Syndication Investing During a Recession

Multi-Family and Apartment Investing
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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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Greg Dickerson
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. 

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  • Jonathan Twombly
    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 @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!

    Of course! You can’t time the absolutely bottom.  You can only know it happened in retrospect. 

    I will be looking for deals where I can pay my investors and 8% pref and 2% to myself from year one without having to do a value add or raise rents aggressively to get there.  That where we were in 2013, when I really got traction - several years into the last recovery so not the absolute bottom.

    If I’m going to put investor money at risk to do a value add play, then I want to receive a premium in return for the risk. Not like recently, where people were paying the after value add price and then having to take the risk of doing the value add to get to their 8 pref - or maybe just to get to a 6-pref. 

    Don’t know if we will get there. If we don’t I will have to adjust. But that’s what I will be looking for. 

    2Reply
  • Ben Leybovich
    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 @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!

    Of course! You can’t time the absolutely bottom.  You can only know it happened in retrospect. 

    I will be looking for deals where I can pay my investors and 8% pref and 2% to myself from year one without having to do a value add or raise rents aggressively to get there.  That where we were in 2013, when I really got traction - several years into the last recovery so not the absolute bottom.

    If I’m going to put investor money at risk to do a value add play, then I want to receive a premium in return for the risk. Not like recently, where people were paying the after value add price and then having to take the risk of doing the value add to get to their 8 pref - or maybe just to get to a 6-pref. 

    Don’t know if we will get there. If we don’t I will have to adjust. But that’s what I will be looking for. 

    Thank you for that. I understand your perspective now. It'll be interesting to see how things evolve, but clearly for you to achieve those hurdles there will have to be monumental discounts, much like a decade back. In which case, good for all of us.

    Let's keep chatting.

    0Reply
  • Mary M.
    Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
    6y

    I love sitting in the corner listening to folks talk.  Lots way over my head, but learning a ton.  So thank you to all participating in this discussion. 

    I was "lucky" in that I sold right when C19 hit.... so smart, right? Ha! Well then I needed to buy an upleg. That has been interesting to say the least. 

    Luckily for me the sellers made some errors and we fell out of contract, then back in with a nice C19 pricing discount. 

    I guess my point is - sometimes you dont get a choice - you get to ride the wave,  ensure you have reserves, and see what happens. 

    0Reply
  • Ivan BarrattBusiness Member
    Investor · Indianapolis, IN · Member since 2015 · 764 posts · 953 votes
    6y

    @Jonathan Twombly

    cc @Ben Leybovich

    Question: what happens to cap rates in multifamily that's performing well (occupancy, collections, rent growth) through the pandemic AND interest rates are ~150bps lower AND there's 6 trillion more in currency floating around?? My theory: pricing will actually rise as it will with other assets, the stock market, etc. 

    Yes, there will be some opportunities to pick off poorly executed real estate as well but if anyone is waiting to pick up B property at an 8 cap; they're simply playing the game like it's 2008 again. It's not. This black swan is different. There's an ocean of capital in the world looking for a home!

    My All Weather Portfolio:

    • 3,500 (and likely growing with more deal flow now!) B+/A- Apartments in the Midwest (Tortoise vs Hare markets with steady growth).
    • Operating Company: vertically integrated management firm to execute the biz plan on the apartment portfolio
    • CASH
    • GOLD - insurance hedge
    • Crypto - insurance hedge
    • Buying into the S&P for the first time in 20 years. Stock Market "melt up" hasn't happened yet.
    5Reply
  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    6y
    Originally posted by @Ivan Barratt:

    @Jonathan Twombly

    cc @Ben Leybovich

    Question: what happens to cap rates in multifamily that's performing well (occupancy, collections, rent growth) through the pandemic AND interest rates are ~150bps lower AND there's 6 trillion more in currency floating around?? My theory: pricing will actually rise as it will with other assets, the stock market, etc. 

    Yes, there will be some opportunities to pick off poorly executed real estate as well but if anyone is waiting to pick up B property at an 8 cap; they're simply playing the game like it's 2008 again. It's not. This black swan is different. There's an ocean of capital in the world looking for a home!

