All Forum Posts by: Brian Burke

@Robby Sanchez rules of thumb don't work, as others here have stated.  The main reason is other buyers who are better able to pin down operating costs will either outbid you because they have their costs right, or you'll outbid them because you have your costs wrong.  Neither outcome is good for you.

I give some approximations of each expense category in The Hands-Off Investor, but the best way to nail down operating costs is to look at the property's historical performance.

For example, Contract Services and Utilities.  Look at the trailing 12 month's expenses on the seller's operating statement.  Add some escalator, such as 3%, for example, to account for potentially higher costs after closing.  

For payroll, ask the seller for a staffing matrix, this lists each position working at the property and their salary.  Don't forget to add fringe benefits such as health insurance and also payroll taxes, etc.  Ask your property manager to prepare a staffing plan which would show how they would staff the property and what the salaries would be.  Compare that to the seller's staffing matrix and make adjustments as needed.  You'll most likely find your staffing costs to be in the neighborhood of $1,200 to $1,900 per unit per year, depending on property size, class, and market.  Anything less than that means the property is either understaffed or the staff is underpaid.  Anything over that could mean that the property is overstaffed, or it could mean that management is delivering a very high level of service such as in a luxury property that has a doorman and all sorts of staff that you don't typically see in garden style apartments.

Greg, the things I'm looking for as clues to a bottom:

1. Sentiment:  I want to see more people hate real estate.  Syndications don't get funded because investors think they are toxic.  More syndicators go out of business and wind up in foreclosure and/or lawsuits to enforce loan guarantees.  Sellers worried they won't be able to sell in time before their lender takes action.  That type of stuff.

2. Interest rates:  I don't really care where interest rates go--I just want to have some way to figure out where they are going.  Right now they are "high" (compared to 2020) and people "think" they are going lower.  But will they?  There's an equal chance they stay here and even a shot they go higher.  If the consensus is that they are flat or higher, properties will be priced accordingly.  Now they are priced such that rates must go lower in order for the deals to work, and I'm not convinced that reality will support that bet.

3. Cap rates:  Cap rates have been expanding, but sellers think they will tighten.  A lot of buyers think that too.  But if borrowing costs remain high and interest rates don't fall as many people expect, cap rates will have to decompress further.  I'd like to have more certainty as to that first.

4. Construction:  Deliveries are at record highs.  I'd like to see those normalize.  It's starting to happen already.

5. Rent growth:  This has been flat to negative lately.  A growing income stream is worth more--so I'd like to see growth so that there is a path to profit.  Once construction moderates and the inventory glut gets absorbed we'll probably see rent growth.  2026 probably?

A lot of this, 3 & 4 especially, is geographic-dependent.  Some markets never saw much construction, and some still have rent growth.  But they still suffer from interest rates and market sentiment factors.

@Tramaine Robinson I can’t pinpoint a moment in time where it “clicked,” but instead I’ve found a series of small victories that yielded improvements.

My first profit gave me confidence.  My first self-developed software gave me efficiency.  My first multifamily gave me scale.  My first recession gave me resiliency (yes, even failures are victories). 

After 25 years I felt that I really knew what I was doing.  After 35 years I’ve developed a healthy respect for this business from the school of hard knocks.

The day I’ve discovered this business is easy or simple will be a good day to retire.

The easy answer is the smart buyers aren't.  But that's an oversimplification--there are probably some very smart people that bought some of these deals.  They are making a bet that interest rates will come down soon and they can refinance at a lower rate.  Or they are betting that there will be a return of runaway rent growth.  Or both.  If they are right, their bet will pay off.  If they are wrong, well, you can buy that deal from them (or their lender after they foreclose) a year or two or three from now for less than they paid...

By the way, there is nothing wrong with buying a single family home or duplex--my first deal was a mobile home.  Find a good deal and get some real estate experience--don't focus so much on that real estate having to fit some specific profile.  Investment quality is all that matters as you build the foundation for your track record.

