My goal is to purchase my first apartment building before the end of 2016 and I have been studying, reading, and listening to everything I can get my hands on. Recently I have come across information from a few different places suggesting that the apartment market is at or near it's peak. As a new investor, I thought it best to reach out and get some feedback from the community. A few specific points that I've heard are: • Many markets are far into the Expansion stage with Hypersupply being the next phase of the cycle • CAP rates are compressing • Great deals are harder to come by • Many deals selling for more than the NOI warrants or at lower CAP rates • Moderate to high new construction in many areas • Many investors going outside of their normal markets to find opportunities • Interest rate hikes on the horizon What are your thoughts on the current state of the apartment market? Is now a smart time to get in? What things should investors keep an eye out for? Are there certain strategies that work better in times like this (i.e value adds, repositioning, longer loan maturity)? What are some of the obvious traps that a new investor might miss? Are certain classes better to own in the event of a downturn? Any other relevant advice? Thanks in advance for all of your valuable insight! THINK BIG...THINK BIGGER...THINK MASSIVELY!

Such a great thread, and filled with valuable information and insight. Real estate is local. National averages simply aren't relevant to the investor. I suggest you follow some data provided for free by Marcus and Milichap, NACREIF and other data aggregators. Best of luck!

Has The Apartment Market Reached The Peak of It's Cycle?

Anthony CharaPro Member

Investor · Centennial, CO · Member since 2012 · 329 posts · 232 votes

10y

It all depends on the market, Hubert. Yes, there are many markets around the country that may max out soon, but there are still more really good markets out there.

As an example, Orlando is projected to increase employment 4% a year for the next 10 years. All those people need to live somewhere. Of course, there is no crystal ball. Keep doing your research. What websites did you research so far?

2 Reply

Nick B.

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

10y

@Hubert Washington, I agree with your bullet points. I see local investors in my network looking into different markets which they are less familiar with. At the same time, outsiders pour into my home market and buy deals that locals pass on. I don't know if it's a bubble yet but it sure feels like one. I watched a movie "The Big Short" a couple of months ago and I kept thinking: "These guys figured out how to short SFH market. There ought to be a way to do the same with apartment market as it is ripe for shorting."

I don't know if I am right or wrong - time will tell - but I shift from "cautious" to "ultra cautious" mode when I review potential deals.

That said, there is always a rare chance of a truly off-market deal offered by a desperate seller who knows one buyer only and that buyer is you (or me :-)), so keep looking and I'll keep doing the same.

3 Reply

Jake ThompsonPro Member

Rental Property Investor · Albany, OR · Member since 2015 · 312 posts · 136 votes

10y

In my opinion, (only formed from what I've read, not based on experience) your best bet is to identify emerging markets and invest there. Places with high job growth and population growth. If you haven't already I'd recommend reading the abc's of real estate investing by Ken McElroy. He does a great job of explaining how to find those emerging markets. David Lindhall also wrote a book called emerging markets that's supposed to talk about how to identify them, but I haven't read it yet. I know it seems my local market (san diego) is at it's peak, just because it's hard to imagine prices climbing much higher, but it'd really be better to get someone with more experience who has done more of the research behind the actual numbers. Anyways I hope this helps, good luck to you, I'm also working on breaking into the apartment world.

1 Reply

Levi T.Pro Member

Rental Property Investor · Tucson AZ / Nice FR / Washington DC · Member since 2016 · 1k+ posts · 1k+ votes

10y

I personally don't think we are at the peak, likely just getting going. Many slumlords have not started seeing the affects of the rent market short and have no idea it's even happening. They would be the last to see rents go up on any market, as the condition of their property and lack of good management silo operations from market upswings. Im not sure how that plays out in the SFH market as your have rents and property value decoupled, but within multi unit or apartment type deals I'm only seeing it go up on the nicer units that we have fully turned. With that said, you likely now have market paralysis. So you have to think about how to hedge the bet as you have to play the game, and not try to time the peak or bottom, as your more likely to miss it than hit the mark. So tighten up your numbers, shave advertised rents a little or a lot, and ask them to give you the property for a dollar and buy you lunch, joking on the last two. Worst that can happen is they say no, so offer rock bottom prices that will keep you very safe if the market slips by a few hundo.

