Syndication Investing During a Recession

Syndication Investing During a Recession

Brian BurkePro Member
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes

Investing in real estate during a recession makes many people feel like a long-tailed cat in a room full of rocking chairs. For others, it’s an exciting opportunity.

In my 30 years of real estate investing, I’ve seen my share of market cycles and felt the pain they deliver, but I managed to get through all of them without losing any of my investor’s money. Losing my own, on the other hand—well, that’s a different story!

Most at-risk during times like this are the investments you’ve already made. If you are invested with the right sponsor, who implemented the right structure, you’ll stack the deck in your favor for a good outcome. Thanks to recent economic events, it probably won’t be the outcome you planned for, but one that you can live with, all things considered.

But what about new investments? I’ve found that the best investments are ones made at the trough of an adverse cycle, and ones made during the initial climb back up. A notable example is when I bought 120 houses in the San Francisco Bay Area from 2010 to 2012 at the depth of the last cycle. When I sold them 5-6 years later, they had gone up in value by 2-1/2 times. That trade underscores the importance of timing. This cycle isn’t likely to duplicate that result, but it could present some interesting opportunities.

So, what about investing in a passive real estate syndication now? Making the right decision is more important than ever. That means that BiggerPockets’ launch of my new book is perfect timing (The Hands-Off Investor: An Insider’s Guide to Investing in Passive Real Estate Syndications). It is critical that you invest with the right syndication sponsors and in the right real estate. This book will show you how to do both.

In talking with our investors about the current state of affairs and how they are planning their investment strategy from the short to medium term, we’ve heard responses ranging from hoarding cash out of absolute fear to those who view this as a chance to take advantage of opportunities that arise from the ashes, to just about everywhere in between. Where do you find yourself on that spectrum?

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Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes
6y
Originally posted by @Brian Burke:

Investing in real estate during a recession makes many people feel like a long-tailed cat in a room full of rocking chairs. For others, it’s an exciting opportunity.

In my 30 years of real estate investing I’ve seen my share of market cycles, and felt the pain they deliver, but managed to get through all of them without losing any of my investor’s money. Losing my own, on the other hand—well, that’s a different story!

Most at risk during times like this are the investments you’ve already made. If you are invested with the right sponsor, who implemented the right structure, you’ll stack the deck in your favor for a good outcome. Thanks to recent economic events, it probably won’t be the outcome you planned for, but one that you can live with, all things considered.

But what about new investments? I’ve found that the best investments are ones made at the trough of an adverse cycle, and ones made during the initial climb back up. A notable example is when I bought 120 houses in the San Francisco Bay Area from 2010 to 2012 at the depth of the last cycle. When I sold them 5-6 years later, they had gone up in value by 2-1/2 times. That trade underscores the importance of timing. This cycle isn’t likely to duplicate that result, but it could present some interesting opportunities.

So, what about investing in a passive real estate syndication now? Making the right decision is more important than ever. That means that BiggerPockets’ launch of my new book is perfect timing. The Hands-Off Investor: An Insider’s Guide to Investing in Passive Real Estate Syndications. It is critical that you invest with the right syndication sponsors and in the right real estate. This book will show you how to do both.

In talking with our investors about the current state of affairs and how they are planning their investment strategy from the short to medium term, we’ve heard responses ranging from hoarding cash out of absolute fear to those who view this as a chance to take advantage of opportunities that arise from the ashes, to just about everywhere in between. Where do you find yourself on that spectrum?

I have been in the business since 1997 and was heavy in real estate in 2009. I had several ground up projects I had just completed. I was in the process of converting the construction loans to perm financing and all lenders went dark. Not only did they go dark but they started calling the loans. I had $35 million in loans at 9% and close to $300k going out each month to keep the properties going. The Fed was nowhere to be found and there was no talk of forbearance. I was very fortunate as I had cash, great cashflow, I pulled all my equity out through the construction loans and all my loans were non-recourse and guaranteed by the entity holding the property so the lenders had to work with me. I funded all the deals on my own so no investors were at risk. Others were not so fortunate and the banks as you know were foreclosing on properties left and right. I finally persuaded the banks to extend the loans and sold through all my properties over the next two years so everything worked out but it was definitely a scary time and a great learning experience. I had never been through anything like that and didn't even know what a work out was prior to 2009. I continued to do deals and develop properties even during that period as I had cash and cashflow so even though these deals were technically in default and in work out a few other banks were still lending. 