Greg, I navigated the last two years the easy way--I haven't bought anything (actually haven't bought anything in 3 years).  My investment focus is large multifamily properties and that market has been falling since 2Q2022--in my estimation prices are down 30-40 percent.  I've found no investable thesis during this time--my plan was and still is to watch it crumble from the sidelines and then get back in after a bottom has been somewhat defined.

A little over a year before the market collapsed I started selling--and during that time I sold 3/4 of my portfolio.  That timing certainly worked out, but I do still have around a thousand units.  Fortunately I stopped borrowing on bridge debt a very long time ago so I've managed to avoid some of the distress you are seeing today as these bridge loans are maturing.  I do have floating rate agency debt, however, and rising rates coupled with lack of rent growth has been a drag on cash flow.  While that's certainly not ideal, my leverage was low to start with and my loan maturities were ten years so I have staying power to sell into a better market.

Looking ahead, anything I'd buy would have to cash flow out of the gate in a higher-rate climate.  That means positive leverage and that isn't where sellers are today.  That will change as the hope for lower rates diminishes, lenders get more assertive on maturities, and sponsors run out of time and money.  I'm starting to see a little of that lately.

Lorenzo, I started investing in real estate when I was 20.  So I was then where you are now.  Do yourself and your investors a favor--don't raise money from people and buy an apartment building right now.  Forget about posting content.  Your content will be based on your experience--that is what adds value to the reader, and you don't have experience yet.

Instead, focus on building a track record.  There are different approaches to this: you could go to work for a large PE firm starting at their entry-level rung on the ladder and working your way up.  You could go into brokerage and sell properties, working your way up to brokering commercial properties.  Or if you are more entrepreneurial, you could start investing in small properties.  Buy a house to flip.  Buy rentals.  Make some profits.  Keep track of every property--the address, purchase price/date, sale price/date, profit, rent at purchase, rent at sale, cost to renovate, take before and after pictures.  Anything and everything that you can do to show others (and prove to them) that you have a talent for selecting properties and producing actual results.

If you do that, people will take notice.  As you post about what you are doing people will see it.  As you buy and sell, people will enter your network.  At some point, people will start asking if they can be a part of what you are doing.  Some will want to be on your team, and some will want to split profits with you in exchange for funding your deals.  This will build naturally and organically.

When I started, I had nothing, knew nothing, and knew no one.  It took me ten years and dozens of deals to syndicate my first investment with investor money--and even then all my investors were co-workers that invested because they knew me and had seen what I was doing.  

Since, I've bought almost a billion dollars of real estate.  I've never advertised for money, I don't mass market.  People come to me to invest because I've shown over several decades that I can produce results, and when the market doesn't go our way and results are difficult to produce, I've shown that I can achieve the best outcome possible and weather storms without losing people's money.  That's what you want to show them.  

It will take time, it will take work, it will take dedication.  The payoff is worth it.

Nik, with all due respect to whoever gave you that advice, I disagree.  Entry cap rate is absolutely meaningless.  Participants in the commercial real estate space could do themselves a lot of favors by forgetting entirely the concept of purchase cap rate.

Cap rate has only one useful purpose--and that is to estimate the price in which the property may sell for at a later date.  This has the obvious weakness of the unknown nature of future cap rates, but that's really the heart of your question here.

Estimating future cap rate is part art, part science.  The science part is determining where market cap rates are today.  Sale comps are a good start.  The art part is adjusting today's market cap rate to a future year.  There are a lot of opinions on how to do this--some say adding 50 to 200 bps to today's market cap rate, some say adding 0.1% per year, others say something else.

I suppose that's a good start, but doesn't really account for much.  I'll give you a couple of examples.  When the market was in the toilet after the great financial collapse, multifamily cap rates were in the 6-8% range.  I was forecasting exit cap rates lower than current market cap rates.  The theory: the market would be better when it was time to sell the asset.  A better market meant lower cap rates.  That bet came true.  

