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

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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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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
11y
@Steve Olafson
father = Bruce Son = Aaron
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Dana WhickerPro Member
Investor · Fernandina Beach, FL · Member since 2014 · 557 posts · 374 votes
11y
This thread is the reason why I read this forum. Yeah, the dollar is still the best game in town, despite the efforts to screw it up, it's actually better than it's been in a generation. International money is escaping to safety.
How about this food for thought - if a nation were to have a somewhat rational central bank, relatively friendly business environment, relative safety from terrorist fuelled disruption, and to become a world leader in energy production, would you want to invest there?
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Ben Leybovich
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Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
11y
Haha @Dana Whicker - nice :)
Guys like those on this thread is why I continue to write...
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Account Closed
Minneapolis, MN · Member since 2014 · 332 posts · 288 votes
11y
You also have to keep in mind the size of these buyers and the fact that most are not using their own money. Institutional funds are able to raise money hand over fist right now for US multifamily. Funds are designed to raise and then spend money. If they raise $500M, they need to o spend it and will continue to buy no matter where things are in the cycle. Yields have been compressed so far on the coasts that we're seeing these funds target the Midwest in their search for yield, which is a new phenomenon. Also, when you are a small syndicator, one bad deals can end you. When you are $500M equity fund, it's a blip on the radar.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
11y
@Ben Leybovich
Ben not sure about the stupid money comment.. One of my clients I sold a 80 unit multi here in PDX a few years back at a solid 5.5 cap. and he just bought the 40 next to him at a 5 cap... Hard to call cash buyers stupid... But when you take on debt one needs to be more diligent of course. As well as the asset class. One thing you will not see here on the West coast is boarded up Multi's like you will in the MId west.. Owners failing is just not in the cards here but these properties were never sold for high cap rates.. and the tenant pool is predictable and easy to manage..
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Ben Leybovich
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Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
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Hell, @Account Closed ?
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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@Ben Leybovich
I got my threads crossed I was commenting on your stupid comment on the 30k mid west Pigs... sorry bout that.. But I do agree with you on that one.
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Ben Leybovich
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Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
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@Jay Hinrichs - I understand you've just undertaken a world tour...how are things?
And, I don't know how to make money at 5.5 cap. I understand 7.5 with a compelling upside story, but 5.5 is beyond any logic that I get. Set me straight...
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Account Closed
Minneapolis, MN · Member since 2014 · 332 posts · 288 votes
11y
Ben Leybovich the people that are buying low 5 caps are typically using floating rate debt which still gives them a 200-300 bps spread over their cost of debt
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
11y
@Ben Leybovich
I don't know either I just collect my commission take them to 500 dollar dinner pop for a bottle of Joseph Phelps Insignia and call it a day and a transaction. For these folks its just about cash flow and no head aches.. professional management a month cash flow NO debt. the 80 unit one I think they paid 4.5 for cash.. on site manager and 4% management fee on top of that. 100% full most of the time. The one next door same scenario. And get this... they bought in Vegas in 01 and sold in 06 at the peak and 1031 into PDX.. the Vegas property tanked PDX has just held its value. as cap rates remain the same.. I think investors like our market for the safety and security.. Much like those investing in the BAy Area. And unlike most places the cap rates are real..
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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@Account Closed
these clients own all their real estate free and clear. And they live in Honolulu and own a lot of commercial there along with the mall in Wailuku Maui... all of it paid for .. they like PDX because its one straight flight and they like the town.. They love the manager and of course they have my wife and I here as well LOL. We visit them 2 times a year in Hawaii and its fun times.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
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@Ben Leybovich
on the road 14 of the last 18 days.. got a nasty head cold yesterday in Mississippi... but back to the rain and grey of PDX. all is well in my markets.
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Mark UpdegraffBusiness Member
Real Estate Broker · Rochester, NY · Member since 2010 · 1k+ posts · 706 votes
11y
Originally posted by @Ben Leybovich:

I guess I'll have to start flipping houses and doing turn-keys for $30,000/pop and make a killing on management...hahaha
What do you think of my plan, @Ned Carey ?
This is my plan! Though, I won't do the 30k - it needs to be 50k or I won't touch it. I'm looking at a commercial property now and won't be too bothered by the cap rate but I know the area and will bring other strong tenants with me. I'm finalizing the pro forma now and walking the property again tomorrow.
Great thread!
Mark
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Ned CareyPro Member
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Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
11y
Originally posted by @Ben Leybovich:

Haha @Dana Whicker - nice :)
Guys like those on this thread is why I continue to write...
Writers like you are why I continue to read.
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Cal C.
Investor · Peachtree Corners, GA · Member since 2014 · 1k+ posts · 1k+ votes
11y
dang BT, I think you have some competition for Ben's affection!
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Ned CareyPro Member
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Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
11y
Originally posted by @Jay Hinrichs:
Hard to call cash buyers stupid... .
Nah, I do it all the time.
What is PDX?
I believe in taking what the market gives you. But I am not good at flipping or managing.
Ben, Maybe you should flip commercial properties. Buy at a dumb price and sell at a really dumb price.
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Ben Leybovich
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Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
11y
Hahah @Ned Carey - that dumb and dumber game seems to be the only game in town - just can't make myself do it, Ned...
@Cal C. - Brandon Turner is really missing the mark. While he is in HI (talked to him today), I'm on Skype all night with @Serge S. , and on the forums with @Ned Carey .
Brandon is so old news
Oh yeah - on email tonight with @J Scott to boot. As you can tell, I'm busy
REI is so boring, after you figure out to stop buying $30,000 pigs hahaha
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Brian BurkePro Member
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
11y
Originally posted by @Ben Leybovich:

