Apartments Plateauing.. It's already starting to happen. Careful!
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
Apartments Plateauing.. It's already starting to happen. Careful!
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Investor · Carrollton, TX · Member since 2015 · 109 posts · 76 votes
10yI also think it is worth noting several other factors that go into what makes a market 'overpriced' 'underpriced' or 'fairly priced'.
First, let's think about cap rate compression. If a property, all things being equal, was trading at 8% cap two years ago, and is currently trading at 6% cap, then you have to ask yourself why? It's not magic, it's not some mysterious third party deciding what the proper cap rate is, it's a market. The market forces which move prices imply many things. (Not that everyone agrees with the implications, which is causes there to be both buyers and sellers) One of the things cap rate compression tells you is that there is implied rent appreciation. As an example, let's say that a property of a certain type has historically traded at a 8% cap in that market. If you believe in reversion to the mean, and it's currently trading at a 6% cap rate then the 'market' is telling you that rent appreciation is expected to be above the historical rental appreciation for that market, such that it will make this property have an NOI that reverts to a historical level close to 8% in the future.
It might seem counterintuitive at first to think that buying at a 6% cap today to 'grow into' an 8% cap later makes sense. If you think of the cash flow and the 'rate of change' of rents in the future, it makes sense.
Secondly, since rent appreciation isn't the only thing that matters and because real estate investing isn't in a vacuum, then it must imply other things as well. It may imply that the premium over the risk free rate of return is a constant (i.e. if 'normal' is 4.5% 10 year treasury rates and 'normal' is 8% cap rates, then the 'normal' premium over the risk free rate is 350bps) so that the expected 10 year treasury rate + 350 bps is 6%. This means that the expectation is that inflation is tame (the 10 year treasury rate is a historic inflation + gdp market expectation). It may imply that availability of credit for first time homebuyers is limited in the near future (which leads to rent appreciation). It may imply that buyer preferences are for rental properties instead of home ownership (i.e. geographically closer to work, a preference for community living instead of suburban living, home price unaffordability, etc) which again leads to rent appreciation.
You can debate these implications, but the information included in the price movements definitely means that more people / more money believes those implications than do not. It's also worth noting that changes in how the market views the implications do not happen over night so the odds of the 'bubble bursting' are very low. In fact, in my lifetime it's happened ONCE (2008 crisis) nationally. Locally, it happens more often, but then again, real estate has always been considered a local market up until the crisis.
Side note: Isn't it funny that people refer to the 2008 crisis as a ONCE IN A LIFETIME MAGNITUDE CRISIS, but then fear it happening again all the time.
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VERY market specific (aka zip code), but I can attest it can be true. Listed my 6-units and become the SOLE MFU in the zip code and subsequently in less than a week we had a bidding war resulting in a full price offer.
@Joel Owens sorry Joel, my comment is off topic and if you like - - delete it.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes10y
There are a lot of buyers for multifamily specifically foreign buyers who cannot get any yield in their country.
That does not change the fundamentals of underwriting a property. No matter what cap rate buyers are paying it won't change vacancy increasing and rents flattening.
I have a bunch of 1031 clients selling out in Cali right now. Everything from multifamily, retail strips, and vineyards at low cap rates to sell and 1031 proceeds into other states.
Hmm; Don't know what you're reading when you say "That does not change the fundamentals of underwriting a property. No matter what cap rate buyers are paying it won't change vacancy increasing and rents flattening."
I'm afraid this topic is another example of regional differences
when https://www.apartmentlist.com/rentonomics/ca/calif...
summarizes the issue:
In California, rents increased by 0.5% between January and February.They are now up 5.4% over the last year at median prices of $1,730 for a 1-bedroom and $2,100 for a 2-bedroom.
San Francisco: San Francisco once again claimed the highest rents statewide for both 1- and 2-bedroom units, averaging $3,500 and $4,800, respectively. San Francisco rents are up 1.2% over last year, and 0.4% in the past month.
- Los Angeles and San Jose: Los Angeles and San Jose tied for the 2nd most expensive California rents with average prices at $2,650 for a 2-bedroom in each city. A 1-bedroom averages $2,200 in San Jose while same unit rents are $1,950 in Los Angeles.
- Riverside: Just east of Downtown Los Angeles, Riverside placed 7th for most expensive rents, with a median 2-bedroom price of $1,400. Riverside rents have shown a 3.3% increase in the past year.
Growth rates:
- San Jose: In addition to placing 2nd for most expensive rents statewide, this Bay Area city claimed the largest rent increase with 7.8% growth over February 2015.
- San Diego: Just north of the border, San Diego places 5th for strongest rent increase over last year. San Diego rents increased by 5.9% from February 2015 to February 2016, and have a 2-bedroom price tag of $2,050.
- Fresno: Fresno ($880) had the 7th strongest year-over-year rent growth with an 2.7% increase over February 2015 for 2-bedroom figures. Although Fresno earned a top ten spot for fastest growing rents in California, its rent growth is still lower than the statewide average of 5.3%.
