Physician · Nutley, NJ · Member since 2015 · 16 posts · 15 votes
The boom in rents may finally be over - Business Insider
https://apple.news/AXD67uSxWSyKjZ742Jq2Hlw
Interested in thoughts/comments from experienced syndicators. I am wanting to get in as a passive investor but very concerned that the timing is not right now.
Real Estate Investor/Broker · Irving, TX · Member since 2015 · 520 posts · 263 votes
9y
Hedge by being in one of the top 5 markets for job/population growth (away from tech industry I.e. Dallas, Atlanta, Phoenix, etc.), go to top sub-market in those markets, stay in class C/B- because people will always need a place to live, run sensitivity analysis on interest rates, caps, rent rates, etc. to make sure DSCR stays above 1.25 for refinance purposes and Return on Equity meets minimum requirements, and some may say keep hold periods to minimum (grab value and get out).
I'm sure there are posts about tech/start-up bubble, but it will be interesting to see how that plays out, and how a bust might affect national economy.
As always, keep diversified.
Investor · Stratford, CT · Member since 2015 · 258 posts · 230 votes
9y
I agree with the article on a macro and national level. However, all real estate is local, and there is opportunity in every market. Certainly in 2010 it was much easier to get a good deal, but solid deals still exist. The old adage "people always need a place to live" is a truism. I have always believed that timing was more a function of my personal situation than the market. And, with the wide variety of passive investment options, there is a way to make solid real estate investments today. I retired early two years ago and thought I would purchase a mid size MF to replace lost income. With high prices and compressed CAP rates, I didn't find any properties that met my criteria. But I was able to put together a portfolio of shorter term investments that got the job done.
Investor · Takoma Park, MD · Member since 2016 · 166 posts · 147 votes
9y
@Derrick Wallace it depends on where you are investing. In some markets, supply remains very low, and prices continue to creep up with demand. As a general rule, I don't think we have seen the same degree of new construction in the multi-unit space that we saw around 2000, so in that sense there is more pent up demand relative to supply. The trick is to look at how the syndication is structured. What is guaranteed? What is at risk? How is it vulnerable (e.g., to a drop in rents)? Where are the properties, and what is the likely economic trend in those areas?
Real Estate Investor/Broker · Irving, TX · Member since 2015 · 520 posts · 263 votes
9y
Hedge by being in one of the top 5 markets for job/population growth (away from tech industry I.e. Dallas, Atlanta, Phoenix, etc.), go to top sub-market in those markets, stay in class C/B- because people will always need a place to live, run sensitivity analysis on interest rates, caps, rent rates, etc. to make sure DSCR stays above 1.25 for refinance purposes and Return on Equity meets minimum requirements, and some may say keep hold periods to minimum (grab value and get out).
I'm sure there are posts about tech/start-up bubble, but it will be interesting to see how that plays out, and how a bust might affect national economy.
As always, keep diversified.
Real Estate Lender · Jacksonville, FL · Member since 2015 · 86 posts · 51 votes
9y
@Mark Allen so true. One of my clients does very well building in the sub markets of the "hot" market. While all the big boys are building in the most competitive zones, they do very well just outside.
Real Estate Investor/Broker · Irving, TX · Member since 2015 · 520 posts · 263 votes
9y
Brent Shryock I think you're referring to secondary/tertiary markets. Markets (or MSAs) like Jacksonville are broken down in submarkets. The top submarkets typically have the lowest crime and highest school ratings. The reason the top submarkets are so competitive with all the big boys is because they know if the economy shifts they're hedging against the market because people want to live in the best areas the market has to offer.
Secondary/tertiary or submarkets just outside major metros typically have low rent appreciation, lower returns, but are generally more stable; like you said, I think poor performing assets in these areas are great to invest in an "up market".
Physician · Nutley, NJ · Member since 2015 · 16 posts · 15 votes
9y
@Mark Allen Are you referring to being diversified with respect to markets or with respect to investment (multifamily/retail office, etc) of both? I like the idea of minimum holds but if the economy goes south the deal has to make sense for a longer hold period, correct?