1 Reply

Chris Soignier

Real Estate Broker · North Richland Hills, TX · Member since 2013 · 1k+ posts · 607 votes

10y

The first thing you have to remember is that real estate is local. I'm not so sure about peaking, but DFW is certainly at a frothy level. Regardless, there are still deals to be had, just fewer and farther between. Also, tertiary markets that aren't as highly competitive often offer better deals.

Even with cap rates currently compressed, rents locally are going nowhere but up. We're experiencing huge population growth, and there's a shortage of housing. New apt. construction will be Class A, so the lower classes will continue to have a supply shortfall. I think the key is to be very conservative in your underwriting assumptions, and exercise patience in waiting for the right deal to come along.

1 Reply

Hubert Washington

OP

Investor · Jacksonville, FL · Member since 2016 · 97 posts · 90 votes

10y

@Anthony Chara - Thanks for your input! Being in Jacksonville, I am hearing similar things here as you mentioned about Orlando. I have also been looking at some local reports on my market (irr.com, colliers.com, marcusmillichap.com, etc).

@Nick B. - Shorting the apartment market? How do I get a piece of that action? lol. What specific things do you do differently in "ultra cautious" mode?

@Jake Thompson - Thanks for the recommendations. I have already read ABCs and Emerging Markets is next on my list once I finish The Complete Guide to Buying and Selling Apartment Buildings.

@Levi T. - Sounds like the common theme so far is conservative underwriting. Thanks for sharing your knowledge!

I would love to continue to hear the thoughts of other experienced multifamily / apartment investors.

THINK BIG...THINK BIGGER...THINK MASSIVELY!

0 Reply

Levi T.Pro Member

Rental Property Investor · Tucson AZ / Nice FR / Washington DC · Member since 2016 · 1k+ posts · 1k+ votes

10y

I think you can still buy C-B property at old prices, which will keep you safe when the market resets, as long as you roll them up.

E.g. I'm buying town houses in my area for 40k-60k that are B-C in a A-B area. If I keep them "as is" I make money on the lower rents, but if I improve them I make more money, but if rents go down for the area, I'm still making money as I improved the property with my base cashflow.

0 Reply

Nick B.

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

10y

Originally posted by @Hubert Washington:

@Nick B. - Shorting the apartment market? How do I get a piece of that action? lol. What specific things do you do differently in "ultra cautious" mode?

I don't know how to short apartment market :-) It was just a thought that kept reappearing while I was watching "The Big Short" movie.

I underwrite for no rent growth or only 2% growth, use higher economic vacancy, higher expenses, use higher cap rates at the exit.

2 Reply

Chris Soignier

Real Estate Broker · North Richland Hills, TX · Member since 2013 · 1k+ posts · 607 votes

10y

Originally posted by @Levi T.:

I think you can still buy C-B property at old prices, which will keep you safe when the market resets, as long as you roll them up.

E.g. I'm buying town houses in my area for 40k-60k that are B-C in a A-B area. If I keep them "as is" I make money on the lower rents, but if I improve them I make more money, but if rents go down for the area, I'm still making money as I improved the property with my base cashflow.

Townhomes are not apartments - they're not valued, financed, or managed like apartments. The B-C multifamily (5 units and up) is red hot around here.

0 Reply

Ben Leybovich

Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes

10y

All of your bullet points are correct, but so what? Aside for being correct, they are also equalizing - they apply to you in the same measure as everyone else.

The Essene of what we do can be thought of as finding ways outperform the marketplace. So, now that you know what's going on in the marketplace, all you have to do is find the needle in the haystack which would allow you to out-perform...

