MF acquisitions - Avoiding low cap rates & Negative Leverage

[Tony Guarino]

Hey Everyone, my business partner and I have recently taken on the challenge of raising some capital and investing in MF properties. I come from a finance/economics & underwriting background. So while he is wheeling and dealing, networking, and putting deals in the pipeline, I am underwriting them. However, all I am getting are on-market with +/- 5% Cap rates. Obviously, with interest rates being above 5%, this creates a negative leverage environment where there really is no deal. Caps rates have to soften at some point, but I think this negative environment could last for at least a little longer.

So with this in mind, I have a few questions for anyone in this space currently doing deals. 

1. Is there anyway to negotiate on market deals with brokers who think the Holy Grail is hidden at the property? Some how convincing them to sell at a 6.5% cap instead of a 5% cap? Maybe target deals that are just sitting on the market?

2. Where is the sweet spot for finding off-market deals where we could negotiate some creative seller financing? My guess is 10-50 units, make friends with wholesalers, etc. 

3. I am thinking that targeting some markets, which are not SUPER HOT, might give some more room for margins due to less competition. Does this pencil out - any comments? 

Any thought provoking thoughts, advice, or critics, are welcomed! Thanks in advance. 

[Russell Brazil]

Quote from @Tony Guarino:

Quote from @Russell Brazil:

Youve entered into one of the biggest logical fallacies that exist in real estate. You assume because you need financing, that others do as well. You know what has happened in my market since interest rates rose? Did prices soften? Nope not at all. But the share of all cash transactions went from 20% of sales to 35% of sales. So the interest rate being higher than the cap rate are irrelevant if the buyers dont borrow. 

Yeah, there was a lot of liquidity in the market, 1031 exchanges with all the equity that was built up, and a lot of buyers needing to park their cash somewhere for tax purposes - but I don't see that lasting forever. Great observation, but any solutions?

 Im on year 11 of hearing people say it wont last forever, prices are about to soften, prices are about to crash. So Im not holding my breath.

My solution is to keep buying year in and year out, regardless of market conditions.