And There's the Truth About Current Market!

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

This article in the Globe tells the absolute truth about what @Wendell De Guzman - do we buy into the upswing and thus speculate on the power of the wave (and in the process overpay relative to fundamentals), or do we continue to underwrite the exit based on fundamentals in the face of the reality that nobody cares about the fundamentals and in underwriting this way we, while ensuring safety fir our investors, are pricing ourselves completely and utterly out of the current market?

Thoughts?

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Joel OwensBusiness Member

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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes

11y

You can't blame brokers really.

Even the ones who know how to analyze numbers. If buyers are clamoring to buy property just to park money SAFELY in their eyes at high purchase levels then the brokers listing for the sellers are all for it.

Syndicates are a very tough nut to pull off. Back when the markets were frozen and you could pull cash together they were the golden child because lenders were not lending. Today too many direct buyers out there with a bunch of cash.

I can tell you what investors tell me. If they are foreign investors they want to park money in the United States. Our worst economy looks amazing compared to the countries they are in. Even though they might like or love their countries they do not want to hold their long term wealth there. Many countries are tightening money restrictions on their citizens flowing money into the U.S. so it's creating a frenzy for foreign investors to move money while they can. Also the U.S. dollar is strengthening from it's past position so foreign buyers want to capitalize on exchange rates while they can.

Another factor at play is the stock market. Fluctuations in earnings and returns for investors who already have a lot of money ( millions ) is not something they want to stomach. They like the idea of owning a commercial real estate asset with somewhat more predictable returns and corporate tenants.

With stock one day it can be worth 30 a share and the next 15 a share when something bad happens. With a physical asset in real estate you at least know what it is. With these stock companies you have to worry about what are they HIDING that you don't know about that will make values plunge.

It's a roller coaster ride many who are already wealthy do not want to take.

I still think there are properties out there that make sense to buy. For syndicators who have to price in extra returns above market conditions to make money for themselves it's a tough sell to sellers.

Think about a single property syndication in a sellers eyes. The syndicate doesn't want to put much down generally. They want more time then market averages from a standard buyer to close. They want outs in the contract because some of the investors might back out at the last second and they have to get back up investors or the deal falls apart on them. The price also has to be much lower to give the returns the investor wants and leave enough meat on the bone to make it worth the syndicators while. All of these factors making closing a deal less and less viable especially if the syndicator has unrealistic expectations in the marketplace.

For example if a syndicator says they want a B asset at a 10 cap then really they are not being very realistic. Their choice is to reassess how they can still do deals and make money in that asset class, buy another asset class at a different point in the cycle that is more advantageous to what they want to do, or wait for the asset class they are in to cycle down to do something ( could be 3,5,10 years - nobody knows for sure ).

Right now debt is really cheap with the oil prices falling. As people clamor to bonds, gold for security etc. the rates are going down. My commercial lenders tell me that once it drops to a certain point they will have a floor they will freeze the rate at. Anything below the floor they will not do a loan or will just wait for rates to go back up because at certain rates they loose money lending or selling off.

So those of you watching the commercial real estate markets and the rates dropping it will soon be at a point where it will not drop further in a lenders eyes. I personally think now is a good time to buy because many buyers come out in the summer time. I am seeing sellers wanting offers now on good properties. The interest rates have dropped 30 to 40 basis points but sellers have not adjusted and have even lowered asking prices. That can give a 100 basis swing in the buyers favor right away.

2015 is a buy year for me. I am looking at possibly setting up a fund myself.