Fast forward to today. This is a very different environment mainly because of the moves on the part of the Fed and the Treasury. They are not going to let the banks, credit and debt markets collapse like they did last time. Especially given the fact that Neel Kashcari is largely influencing the policy makers as he had a front row see at the treasury in 2008-2009. 

The only caveat is we do not know how long this is going to last and what the real and lasting effects will be on the consumer. The longer this goes the more likely things will take longer to recover. What we do know is there are always opportunities in every economic cycle. There will be opportunities in retail and office if you have the stomach and the capital. There will likely be several multifamily properties that will take a hit if the shutdown continues into June or July. Storage will most likely weather the storm and continue to perform however new developments may take much longer to fill so there may be some opportunities there. Mobile home parks are also very recession resistant and given the unemployment benefits the Fed is backing up the states with they should continue to perform. Industrial is booming right now due to the rise of e-commerce but you need to pick your spots as the old "build it and they will fill it" doesn't work everywhere when it comes to industrial. 

Personally I am opportunistic so it's a bit too early for me to jump unless its a really compelling deal. Investors are eager. I get calls every day from people looking to deploy capital. These are relationships I've had for years and they have all been sitting on cash waiting for a time like this. What I have found is those in my network who are liquid (over $100 million) are not concerned and are ready to deploy but they are looking for much more yield than 2 months ago. I have also found that less sophisticated investors especially those who have not been through 2009 are much more conservative and are not comfortable investing in anything right now. 

See this reply in the discussion

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  • Member since 2018 · 2 posts · 0 votes
    6y

    I’m looking to transition from wholesaling to syndication deals. Any advice and best strategies I can take to pursue this strategy

  • Investor · Indianapolis, IN · Member since 2015 · 764 posts · 953 votes
    6y

    @Randy Bloch if/when rates go up due to inflation (I hope they do at some point); another thing will go up as well. Rents! Multifamily is best in inflation b/c rents can reset every 12 months vs long term leases in other asset classes like office or retail. The key will be to manage debt maturity. If you have a long horizon left on your debt you should be able to offset cap rate expansion with higher cash flow. Managing maturity risk and not being forced to sell at the "wrong time" in the cycle is the key to playing this game over the long term. :)

  • Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
    6y
    Originally posted by @Charles Toe:

    I’m looking to transition from wholesaling to syndication deals. Any advice and best strategies I can take to pursue this strategy

    There's a lot of information out there about breaking into syndication, including podcasts and here on BP. Take time and read all of it. Perhaps consider using your wholesaling expertise to build deal flow in off-market commercial real estate, such as self storage or mobile home parks. Those are hot commodities. If you can get a decent deal under contract and bring it to a syndicator, you may be able to get a piece of the GP for bringing the deal. Either that or a big wholesaling fee, which isn't too bad either!  BP's Brandon Turner pays $50k fees to people who bring him true off-market 100+ mobile home park communities that he ends up closing on. 

  • Financial Advisor · Somerset, NJ · Member since 2018 · 4 posts · 1 vote
    6y

    @Brian Burke

    Hi Brian,

    My husband and I are looking to build some passive income streams and would appreciate having an opportunity to talk with you. Please let me know if we can set a time. Thanks

  • Investor · St Augustine, FL · Member since 2016 · 136 posts · 126 votes
    6y

    @Brian Burke - Personally I dont think this changes anything, everyone must still diligently underwrite and stress each and every "deal", albeit we may be looking a bit closer at economic occupancy and where the break-even points lie at this juncture.

