All Forum Posts by: Jonathan Twombly

@David Latimor  

My view is that we're currently at or close to the top in most markets, and the only issue is when the correction begins and where it starts.

Though, nationally, as it's been pointed out, there is still a deficit of multifamily construction when compared to household formation and historical norms, what we have seen during this boom is an incredible concentration of construction, both in terms of asset class and location.  It's been reported that more than 75% of the construction has been Class A, and that 50% of all construction has been in about 12 submarkets.  What that means is an oversupply situation in the markets that the institutional investors care about most.  We're already seeing this in NYC, where banker friends told me two years ago that they were no longer lending on NYC development because of oversupply and pricing concerns, Tishman-Speyer (one of the leading developers in the country) fired its entire NYC development division, and just walking around town you see the number of newly constructed properties not only with "for rent" signs out, but offering concessions.  It's been years since you even saw "for rent" signs.  (Apartments are also getting hard to sell.)

When the crash happens in places like New York, the fundamentals elsewhere won't matter that much, because the correction in the favored markets will spook the lenders - who are and always have been predisposed to be wary of smaller markets, where they have now followed the investors because that's where investors have gone.  But at the first sign of trouble, the lenders will pull back to the "safer" big-city coastal markets, causing the correction to spread.

In B/C class properties, there is no new supply, which is good for owners, as rents are climbing steadily.  But at some point, you need to worry about whether incomes are keeping up.  As prices have climbed steadily for these assets, high rent growth is necessary to justify the prices.  At some point, the numbers stop working.

As you pointed out, prices are now way above previous peak.  In the most recent annual report by the Joint Center for Housing Studies at Harvard, it was mentioned that MF prices are now 30% above their previous peak.  

Prices continue to rise, but a great deal of this has to do with supply on the market dropping.  It was recently reported that volume year over year was down substantially, but prices are up.  This is because of the lack of supply on the market at the moment.  What's happened is that so much of the product has been traded in this cycle that investors are now into their holding periods and are not trading what they own yet.  They also have low interest rates locked in, and because of the lack of supply the market is not liquid enough to provide enough 1031 opportunities, so they are sitting tight.  Why sell if there is nothing out there to buy, at least not at reasonable pricing?

I and many people I talk to are on the sidelines, because they are just priced out of deals.  Deals don't pencil out at the moment.  The number of people sitting on the sidelines for this reason is growing.

And just anecdotally, the press has certainly changed in sentiment.  Articles asking if the bull market is running out of steam have started to appear regularly, as have the rebuttals by the bulls who want to see it keep going.  It's been my experience that the cheerleaders only start coming out to defend the continued bull market when they start to feel threatened that it may be over . . .

This article just popped up in my Facebook feed.  House Flippers Caused the US Housing Market Crash.

It suggests that it was not subprime borrowers with bad credit who caused the crash, but investors, based on the fact that the great expansion of credit happened with people who had good to excellent credit.

What do you think about this argument?  

(PLEASE ACTUALLY READ THE ARTICLE BEFORE EXPRESSING AN OPINION ON IT!)

 The syndication issue only arises if you are selling someone an ownership interest in the property where they have no right to manage the property.  Seller financing is not a syndication issue; neither is refinancing.  The only issue is if you have a cash partner who basically does nothing.  You can structure it as a standard partnership, where the cash partner has the same right as you to manage the property, and then you don't have to worry about syndication rules.  But as long as you are talking about a scenario in which A puts up all the money, B does all the work, and B has 100% control over the deal, you get into syndication territory.

 I have not personally used this strategy, but when I first started out a very experienced investor told me his strategy was to approach brokers and ask for deals that never sold.  They would find the deals that were mispriced that the market rejected.  Sometimes a year or more had passed.  The owner at that point was just tired and ready to make a realistic deal.  They were very successful doing this but it was also a different point in the property cycle.  Maybe it's worth a try though.  

 You're basically talking about a syndication with a sponsor (you) and a single investor.  Typically, you are going to pay the investor some kind of preferred return and then you get to participate after the pref is met.  If you want me to walk you through it, pm me. 

@Parker Grissom

Sit tight.  This bull market is coming to an end soon.  Wait for the correction before getting in.  Spend the time between now and then learning as much as you can and networking with good people who can help you.

"Now!" is almost never the right time to do a deal.  And there is always another deal out there.  Learn before you leap.

I just saw someone touting the "Top Markets" for real estate investors, based on their high cap rates.

Nearly every market on the list would also be on a list of "fastest declining rust belt cities".

There's something really important to remember about cap rates.

Cap rates aren't just a number indicating the unleveraged return an investment.

They also reflect the market's assessment of the risk of the investment. The higher the perceived risk, the higher the cap rate must be. This is known as a "risk premium" - the market demands more return to take on more risk.

The fact that cap rates are high in these areas - at a time of historically low cap rates - has to tell you something about the market's view of these areas.

Just because assets look cheap in these markets doesn't mean they are cheap. They're only cheap compared to markets that investors feel have better fundamentals, including strong population growth and healthy economic outlooks.

If you find a market with strong fundamentals AND high cap rates, you have a buying opportunity. But that's not what's going on here. Here, you have investors desperate to generate returns, venturing into markets they wouldn't have touched with a barge pole just a couple of years ago. And they're declaring themselves geniuses for doing so too!

If a market has assets trading at a 10-cap right now, in this time of historically low cap rates, what do you think happens to cap rates there when the market returns to normal, as it always does?

And what happens to the value of assets there when that happens?

@Kelly Conrad

It is more important to say “no” to an opportunity, than to say “yes.”

~Warren Buffett

@Peter K. It's the other way around. Low cap rate = high price relative to NOI, so good for the seller. High cap rate = low price relative to NOI, so good for the buyer.

I just spent several days doing deep dive interviews with people who are determined to get into real estate investing about what is holding them back.  What I found is that there is a lot of fear of loss or making a mistake, and there is the knowledge that there is much that they don't know, and this reinforces the fear.

These are the people who are so highly motivated to get into real estate that they are researching everything everywhere and reached out to me for help.  Almost all of them are very sophisticated, skilled business people, with access to funds - their own and others'.  And yet they are consumed with fear and their own lack of knowledge.

If some of the most highly motivated and highly qualified people are stuck this way, imagine how it must be for everyone else.