club to me.

    I checked out your website. What type of developing do you focus on?

    0Reply
  • Bryan Hancock
    Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
    10y

    We do small development projects like pocket neighborhoods or SFRs or duplex condo regimes.  

    Scaling doesn't help if you are chasing crappy yields.  The goal of scaling should be to get efficiencies and make your money work harder.  If you are playing in the same markets as people with much larger checkbooks and better deal flow you're probably going to lose if you're using brokers.  You need to find a way to generate deal flow on your own without the use of brokers or figure out a different place to park your money.  

    1Reply
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