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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  • Paul Sorgi
    Real Estate Investor · Abington, MA · Member since 2011 · 356 posts · 114 votes
    10y

    @Mark Neiger I agree with having good underwriting and being careful not to  overpay for a property.  It sounds if you are only looking at properties listed with agents.  You may find better deals with your own marketing or finding a good wholesaler.  

    It also seemed you are concerned about the longevity of rent increases and I would be too. Employment growth, Corporate expansion, Job diversity and wage growth will be several factors that will impact the direction of rents.  

    I do believe that if you stick to your requirements and  expand your prospect pool you will uncover a great deal.  Good luck!

    0Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    10y

    If you see that agent and mortgage brokers are killing it, then why not do that? Just don't get cocky like some and go broke when the market turns. Instead, use it as a way to make money and educate yourself in the space during a hot market, then transition back to an investor when things cool off.

    Other options would be to flip SFRs or go work with/for a developer... this would be a good way to get yourself on the path to becoming a developer yourself someday. Final option would be to wait until the market cools.

    Investment money burning a hole in your pocket can be frustrating and dangerous if you loosen your standards to land a "deal".

    1Reply
  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    10y

    Originally posted by @Mark Neiger:

    1. 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.

    Sorry  to see some nasty replies to a perfectly good question.  Let's talk guidelines and some property evaluation metrics and  what they measure.  It's great you've set a criteria, but maybe your looking a 'funny' numbers.  Let me explain that.

    The DSCR is a loan officer's metric for the MFU to sustain itself with rents. As long as you get the loan do you care what the Bank says - - this number does nothing to indicate your profitability - - drop it from your criteria.

    Cap Rates: another bogus number that has nothing to do with profitability.  This number is useful ONLY when several properties have the same cash/cash (roi) and then you can use it to choose which property costs you less to buy - - drop it too.

    The number that matters - - the number that puts $$$ into your bank account - - is the NOI as noi/12 is cash per month coming to you. From the NOI we derive the cash-on-cash (c/c) and for clarity, that's the NOI divided by your real cash down payment ( noi / dp). If you get a loan at some LTV (typically 70-75%), then your C/C can be compared to any economic investment, eg money market funds, certificates of deposit ... If you use OPM (ie get a mortgage) your C/C will be the highest, whereas if you buy all cash, you drive the C/C to it's lowest.

    At this moment, my MFU is running at a GSI is 68.4k, NOI 49.6k and C/C is 26.4%

    while the dumb CR is 6.93% - - 

    awe gee, maybe I made a bad deal? - - NOT ON YOUR LIFE

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

    NOI is important but I find many sellers and brokers not counting underwriting measures that are typically used for properties.

    On the commercial side sellers say crap like ( We are not counting PM, Reserves, Leasing Commissions, Vacancy, Tenant Improvements, etc. ) because it is a hot market. So therefore we are claiming the cap rate is XX based off of NOI of XX.

    Total crap.

    A lender will not overlook these things unless maybe full recourse and putting 50% down for example. Then the LTV is so low for their 1st position loan and the guarantor is so strong that they overlook some details. If you are getting non-recourse and putting 25% down the deal has to underwrite cleanly and be pristine. If the numbers are off a little you will be pushed to 28 or 29% down. If the seller has 5% market vacancy but the appraisal has 8% for instance.

    As far as the overspending it isn't just brokers and agents. Many investors who have not experienced a down cycle before are living high on the hog thinking that gravy train will keep on chucking. I know better as I have been in the business 12 years. During the good times now I am plowing away most of my earnings into investments. When things slow down and I have 400k to 500k passively coming in I can then do just a few deals a year with reduced deal flow and a couple of syndications and relax in a worst case scenario. The ones who bought a bunch of stupid stuff will be on the Bankruptcy path with no reserves.