    My All Weather Portfolio:

    • 3,500 (and likely growing with more deal flow now!) B+/A- Apartments in the Midwest (Tortoise vs Hare markets with steady growth).
    • Operating Company: vertically integrated management firm to execute the biz plan on the apartment portfolio
    • CASH
    • GOLD - insurance hedge
    • Crypto - insurance hedge
    • Buying into the S&P for the first time in 20 years. Stock Market "melt up" hasn't happened yet.

    @Ivan Barratt - well said. I agree. 

    4Reply
  • Jonathan Twombly
    Rental Property Investor · Brooklyn, NY · Member since 2014 · 722 posts · 1k+ votes
    6y
    Originally posted by @Ivan Barratt:

    @Jonathan Twombly

    cc @Ben Leybovich

    Question: what happens to cap rates in multifamily that's performing well (occupancy, collections, rent growth) through the pandemic AND interest rates are ~150bps lower AND there's 6 trillion more in currency floating around?? My theory: pricing will actually rise as it will with other assets, the stock market, etc. 

    Yes, there will be some opportunities to pick off poorly executed real estate as well but if anyone is waiting to pick up B property at an 8 cap; they're simply playing the game like it's 2008 again. It's not. This black swan is different. There's an ocean of capital in the world looking for a home!

    My All Weather Portfolio:

    • 3,500 (and likely growing with more deal flow now!) B+/A- Apartments in the Midwest (Tortoise vs Hare markets with steady growth).
    • Operating Company: vertically integrated management firm to execute the biz plan on the apartment portfolio
    • CASH
    • GOLD - insurance hedge
    • Crypto - insurance hedge
    • Buying into the S&P for the first time in 20 years. Stock Market "melt up" hasn't happened yet.

    Capital doesn’t move simply because it’s there sitting in a bank account. 

    All the capital on the sidelines is there because there were no uses for it deemed to generate sufficient opportunity with more upside and less risk than cash. 

    The money has accumulated in anticipation of a crash, when bargains appear. It won’t move until the perception is that the market is nearing a bottom. It will be looking for bargains. 

    It will not move if the common belief is that the bottom has not been reached and patience will be rewarded with bigger bargains.

    Right now it’s too early to say exactly what will happen. But in my opinion most of the sidelines money will not enter the market to support high prices. It will not enter the market simply because borrowing costs are low. It will not enter the market if it believes the market still has substantial downside risk, unless assets can be acquired at such a discount that they can absorb that further downside risk. The money will move when it appears advantageous to move, and not before. 

    7Reply
  • Alex Sabio
    Investor · Fontana, CA · Member since 2017 · 95 posts · 59 votes
    6y

    @Brian Burke I’m so excited to start investing in MF. I invested passively in my first deal last month.

    2Reply
  • Jay Helms
    Rental Property Investor · Gulf Breeze, FL · Member since 2014 · 1k+ posts · 733 votes
    6y

    Very trendy topic @Brian Burke. Thanks for starting it. 

    0Reply
  • Max Versteppen
    Member since 2020 · 113 posts · 33 votes
    6y

    During a recession, you might be inclined to give up on stocks, but experts say it's best not to flee equities completely. ...

    Reliable Dividend Stocks. Investing in dividend stocks can be a great way to generate passive income. ...

    Real Estate. ...

    Precious Metals. ...

    Invest in Yourself.

    0Reply
  • Ivan BarrattBusiness Member
    Investor · Indianapolis, IN · Member since 2015 · 764 posts · 953 votes
    6y
    @Jonathan Twombly agree there's vulture/opportunistic money on the sidelines that's not moving into the space. There's likely more there now than previously. However; that sort of capital is a mere fraction of the all the capital that exists. There's still hundreds of billions; if not more, floating around the world looking for a safe home.  THAT capital will reinforce a pricing floor on "safe" assets with meaningful risk adjusted returns. The price of financial assets isn't going down with QE infinity; it's going up.  The Fed and all major central banks will do whatever they have to do to slowly (hopefully not quickly) devalue your mattress money because if they don't; welcome to a new dark age.