    We haven't changed our strategy much, still looking to build our own portfolio and expect some of the less experienced or overly-optimistic operators / partnerships to get knocked around and look for quick exits in the upcoming months (hence keeping our powder dry). We always have looked carefully at diversity of employment and market growth - and aligned that with any syndication's we have invested with (in fact Bristol Creek and the Reserve seemed to fit our model :-).

    We also have NEVER taken a risk with an unproven entity or operator, seems there were a LOT of spreadsheet jockeys without any hands-on not too long ago, and even a few of the better known names have eliminated themselves from our short list during our due-diligence. As with everything, we like diversity and have spread across a few select operators as well so as not to get caught by any singular issue... although this one was pretty hard to see coming.

    Always keeping a close eye on distributions... and ongoing communications from our operators is always welcome.

  • Rental Property Investor · Corona, CA · Member since 2015 · 46 posts · 8 votes
    6y

    e it isn't. The legislature is heavily invested in that space and will continue to shore up the industry. Conservative, underwriting is the key. This will allow a lower break even point. And remember this is the long game, it isn't an instant game.

  • Rental Property Investor · Corona, CA · Member since 2015 · 46 posts · 8 votes
    6y

    Oh my post got cut off. But if you are waiting for the bottom to fall out of multifamily housing, it isn't. with 4.6 million unit shortage and 90 million millennials entering the rental market and Gen Z right behind them. Banks tightening lending lends to the pool of renters  

  • Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
    6y
    Originally posted by @Anthony Woods:

    Oh my post got cut off. But if you are waiting for the bottom to fall out of multifamily housing, it isn't. with 4.6 million unit shortage and 90 million millennials entering the rental market and Gen Z right behind them. Banks tightening lending lends to the pool of renters  

     I think the main risk is for the syndicators who are undercapitalized. If rents continue too  go unpaid, how long can owners last? I seriously doubt the feds will step in to bail out even large syndication who get into a bind. The longing term trends favor property ownership heavily, but in the short term we're in  the middle of a big test.

  • Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes
    6y
    Originally posted by @Anthony Woods:

    Oh my post got cut off. But if you are waiting for the bottom to fall out of multifamily housing, it isn't. with 4.6 million unit shortage and 90 million millennials entering the rental market and Gen Z right behind them. Banks tightening lending lends to the pool of renters  

     Bingo! Well said.

    By the way, I like the name of your town.

  • Investor · Indianapolis, IN · Member since 2015 · 764 posts · 953 votes
    6y

    @Account Closed I would tell you to focus 100% on starting and growing your biz first. Down the road you can use the cash flow from the biz to buy your real estate.  Rich Dad Poor Dad "The Cash Flow Quadrant" breaks down this formula quite well.  As an example Robert Kiyosaki did NOT get wealthy via real estate. He got wealthy via growing an education company. Then, he used the funds from the biz to buy income producing assets.  Look behind the curtains and most "real wealth" has been built this way.  Focus on the B quadrant first. :)

  • Member since 2020 · 113 posts · 33 votes
    6y

    A good investment strategy during a recession is to look for companies that are maintaining strong balance sheets or steady business models despite the economic headwinds. Some examples of these types of companies include utilities, basic consumer goods conglomerates, and defense stocks.

  • Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    6y

    About 6 weeks ago it was a 50/50 split among our investor base. I am feeling it climb up now. I am not sure how indicative this is of anything based on the fact that we only buy in Phoenix, so the question is not - do you want to deploy in a recession, but - do you want to deploy in a recession in Phoenix...

    But, there you have it.

  • Rental Property Investor · Brooklyn, NY · Member since 2014 · 722 posts · 1k+ votes
    6y
    Originally posted by @Greg Dickerson:

    Personally I am opportunistic so it's a bit too early for me to jump unless its a really compelling deal. Investors are eager. I get calls every day from people looking to deploy capital. These are relationships I've had for years and they have all been sitting on cash waiting for a time like this. What I have found is those in my network who are liquid (over $100 million) are not concerned and are ready to deploy but they are looking for much more yield than 2 months ago. I have also found that less sophisticated investors especially those who have not been through 2009 are much more conservative and are not comfortable investing in anything right now. 