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Steve Olafson
Scottsdale, AZ · Member since 2014 · 659 posts · 536 votes
11y
Do you have a link?
1 Reply
Ben Leybovich
OP
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
11y
@Steve Olafson - sorry - just fixed
1 Reply
Steve Olafson
Scottsdale, AZ · Member since 2014 · 659 posts · 536 votes
11y
You already know my thoughts on this. I'm not saying that the correct way is to stop buying. But I am doing so for a while.
1 Reply
Wendell De Guzman
Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes
11y
The answer is: "Be like Warren Buffett". During the tech boom in the late 1990s, Warren did not buy into the hype of the so-called "New Economy". The so-called experts called him "a has-been" because he missed all the gains other stock pickers and speculators have made.
Apartment real estate brokers in Austin TX called me names too and laughed at me when I asked for 8% cap rate properties. They told me that I don't understand the market and more sophisticated investors are buying at 4-5% cap. Forget it. I will not jump into the hype of "stupid money". Stupid money seems smart in the short term but as history has shown, jumping into the hype and forgetting the fundamentals is a recipe for disaster.
In a lot of markets, multi-family real estate markets are brewing bubbles waiting to POP! I am fearful when everyone are hyped up and I eagerly await that collapse and will buy when everyone are fearful.
10 Reply
Steve Olafson
Scottsdale, AZ · Member since 2014 · 659 posts · 536 votes
11y
@Ben Leybovich @Wendell De Guzman
Wouldn't it be nice if we could find lenders that went opposite the flow? The best times to buy are usually when the lenders have pulled back. It may be a bit of cause and effect. Lenders in their efforts to be cautious seem to hurt themselves.
5 Reply
Marian Smith
Real Estate Investor · Williamson County, TX · Member since 2011 · 1k+ posts · 961 votes
11y
Hey Ben,
I checked out your site...your article on flipping vs rental income...and I was wondering where you found something to indicate that "most people who own rentals actually lose money in the long run?" I have frequently read that over 1/2 of restaurants fail in the first year...but never anything on rentals. I know there are plenty of "alligators" out there, but I always assumed that the monthly outlay was recaptured at tax time.--you'd think that over time, with inflation on rents and property value combined with amortization, all but the most imprudent or unlucky investments would do just fine.
0 Reply
Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
11y
You can't blame brokers really.
Even the ones who know how to analyze numbers. If buyers are clamoring to buy property just to park money SAFELY in their eyes at high purchase levels then the brokers listing for the sellers are all for it.
Syndicates are a very tough nut to pull off. Back when the markets were frozen and you could pull cash together they were the golden child because lenders were not lending. Today too many direct buyers out there with a bunch of cash.
I can tell you what investors tell me. If they are foreign investors they want to park money in the United States. Our worst economy looks amazing compared to the countries they are in. Even though they might like or love their countries they do not want to hold their long term wealth there. Many countries are tightening money restrictions on their citizens flowing money into the U.S. so it's creating a frenzy for foreign investors to move money while they can. Also the U.S. dollar is strengthening from it's past position so foreign buyers want to capitalize on exchange rates while they can.
Another factor at play is the stock market. Fluctuations in earnings and returns for investors who already have a lot of money ( millions ) is not something they want to stomach. They like the idea of owning a commercial real estate asset with somewhat more predictable returns and corporate tenants.
With stock one day it can be worth 30 a share and the next 15 a share when something bad happens. With a physical asset in real estate you at least know what it is. With these stock companies you have to worry about what are they HIDING that you don't know about that will make values plunge.
It's a roller coaster ride many who are already wealthy do not want to take.
I still think there are properties out there that make sense to buy. For syndicators who have to price in extra returns above market conditions to make money for themselves it's a tough sell to sellers.
Think about a single property syndication in a sellers eyes. The syndicate doesn't want to put much down generally. They want more time then market averages from a standard buyer to close. They want outs in the contract because some of the investors might back out at the last second and they have to get back up investors or the deal falls apart on them. The price also has to be much lower to give the returns the investor wants and leave enough meat on the bone to make it worth the syndicators while. All of these factors making closing a deal less and less viable especially if the syndicator has unrealistic expectations in the marketplace.
For example if a syndicator says they want a B asset at a 10 cap then really they are not being very realistic. Their choice is to reassess how they can still do deals and make money in that asset class, buy another asset class at a different point in the cycle that is more advantageous to what they want to do, or wait for the asset class they are in to cycle down to do something ( could be 3,5,10 years - nobody knows for sure ).
Right now debt is really cheap with the oil prices falling. As people clamor to bonds, gold for security etc. the rates are going down. My commercial lenders tell me that once it drops to a certain point they will have a floor they will freeze the rate at. Anything below the floor they will not do a loan or will just wait for rates to go back up because at certain rates they loose money lending or selling off.
So those of you watching the commercial real estate markets and the rates dropping it will soon be at a point where it will not drop further in a lenders eyes. I personally think now is a good time to buy because many buyers come out in the summer time. I am seeing sellers wanting offers now on good properties. The interest rates have dropped 30 to 40 basis points but sellers have not adjusted and have even lowered asking prices. That can give a 100 basis swing in the buyers favor right away.
2015 is a buy year for me. I am looking at possibly setting up a fund myself.
Podcast Guest on Show #47
NNN Invest53 Reviews
Website View Page
11 Reply
Mark Ferguson
Flipper/Rehabber · Greeley, CO · Member since 2013 · 2k+ posts · 1k+ votes
11y
I think the problem is exactly what the article stated. The buyers have different goals than what traditional US investors goals are. They aren't looking for amazing returns on their money they are looking for a more stable place to park their money than their own real estate markets which are even harder to make money in.
The problem with waiting for a collapse and why we are in a different place now than we were is the cash factor. Many of these foreign investors and hedge fund buyers are using cash to buy. They aren't using 5% down investment loans that were used in early 2000's. If they are using cash we won't see a huge influx of foreclosures, because there are no loans.
It sucks for the big apartment guys, but look at Australia they have been waiting for a crash for years and prices just keep rising because of all the foreign cash coming into the market.
2 Reply
Ben Leybovich
OP
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
11y
@Mark Ferguson - there will be foreclosures. You are thinking as an SFR investor. In that space many investors are using cash. In apartment sector, MBS is sky high...
2 Reply
Ben Leybovich
OP
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
11y
@Marian Smith - there will never be any statistic around this. You know why - because people aren't sophisticated enough to even know that they are loosing value in the long run. The most we can wrap our heads around is CCR, which says nothing of the real story over a period of time...
Most people think they are making money...ignorance is bliss :) The only way you can buy a building now days is based on Pro Forma. You know why - cause most buildings are loosing money or earning so little that it's impossible to underwrite any value based on the actuals.
You can make money with apartments, but you have to know a whole hell of a lot...
Care to comment on this, @Serge S.
0 Reply
Steve Olafson
Scottsdale, AZ · Member since 2014 · 659 posts · 536 votes
11y
Originally posted by @Mark Ferguson:

