All Forum Posts by: Spencer Gray

I've always been a big believer in long term, fixed rate debt - and I still am. What's better than eliminating interest rate risk on a deal for 5, 10, 12, or 35 years in the case of a HUD 223(f)?

That being said, as the yield curve steepens, variable based rates indexed to shorter maturity notes have the potential to stay much lower for quite some time with the Fed having more influence on these than longer term notes. Fixed rate debt, which is typically indexed off the the 10 year treasury, that has risen significantly the last few months, nearing back to pre-pandemic levels. While lenders can adjust their spreads to keep actual borrowing rates competitive for a while, eventually real borrowing rates will rise as well. 

This is a different environment than the past few years when the spread between the shorter and longer term bonds was very tight, even inverted. That is no longer is the case.

I still think locking in historically low fixed rate debt is a no-brainer in this environment, but am curious if others are using, or considering utilizing variable rate debt to take advantage of even lower rates to drive your return?

Excel and some 4th grade level math is all you need and building your own model will make you a better investor. 

BP also has an analyzer in addition to the ones mentioned already.

This is just a quick list off the top of my head

Pros - 

• Access to opportunities that you couldn't undertake by yourself 
• Ability to diversify across multiple commercial assets
• Profesional management
• Larger deals offer better economies of scale and have superior financing
• Completely passive investment besides initial due diligence on sponsor and deal
• Ability to diversify across different sponsors, markets and asset classes
• Scalable strategy
• No personal guarantees for debt 

Cons - 

• You are not "in control" of the deal
• Bad/inexperienced sponsor can ruin a good deal
• You do not receive all of the upside, a portion is split with sponsor
• Difficult to 1031 exchange
• There are fees charged to the deal
• The wrong structure can create unaligned interests 

It's more important to vet a sponsor than a particular deal. You're picking your race horse, not necessarily the track, although you can have your say in that as well. 

You want to find a group that has goals that align with yours and pursuing the types of projects that you are interested in. Experience is key, ask about their worst deals not just their home runs. 

@Justin Goodin I generally agree with your outlook. 

Fortuneatly/unfortunately the Fed is in the driver's seat. If they taper their bond buying and allow long term rates to rise significantly then we will see a crash to a degree, maybe just a healthy correction. 

But as others have said, demand is very high. Wages are picking up, materials inflation will restrain new supply to an extent, and we are still undersupplying what is being demanded. 

However, and again, if the 10YT rises above 2-3%, unless we see some serious rent inflation (we probably would) prices will decline as cap rates expand. Best case scenario, and what happened in 2018 when the Fed rose rates, is cap rates will stagnate but prices will rise with NOI growth.

But who knows? I certainly do not so we will keep buying for cash flow as others have said. 

I have not had as much success pursuing projects directly from owners, especially compared to what @Sterling White does and has done. 

It depends on how large of deals you are pursuing. 5-50 unit deals are the sweet spot to working with owners directly. After 50 units, and especially over 100, most owners believe that they will be able to get the highest price (factoring in a commission) by having a broker take it to market.

We focus on 100+ unit projects and have found that our time is bette spent networking and building relationships with the brokers.

Instead of sending letters or mailers, we try to use our network it's 6 degrees of separation to find someone who knows the owner to make an introduction. We usually ask if they are thinking about selling, what kind of debt they have on the property, and indicate that we are interested if they ever do want to sell. Then we try and follow up once a quarter. 

Thanks @Justin Goodin . The syndication space is to a degree very commoditized with the only differentiating factors between sponsors being ones personality, strategy (most strategies are basically the same thesis in different markets), and track record. 

The idea wasn't born out of a "what's our differentiating factor" discussion but once we developed the idea it became clear that incorporating crypto in some capacity could help us stand out. 

I owe you a coffee BTW!
 

@Bill B. The idea would be to attract a new group of investors who want to utilize their BTC for other investments. You are exactly right they could sell their crypto and just contribute the cash. 

On our end it would be immediately converted to USD (unless a reserve in BTC was being held) to minimize any devaluation risk.

It would be exactly the same as accepting gold. If gold was just as easy to transfer, trace, store, and liquidate I wouldn't be opposed. 

@Marc Cohen The benefit of purely accepting crypto would simply be another way to contribute to  a MF syndication. It doesn't matter if the contribution comes in from a wire, ACH, or BCT. There's a good chance no investors would utilize the option. 

On the prospect of holding some reserves in BTC the benefit would be if the thesis is correct that BTC will be a better store of value over the investment period than the USD. The same argument can be made against keeping reserves in USD of "I can invest in USD, why keep reserves in USD when you could buy short term bonds, etc." 

The investment vehicle would only be for investors who do not have high hopes for the dollar over the next 5-10 years. It would not be for everyone and we would probably never structure all of our deals this way. 

I don't think the promote/incentive structure would change at all, best to keep everyone's interest aligned. 

@Todd Dexheimer Smart with putting reserves in a money account. For some projects reserves and working capital can be significant and when you think about earning 0% (-2% real yield) on hundreds of thousands of dollars over a 3-10 year period you realize that a lot is being left on the table. 

But to your point the idea wouldn't be to "invest" the reserves, but to allocate them to whatever will be the best store of value over the hold period. 

@Michael D. The point of purely accepting crypto as a contribution would only provide another option to invest in a MF syndication. If an investor has significant holdings in btc or other coin they may want to use it to deploy into a real asset such as multifamily. 

At the end of the day, it's really just adding another method to invest. We would accept wire, ACH, check (please no checks), or btc. 

The point of keeping some reserves as btc comes from the idea that the btc will be a better store of value than the USD. BTC has a fixed supply, where the M1 money supply of the USD has increased over 50% in the last year and could be further devalued.