    Great post, Greg, and thanks for adding the long perspective. I'm actually seeing something slightly different, which is that the very sophisticated and cash-rich investors are being cautiously opportunistic, but the people who are too young or new to remember the last downturn are convinced the bottom is already in and the time to move is now - or you'll miss out on the rebound!

  • Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    6y
    Originally posted by @Jonathan Twombly:
    Originally posted by @Greg Dickerson:

    Personally I am opportunistic so it's a bit too early for me to jump unless its a really compelling deal. Investors are eager. I get calls every day from people looking to deploy capital. These are relationships I've had for years and they have all been sitting on cash waiting for a time like this. What I have found is those in my network who are liquid (over $100 million) are not concerned and are ready to deploy but they are looking for much more yield than 2 months ago. I have also found that less sophisticated investors especially those who have not been through 2009 are much more conservative and are not comfortable investing in anything right now. 

    Great post, Greg, and thanks for adding the long perspective. I'm actually seeing something slightly different, which is that the very sophisticated and cash-rich investors are being cautiously opportunistic, but the people who are too young or new to remember the last downturn are convinced the bottom is already in and the time to move is now - or you'll miss out on the rebound!

    So, I guess I'd like to know what you guys are doing now? I know you were waiting before because the market was too high. Are you basically still waiting?

    I know I am not the smartest tack in the box, so I guess no one should be surprised at my inability to time the market. But that's exactly it - I have no idea how to time the market. I am eagerly watching you guys and hoping to learn.

    In the meantime, if the deal is good enough, it's good enough. And if the one tomorrow is even better then I'll buy that one too. 

  • Rental Property Investor · Brooklyn, NY · Member since 2014 · 722 posts · 1k+ votes
    6y
    Originally posted by @Ben Leybovich:
    Originally posted by @Jonathan Twombly:
    Originally posted by @Greg Dickerson:

    So, I guess I'd like to know what you guys are doing now? I know you were waiting before because the market was too high. Are you basically still waiting?

    I know I am not the smartest tack in the box, so I guess no one should be surprised at my inability to time the market. But that's exactly it - I have no idea how to time the market. I am eagerly watching you guys and hoping to learn.

    In the meantime, if the deal is good enough, it's good enough. And if the one tomorrow is even better then I'll buy that one too. 

    Hey Ben! Basically, I am reinvigorating all of my lender, broker, manager, and investor contacts and letting them know what I am looking for.  You're right that, if a deal works, it works.  However, I am putting a lot of bumpers on the deals, underwriting in a lot more uncertainty and margin of safety, so that I know the deal can withstand bad times.  Basically, being very cautious.  But also getting ready for when things stabilize and I can predict what the next couple of years look like with more accuracy.  Whereas, I was on on the sidelines before, now I am no longer on the sidelines.  Don't know if I will buy yet, but I am getting ready for the opportunities that I think are coming.

  • Investor · Indianapolis, IN · Member since 2015 · 764 posts · 953 votes
    6y

    LOL @Ben Leybovich I love your take. We're "dollar cost averaging" into more apartments as our portfolio is doing quite well here in the midwest.  Some smaller investors are skiddish but a lot of our higher net worth families are allocating more into workforce mfam.

    @Jonathan Twombly I hope you were putting in the bumpers previously as well. lol. The "strong hands" will be taking the "weak hands" that weren't previously underwriting cushion.

    In every market there's opportunity. Discipline is key.

  • Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    6y
    Originally posted by @Jonathan Twombly:
    Originally posted by @Ben Leybovich:
    Originally posted by @Jonathan Twombly:
    Originally posted by @Greg Dickerson:

    So, I guess I'd like to know what you guys are doing now? I know you were waiting before because the market was too high. Are you basically still waiting?