    I see this often with residential agents. They get licensed when the summer months are happening which is peak selling time for SFR. They make 10k to 15k a month for 3 months and spend like fat cats. Then the bottom drops out and then do an occasional sale between the winter months. They do not plan for taxes as they are not used to being self-employed so get hit with high bills. Then they are starting to get into trouble.

    The seasoned brokers and agents know markets cycle over the years. Amazing markets, okay markets, horrible markets. I have seen them all. Great markets I can hit seven figures in commission for a really good year. Bad markets I still make six figures in commercial.

    The residential agents in a bad market tend to make 10 or 20k a year and go work 1 to 2 other jobs to get by because they never saved anything. I see them p*ssing away the money constantly on vacations and crap that is losing value. 

    I still have fun but within reason.        

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    1Reply
  • David Mirza
    Investor · San Jose, CA · Member since 2015 · 54 posts · 29 votes
    10y

    If home prices and rent are going up in an area expect to get a lower cap rate.  It's a lot like stocks, if the stock is experiencing high growth in income, it will sell for a higher price earnings ratio because people are factoring in future growth.  You have to decide if you think prices will keep going up at the same rate before investing.  Also, you might be more of a value investor looking for homes in areas that aren't experiencing as much growth in prices but have higher rents.  Both strategies work.

    0Reply
  • Ramon Moreno
    Chicago, IL · Member since 2015 · 52 posts · 8 votes
    10y

    @Mark Neiger , I'm sure I'm WAY out of my league posting in this forum. I m basically a newbie with some cash looking to put it in the right market. I can't tell you how or what NUMBERS to crunch but I can suggest this .

    " Extraordinary Popular Delusions and the Madness of the Crowd " by Charles Mackay

    ZIG WHEN EVERYONE  ZAGS. 

    I wish you luck with you future investment and to all those who have posted their thoughts. AWESOME JOB priceless amounts of information in this forum. @Jeff B.

    1Reply
  • Rod Desinord
    Real Estate Agent · Pompano Beach, FL · Member since 2015 · 249 posts · 73 votes
    10y

    From my experience these even the so called deals that are out there have a little issue attached to them that does not show on the comps that are being sold like " liens and fees from a city."  

    0Reply
  • Karen MargraveBusiness Member
    Moderator
    Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
    10y

    @Mark Neiger When you're in a hot market, you're not going to find the "deals" unless you get out and start digging into off market properties. 

    However; sometimes rather than putting yourself into a box and looking for X type property, that makes X (based on what other people think is THE formula) you look at other factors, you might find the answer for you. 

    • What types of properties are in demand in the area? 
    • What neighborhoods have highest demand? 
    • What is the availability of rental units, both SFR and Multi Family?
    • What are the rents? 
    • Is there land available to develop? 
    • What is the local economy? 
    • What is the unemployment rate? (Is there a pool of qualified tenants for properties or is everyone scraping by to pay rent?) 

    Once you understand your market you may find a different strategy would be better. New construction might make more sense. Finding land and turning it around might work. The point is, every market has its own characteristics, and it's important to know yours. Moving to a new area will have its own set of challenges. 

    0Reply
  • Mark Creason
    Real Estate Lender and Broker · Dallas, TX · Member since 2013 · 966 posts · 500 votes
    10y
    Originally posted by @Jeff B.:

    At this moment, my MFU is running at a GSI is 68.4k, NOI 49.6k and C/C is 26.4%

    while the dumb CR is 6.93% - - 

    awe gee, maybe I made a bad deal? - - NOT ON YOUR LIFE

    I am assuming you did not purchase the property at the 6.93% cap rate to obtain the 26.4% cash on cash. DCR, cap rate and yield spread are all important lender criteria, but if you ignore them, you may not close your loan with friendly terms. I still recall the borrower who came to me spring 2014 and said he wanted to finance a GSA property at a 9 cap. He thought it was a great deal. Property was in a ghetto and had 1 year remaining on the lease. GSA was overpaying for the location. I said no and he ended up not buying it. Today the property is vacant and that 9 cap price is a pipe dream.

    Mark

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