All Forum Posts by: Carlos Ptriawan

 One thing I am seeing a lot of is sugar-coating and hopeful optimism on the part of GPs and lenders—and that’s my takeaway from your notes on this CEO call.  They probably don’t want to admit the real story to themselves or their investors.

My observation is MF values are down 25% to 37% from peak—I have a case study with a reliable value at the moment of peak and a semi-reliable current value estimate—the drop is 37% and this is not a distressed property. 

LTVs are all over the place, depending on vintage. Originations pre-pandemic are likely fine if the LTV at origination was reasonable. But all that 90% LTC stuff in 2021-2022 is likely deeply underwater.

Your inference that the government is participating to mitigate bridge lender losses is incorrect. The government isn't giving these lenders a dime. What this CEO was referring to is the government's support of housing through the GSEs, which provide very good loan terms for multifamily owners, and his statement was that this is a good source of takeout financing for their borrowers. Ok, great, but the troubled loans in his portfolio won't be able to refinance into GSE debt without massive cash injections by the borrower because agencies are topping out at 60-ish LTV (current value).

I agree with you that there is an opportunity here—but I wouldn’t want to touch any of this bridge debt unless bought at a very steep discount, and so far those trades don’t seem to be happening.

Is this a sense of optimism in new MF investments that I sense @Carlos Ptriawan? I never thought I would see this day.

A HOT Latina image in the ad. :) 

@Theresa Harris nobody has made an offer to take it down for free. My guy from 5 years ago is hard to get he bought acreage in Sandy Oregon and is primarily spending his time out there. He was great, a skinny guy and would fly up those trees. He trimmed 5 trees and took one down but it was not for free and he is/was so busy hard to get. 

I know many of you will immediately remove all trees from your properties because of the potential for problems going forward. I own in a subdivision that has many 40' fully grown white oak trees. This one tree I own in the backyard of my rental has died and needs to be removed. Now the last tree I had removed was 5 years ago and the arborist took it to a friends house that has a mill where he was planning on milling the tree into oak flooring for a house he was building.

My question is should I bother trying to get some value out of this tree one way or another? Most of the expense in removing the tree is in disposing of it.

I'm sure there is a creative workaround but the trouble I am finding with BRRRR model is the Refinancing part!! More specifically, I can't seem to refinance due to my Debt to Income ratio due in large part to BRRRR!!!!!

Facts: My net worth is about $3m. My income is about $350k. I own a car ($850 mos. payment). I have no credit card debt. I have no other debt. The only real "debt" I have is my investment properties which earn me about $75k cash flow (included within my $350k annual). Here's the problem. Due to the "magic" of real estate (i.e. depreciation, expenses etc.), on paper my properties are functioning at a loss (great for taxes, terrible for DTI). Of course with great losses, the debt side of the ledger greatly increases and substantially decreases the income side. Thus, despite two of my properties having over $1m in equity each, I can't seem to refinance to access the money for new investments due to DTI. Oh and my interest rates are 3.5 and 4.25 on the two properties, so the numbers would have to make sense.

HELOC - No. No HELOCs on investment properties I am constantly told.

CASH OUT - No. DTI

TRADITIONAL - No. DTI.

Soooooooo, why am I struggling with the third 'R' of BRRRR?

Thank you,

Dave

 @Carlos Ptriawan I’ll answer as best as I can from the perspective of a borrower (I’ve borrowed on bridge debt way back in the day), GP of 4,000+ units (75% of which I sold in 2021/2022), LP (I have passive investments), and lender (a mortgage banker I co-founded did over $2 billion prior to selling in 2022). 

With the exception of a few “loan to own” shops, the lenders don’t want these properties.  They don’t make loans hoping the borrower will fail.  They might not always make the best decisions, resulting in failures, but some of those decisions were driven by bad data (whether from the borrower, appraiser, inspector, or whoever).  And some of these lenders just did a poor job because they got caught up in the same unjustifiable market euphoria as the borrowers.

But now as those bad decisions or incompetence or inappropriate market enthusiasm rise to the surface, most lenders have only one goal:  to get their principal (and hopefully interest and costs) back.

So as it relates to negotiating an extension with a borrower…these are individualized conversations with ala carte selections, not a prix fixe menu.  The lender knows that as long as the GP has some thread of hope in saving the deal, or just saving face, they have a fish on.  What the servicer will do is figure out how much they can squeeze out of the borrower in exchange for kicking the can down the road.  $X principal reduction gets you X extra months.  Both the GP and the lender can tell their investors that they won.

To your question on how this is calculated, there’s no math formula, instead it’s more like that scene in National Lampoon’s Vacation where the Griswold Family Truckster gets repaired at the only gas station in the desert.  When Clark Griswold asks the mechanic how much is the bill, the mechanic looks at the gas station attendant, they both laugh, then looks at Clark with a serious look and asks Clark, “How much you got?”.  Clark says “you can’t do that, I’m going to call the Sheriff.”  The mechanic laughs even harder and whips out his Sheriff badge.

Current market conditions, especially with cap rates having risen from the low 4s to over 5-5.5%, essentially wipes out LP equity when the value of properties went down at least 30%.

Recent shifts due to 0 => 5.5% Fed Rate in the quickest time in history, has turned cap rates from the low 4s to over 6.5-7% in some markets for Class B apartments. This shift has notably impacted property values, leading to significant downturns. To illustrate, a property initially valued at $60 million might see its worth decrease by 30%, settling at around $45 million. In scenarios where senior debt (and renovation costs) hovers around the $50 million mark, the resultant cause pushes preferred, and LP and GP equity positions below the surface.

Basics on Property Evaluation:

To figure out how much your commercial property is worth, you can use the following simple math equation. You take the money you make (NOI) and divide it by something called the cap rate. The cap rate tells you what people are willing to pay for properties like yours.