    I know I am not the smartest tack in the box, so I guess no one should be surprised at my inability to time the market. But that's exactly it - I have no idea how to time the market. I am eagerly watching you guys and hoping to learn.

    In the meantime, if the deal is good enough, it's good enough. And if the one tomorrow is even better then I'll buy that one too. 

    Hey Ben! Basically, I am reinvigorating all of my lender, broker, manager, and investor contacts and letting them know what I am looking for.  You're right that, if a deal works, it works.  However, I am putting a lot of bumpers on the deals, underwriting in a lot more uncertainty and margin of safety, so that I know the deal can withstand bad times.  Basically, being very cautious.  But also getting ready for when things stabilize and I can predict what the next couple of years look like with more accuracy.  Whereas, I was on on the sidelines before, now I am no longer on the sidelines.  Don't know if I will buy yet, but I am getting ready for the opportunities that I think are coming.

    It's certainly an interesting time, Jonathan. The Devil is in - what's it mean when "things stabilize"?

    As you know, in Phoenix, you couldn't get a deal at 5 cap four months ago. Everything was sub-5. 

    I spoke to one of the biggest brokers in town yesterday. 4 weeks ago a bunch of investors decided that the market was only worth 6 cap. They tried. This week offers are coming in at 5.5 cap. Still nothing. Where will the psychology be a month from now?

    In the meantime, I lost a deal last week. I suppose coming into Phoenix out of Seattle is all the visibility the buyer need...

  • Investor · Passiveadvantage.com · Member since 2019 · 166 posts · 91 votes
    6y

    Agree, as an LP I am happy to pull the trigger on a deal, if the numbers are right...  However, the numbers today are not what they were yesterday.  The big issue is there is no accurate numbers for rent comps over the next 6 months, they just dont exist because it is not an accurate comp in reality to look Pre-COVID.  Although April looked ok, it really has not given a chance for the economic effect to take hold, and many more people are prepared for short term (1-2 month) job loss or income loss than 3-6 months of such.  This leads to an inaccuracy and a guessing component of underwriting rent prices for which it is all based.  The cost for that inaccuracy in the underwriting for me as an LP I have outlined below acceptable parameters.  Assuming it has proper underwriting adjustment from pre to Post-COVID variables.  

    Off the top of my head I would like to see the following in the "New World Underwriting" and looking for:

    - Operator experience, reputation and character (always the most important at any time)

    - No class C

    - calculating in worse occupancy rate

    - acceptable cap rate reversion

    - property expense ration 5-10% less than what I was looking for (Not much more than 45% now)

    - Break Even occupancy closer to 55-60%

    - better DSCR, LTV

    - Better reserves

    - No Bridge debt (or at least bridge debt that converts to fixed rate)

    - no planned rent increases for 1 year or very little

    - Value add on hold for 1 year

    - Area employment diversity and not dominated by toursim, hotels, or one industry

    Admittedly, these are high standards and I am aware it may leave me on the sidelines for some deals but I am ok with that, I can be patient.

  • Rental Property Investor · Brooklyn, NY · Member since 2014 · 722 posts · 1k+ votes
    6y
    Originally posted by @Ben Leybovich:
    Originally posted by @Jonathan Twombly:
    Originally posted by @Ben Leybovich:
    Originally posted by @Jonathan Twombly:
    Originally posted by @Greg Dickerson:

    So, I guess I'd like to know what you guys are doing now? I know you were waiting before because the market was too high. Are you basically still waiting?

    I know I am not the smartest tack in the box, so I guess no one should be surprised at my inability to time the market. But that's exactly it - I have no idea how to time the market. I am eagerly watching you guys and hoping to learn.

    In the meantime, if the deal is good enough, it's good enough. And if the one tomorrow is even better then I'll buy that one too. 