The problem with waiting for a collapse and why we are in a different place now than we were is the cash factor.
Not waiting for a collapse... just waiting for some of the frenzy to slow. Right now even distressed deals are selling for high prices.
0 Reply
Steve Olafson
Scottsdale, AZ · Member since 2014 · 659 posts · 536 votes
11y
Originally posted by @Ben Leybovich:

The most we can wrap our heads around is CCR
Credence Clearwater Revival!!! I can wrap my head around that! (dating myself with this comment)
9 Reply
Mark Ferguson
Flipper/Rehabber · Greeley, CO · Member since 2013 · 2k+ posts · 1k+ votes
11y
Originally posted by @Ben Leybovich:

@Mark Ferguson - there will be foreclosures. You are thinking as an SFR investor. In that space many investors are using cash. In apartment sector, MBS is sky high...
Most foreign investors are using cash as well when buying apartments right? It is not exactly easy for a foreign investor to get a 2 million dollar loan.
I found this article that shows a steady increase in MBS, but nothing significant over the last 7 years. It was from the 2014 so a little dated. Do you have more info on it? http://www.mba.org/files/Research/CommercialServicing/Q114CMFDebtOutstanding.pdf
0 Reply
Ben Leybovich
OP
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
11y
MBS is higher than the last bubble. But, you're right, a lot more foreign cash in the market, @Mark Ferguson .
0 Reply
Steve Olafson
Scottsdale, AZ · Member since 2014 · 659 posts · 536 votes
11y
I sold a property recently to a group from Japan. The sponsor was a US citizen and he secured the loan.
0 Reply
Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
11y
Purchase of real estate that doesn't have fundamentals to support it is nothing more than trying to time the market. But doing it with debt is trying to time a market with a loaded gun to your head - Yikes! I'm hearing the exact same mantras I was hearing in 2004 - 2006. I was hoping I wouldn't hear them for another year or so.
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Ned CareyPro Member
Moderator
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
11y
Thanks for the heads up @Ben Leybovich
I have been saying this for a while. Most commercial investors have no idea of the risk they are taking by buying at low cap rates.
From the article
How stupid. Buying at historically low cap rates means NOI has to increase significantly just to hold value even as cap rates eventually return to historical norms. This is a phenomenal risk that so many seem to be clueless about. Cap rates WILL rise to historic norms which means values will drop.
Inflation may help leveraged deals as the cost of the borrowed dollar becomes less significant. Of course it could backfire as rapid inflation causes expenses to rise faster than rents.
Cash buyers won't lose principal as they are able to hold on until prices recover or inflation bails them out. However their inflation adjusted returns maybe zero.
The great thing about predictions of inflation or recession is they all come true eventually.
I am predicting both . . . eventually
2 Reply
Ned CareyPro Member
Moderator
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
11y
Originally posted by @Marian Smith:

