Should I buy Multifamily in Dallas now or wait

11 Replies

Hi everyone, I am so close to making an offer on a apartment deal that I like. It’s in Dallas Fort Worth area with around 6% cap. Some value add opportunity to raise the rent and potentially exit in 2 to 3 years. Current calculations project and IRR anywhere between 15 to 25%. Should I purchased now or wait until later next year, can expect potentially recession hitting or market correction; where I anticipate having a better deal to buy. In any case a better deal I’m not sure it will mean That Dallas will see any rates in the 7 to 8 range in the next 2 to 3 years. I can still potentially hold the property for 7 to 8 years, I have planned multiple exit strategies. Therefore, is it better to wait for that better deal next year or later where you could potentially buy it at a 7+ cap versus buying what I have now. I am trying to understand the opportunity cost and loss in that here. Is this the time most seasoned investors hold their money and wait for the right opportunity in the next 1 to 2 years? Hoping someone can explain or walk me through the logic and pros and cons of waiting for 1 to 2 years vs buying something now and potentially trying to exit in three years versus holding it a little longer to tide a bad phase if it does occur.

There is no crystal ball with investing... I suppose that's what can make it so hard. We have to take in the best information that we have now and try to navigate the waters over the investment horizon. 

Personally, I think Dallas is a little overheated, but that is a view of the broader market. There can always be diamonds out there you just have to find them. Know your numbers well and make sure you are conservative in your underwriting. Know where your business model is exposed and make plans to mitigate that risk if something should happen. 

For instance, we know that the demographic data  still supports "bullishness" for the Dallas market. Dallas has a powerhouse economy beating national job growth by around 100bps, population growth is around 3 times the national average, it is a business friendly environment that attracts real talent, and it is a pretty affordable market relative to other similar locations in the nation. 

My take is that Dallas is certainly still a good market. 

But good markets attract more investors. Prices are creeping up, interest rates are creeping up, and rental growth is starting to face some headwinds nationally. During your underwriting make sure you are not being overly aggressive with factors related to these items (and other items you may find in your own research). 

Sounds like you have found an interesting opportunity. Let us (BP) know how we can help. This site is a great knowledge base. 

- JA

@Sanjoy V. Unless you have some great knowledge no one else does, I would buy it now. In DFW, investors have talked of a recession for the past 3 years and it hasn't happened yet. It is softening now but is still a seller's market with demand greatly exceeding supply in both rentals and single family. I agree with many of those investors that a correction of some sort will happen but I am under the belief that it will not lead to prices decreasing much but rather stagnating for a few years.

Though @Alvin Sylvain says he is new to investing, he has the right idea. If you think it is a good deal now, I would go for it. DFW is growing and it all hinges on when/if that growth will stop.

2017 DFW added 32,000 new rental units (Source)

From June 2017 to June 2018 35,000 new homes starts (Source)

2018 DFW has issued 19,000 new permits for rental unit construction (Source)

The last of these sources from Texas A&M gives some great detail on market absorption of the new units and demand/vacancy rates. They are predicting a slow down as well but put vacancy rates to be flat and rent increases to go down from 4% from last year to 2% projected for both 2019 and 2020.

If you have a deal that should get you to IRR of 15+% I wouldn't hesitate. It seems like a pretty sound deal.

Hope this info helps.

Originally posted by @Sanjoy V. :
Hi everyone,

I am so close to making an offer on a apartment deal that I like. It’s in Dallas Fort Worth area with around 6% cap.

Some value add opportunity to raise the rent and potentially exit in 2 to 3 years. Current calculations project and IRR anywhere between 15 to 25%.

Should I purchased now or wait until later next year, can expect potentially recession hitting or market correction; where I anticipate having a better deal to buy. In any case a better deal I’m not sure it will mean That Dallas will see any rates in the 7 to 8 range in the next 2 to 3 years.

I can still potentially hold the property for 7 to 8 years, I have planned multiple exit strategies. Therefore, is it better to wait for that better deal next year or later where you could potentially buy it at a 7+ cap versus buying what I have now. I am trying to understand the opportunity cost and loss in that here.

Is this the time most seasoned investors hold their money and wait for the right opportunity in the next 1 to 2 years?

Hoping someone can explain or walk me through the logic and pros and cons of waiting for 1 to 2 years vs buying something now and potentially trying to exit in three years versus holding it a little longer to tide a bad phase if it does occur.

I would buy unless you have knowledge none of us are privy to. Often times, deals in Dallas look great because people assumed the past is a predictor of the future. That is not the case as trees don't grow to the sky. 

It would be helpful to know: rent growth, exit cap, business plan and your experience with such assets before offering any suggestions. For instance, even in hot markets like Fort Worth, Garland and Richardson many investors have had a hard time hitting their #s either because of inexperience or having the wrong partnerships (especially for out-of-state investors). 

Does the deal make sense at todays numbers? If you are using 3%+ rent growth and assuming low vacancy, then I would wait. If the deal makes sense to do without the market performing like it has in the past, then go for it. Dallas, along with many other markets will likely see some rocky times in the near future, but if you are buying right, in my opinion there is no reason to wait. 

The test for me is to consider the market you're in. If it is a strong market with good growth potential into the future (Dallas is that) and you can weather a 3-5 year down turn (Dallas is bound to have), then buy. 

It's all a function of the value-add. 6 Cap is not a cash flow proposition on the surface unless you can get it up to 8 or 9. 

@Sanjoy V. - timing a market is always 20/20...Remember that in a recession, some properties are traded for a higher cap rate, but it's harder to raise rents - and in a value add deal is the main source for your profit. Dallas is a strong market. As long as your underwriting is conservative and you are still profitable even in your worse case scenario, you should be fine.

@Sanjoy V.

IRR Looks good, How much is CoC?

Pros of Investing now

  • Dallas is very strong market
  • If number makes sense, you can not go wrong in DFW market.
  • As investment is value add, there is opportunity of changing your investment to 7-8 Cap
  • You have backup plan of holding for long time in case of market go south.
  • If you are lucky... Amazon HQ2 select Dallas as their choice :)

Cons of Investing Now

  • Market is very expensive
  • Historically 6 cap rate is very low in Dallas

As I think though the Math...
If a property that is worth 5.3 million today at 6% cap approximately, at 5% interest rate; if the same property I could get at 4.3 millions in 2 years if the market falls, then interest rate possible at 6-7%, my cash on cash may be better but still not significantly better due to the higher interest rate, plus opportunity costs of sitting on capital for 2 years (1.3 million investment earning 1% bank interest instead of 7% COC if invested, loss of tax break depreciation, total loss may equal 200k loss in profit), plus increase in the rents and some value add could increase the cap from current 6 to 6.7 or so.

Unless, I find another source that can give me a COC of 7%, sitting on cash for 1.5-2 yrs for market to correct may itself be a loss. I know a lot of speculation, but if I have multiple exit strategies including possibly holding the property for much longer up to 5-7 years may be an option.

I don't know, just feel like, I am talking myself into it.
Best time to buy may be brief period when the cap eventually goes high with market crash/adjustment and eventually the interest rates will need to be lowered to revive economy!