I think we have room still to keep compressing for a couple of years. But, this doesn't mean I don't look, and it doesn't mean that there aren't needles in that haystack.

It dies mean that you have to be really, really, really good to play!

5 Reply

Levi T.Pro Member

Rental Property Investor · Tucson AZ / Nice FR / Washington DC · Member since 2016 · 1k+ posts · 1k+ votes

10y

Originally posted by @Chris Soignier:

Originally posted by @Levi T.:

I think you can still buy C-B property at old prices, which will keep you safe when the market resets, as long as you roll them up.

E.g. I'm buying town houses in my area for 40k-60k that are B-C in a A-B area. If I keep them "as is" I make money on the lower rents, but if I improve them I make more money, but if rents go down for the area, I'm still making money as I improved the property with my base cashflow.

Townhomes are not apartments - they're not valued, financed, or managed like apartments. The B-C multifamily (5 units and up) is red hot around here.

Says who?

I don't have an apartment deal that I'm currently working on, so for this thread, I was using a real example that my team is working on here and now; which is a neighborhood of 51 townhouses we've picked up, and are operating them like an apartment complex, because that's what we do.

We don't go around buying up single units, or scattered portfolios of SFH. Everything we have is an apartment complex, or entire batches of side-by-side townhouses.

Rents is rent, and cashflow is cashflow. I live in NOVA by DC, it's been red hot forever. At the end of the day, your looking for that property that has deferred maintenance, thus suppressed rents, which normally means they are siloed from the market inflation till the very last minute before the market rolls over. The demand is always at the top end of the market, and the bottom of the market is always the last to respond.

This is why your trying to find a B-C property in an A-B area. These two points are very important. So when you have a complex, or a set of units, that you are able to buy, repair, and cashflow with the current rental prices as a B-C property, your going to make a lot of money when yo roll it up to an class A property in an A-B area. If you roll a building up to a class A in a B-C area, it's not going to work out so nicely. e.g. Don't buy that stuff.

Another example; The other year I found a small 9 unit building by a college, it netted $85,000 per year, and the owner wanted $1 million for it. Long story short, we picked it up for 845k when said and done with closing and repairs. We could have let the property sit, but we did not. The property just needed the basics; sanding the hardwood floors, paint on the walls and tubs, new vinyl, and appliances. Not much really. It now nets 117k a year, but if the market ever resets so low that we have to net 85k a year.. we are still winning.

So yeah, same principals, and same mechanics apply to both building types in an inflated market, or any market frankly. The entire country has been pouring into the capital to find work since 2008.

Best,

2 Reply

Gino BarbaroPro Member

Rental Property Investor · St Augustine, FL · Member since 2014 · 2k+ posts · 1k+ votes

10y

@Hubert Washington

HI Hubert

We started buying about three years ago, and prices have risen. All the brokers say the low hanging fruit is gone. They remember 08-10 when everyone was afraid, there was big risk, occupancy rates stunk and financing was nonexistent. You could buy these assets if you had cash and wait a yr or two to reposition.

Now you have to be very selective when looking at deals and choose your niche and focus. As you know, I focus on mom and pops in the 50-250 unit range in a certain market, C to B property, Cap rates 7 or 8 actual.

Yo can still buy these assets on actual numbers, but they are not going to be pretty. Most of our properties have some type of problem, whether it is tenant related, deferred maintenance, etc.

I think we are becoming a renter nation, and you can see that by rental rate increases and tighter supply. Millennials and Baby boomers are wanting to rent and the job market lends to people being more transient. Plus, money from other investments is pushing real estate up further.

There are always pros and cons to prices going up. If you learn how to "Buy right", you limit your downside risk. A smart person once told me: It's not what you buy, it's what you pay.