Real Estate Investor/Broker · Irving, TX · Member since 2015 · 520 posts · 263 votes
9y
Derrick Wallace yes, both asset types and investment vehicles.
The general partners should "war game" different market shifts and exit strategies both prior and during operation.
I agree with the article on a macro and national level. However, all real estate is local, and there is opportunity in every market. Certainly in 2010 it was much easier to get a good deal, but solid deals still exist. The old adage "people always need a place to live" is a truism. I have always believed that timing was more a function of my personal situation than the market. And, with the wide variety of passive investment options, there is a way to make solid real estate investments today. I retired early two years ago and thought I would purchase a mid size MF to replace lost income. With high prices and compressed CAP rates, I didn't find any properties that met my criteria. But I was able to put together a portfolio of shorter term investments that got the job done.
Congratulations on the early retirement. What did you decide to invest in?
Real Estate Agent · Plano, TX · Member since 2015 · 734 posts · 511 votes
9y
@Derrick Wallace multifamily basics are very similar to any other real estate basics:
You make your money when you buy - value add play and below market prices will help reduce the risk.
It's a long game - if your syndicator's exit strategy is 2-3 years turn around, in MY opinion, it's a higher risk. Everyone is talking about a looming correction but you crystal ball is as good as mine. We chose to build our current model for a 10 year hold with the anticipation that it will take us through and beyond the coming cycle.
There are also syndication specific strategies to reduce risk. We try to reduce our investors exposure if we can (if the market doesn't implode then our plan is to reduce the investors risk by 50% within 2 years!). I do agree with Mark that staying away from the core MSAs is right. Our preferred targets have been secondary and tertiary markets as a strategy (quick reality check though, secondary market in Texas are cities with population of 200K+). Make sure to vet the property, the deal AND the syndicator. I think @David Thompson wrote a good blog post about it.
Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
9y
Overbuilt markets affect Class A properties more. It takes a while to trickle down to B and Cs. That said, a lot of market the B and Cs are priced very high too so potentially rising cap rates and slowing rent increases have to be factored into for any exit strategies.
Investor · Austin, TX · Member since 2013 · 933 posts · 1k+ votes
9y
Several good comments above from Mark, Joseph and Michael. Most of the data is talking about Class A where there are some hot cities where overbuilding may be a problem if we get a pullback but most syndicators look for value add. The demographic and price disparity between someone renting a class A apartment and a class B apartment can be as big as $1K/month rent. If class A owners need to reduce rent, it can't come down enough to compete w/the demographic that can continue to afford the $1k/mo rent. We saw this in Houston when the oil turned and occupancy at our partner's properties (B/C) did fine, actually trended up slightly while class A crashed pretty hard in some areas of town due to the fleeing $100K/yr oil jobs.
Being more selective than ever, buying value add only, in the strongest markets and submarkets is essential. The rental trend is long and has several contributors not just millennials, but downsizing boomers which is a growing contributor not on the tail end here.
Investor · New York, NY · Member since 2016 · 105 posts · 118 votes
9y
I would have to agree with the previous comment. Class B and C tend to perform better during the downturn while Class A properties take the largest risk as people look to downsize. This was evidently clear in NYC during the financial crash. The class A properties were offering incentives left and right while we saw rent growth in our C Class properties.
We are very bullish on value add MF but even then we are selective as to where we are deploying capital. The market fundamentals still have to make sense and we have to be able to see a path for forcing appreciation that is not market dependent. Our underwriting is still 10 years out and we plan for flat to rising cap rates even if we don't believe that to be the case. If we can get out before that at a lower cap rate then that's a bonus.
Physician · Nutley, NJ · Member since 2015 · 16 posts · 15 votes
9y
Very informative comments above. Thank you. My understanding is that Cap rate expansion in an economic down turn can still hurt you even with a value-add play. Are you guys building this in to your modeling and if so how much expansion are you planning for 1.5 - 2% increase. I am more interested in holds for 5-7 years in order to build up momentum and reinvest that capital. 10 years just seems a little long for me.