    Lesson: don't bet against central banks. :)

    Originally posted by @Jonathan Twombly:
    Originally posted by @Ivan Barratt:

    @Jonathan Twombly

    cc @Ben Leybovich

    Question: what happens to cap rates in multifamily that's performing well (occupancy, collections, rent growth) through the pandemic AND interest rates are ~150bps lower AND there's 6 trillion more in currency floating around?? My theory: pricing will actually rise as it will with other assets, the stock market, etc. 

    Yes, there will be some opportunities to pick off poorly executed real estate as well but if anyone is waiting to pick up B property at an 8 cap; they're simply playing the game like it's 2008 again. It's not. This black swan is different. There's an ocean of capital in the world looking for a home!

    My All Weather Portfolio:

    • 3,500 (and likely growing with more deal flow now!) B+/A- Apartments in the Midwest (Tortoise vs Hare markets with steady growth).
    • Operating Company: vertically integrated management firm to execute the biz plan on the apartment portfolio
    • CASH
    • GOLD - insurance hedge
    • Crypto - insurance hedge
    • Buying into the S&P for the first time in 20 years. Stock Market "melt up" hasn't happened yet.

    Capital doesn’t move simply because it’s there sitting in a bank account. 

    All the capital on the sidelines is there because there were no uses for it deemed to generate sufficient opportunity with more upside and less risk than cash. 

    The money has accumulated in anticipation of a crash, when bargains appear. It won’t move until the perception is that the market is nearing a bottom. It will be looking for bargains. 

    It will not move if the common belief is that the bottom has not been reached and patience will be rewarded with bigger bargains.

    Right now it’s too early to say exactly what will happen. But in my opinion most of the sidelines money will not enter the market to support high prices. It will not enter the market simply because borrowing costs are low. It will not enter the market if it believes the market still has substantial downside risk, unless assets can be acquired at such a discount that they can absorb that further downside risk. The money will move when it appears advantageous to move, and not before. 

    4Reply
  • Jonathan Twombly
    Rental Property Investor · Brooklyn, NY · Member since 2014 · 722 posts · 1k+ votes
    6y
    Originally posted by @Ivan Barratt:
    @Jonathan Twombly agree there's vulture/opportunistic money on the sidelines that's not moving into the space. There's likely more there now than previously. However; that sort of capital is a mere fraction of the all the capital that exists. There's still hundreds of billions; if not more, floating around the world looking for a safe home.  THAT capital will reinforce a pricing floor on "safe" assets with meaningful risk adjusted returns. The price of financial assets isn't going down with QE infinity; it's going up.  The Fed and all major central banks will do whatever they have to do to slowly (hopefully not quickly) devalue your mattress money because if they don't; welcome to a new dark age.

    Lesson: don't bet against central banks. :)

    Originally posted by @Jonathan Twombly:
    Originally posted by @Ivan Barratt:

    @Jonathan Twombly

    cc @Ben Leybovich

    Question: what happens to cap rates in multifamily that's performing well (occupancy, collections, rent growth) through the pandemic AND interest rates are ~150bps lower AND there's 6 trillion more in currency floating around?? My theory: pricing will actually rise as it will with other assets, the stock market, etc. 

    Yes, there will be some opportunities to pick off poorly executed real estate as well but if anyone is waiting to pick up B property at an 8 cap; they're simply playing the game like it's 2008 again. It's not. This black swan is different. There's an ocean of capital in the world looking for a home!

    My All Weather Portfolio:

    • 3,500 (and likely growing with more deal flow now!) B+/A- Apartments in the Midwest (Tortoise vs Hare markets with steady growth).
    • Operating Company: vertically integrated management firm to execute the biz plan on the apartment portfolio
    • CASH
    • GOLD - insurance hedge
    • Crypto - insurance hedge
    • Buying into the S&P for the first time in 20 years. Stock Market "melt up" hasn't happened yet.

    Capital doesn’t move simply because it’s there sitting in a bank account. 