Best

Gino

Podcast Guest on Show The “Conveyor Belt” System That’ll Build You a BIG Rental Portfolio Quickly

2 Reply

Hubert Washington

OP

Investor · Jacksonville, FL · Member since 2016 · 97 posts · 90 votes

10y

@Ben Leybovich - I guess I better start looking for that needle in the haystack! Thanks for your input!

@Gino Barbaro - As always, thanks for your valuable insight! I agree about becoming a renter nation and would love to see that keep rental demand strong for many years to come.

Thanks to everyone who took time to respond to my post. I guess the moral of the story is regardless of where the market is headed, I will be ok as long as I "Buy Right":

Look for apartments with value add opportunities
Find B/C properties that are in A/B areas
Stick to my investment criteria
Underwrite conservatively
Be prepared to pass on a lot of deals since I am looking for a needle in a haystack
Be patient

Did I miss anything? Thanks again for all the feedback and knowledge!

THINK BIG...THINK BIGGER...THINK MASSIVELY!

3 Reply

Zachary Brooks

Banker · New York City, NY · Member since 2016 · 2 posts · 1 vote

10y

@Hubert Washington, one point that I haven't seen mentioned is looking to the public markets for signs. There are numerous academic studies that show valuations in the public markets tend to be a precursor for private market valuations. There has been a lot of REIT volatility recently (in particular, Jan & Feb).

In addition, there have been some large transactions by major players that could be signals that they think the end is coming soon. Equity Residential (EQR) sold a large portion (~$5bn) of its multifamily apartment portfolio to Starwood late last year. Sam Zell, the head of EQR, became a real estate celebrity when he sold his Equity Office Properties to Blackstone at the very peak of the last real estate bubble. In addition, Blackstone has been offloading a number of large portfolios and real estate assets.

My main point is I think that the public markets could be another useful indicator of where the cycle is. In my opinion, there are many signs in the public market that the end of the cycle could be close.

1 Reply

Vitaly Lunev

Rental Property Investor · Dallas · Member since 2016 · 33 posts · 13 votes

10y

As most commentators pointed out the easy hanging fruits have been picked at least in the major growing metros. Most of the deals in those that are getting done now are either by major Pension Funds/VCs that have raised funds and need to put them somewhere and are fine with parking funds for a very long time or the aggressive turn around opportunities. A few members here are from DFW, so to use it as an example the Uptown and Knox-Henderson is bursting at the seams with activity and can probably fit no more cranes as a result the development or re-development (typically a phase that typically precedes new development in urban areas) is getting pushed north all the way and even past the Loop (Loop 12) where the apartments that used to go $15-25k a door just three years ago are now approaching $50-60's as-is and $100s once updated.

This movement has displaced a lot of local DFW investors who are starting to look at Wichita Falls or parts of Oklahoma, which is actually undergoing a contraction and Louisiana, where the 7 or 8% cap rates are still feasible and cost per door is much closer to the historic levels that Dallas enjoyed for years, however, by going for the cash flow they have to forgo potentially explosive growth (which can go both ways).

@Gino Barbaro , @Chris Soignier and @Levi T. As a lender I am always curious what do you use to finance those B/C properties local banks, agencies or FHA and if more than which is your preferred source? Also related to the first question what is your holding period and exit strategy for those assets and how much does it impact your loan decision?

1 Reply

Chris Soignier

Real Estate Broker · North Richland Hills, TX · Member since 2013 · 1k+ posts · 607 votes

10y

Originally posted by @Vitaly Lunev:

As most commentators pointed out the easy hanging fruits have been picked at least in the major growing metros. Most of the deals in those that are getting done now are either by major Pension Funds/VCs that have raised funds and need to put them somewhere and are fine with parking funds for a very long time or the aggressive turn around opportunities. A few members here are from DFW, so to use it as an example the Uptown and Knox-Henderson is bursting at the seams with activity and can probably fit no more cranes as a result the development or re-development (typically a phase that typically precedes new development in urban areas) is getting pushed north all the way and even past the Loop (Loop 12) where the apartments that used to go $15-25k a door just three years ago are now approaching $50-60's as-is and $100s once updated.