Does it still make sense to invest in MF if most if not all of them seem so overvalued? Are we going to see reasonable prices in a near future?
I recently walked away from a seller who wanted over $100K/unit for a 1969 C class property. Oh, and they bought it for $50K/unit and are currently losing money on it. And this is in DFW, not in California of all places. Some idiot will buy it at the asking price though.
- Investor · Los Angeles, CA · Member since 2016 · 42 posts · 10 votes10y
I rented my 3 bedroom out in LA for $3000/month last June which was fair at the time. Had the house re-appraised in August and they told me I was already below market rent. It definitely isn't plateauing in LA. But once all these small lot developments start popping up - it may.
- Real Estate Broker · Los Angeles, CA · Member since 2016 · 55 posts · 16 votes10y
here's an article that just came out today regarding LA rents and a study done by the university of southern california. rents expected to continue to rise for at least two more years.
http://la.curbed.com/2016/4/12/11414618/los-angeles-rents
Originally posted by @Nick B.:
Does it still make sense to invest in MF if most if not all of them seem so overvalued?
Don't choke on the PP. As a B&H operator, I focus(ed) on the monthly cash flow when I bought and now when selling, the buyer STILL gets a great return.
It's hard to classify $5400 monthly deposits to my bank account as 'over valued'.
Originally posted by @Jeff B.:
Originally posted by @Nick B.:
Does it still make sense to invest in MF if most if not all of them seem so overvalued?
Don't choke on the PP. As a B&H operator, I focus(ed) on the monthly cash flow when I bought and now when selling, the buyer STILL gets a great return.
It's hard to classify $5400 monthly deposits to my bank account as 'over valued'.
It all depends on whether you're buying or selling :-)
I see listing after listing that look great with 3% economic vacancy and $3000 expense per unit per year but lose money hand over fist if the vacancy goes to 12% and expenses are $5000/unit as they should be for this type of property. So, when you underwrite conservatively your cash flow may only happen if the price is reduced substantially.
Originally posted by @Nick B.:
Originally posted by @Jeff B.:
Originally posted by @Nick B.:
Does it still make sense to invest in MF if most if not all of them seem so overvalued?
Don't choke on the PP. As a B&H operator, I focus(ed) on the monthly cash flow when I bought and now when selling, the buyer STILL gets a great return.
It's hard to classify $5400 monthly deposits to my bank account as 'over valued'.
It all depends on whether you're buying or selling :-)
but lose money hand over fist if the vacancy goes to 12% and expenses are $5000/unit as they should be for this type of property. So, when you underwrite conservatively your cash flow may only happen if the price is reduced substantially.
That's a real problem for the underwriter that deals with WHAT IF. As an operator, I deal with real, monthly cash flow. Even in 2008 when things were dire, my cash flow did not decline. What did cause pain was a fire in 2013 - - circumstances beyond control - - but even then the MFU saved the day and was net positive all the while.
btw: my fixed expenses are 30% and no where near the inflated $5k example shown.
When I bought, I determined the fixed breakeven point as 70% occupancy and never suffered anything near that.
When the UK exits the EU, Greece & Turkey collapse, THEN we will see issues hard to deal with.
$5K is not inflated. It is a little DEflated. The real number is closer to $5200. This is what it costs to operate 1965-1975 vintage C class property with all bills paid in DFW. I got this number from a few PM companies. It is only rational to think that my numbers will be close to that rather than to a broker's fantasy of $3K.
Your numbers are specific to your market and property class and I bet you self-manage that 6-unit building. I am looking at 30+ units and have no desire to self-manage.
Originally posted by @Nick B.:
Your numbers are specific to your market and property class and I bet you self-manage that 6-unit building. I am looking at 30+ units and have no desire to self-manage.
You are 100% correct. My comment is intended to deflate the concept that a National Average NEVER apply to specific cases - - eg: American's have 2.5 kids - - quite impossible isn't it.
Numbers I cite are operation in my market, my region, true and reliable enough to get a full price offer in ten days. While the original National RE Investor exposes a National issue, the California Apartment List is more regional and therefore less generic FOR MY MARKET.
Somehow we have to understand Once Size Does Not Fit All. Trying to wear Cinderella's slippers will create bunions for many investors.
My numbers are also market and property type specific. It is what it is in this area according to PM companies that operate there. I would not use national averages for anything.
My point is that sellers stretch projected numbers to justify their higher asking price. They don't want to sell on actuals but instead try to build a case that a buyer should buy based on projected numbers.
Originally posted by @Nick B.:
$5K is not inflated. It is a little DEflated. The real number is closer to $5200. This is what it costs to operate 1965-1975 vintage C class property with all bills paid in DFW. I got this number from a few PM companies. It is only rational to think that my numbers will be close to that rather than to a broker's fantasy of $3K.