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 :)
There's not much to say about the plight of the syndicator that @Joel Owens didn't say...he pretty much nailed it. It's tough to syndicate because only the very best deals are good enough to leave enough meat on the bone for multiple players. Off-market deals are the syndicator's best shot at getting a "deal".
As to the fundamentals--it's hard to argue that the fundamentals are bad when the economy is creating jobs, household formation is on the rise and "renters by choice" have now joined "renters by necessity" in the hunt for available units.
So let's say that cap rates are 6% and interest rates on debt are 4%...that leaves a 2% interest to cap rate spread. For those of us old enough to remember when rates were 8% (and even higher) were buyers crazy when they were buying at 10% cap rates? It's still the same 2% spread. Something to think about.
Here is another thing to think about. If you increase the NOI by $10K on a 10 cap property, the value goes up $100K. On a 5 cap deal it goes up $200K. So if you are underwriting to IRR in a market with growing rents, the net effect of that rent growth to the property's value at a 5 cap is extreme and the IRR is a factor of both cash flow from operations AND disposition.
So there you have it--as Joel said its a good time to buy and that's why everyone is buying. It's also a risky time to buy because we are getting later into the cycle, and cap rate decompression will have a very pronounced effect on valuation. In a 10 cap market a cap rate movement of 1% will decrease your property value by 10%. In a 5 cap market, that same 1% movement drops valuation by 20%. The question is will that movement happen soon, or will it happen after the property already appreciated 40% due to NOI growth? One scenario creates a loss (if sold), the other scenario is still a net gain but maybe the deal changes from home run to base hit. Then again, maybe it's just held for cash flow which by that point is probably pretty robust.
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Ned CareyPro Member
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Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
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@Brian Burke excellent analysis. Your last few sentences about the timing of cap rate decompression are right on. Personally I see it as a serious risk I bet many have not considered.
I look at it from a much simpler point of view. Cap rates are low. This equates to prices are high. Buy low - sell high. This is not the time to buy low
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Serge S.
Rental Property Investor · Scottsdale, AZ · Member since 2010 · 390 posts · 599 votes
11y
@Brian Burke Spot on regarding the 2% cap rate difference. I purchased a mid size complex last year around a 7% cap on actuals. This was a marginal "deal" on paper at the time because getting over 6% for B class was difficult at best. Today its impossible. 4 years ago, I would have never considered a 7% cap. Why? Because I knew my exit had to be based on fundamentals and actuals rather than a lower cap and pro-forma. Today not so much.
Now this 7 cap at purchase is irrelevant. I knew that I could push NOI $30k by simply reassessing taxes, RUBS and timming loss to lease. Fast forward a year and I've hit that target and then some by converting units into vacation rentals. And my exit cap is now closer to 5% with significant value add. As good as this deal looks today, it would not have been syndicatable at the time of purchase.
The bigger question here is would you take the $1M in value added and sell or ride it out? Assume there is no realistic 1031 trade. I believe I will hit max GOI this year and there will be little value left to be squeezed out.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
11y
@Serge S.
sell it take your profit.. No one can critisise you about taking a profit!
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Brian BurkePro Member
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
11y
@Serge S. I think @Jay Hinrichs is right. I'm in a similar situation. I bought 136 units at a 6.6 cap on actual T12 and then put on all new siding and paint, upgraded all of the interiors, replaced a boiler, installed more carports and a bunch of other misc stuff. That was 3-1/2 years ago. Today it's 99% occupied and rents are pushed a lot higher. So what to do?
From my point of view, I've done 90% of what I can do so its time to move on. At a 7 cap the property is worth just under double what I paid, so I'm selling. I can take that money and do the same thing again. It won't be easy to find another deal, and maybe I won't find one, but I can't go wrong taking a profit and loading the magazine with bullets ready to fire when the deal is right.
On the other hand, I bought a 140 unit 1-1/2 years ago and am in the process of doing a very similar scope of work. Rents and occupancy are up but the trailing income hasn't caught up to current performance yet and I still have about 20% of the units left to upgrade. Thus, my work isn't done here so I'm not selling. I think it is more likely that I can giveth more than the market can taketh, at least in the timeframe I have in mind. So I "ride it out" as Serge says.
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Ned CareyPro Member
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Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
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Holy Cow @Ben Leybovich is the man. He has Two discussions at the same time in "trending discussions"
He didn't even need to resort to a gimmick like making fun of WALDO to do it.
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Ben Leybovich
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Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
11y
@Serge S. and@Brian Burke - very nice indeed! This illustrates 2 things:
Serge is lucky and Brian is good, and it is indeed better to be lucky than good...
Oh my
but seriously, the market is significantly helping you guys on those deals. Can it be done again today? Yes - off market. I don't see how the CAP Rate compresses 2 more points from here - do you? I mean, a purchase today which is underpinned by the notion of CAP Rates compressing further is kind of gamblish...no? With other people's money too boot...
Thoughts you two?
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Ben Leybovich
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Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
11y
@Ned Carey - and I did it with three fourths of my brain occupied elsewhere with other conversations and pretty big projects right now...hahaha
In other words, Ben Leybovich knows how to git 'r done...!!!!!!
hehe
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