    All the capital on the sidelines is there because there were no uses for it deemed to generate sufficient opportunity with more upside and less risk than cash. 

    The money has accumulated in anticipation of a crash, when bargains appear. It won’t move until the perception is that the market is nearing a bottom. It will be looking for bargains. 

    It will not move if the common belief is that the bottom has not been reached and patience will be rewarded with bigger bargains.

    Right now it’s too early to say exactly what will happen. But in my opinion most of the sidelines money will not enter the market to support high prices. It will not enter the market simply because borrowing costs are low. It will not enter the market if it believes the market still has substantial downside risk, unless assets can be acquired at such a discount that they can absorb that further downside risk. The money will move when it appears advantageous to move, and not before.  

     If the Fed can waive its magic wand and support asset prices at will, then why did the Fed this very morning warn about asset prices potentially tanking? This includes commercial real estate. 

    If the Fed can control asset prices, it seems to me there’s no need for this warning. All it needs to do is take its magical action. 

    Low interest rates cannot make people invest if they don’t think the investment is worthwhile or they believe asset prices are still falling. 

    Low interest rates and tons of liquidity and cash on the sidelines did not prevent the last crash. They did not prevent cap rates from expanding as investors demanded higher risk premiums. Eventually they did fuel an overpriced market in all asset classes, but that took several years. 

    As an aside, I find it rich that the Fed, whose low interest rate policies were directly responsible, saying in its warning this morning that asset prices were higher than justified by the fundamentals before Covid. 

    2Reply
  • Ivan BarrattBusiness Member
    Investor · Indianapolis, IN · Member since 2015 · 764 posts · 953 votes
    6y

    @Jonathan Twombly again I thinking you're painting with too big a brush. I'm speaking to A and B apartments in non-boom/non-red hot markets (think most of the rest country outside of CA, NY). If we're talking retail and office commercial real estate I'm with you. :)

    2008 WAS a crisis of liquidity. Today it's a healthcare crisis and there's vastly more liquidity than in 08.

    Time will tell I guess. In the meantime I'm turning future toilet paper, I mean US currency into income producing, apartments in markets where people need a roof and can pay for it. Return Targets: 2 - 2.5x in 5 to 7 years with conservative underlying leverage to reduce downside risk.

    Happy to count our respective chips in 5 years and see who did better. :)

    4Reply
  • Ricardo A Perez
    Hollywood Florida · Member since 2019 · 90 posts · 46 votes
    6y

    As an inspiring new investor i hope to join some syndication's in the future i am very hopeful for the lessons i will learn during this down turn. i am watching,reading and learning. 

    0Reply
  • Shina Franklin
    Member since 2020 · 3 posts · 0 votes
    6y

    Is syndicating the road to take to get started in real estate if you don't have much funds or experience in the business, especially living in the bay area?

    0Reply
  • Austin Mudd
    Real Estate Agent · Los Angeles, CA · Member since 2015 · 149 posts · 75 votes
    6y
    Originally posted by @Ivan Barratt:

    @Jonathan Twombly

    cc @Ben Leybovich

    Question: what happens to cap rates in multifamily that's performing well (occupancy, collections, rent growth) through the pandemic AND interest rates are ~150bps lower AND there's 6 trillion more in currency floating around?? My theory: pricing will actually rise as it will with other assets, the stock market, etc. 

    Yes, there will be some opportunities to pick off poorly executed real estate as well but if anyone is waiting to pick up B property at an 8 cap; they're simply playing the game like it's 2008 again. It's not. This black swan is different. There's an ocean of capital in the world looking for a home!

    My All Weather Portfolio:

    • 3,500 (and likely growing with more deal flow now!) B+/A- Apartments in the Midwest (Tortoise vs Hare markets with steady growth).
    • Operating Company: vertically integrated management firm to execute the biz plan on the apartment portfolio
    • CASH
    • GOLD - insurance hedge
    • Crypto - insurance hedge
    • Buying into the S&P for the first time in 20 years. Stock Market "melt up" hasn't happened yet.