This movement has displaced a lot of local DFW investors who are starting to look at Wichita Falls or parts of Oklahoma, which is actually undergoing a contraction and Louisiana, where the 7 or 8% cap rates are still feasible and cost per door is much closer to the historic levels that Dallas enjoyed for years, however, by going for the cash flow they have to forgo potentially explosive growth (which can go both ways).

@Gino Barbaro , @Chris Soignier and @Levi T. As a lender I am always curious what do you use to finance those B/C properties local banks, agencies or FHA and if more than which is your preferred source? Also related to the first question what is your holding period and exit strategy for those assets and how much does it impact your loan decision

Vitaly, you mentioned OK. Ironically, my best performing MF asset in terms of current cash flow is in OKC. As a passive, i'm not directly involved in the financing beyond my role as a KP in 3 deals, 2 of which are financed by a credit union, 1 by a state bank. Others are all over the place, w/ FHA being most common. Many of my deals are in my retirement funds, so holding period isn't as important as annualized return, ,but I generally set a 20% avg. annualized cash on cash return, including back end gains and/or refinancings, as my bogey for underwriting.

0 Reply

John CasmonPro Member

Cincinnati, OH · Member since 2013 · 1k+ posts · 1k+ votes

10y

Lots of great info and comments on this thread already, especially about RE being local, focusing on emerging markets, the reduction of low hanging fruit deals and finding your needle in a haystack. I'll add that overseas investments, historically low interest rates and ROI vs. other investments should be considered as well as you gauge the current MF landscape. If you can buy an apartment building at an 8 cap with just 4.5% interest and only 25% down, it's going to perform better than many other investment tools. One of the keys is to make sure you can manage through any volatility (vacancies or market fluctuation) and have multiple exit strategies (refi, sell, reposition, etc.)

1 Reply

Gino BarbaroPro Member

Rental Property Investor · St Augustine, FL · Member since 2014 · 2k+ posts · 1k+ votes

10y

@Vitaly Lunev

HI Vitaly

We are using a portfolio lender who has a growth mentality and invests primarily in our asset type. We have developed a fantastic relationship and we get great terms. At first, it was hard to find a bank who would give us good terms. Once we started buying bigger assets and the revenue started to explode, banks take note of this and want your business. Our goal is now in the process of putting these assets to fannie non-recourse 30 yr am loans. We have repositioned some of the assets to be able to do this

Gino

Podcast Guest on Show The “Conveyor Belt” System That’ll Build You a BIG Rental Portfolio Quickly

0 Reply

Joe SplitrockPro Member

Moderator

Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes

10y

@Hubert Washington you can invest in any market, but arguably it becomes more difficult to find good deals in an up market. The old saying buy low, sell high indicates now is a better time to be a seller. Anyone thinking of exiting the rental property market should take this opportunity. If this is your first step into investing, then I think action becomes important. The hardest step is getting into the business and I don't think it gets any easier no matter what the market is. I like SFH in any market. I would get your feet wet on something manageable. Don't go all-in and stretch yourself thin on your first deal. I know people who lost everything in the last downturn because they purchased at the peak of the market in the wrong area.

0 Reply

David Veeder

Investor · Dallas, TX · Member since 2014 · 112 posts · 83 votes

10y

I agree with @Nick B.

Don't pay for Ifcome If you do this it will be more valuable.

Conservatively underwrite your deals. with no or low income growth defiantly 2% or under and of course use realistic expenses with expectation that they will go up.

A property that I am involved was purchase in 2014 and the property tax value went up to the purchase price. Our group underwrote an increase to 80% of purchase price. Ended up in litigation with the city to get the taxes reduced. It would not have killed the deal but certainly would have reduced the NOI and there for the value of the property.

1 Reply

Lane Kawaoka

Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes

10y

Gino Barbaro where are your apartments?

