Bullish on Multifamily?

64 Replies

@Serge S. Yes, buying value add parks in AZ with a focus on parks between 50-200 pads. That historic spread is gone in Phoenix. FYI. Institutional buyers have been buying at a 5cap.

Originally posted by @Serge S. :
Originally posted by @Joel Florek:

US population now: 327 million. 

US population estimates for 2050: Range from 380 million to 420 million depending on the number of migrants allowed to move to the US within calculations. 

Taking this one simple idea into consideration all these additional people need places to live and multifamily properties are the most affordable solution to the problem of growth. Cycles with happen with cap rates, interest rates being one of the big drivers in that discussion. But the fundamental problem of people needing a place to live doesnt change. 

Absolutely agreed and I am the biggest advocate and benefited from investing in multifamily. I have nothing to gain from any correction and sincerely hope we continue this run. If the market tanks I'll probably go down with it. But when I'm sitting on 50% LTV, 1.5 DSCR and cash reserves then falling rents and high vacancy means I'll have a bad year on that investment. Maybe 2-3 bad years with the nice side effect of new buying opportunities. A little different than the guy whos bridge loan is called in the year NOI is half of where it needs to be.

 I wish I could give you 100 votes for this post. 

Originally posted by @Megan Pugh :

@Serge S.

What suggestions might you have for someone like my husband and I (husband finishing grad school in May) who want Multifamily to be their retirement plan and ultimately their wealth building tool?

I know you asked Serge, but here is my advice. You are young and there is no rush. Time is your friend in real estate but you still need to buy in the right part of the cycle. 

My advice is wait until you start hearing horror stories on BP about people losing money, and about how terrible MF is, and how it’s rigged against the little guy. When you start hearing about foreclosures and blood in the streets. That will be the time to buy, and if you are patient enough to wait until then you will do very well. Save your pennies for that day. 

If you cannot wait for some reason then you must be extremely cautious. Learn how to underwrite deals and then scenario plan them to see how far down your vacancy can go before you cannot make your debt service payments. Plan for the absolute worst to happen a year or two into your hold period. Only if the deal still works under the worst case scenario should you even consider moving forward.  

Also, at this point in the cycle, you want to buy the best located properties, where people will always want to rent no matter how bad the economy is. Buying marginal properties in marginal markets, as so many people are doing right now, is a really bad idea. 

And a word on markets. There are a lot of markets that look cheap because they are marginal. Lots of people are investing in these places because they think they are finding bargains. But they are still overpaying and don’t even realize it because you should never compare markets laterally. Only compare them to themselves. These marginal markets will always be cheaper than the good markets and when a downturn hits and the good markets get cheaper, the marginal markets will get even cheaper and people who invested there at the top will lose money. 

@Jonathan Twombly  @Serge S.  your advice is sound and this whole thread has done two things for me. 1) Instilled fear 2) Instilled fear. Which I honestly don't mind at all. I like most others on BP are just starting out. By that I mean I’ve flipped one house and read a handful of books but have no rentals as we speak. If I had a dozen I would still consider myself a newbie. There are very few seasoned investors on here in my opinion so when investors like you two jump in I feel fortunate to soak up the knowledge shared. 


I recently formed a partnership for flipping homes here in Houston and we successfully flipped our first home that sold/closed last month. It was a great learning experience and the margin wasn't what we had hoped but we still made money. Initially, I had zero interest in flipping homes when I was approached by my partner but I figured it would be a good way for me to build up cash reserves so that I could acquire more and more rentals so I said yes. I have always wanted the long term buy and hold approach that so many of us newbie investors are after. I started with looking into SFH, and then moved onto 2-4 unit properties and now looking into MFH. All the while not having a single rental. It's surprisingly hard to pick one niche in real estate and truly dig in and plow ahead. I find myself stuck in this cycle of which type of REI I should hone in on.