    Hey Ben! Basically, I am reinvigorating all of my lender, broker, manager, and investor contacts and letting them know what I am looking for.  You're right that, if a deal works, it works.  However, I am putting a lot of bumpers on the deals, underwriting in a lot more uncertainty and margin of safety, so that I know the deal can withstand bad times.  Basically, being very cautious.  But also getting ready for when things stabilize and I can predict what the next couple of years look like with more accuracy.  Whereas, I was on on the sidelines before, now I am no longer on the sidelines.  Don't know if I will buy yet, but I am getting ready for the opportunities that I think are coming.

    It's certainly an interesting time, Jonathan. The Devil is in - what's it mean when "things stabilize"?

    As you know, in Phoenix, you couldn't get a deal at 5 cap four months ago. Everything was sub-5. 

    I spoke to one of the biggest brokers in town yesterday. 4 weeks ago a bunch of investors decided that the market was only worth 6 cap. They tried. This week offers are coming in at 5.5 cap. Still nothing. Where will the psychology be a month from now?

    In the meantime, I lost a deal last week. I suppose coming into Phoenix out of Seattle is all the visibility the buyer need...

    It's just so early.  We don't know where we are; that's the problem.  There are always going to be buyers who think that the beginning of a great crash is just a dip they need to buy.  I'm not saying it IS going to be a great crash.  But the point is maybe we don't know.  Maybe the guys buying at 5.5% caps are going to look super smart in a year.  Maybe the guys only offering 6% caps are going to look hyper-aggressive in retrospect.

    Since we just don't know yet, I think that causes caution in the marketplace. And caution leads to lower prices all by itself.

    For what it's worth, Green Street Advisers are already saying that Multifamily is down more than 10% from a couple of months ago.  That would mean 5.5% is accurate.  But who knows where we land?  That's the problem. 

  • Rental Property Investor · Brooklyn, NY · Member since 2014 · 722 posts · 1k+ votes
    6y
    Originally posted by @Ivan Barratt:

    LOL @Ben Leybovich I love your take. We're "dollar cost averaging" into more apartments as our portfolio is doing quite well here in the midwest.  Some smaller investors are skiddish but a lot of our higher net worth families are allocating more into workforce mfam.

    @Jonathan Twombly I hope you were putting in the bumpers previously as well. lol. The "strong hands" will be taking the "weak hands" that weren't previously underwriting cushion.

    In every market there's opportunity. Discipline is key.

    I didn't think it was worth doing deals at all three months ago.  There was way too much risk in the market.  That's why I sold everything last year - the risk was almost all to the downside, not losing the upside.

    Now, my curiosity is piqued again.  I will be getting more and more interested the further things fall.

  • Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    6y
    Originally posted by @Ivan Barratt:

    LOL @Ben Leybovich I love your take. We're "dollar cost averaging" into more apartments as our portfolio is doing quite well here in the midwest.  Some smaller investors are skiddish but a lot of our higher net worth families are allocating more into workforce mfam.

    @Jonathan Twombly I hope you were putting in the bumpers previously as well. lol. The "strong hands" will be taking the "weak hands" that weren't previously underwriting cushion.

    In every market there's opportunity. Discipline is key.

     One thing is for certain, Ivan - we need to sit down over a good scotch. That much has been evident for a while, and it's surprising that it hasn't happened yet.

    The thing I just don't get is this. @Jonathan Twombly jump in. The guard rails are needed when? When the exposure to the downside is greater than the upside. This should mean that once you've come down far enough, and the exposure to further downside is limited relative to the upside, generally it's time to get aggressive, take the guardrails off, and practice focus investing. 

    Thus, I could understand you staying on the sidelines the last few years. I did not agree, but I understood that in your opinion the exposure to the downside was to heavy for the potential profit. However, at this time what you are needing to do is to time the bottom at a point where you feel an inversion of risk/reward.

    One problem with that is understanding what is the acceptable risk, and this is something I struggle with. Sounds like Ivan is not too sure either. So - what are the hurdles indicative of this reverse in your opinion. I mean aside for seeing pricing like what we saw in 2010. That aside, what do you need to see in order to pull the trigger?