Around 2020-2021 it was a seller's market and everything was getting a dozen or more offers.  Cap rates had plummeted into the 4% range for multifamily.  I was forecasting 5-year exit caps around 1% higher than current market cap rates (for perspective, that's a 25% decline in value).  The theory: the market was about as good as it gets, and when it's time to sell, the market will probably be worse.  Turns out the theory was right, but the decline has been even steeper.

You might be able to predict whether a future market will be better or worse than the current one, but predicting how much worse or better is nearly impossible.

And don't even get me started on how sponsors could be manipulating purchase cap rate, whether intentionally or unintentionally, by reporting pro-forma caps, non tax-adjusted NOI, and so on. If a sponsor is touting a 7.3 entry cap in a 6.4 cap market, I'd be digging really deep into how that 7.3 was calculated, and how that 6.4 was substantiated. This math implies that the property is being purchased at a 14% discount to current market value. Certainly not impossible, but the multifamily market (especially for larger properties) is pretty active and below-market purchases, while possible, don't happen as often as they might in the smaller property space.

Pro tip:  If you still like the idea of purchase cap rate, use stabilized yield on cost instead.  I defined that in the Hands-Off Investor.  It's so much more meaningful than cap rate.

Brett, managing syndications funded by other people's hard-earned capital is a serious responsibility and not a part-time job.  When I first started in this business it was 7 days/week and 8-14 hour days.  I could sometimes get in 5-7 days once a year for a vacation but I'd pay the price when I got back.  That went on for at least the first ten years.  

Ask anyone that has started and grown a successful business and they will probably tell you a similar story.  Managing syndications is a business, just like any other, and requires the same level of dedication for it to be successful long-term.

But it gets better over time.  As I built my team and delegated responsibilities I was able to achieve a better work/life balance.  Even as my portfolio grew exponentially, my work/life balance continued to improve.  Part of that is team, part is systems that create efficiency, and part is advances in technology that allow me to do things I could only dream of 30 years ago.

Nicholas, it depends on what you are buying. If the deal is residential 1-4 units, I'd aim for 30-year fixed-rate debt.  You lock in your interest rate and if rates drop you can prepay at any time and refinance at a lower rate without penalty.

If the deal is commercial, whether commercial multifamily (5+ units), office, industrial, self storage, hotel, you name it...the choice becomes far more difficult.  Shop around for debt to see what is available and model the various structures to see how the different terms impact performance.

The tradeoffs will be fixed vs. floating rate, conventional vs bridge vs CMBS vs bank vs agency. Maturities tend to be 3, 5, 7, or 10 years. The longer the better, but keep in mind that many of these structures have severe prepayment penalties so using 10 year debt for a 3-year hold creates a problem.  But shorter term debt greatly amplifies risk.  

For commercial multifamily, my personal preference is agency 10-year floating-rate debt.  You don't have short-term maturity risk, and you don't have prepayment penalty risk (just has a 1% exit fee).  But you trade that for interest rate risk.  In a rapidly-rising interest rate environment (such as we've recently experienced) that tradeoff may or may not pay off.

Unfortunately, in CRE finance there is no perfect financing vehicle and you can't eliminate risk--you must choose which risk you want.

@Parker Pattschull you should get a response within a day or two.  Having said that, before you dismiss a sponsor for violating this guideline, take some steps to ensure you are communicating with the right person, and that communication is actually established. It could be that you sent an email to an incorrect email address. Or it could be that the recipient inadvertently dropped the email (it happens).

But if two-way communication has been established and you’ve found that the sponsor is consistently slow to respond, that would be cause for concern.  Remember that they put their best foot forward before the investment, so it only gets worse from there.

You said you were eager for this opportunity.  Thats a red flag.  There’s no room for emotion in investing—if you catch yourself getting eager or excited, take a step back.  The market is just starting to bottom.  It could be a long road to recovery—meaning there is plenty of time and there will be plenty of opportunities.  There’s no need to rush.