So, the equation looks like this:

Value of Property = Net Operating Income / Cap Rate

Imagine your shopping center makes $100,000 a year after you pay all your costs (that's your NOI). And let's say the cap rate in your area is 0.05 (or 5%). You can figure out how much your shopping center is worth like this:

Value of Property = $100,000 / 0.05 = $2,000,000

But here's the tricky part: You don't get to decide the cap rate, it's decided by the market, kind of like how fashion trends decide what clothes are cool. If the cap rate goes up because the market changes, like from 0.05 (5%) to 0.06 (6%), even if you're still making $100,000, your property's value changes.

So with a cap rate of 6%, it looks like this:

Value of Property = $100,000 / 0.06 = $1,666,666.67

Even though you're making the same amount of money, your shopping center's value went down because the cap rate went up. It's important to remember that you have control over making your shopping center nicer and more profitable, but you can't control the cap rate, which can make your property's value go up or down without you changing a thing!

It's a sobering situation that no one has faced since 2009 faced with it firsthand (the dinosaurs who did are out of the game or in the institutional world not working with BP type retail investors like you and I). The stark reality is that a 30% market downturn, again caused by an unprecedented surge in interest rates – the highest in four decades – can profoundly affect market values. Such a scenario doesn't just bring values down by 30% but also places substantial pressure on property holders, especially when debt refinancing looms on the horizon, compelling action at these reduced market values.

Here is the double whammy that increases the cash in refinance needed, the capital markets (bank lending) terrain has tightened greatly. Banks, previously granted loans at 70% of the property's value, are now capping at 50%. This adjustment demands a greater cash input at the point of refinancing. This is the debt renewal tidal wave everyone is talking about and where we will start to see a lot more of.

From a personal perspective, this period has been particularly taxing. Having personally a lot of skin in the game, often being among the first to contribute when things got difficult. Witnessing the dissipation of substantial (multiple seven figures) personal capital, especially in efforts to steer through these turbulent times, has been a sobering experience. It became very apparent in Q4 2023 (point of no return for those in 2021-2022 vintage project) as the market cap rates deteriorate even more as pricing has not found a firm ground, particularly when it seems that additional capital infusion won't bridge the gap to more secure financial footing.

In these moments, the weight of the situation can feel particularly burdensome, and I speak from a place of shared experience. The recent period has been emotionally intense, marked by earnest discussions with investors navigating these very challenges. It's prompted a profound realization of the importance of compassion for everyone involved and those caught in this same situation.

If you find yourself in a similar position as a GP, grappling with the uncertainties and complexities of the current market, know that you're not navigating this alone (unverified data something like 25 million assets with renewing debt situation). In times like these, empathy and understanding are important. If you're an investor or a general partner facing similar challenges, I encourage prudence and reflection before funneling resources into uncertain ventures, building a bridge to no where as something where I did with my personal capital. While I might not be the first person you'd think of reaching out to, I'm here to lend an ear, to engage in a dialogue, I've seen operators commit suicide over this and some flee the country check I don't think either are viable actions. If you're navigating these turbulent waters, know that your experiences resonate, and you're not alone in this journey.

I began investing in 2009 and started out of state turnkeys in 2012 a period that remarkably coincided with a great time to enter the market, I've witnessed the past 12 to 13 years have showcased an impressive and steady bull market. However, it's also clear that markets naturally ebb and flow, and corrections, though challenging, are a part of the investment landscape.

One of the key insights from this journey has been the importance of diversification. Today involved in over 2B of deals or 65 plus projects - most of these ventures are secured with fixed-rate debt or long-term notes, extending beyond five and even ten years, or particularly in the realm of developments through substantial completion. Spreading investments across various sectors and over time has proven to be a prudent strategy, especially for navigating through market corrections. Abet it still sucks.

Another undeveloped takeaway that I have is how influential interest rates are with real estate prices especially when you get such a synthetic change to interest rates we have seen this year, whereas we have seen the stock market react counterintuitively positive (perhaps due to fake money being produced). This as an investor has forced me to look for Alpha in different asset classes potentially outside of the BiggerPockets world of real estate. From late 2022, we did not do traditional value add multifamily deals because we could not make the numbers work due to the distressed capital markets terms that were available in the market... this is essentially why the market came down so much because buyers like us were not buying. There are a lot of operators out there saying that they can get properties at 30-50% off the highs (they are correct on that) but without the debt package, the deal ROI numbers don't work.

My wife and I are looking for a two family to start with for our 1st home. Every home we look at is going 50-60k over ask. Recently, 2 we were looking at went 100K over ask. I can't make sense of the last 1. It was on the market for a week. The asking price was 575K, which, in my opinion, was a very high asking price. It was purchased by a flipper on 12/13/2023, just 6 months ago, for 395K. He did a terrible job of fixing/renovating. They were issues that did not meet building codes everywhere. The roof had 2 layers and needed to be completely replaced. There was a fire escape staircase for the upstairs unit that was made with wood( not metal that was about to fall apart. The attic was unfinished, and there were signs of rodents everywhere. There were several holes in the siding that were replaced, but it was done terribly; you can see cracks in the siding everywhere.  I could go on, there were many more issues. I would estimate it would cost 75-100K just to make this property liveable. 

IT JUST SOLD FOR 108K OVER THE ASKING PRICE OF 575K. There is no way in hell the property appraised for nearly that much. Who is buying this property?  is it an investor buying for rental income? if so, it will not be cashflow positive. Is it a new home buyer that their real estate agent is taking advantage of and convincing their client that this is a good home and worth that much? what is going on? 

Please, someone tell me I'm not the crazy one for walking away from deals like this. What am I missing ?  who in their right mind would buy a property like this for that price?