I also have a friend of mine who has spoken to me about helping him syndicate for some apartments. He has successfully purchased a few apartments within the last 18 months or so but I cannot tell you whether or not the figures within those deals are contingent upon value add and increase rents or if the deal was structured in a way that it would survive a worst case scenario vacancy / market crash.

Now I am confused more than ever on what to do.

  1. Continue to flip to build up cash reserves so when the market tanks I can go in?
  2. Acquire some secure and cash flowing 1-4 unit properties?
  3. Join my friend who syndicates for apartments but only if his numbers still make sense after we assume for a worst case scenario?
  4. Do nothing and stay in corporate America ha ha.

@David Olson congratulations on getting into it! 

Re: your number 1 - flippers can get in trouble if the market hits a rough patch as well. If you can't move your properties and lenders come knocking that can lead to cascading foreclosures.

Tough call on your options. Except for #4, don't do that.

Originally posted by @Jonathan Twombly :
Originally posted by @Megan Pugh:

@Serge S.

What suggestions might you have for someone like my husband and I (husband finishing grad school in May) who want Multifamily to be their retirement plan and ultimately their wealth building tool?

I know you asked Serge, but here is my advice. You are young and there is no rush. Time is your friend in real estate but you still need to buy in the right part of the cycle. 

My advice is wait until you start hearing horror stories on BP about people losing money, and about how terrible MF is, and how it’s rigged against the little guy. When you start hearing about foreclosures and blood in the streets. That will be the time to buy, and if you are patient enough to wait until then you will do very well. Save your pennies for that day. 

If you cannot wait for some reason then you must be extremely cautious. Learn how to underwrite deals and then scenario plan them to see how far down your vacancy can go before you cannot make your debt service payments. Plan for the absolute worst to happen a year or two into your hold period. Only if the deal still works under the worst case scenario should you even consider moving forward.  

Also, at this point in the cycle, you want to buy the best located properties, where people will always want to rent no matter how bad the economy is. Buying marginal properties in marginal markets, as so many people are doing right now, is a really bad idea. 

And a word on markets. There are a lot of markets that look cheap because they are marginal. Lots of people are investing in these places because they think they are finding bargains. But they are still overpaying and don’t even realize it because you should never compare markets laterally. Only compare them to themselves. These marginal markets will always be cheaper than the good markets and when a downturn hits and the good markets get cheaper, the marginal markets will get even cheaper and people who invested there at the top will lose money. 

 Jonathon,

I applaud your advice to this young family. I am new to RE investing, but have significant experience in equity investing. You are right...cycles matter. If you bought the S&P 500 in 2007 you got hammered to the tune of -37% the proceeding year.  Although the magnitude of that financial calamity was much more severe than most the lesson is the same. The signs are everywhere. Three of my friends are getting their RE license to invest “on the side”. These are people with no real financial acumen much less a background in RE. I think your advice was honest, practical and came from experience. If your wrong? They lose out on an opportunity. Big deal. 

Warren Buffett’s rules of investing:

#1 Don’t lose money

#2 Always observe rule #1

Anyway, personally, appreciated your honesty and sage advice. Good luck in all you do.

Dave

@Jonathan Twombly

Thank you for the advice. That is what my line of thinking was. Especially where we have some serious student loans to hack away at. I am, however, contemplating a smaller multifamily to live in while we tackle our debt. What are some things to consider in this part of the market cycle? We are in Asheville, NC.

Originally posted by @Megan Pugh :

@Jonathan Twombly

Thank you for the advice. That is what my line of thinking was. Especially where we have some serious student loans to hack away at. I am, however, contemplating a smaller multifamily to live in while we tackle our debt. What are some things to consider in this part of the market cycle? We are in Asheville, NC.

 Take advantage of the difficult time to study your chosen market, find target properties you’d buy if the price were right, and start saving. In other words, get prepared so you can pounce when the moment is right.  

@Serge S. , Thank you as well for the feedback. Most of what I know about DSTs and installment sales are from reading online or in books. So, from that perspective, a DST has always seemed to me something to consider more towards retirement, or when I'm truly tired of active RE management. You're making me think it deserves another look, though. Can you mention some big reasons NOT to do a DST when exiting? It does sound awfully good on paper.