0 Reply

Gino BarbaroPro Member

Rental Property Investor · St Augustine, FL · Member since 2014 · 2k+ posts · 1k+ votes

10y

@Lane Kawaoka

Hi Lane

the portfolio is concentrated in the Knoxville, TN market. I am moving to Jacksonville Fl to expand the portfolio

Gino

Podcast Guest on Show The “Conveyor Belt” System That’ll Build You a BIG Rental Portfolio Quickly

0 Reply

Joshua Nicholas

Commercial Real Estate Broker · New York, NY · Member since 2014 · 65 posts · 47 votes

10y

Hate being this guy but I gotta interject.

1.http://www.multifamilyexecutive.com/news/why-older...

Millennials are not totally averse to homeownership. Low rates have just driven prices to unaffordable levels for millennials to get into the market. I say this as a 28 year old millennial.

2. http://www.multifamilyexecutive.com/design-develop...

Vacancy rates are already starting to slip because of massive new construction. I know I know it's "All class A, all urban core" blah blah blah. You build enough Class A and you're going to end up with class B rents. See Florida in 2009.

3. Hubert, you're 100% correct on your assessments. Average cap rates in NYC on real numbers are sub 2% (on real numbers), same as the Bay Area and most of the gateway markets across the country. Rents have been on a tear but started to cool off even in NYC and if they're cooling off in the most supply constrained market in the country, I would be cautious in your local markets.

The real way to protect yourself is underwrite conservatively. At the same time, I don't care what people say, you're probably not going to be able to purchase a sizable deal today without stretching at least somewhat.

There's an abundance of foreign money, 1031 exchange money, people cashing out of the stock market, etc etc. Cap rates have compressed around the country dramatically so you'll have to be aggressive in making a deal, gone are the days when you could take your time and negotiate with a seller for an extended period of time. I have a deal I'm looking to sell right now at a 1.8% cap rate on real numbers. Very cheap in terms of price per square foot and price per unit however.

I sent it out to my list of buyers and had 4 cash offers come in sight unseen on day 1. This is NOT in core Manhattan but a suburb of NYC. That's who you're competing with in today's frothy market because bubbles make everyone act stupidly.

Another way to protect yourself is buy a building with some value-add component, borrow 10 year fixed rate money with 25 year amortization and 70% LTV. You're going to be very safe no matter what happens in the economy because of a large cushion in terms of your DSCR and how quickly you are paying down the debt. Most people who got in trouble in 2008-2010 were in trouble because of refinancing issues, not occupancy levels which never dipped below 85% nationally. 10 year money and a 25 year amortization eliminates that risk. Admittedly you're not going to have the same cash on cash returns available even a few years ago and not the returns you'd have if you used 80% LTV but you'll sleep well at night knowing your investment is "anti-fragile" to quote Nassim Nicholas Taleb.

3 Reply

Alejandro Gibbs

Engineer · Fort Myers, FL · Member since 2016 · 23 posts · 11 votes

10y

@Hubert Washington there are many areas in South West Florida where the apartment market is rising very good, because there is not to much offers and the people is seeking for rentals and also looking for properties that are easier to manage from the distance. We have a couple of new apartments projects ready to build in Cape Coral Florida that could be very interesting for you, if you want to know more please don't hesitate to contact me.

Have a great day a more success

1 Reply

Michael Lee

Investor · Coppell, TX · Member since 2008 · 2k+ posts · 646 votes

10y

Hello and welcome to BP! If you know anybody that can tell you the future please let me know who that is. I can not tell what is going to happen tomorrow. You can only go by what the numbers are today. If the project is doing good today it will probably be good tomorrow. Is it the best? No one can answer that question unless they know the future and I do not know anyone that can. I hope this helps. Good luck!

0 Reply

Has The Apartment Market Reached The Peak of It's Cycle?

Has The Apartment Market Reached The Peak of It's Cycle?

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