All Forum Posts by: Ben Leybovich

@Ben Leybovich & @Sam Grooms nice work on this complex! I live in Downtown Phoenix and commute(d) to Chandler pre-coronavirus.  Sometimes I bring my gravel bike and ride a loop that includes that canal after work.  When I first started I was really surprised and the number of "nice" areas sprinkled throughout the South Mountain area.  With easy access to recreation, shopping, Chandler, Tempe, and Downtown this area is sure to continue to explode.

@Jonathan Twombly

cc @Ben Leybovich

Question: what happens to cap rates in multifamily that's performing well (occupancy, collections, rent growth) through the pandemic AND interest rates are ~150bps lower AND there's 6 trillion more in currency floating around?? My theory: pricing will actually rise as it will with other assets, the stock market, etc. 

Yes, there will be some opportunities to pick off poorly executed real estate as well but if anyone is waiting to pick up B property at an 8 cap; they're simply playing the game like it's 2008 again. It's not. This black swan is different. There's an ocean of capital in the world looking for a home!

My All Weather Portfolio:

• 3,500 (and likely growing with more deal flow now!) B+/A- Apartments in the Midwest (Tortoise vs Hare markets with steady growth).
• Operating Company: vertically integrated management firm to execute the biz plan on the apartment portfolio
• CASH
• GOLD - insurance hedge
• Crypto - insurance hedge
• Buying into the S&P for the first time in 20 years. Stock Market "melt up" hasn't happened yet.

Of course! You can’t time the absolutely bottom.  You can only know it happened in retrospect. 

I will be looking for deals where I can pay my investors and 8% pref and 2% to myself from year one without having to do a value add or raise rents aggressively to get there.  That where we were in 2013, when I really got traction - several years into the last recovery so not the absolute bottom.

If I’m going to put investor money at risk to do a value add play, then I want to receive a premium in return for the risk. Not like recently, where people were paying the after value add price and then having to take the risk of doing the value add to get to their 8 pref - or maybe just to get to a 6-pref. 

Don’t know if we will get there. If we don’t I will have to adjust. But that’s what I will be looking for. 

You’re exactly right. The further the market climbs the more conservative you need to be - but this is the opposite of what most people are doing. As the market climbs they loosen their standards to continue to make deals happen. Everyone claims to be underwriting conservatively, but if that were true cap rates would never compress. It’s precisely because the market as a whole justified loosening it’s standards that cap rates compress so much. (Low interest rates are a justification for, not the cause, of cap rate compression.) 

At the top of the market, you have to get everything exactly right to have your deals work out as you planned. The looser an investor’s standards get as to what “works,” the greater the deviance from the plan they will end up with. At the extreme, deals bought at the top with too loose standards will go back to the bank. 

The average investor’s perception of risk is backwards. When everyone is buying and prices are rising, they perceive risk to be low, which causes more people to jump in, raising prices further, and increasing risk. 

Conversely, when the market nears the bottom, the risk is at its lowest. You can be most aggressive at this time. Cap rate compression as the market recovers will hide a lot of sins. You’ll often exceed your underwriting. 

But at this point in the cycle, news of the crash is recent. And the casual investor believes risk is high. However, in fact, risk is at its lowest point. 

The cap rate tells you everything. When cap rates for the asset in that market are at their cyclical low, risk is highest. When they are at their cyclical high, risk is lowest. 

Anyway, that’s my view of things. Others will no doubt differ. 

@Ben Leybovich beautiful property and amazing value add numbers. Best strategy in the best asset class in the world. Do you ever have value adds where you renovate and stabilize all units then sell? Or do you always leave meat on the bone for future buyers to add value?

@Ben Leybovich because there is no lipstick on it huh?

LOL @Ben Leybovich I love your take. We're "dollar cost averaging" into more apartments as our portfolio is doing quite well here in the midwest.  Some smaller investors are skiddish but a lot of our higher net worth families are allocating more into workforce mfam.

@Jonathan Twombly I hope you were putting in the bumpers previously as well. lol. The "strong hands" will be taking the "weak hands" that weren't previously underwriting cushion.

In every market there's opportunity. Discipline is key.

Hey Ben! Basically, I am reinvigorating all of my lender, broker, manager, and investor contacts and letting them know what I am looking for.  You're right that, if a deal works, it works.  However, I am putting a lot of bumpers on the deals, underwriting in a lot more uncertainty and margin of safety, so that I know the deal can withstand bad times.  Basically, being very cautious.  But also getting ready for when things stabilize and I can predict what the next couple of years look like with more accuracy.  Whereas, I was on on the sidelines before, now I am no longer on the sidelines.  Don't know if I will buy yet, but I am getting ready for the opportunities that I think are coming.