Not to bring the conversation over to opportunity zones, since there are tons of threads on the topic now, but based on my research, it seems like there are a number of tricky uncertainties there like:

1.) How to pick a fund to invest in? Seems like there are endless managers who are great at raising money right now, but it's hard to tell which ones know how to operate on the ground (even more so than traditional syndications since it's so new).

2.) If investing individually, a lot of the good locations are as competitive as ever with prices already on the rise, and the property has to be ripe for extensive rehabilitation or development. 

3.) I heard that different states are adopting variations of the opportunity zones tax law, which brings me to another point that there's so much hype and information being spread about opportunity zones right now that it's hard to figure out what's accurate or worth pursuing. 

Definitely some interesting topics to think about. I'm a guy who's hyper-localized in my investments, and while I think that has served me well, I also think it's become a barrier to pursuing certain other opportunities. 

@Robert C. there are some drawbacks to DST primarily fees. They want 2-3% of the cash (cap gains) brought into the trust. Then .5-1% annually AND a fund management fee for every investment you purchase. And thats if its a "preferred" investment that they pitch. Its a partnership between investor, trustee and investment manager. You can invest in what you want but then the yearly fee spikes to over 1%. All these fees add up. But you can invest in what you like and write the note as you prefer.

Regarding the opportunity zones, again plenty of ways to skin it. There is a lot of flexibility. You can cash out of RE $1M then open a bank account called Opportunity Zone Fund and now you are the fund. Put the $1M there and its deferred 10 years plus stepped up basis in whatever you subsequently buy. You have time to buy as well so your deferring in the year of the cap gain event and purchasing the following year. Big problem is that you need to spend the equivalent amount in improvements as your initial purchase so this works best for land or some inner city revitalization where your buying a shell, otherwise can be difficult to pull off. Or you can give it to a "fund" and hope your not getting interviewed 2 years later on an episode of "American Greed." The RE run up has made everyone look smart and there are a ton of operators out right now rolling the dice with other peoples money.

End of the day 1031 is the best option but finding a replacement property, different story.

First off, thank you @Serge S. and @Jonathan Twombly for this incredible thread. Some of the best content I've read on BP. 

I'm glad to hear there are other experienced investors with the same view of the market I have. I have the ultimate goal of getting into MF investment but I'm still relatively young and have time. 

To those out there that are in my same boat, I'll tell you what I'm doing:

1. Learning my market as best I can

2. Underwriting every single deal that comes across and learning as much as I can about larger properties

3. Networking as much as I can in my market to put myself in a good position

4. Since I have some capital, I am investing in some deals with sponsors that have a serious track record, specifically having been doing this prior to the recession not just post-recession. Among other criteria, debt has to be long term agency from the get go. These deals are few and far between. Most deals I see from sponsors are similar to what everyone has been discussing above

5. I'm also looking at 2-4 unit multifamily. They must have strong cash flow and be in good parts of town, not marginal. I can do these deals by myself. The worst think I could do is kill my reputation with potential investors by losing their capital before the real buying opportunities come along. 

@Scott Runyan sounds like you are on the right path. I love the dual track of investing with sponsors while looking/purchasing small multifamily.  Everything you learn with the 2-4 unit will be applicable to your larger multifamily purchase and watching the sponsors over time will fill in the rest of the gaps. There will be a time of distress and you will be ready.

I am transitioning from active to more passive and diversifying through LP syndication investments. I'm enjoying reviewing and comparing notes as to what these guys are doing (sorry to any women in this game but I haven't run across a female sponsor yet). What I've learned is that not all sponsors are created equal. There are marginal sponsors that are learning on your dime and there are pros that have been in the game. I'm not sure how a dentist from CA figures out one from another.

@Ivan Barratt

Exactly. I had the same thought given the yield curve inverted today. I just posed the question in a new post.

Serendipity!!

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here