Hey Ben,
I checked out your site...your article on flipping vs rental income...and I was wondering where you found something to indicate that "most people who own rentals actually lose money in the long run?" I have frequently read that over 1/2 of restaurants fail in the first year...but never anything on rentals. I know there are plenty of "alligators" out there, but I always assumed that the monthly outlay was recaptured at tax time.--you'd think that over time, with inflation on rents and property value combined with amortization, all but the most imprudent or unlucky investments would do just fine.
Marian,
Perhaps not as fast as restaurants but it takes about three years for the average landlord to become "burnt out". Yes rents inflate over time but so do expenses.
Most new investors greatly underestimate the true cost of expenses and consequently lose money because they bought deals they thought would be profitable but were doomed to failure from the beginning. Poor management can make the vacancy and expense problem worse.
Inflation can bail you out IF you can hang on long enough. Also while inflation may seem to help, If you can brake even after 5 years then you have lost a lot of money in "Inflation Adjusted" dollars.
1 Reply
Cal C.
Investor · Peachtree Corners, GA · Member since 2014 · 1k+ posts · 1k+ votes
11y
Sorry if someone else said this, but I think what they are looking for is safety with the chance of appreciation. To use Dennis Gartman terminology they are long RE in US dollar terms. They are seeking the stability of the dollar but are looking for higher yields than treasuries. Even a 3% return for them is vastly superior to the 1.88% they would be getting on the ten year (with a threat of rising interest rates lowering their bond price). This is certainly much different than investors in the US looking for 7% or better or their money.
1 Reply
Mike HurneyPro Member
Real Estate Investor · Boston, MA · Member since 2009 · 2k+ posts · 542 votes
11y
Go to Bruce Norris. He's way ahead of us and always right!
1 Reply
Aaron Norris
Lender · California and Florida · Member since 2008 · 319 posts · 194 votes
11y
Thank for the plug Mike! Actually, our last three radio shows are pretty interesting because it talks a little more about a global perspective. Guests are Eric Janszen with iTulip and Harry Dent. Mr. Dent, is always a big interest in our network, at least out here in California it seems. He goes into what he thinks about China. Yikes! His expertise is in demographics which always adds a very interesting layer. I just started listening to the second show which will get more into his predictions. We're on iTunes.
1 Reply
Roy N.Pro Member
Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
11y
@Ben Leybovich
Ahhh yes, the current market. I'm in the @Steve Olafson camp and am making popcorn and settling in for the big show.
Our latest offer was received with a smile. I went through the trouble of providing the Vendor with a copy of our analysis of his business (property), the local area, and how we derived our offer from that information. We were almost 500K below ask. The Vendor agreed with our analysis; told us our offer was fair, but is certain that someone will come along and pay his price. Based on the past year, he's probably correct.
3 Reply
Steve Olafson
Scottsdale, AZ · Member since 2014 · 659 posts · 536 votes
11y
Originally posted by @Mike Hurney:
Go to Bruce Norris. He's way ahead of us and always right!
Please elaborate!
Is there a connection between Aaron Norris and Bruce Norris?
0 Reply
Ned CareyPro Member
Moderator
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
11y
@Aaron Norris Harry Dent has been amazingly accurate in his predictions. However I think he has been plain lucky,. When you look at his predictions in hind site, the REASON for the result does not match the reason for his prediction.
He is still intersting to follow though.
0 Reply
Ben Leybovich
OP
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
11y
1. Any talk of the US dollar loosing its status as world currency of last resort is just absurd. They are all running here, because what else is there...?!
2. @Aaron Norris - I am a fan Harry Dent. Would you mind sharing the link, please?
3. It's really an interesting dynamic out there boys and girls. We all know it's inflated as hell. And yet, most of us think it'll go on for a while yet. None of us want to speculate into the up market, but that means we'll be sitting on the sidelines potentially for years. The marketplace stopped making fundamental sense about 18 months ago, and it's steaming along... Crazy stuff going on out there. We need @Brian Burke to splain this to us :)
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And There's the Truth About Current Market!

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The great thing about predictions of inflation or recession is they all come true eventually.