    Multifamily pricing doesn't currently reflect what happens when all of the pandemic related government spending runs dry. Lots of who are unemployed are taking home much more money from unemployment than they were pre-covid. That money is helping to pay for rent.

    I'm seeing it first hand with a 200+ unit project in DFW I'm involved in. Even though collections have been very strong, occupancy has started to slowly decline and renewals are coming in 5-10% lower than in-place rents. That's a drop in income that hits the NOI and reduces value. Not to mention the adjustment investors will underwrite new acquisitions and the cap rates appraisers will assign. And don't forget, there are not many transactions happening right now. When those properties finally transact at lower values, those will be the new sales comps.

    It's too early to make any conclusions where the market is going.

    3Reply
  • Daniel Han
    Investor · Member since 2019 · 74 posts · 70 votes
    6y

    @Shina Franklin

    to participate in syndication, you need to be an accredited investor in general. $1M asset excluding primary residence or $200k income in the last couple of years if you are single, $300k if you are married. I found that many have a $50k minimum investment. it depends on what you mean by "much funds". these might be easy requirements if you are living in the bay area comfortably.

    0Reply
  • Jonathan Twombly
    Rental Property Investor · Brooklyn, NY · Member since 2014 · 722 posts · 1k+ votes
    6y

    @Ivan Barratt


    The institutional with the cash are not looking for 5% discounts or to "support the market" because they have nothing better to do with their cash.  They are looking for big bargains and won't move until they see them.  In my experience, investors are not in the business of altruistically supporting the market at inflated prices when they believe it's not the best use of their money.  See today's National Real Estate Investor.  https://www.nreionline.com/dis...

    @Ivan Barratt

    3Reply
  • Damian Smith
    Developer · Marlton, NJ · Member since 2019 · 44 posts · 8 votes
    6y

    looking to get with folks in the Philly area & surrounding areas for multifamily housing.

    I personally think you have to analysis each deal individually and see if it makes sense 

    No matter what asset class there will be winners or losers be conservative right now

    0Reply
  • Brian Briscoe
    Real Estate Coach · Salt Lake City, UT · Member since 2017 · 273 posts · 414 votes
    6y
    I wish I had bought 120 homes post-recession last time around. I did buy two and turned $250k in profit in a few years. I wish I had figured out the OPM piece of the puzzle at that point in my life... This recession is a bit different. We are optimistically moving forward on an 80-unit property that we had under contract pre-COVID shutdown. We had no problem raising money and intentionally brought in more than our target. Of course, we revised our projections, but we had already set our vacancy/concessions/loss at a few points higher than market and the rent escalation at 1% for the first year and 2% for the following. End of the day, I'm confident that we've been conservative in our estimates, and that over time, multifamily investments well still be strong. @brian burke - I am very appreciative of your posts as they add value and bring perspective during this time of uncertainty.
    1Reply
  • Austin Mudd
    Real Estate Agent · Los Angeles, CA · Member since 2015 · 149 posts · 75 votes
    6y
    Originally posted by @Brian Briscoe:

    I wish I had bought 120 homes post-recession last time around. I did buy two and turned $250k in profit in a few years. I wish I had figured out the OPM piece of the puzzle at that point in my life...

    This recession is a bit different. We are optimistically moving forward on an 80-unit property that we had under contract pre-COVID shutdown. We had no problem raising money and intentionally brought in more than our target. Of course, we revised our projections, but we had already set our vacancy/concessions/loss at a few points higher than market and the rent escalation at 1% for the first year and 2% for the following.

    End of the day, I'm confident that we've been conservative in our estimates, and that over time, multifamily investments well still be strong.

    @brian burke - I am very appreciative of your posts as they add value and bring perspective during this time of uncertainty.

    Would you mind sharing some deal points? What's the business plan? Going in cap-rate, unit basis, etc.? How have collections been on this property in April/June?

    1Reply
  • Brian Briscoe
    Real Estate Coach · Salt Lake City, UT · Member since 2017 · 273 posts · 414 votes
    6y

    @Austin Mudd

    Collections for April show it was the best month in the last 12 for both occupancy and collections... Crazy, I know.