Simple FYI Nick: Mine is a '58 class c all bills paid 30% actual expense IS $3k/unit and I didn't need to ask for those values - - not fantasy - - sch E facts.
Regional variances and the use of a PM will easily account for the differences :)
- Investor · Los Angeles, CA · Member since 2013 · 231 posts · 260 votes10y
Also, the peak millennial is now 25. In many parts of the country that is an age when many of them will start families in the next few years. Also, supply has really increased in many markets. Here in Los Angeles, the rent increases are only expected to be in the 3% range for the next few years, which is short of the 5-6% we have been experiencing for some time.
- Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes10y@gino
- Investor · Fayetteville, NC · Member since 2016 · 24 posts · 6 votes10yI love this conversation. Thanks Nick B. And J Beard! You guys really provided some incredible information for those of us looking to get into MFH. I have heard about price inflation in many markets and I do know real estate is definitely regional and even has smaller pockets within them. Based on some of the things you all posted, what is your opinion of the overall rental market for SFH vs MFH?
My crystal ball is broken but in my home market (DFW) I see both SFH and MFH being traded at the prices I am not comfortable with. The market is hot and deals are scarce.
Nick
- North Easton, MA · Member since 2016 · 17 posts · 3 votes10y
On a Macro level everything has been slowing since December as I'm sure all of you know. Of course, different markets are going to be affected differently by the same contagion (I know close to nothing about the real estate market specifically, I'm still in college) but maybe that has something to do with it?
Actually, what happens to real estate when oil prices go up? interest rates (FFR) go up? Less spending on houses and more on apartments? People moving closer to cities so they don't have to pay for their commute/gas? interesting...
Sorry I'm thinking out loud, but thank you for your post and comments. Definitely got me thinking!
Howell
Originally posted by @Jeff B.:
Hmm; Don't know what you're reading when you say "That does not change the fundamentals of underwriting a property. No matter what cap rate buyers are paying it won't change vacancy increasing and rents flattening."
I'm afraid this topic is another example of regional differences
when https://www.apartmentlist.com/rentonomics/ca/calif...
summarizes the issue:
In California, rents increased by 0.5% between January and February.They are now up 5.4% over the last year at median prices of $1,730 for a 1-bedroom and $2,100 for a 2-bedroom.
San Francisco: San Francisco once again claimed the highest rents statewide for both 1- and 2-bedroom units, averaging $3,500 and $4,800, respectively. San Francisco rents are up 1.2% over last year, and 0.4% in the past month.
- Los Angeles and San Jose: Los Angeles and San Jose tied for the 2nd most expensive California rents with average prices at $2,650 for a 2-bedroom in each city. A 1-bedroom averages $2,200 in San Jose while same unit rents are $1,950 in Los Angeles.
- Riverside: Just east of Downtown Los Angeles, Riverside placed 7th for most expensive rents, with a median 2-bedroom price of $1,400. Riverside rents have shown a 3.3% increase in the past year.
Growth rates:
- San Jose: In addition to placing 2nd for most expensive rents statewide, this Bay Area city claimed the largest rent increase with 7.8% growth over February 2015.
- San Diego: Just north of the border, San Diego places 5th for strongest rent increase over last year. San Diego rents increased by 5.9% from February 2015 to February 2016, and have a 2-bedroom price tag of $2,050.
- Fresno: Fresno ($880) had the 7th strongest year-over-year rent growth with an 2.7% increase over February 2015 for 2-bedroom figures. Although Fresno earned a top ten spot for fastest growing rents in California, its rent growth is still lower than the statewide average of 5.3%.
What you should worry about (if anything) is home prices/values. Have you ever heard of rents dropping (by more than a temporary 1-3%) in any decent market, EVER? Neither have I.
Originally posted by @Jeff B.:
Originally posted by @Nick B.:
Originally posted by @Jeff B.:
Originally posted by @Nick B.:
Does it still make sense to invest in MF if most if not all of them seem so overvalued?
Don't choke on the PP. As a B&H operator, I focus(ed) on the monthly cash flow when I bought and now when selling, the buyer STILL gets a great return.
It's hard to classify $5400 monthly deposits to my bank account as 'over valued'.
It all depends on whether you're buying or selling :-)
but lose money hand over fist if the vacancy goes to 12% and expenses are $5000/unit as they should be for this type of property. So, when you underwrite conservatively your cash flow may only happen if the price is reduced substantially.
That's a real problem for the underwriter that deals with WHAT IF. As an operator, I deal with real, monthly cash flow. Even in 2008 when things were dire, my cash flow did not decline. What did cause pain was a fire in 2013 - - circumstances beyond control - - but even then the MFU saved the day and was net positive all the while.
btw: my fixed expenses are 30% and no where near the inflated $5k example shown.
When I bought, I determined the fixed breakeven point as 70% occupancy and never suffered anything near that.
When the UK exits the EU, Greece & Turkey collapse, THEN we will see issues hard to deal with.
Issues such as?
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