  • Rental Property Investor · Scottsdale, AZ · Member since 2010 · 390 posts · 599 votes
    6y

    I would exercise an overabundance of caution. There is excessive capital Distressed fund in the market all looking for the same group of assets meaning it will take longer to reach a price floor. We tend to forget that this will be a very long recovery. Nobody is in denial about that any longer. Those that exercise patience will be rewarded.

    Multifamily owners made it through Apr and May collections and June should be more of the same. As such, technically valuations should remain strong in the short run. The bigger issue in today's underwriting is the multiple new and unquantifiable inputs for year 1 through year 5. I personally think it would be a mistake to value a deal today based on prior T12 or a year 2+ rent growth. There is no underwriting consensus in the broker community as of yet either. There are no true post Covid comps so today's buyer would be setting that bar, quite a risky proposition. I struggle taking a position that today's value is commensurate with the risk, perhaps the largest imbalance I have ever seen.

  • Brian BurkePro Member
    OP
    Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
    6y

    Check it out--three podcast 152 guests in a row!

    What we are seeing today can bring a whole new meaning to "the second mouse gets the cheese."  First-mover advantage might make some people rich, but it could also put them in a long road back to zero.  Ask me how I know...LOL.

    There's nothing wrong with being six months too late in this situation.  It might even be better than being six months too early.  There will be some good opportunities to buy.  Maybe that opportunity materializes soon--I can't tell from where I sit right this minute--or maybe it takes a while.  What's important is that when I see it, I'll be ready.  Then it just leaves the question, will I be right?

  • Rental Property Investor · Brooklyn, NY · Member since 2014 · 722 posts · 1k+ votes
    6y
    Originally posted by @Ben Leybovich:
    Originally posted by @Ivan Barratt:

    LOL @Ben Leybovich I love your take. We're "dollar cost averaging" into more apartments as our portfolio is doing quite well here in the midwest.  Some smaller investors are skiddish but a lot of our higher net worth families are allocating more into workforce mfam.

    @Jonathan Twombly I hope you were putting in the bumpers previously as well. lol. The "strong hands" will be taking the "weak hands" that weren't previously underwriting cushion.

    In every market there's opportunity. Discipline is key.

     One thing is for certain, Ivan - we need to sit down over a good scotch. That much has been evident for a while, and it's surprising that it hasn't happened yet.

    The thing I just don't get is this. @Jonathan Twombly jump in. The guard rails are needed when? When the exposure to the downside is greater than the upside. This should mean that once you've come down far enough, and the exposure to further downside is limited relative to the upside, generally it's time to get aggressive, take the guardrails off, and practice focus investing. 

    Thus, I could understand you staying on the sidelines the last few years. I did not agree, but I understood that in your opinion the exposure to the downside was to heavy for the potential profit. However, at this time what you are needing to do is to time the bottom at a point where you feel an inversion of risk/reward.

    One problem with that is understanding what is the acceptable risk, and this is something I struggle with. Sounds like Ivan is not too sure either. So - what are the hurdles indicative of this reverse in your opinion. I mean aside for seeing pricing like what we saw in 2010. That aside, what do you need to see in order to pull the trigger?

    You’re exactly right. The further the market climbs the more conservative you need to be - but this is the opposite of what most people are doing. As the market climbs they loosen their standards to continue to make deals happen. Everyone claims to be underwriting conservatively, but if that were true cap rates would never compress. It’s precisely because the market as a whole justified loosening it’s standards that cap rates compress so much. (Low interest rates are a justification for, not the cause, of cap rate compression.) 

    At the top of the market, you have to get everything exactly right to have your deals work out as you planned. The looser an investor’s standards get as to what “works,” the greater the deviance from the plan they will end up with. At the extreme, deals bought at the top with too loose standards will go back to the bank. 

    The average investor’s perception of risk is backwards. When everyone is buying and prices are rising, they perceive risk to be low, which causes more people to jump in, raising prices further, and increasing risk. 