    Previous owner refinanced last year - complex appraised for $300k more than we're paying for it.  Long story, but we got a good deal.  We are assuming the loan, so are not largely affected by the volatility in the lending market (we were affected by their teleworking policy as it's taken a long time to get approved).

    It's an 80-unit complex with 72 units that are leasable. Occupancy is currently ~95% (not including the down units). First order of business will be to bring those 8 units back online, which will average about $15k per unit. They're in varying states of disrepair... Just bringing those online will increase our NOI by roughly 12%.

    We have money budgeted for an exterior facelift - painting, resealing asphalt, landscaping, etc.  We have another pot set aside for more interior improvements.  About half of the remaining units will get new laminate counters, floors, cabinet doors, and paint.  The other half will get less because they've been recently updated.  We'll keep a good portion of our overall cap-ex budget in the bank until the world has adapted to COVID though.  Of course we have a few months of reserves in the bank too.

    Going in cap rate?  I don't know.  It's not a figure that I track very well.  We're using 7-cap as our exit.  Per unit - we're paying about $15k less per unit than one that went under contract a few blocks away.  That one has townhome style units that are bit larger, but our property looks nicer and has a lot more open green space. Amenities are about the same.

    Overall, we'll have a ton of cash at closing and will cash flow just fine out the gate.  

    0Reply
  • Brian Briscoe
    Real Estate Coach · Salt Lake City, UT · Member since 2017 · 273 posts · 414 votes
    6y
    Originally posted by @Greg Dickerson:

    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. 

    Took me a month to get to this thread, but thanks for this post - lots of gold nuggets.  I really appreciate you for taking the time to write that down.  As someone who's newer in the game (first investment property was 2007), I've heard over and over again that cash is king.  It's extremely helpful to read a brief summary of your experience during the last downturn, how your strong cash position saved your skin, and now to hear your perspective on this one... Thanks again.

    0Reply
  • Julia Bykhovskaia
    Rental Property Investor · New York City, NY · Member since 2017 · 93 posts · 101 votes
    6y

    @Jonathan Twombly That NREI article you posted (and the original one in WSJ) talked about lodging/retail/senior housing CRE. Those industries are going through a secular change. It didn't talk about multifamily - cyclical decline. Multifamily prices will adjust (due to lower NOIs and less attractive financing terms), no doubt - but it is NOT likely to be 2008 kind of a meltdown. I agree with @Ivan Barratt and believe that those who insist on 30%+ discounts when they might not be warranted (cash flow is still there albeit slightly lower; relative risk is attractive, capital is looking for home) will simply miss the opportunity to invest/grow their portfolios.

    1Reply
  • Duke Giordano
    Investor · Passiveadvantage.com · Member since 2019 · 166 posts · 91 votes
    6y

    For those operators who feel there is nothing to worry about from a multi-family standpoint, and all is well in the MF world you may truly be right.  I actually hope you are right...

    However, if you could please answer me then a few fundamental questions:

    1. Why is it that you think the non-agency debt and lending has dried up?  Hard money loans are more difficult to come by and rates are inflated?

    2. Why is it that agency debt now requires 9-12 month reserves, debt to income requirements more strict?

    3. Why is it that some operators have frozen LP distributions or decreased them at this time (I know there are some GP who still are distributing at least for now, I am simply stating that many are not)?

    My answer to my own question comes down to RISK.  Its that simple, and the fact of the matter is that risk is not currently priced into deals as some people still living in the Pre-COVID world.  Thus, one of two things need to happen for the deal to work.  Either sellers will eventually need to price in the aforementioned RISK, or that perception of that risk will eventually go away.  As of now, my questions above outline why it is still very much here.

    0Reply
  • Chris Salerno
    Rental Property Investor · Charlotte NC · Member since 2019 · 306 posts · 183 votes
    6y

    We are still sourcing deals and underwriting new ones. 

    You have to stay positive during times like this. Good deals are out there. 

    0Reply
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