    Conversely, when the market nears the bottom, the risk is at its lowest. You can be most aggressive at this time. Cap rate compression as the market recovers will hide a lot of sins. You’ll often exceed your underwriting. 

    But at this point in the cycle, news of the crash is recent. And the casual investor believes risk is high. However, in fact, risk is at its lowest point. 

    The cap rate tells you everything. When cap rates for the asset in that market are at their cyclical low, risk is highest. When they are at their cyclical high, risk is lowest. 

    Anyway, that’s my view of things. Others will no doubt differ. 

  • Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    6y
    Originally posted by @Jonathan Twombly:
    Originally posted by @Ben Leybovich:
    Originally posted by @Ivan Barratt:

    LOL @Ben Leybovich I love your take. We're "dollar cost averaging" into more apartments as our portfolio is doing quite well here in the midwest.  Some smaller investors are skiddish but a lot of our higher net worth families are allocating more into workforce mfam.

    @Jonathan Twombly I hope you were putting in the bumpers previously as well. lol. The "strong hands" will be taking the "weak hands" that weren't previously underwriting cushion.

    In every market there's opportunity. Discipline is key.

     One thing is for certain, Ivan - we need to sit down over a good scotch. That much has been evident for a while, and it's surprising that it hasn't happened yet.

    The thing I just don't get is this. @Jonathan Twombly jump in. The guard rails are needed when? When the exposure to the downside is greater than the upside. This should mean that once you've come down far enough, and the exposure to further downside is limited relative to the upside, generally it's time to get aggressive, take the guardrails off, and practice focus investing. 

    Thus, I could understand you staying on the sidelines the last few years. I did not agree, but I understood that in your opinion the exposure to the downside was to heavy for the potential profit. However, at this time what you are needing to do is to time the bottom at a point where you feel an inversion of risk/reward.

    One problem with that is understanding what is the acceptable risk, and this is something I struggle with. Sounds like Ivan is not too sure either. So - what are the hurdles indicative of this reverse in your opinion. I mean aside for seeing pricing like what we saw in 2010. That aside, what do you need to see in order to pull the trigger?

    You’re exactly right. The further the market climbs the more conservative you need to be - but this is the opposite of what most people are doing. As the market climbs they loosen their standards to continue to make deals happen. Everyone claims to be underwriting conservatively, but if that were true cap rates would never compress. It’s precisely because the market as a whole justified loosening it’s standards that cap rates compress so much. (Low interest rates are a justification for, not the cause, of cap rate compression.) 

    At the top of the market, you have to get everything exactly right to have your deals work out as you planned. The looser an investor’s standards get as to what “works,” the greater the deviance from the plan they will end up with. At the extreme, deals bought at the top with too loose standards will go back to the bank. 

    The average investor’s perception of risk is backwards. When everyone is buying and prices are rising, they perceive risk to be low, which causes more people to jump in, raising prices further, and increasing risk. 

    Conversely, when the market nears the bottom, the risk is at its lowest. You can be most aggressive at this time. Cap rate compression as the market recovers will hide a lot of sins. You’ll often exceed your underwriting. 

    But at this point in the cycle, news of the crash is recent. And the casual investor believes risk is high. However, in fact, risk is at its lowest point. 

    The cap rate tells you everything. When cap rates for the asset in that market are at their cyclical low, risk is highest. When they are at their cyclical high, risk is lowest. 

    Anyway, that’s my view of things. Others will no doubt differ. 

     Jonathan - so essentially we agree. The only issue right now is that this conversation is purely theoretical until and unless we start buying again, at which point we will know what the buying criteria are. 

    It's apparent that you are looking for the bottom. I must assume that you are much too knowledgeable to try to time the cycle, which means you must have hurdles in mind when the risk equation is good enough to deploy.

    What are some of these hurdles you are looking for? Are you looking for your markets to trade at certain cap rates? What's that Delta you are looking for relative to 3 months ago? Or, are there other hurdles?

    Just trying to understand where a smart investor like you stands. Something concrete...

    Thanks!

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