Most apartment markets are near the peak -- buyer beware

[Account Closed]

I'm just posting this as a warning for newbies.  Obviously, no one can predict the future and no one knows what's going to happen next year, the year after, etc.  But most apartment markets are at or near the peak in pricing for this cycle.  The apartment market cycle is not something that is discussed much on this forum, and I've been seeing a lot of posts about buying apartment buildings with little money and then having loans with a balloon payment in 1, 2 or 3 years down the road.  

It's really great that people are taking action and buying, but please please please be running sensitivity analyses on your exit strategy.  Don't assume rents will be higher in 3 years, values will be higher in 3 years, cap rates lower, etc.  Ask yourself, what is my exit strategy to deal with my balloon payment if interest rates are 2% higher and cap rates are as well?  Please understand what that does to the value of your building and plan accordingly.

Not trying to be doom and gloom, and hopefully the market continues to boom and rates stay low, but I'm seeing so many new buyers enter the market with little to no experience, no discussion at all about the cycles and most have these balloon payments.  

[Joel Owens]

I can tell you I have seen many investors make millions and then lose millions because they became overleveraged at the peak of a cycle.

You own all of these properties but when the market goes down you can become upside down or cash flow insolvent.

The time for 100% owner finance, little money down, etc. is when the market cycle is frozen and just starting to recover for an asset class. You get the equity upside and cap compression on the upswing and can refi out with a new loan or sell. You can't do that if a peak has occurred and it drops.

As a commercial broker it's a great time for a seller to sell. The asset classes cycle at different times. So you can 1031 into a different asset class that is at a different stage of recovery. 90% of multifamily I am not a buyer on right now. Too expensive and the numbers do not work. Listing brokers are pushing puke pro-formas with rosy numbers based on a market to keep rising with strong rent growth and low expenses.

Biggest thing I can't stand is from the big apartment listing brokers where they use TBD for pricing. They make buyers go through rounds of bidding over 2 months to try to extract the highest price or play the buyer against themselves even if they want to accept that buyers offer.

Frankly I run across quality commercial brokers and then I run across scummy ones who will do anything to close a deal and give the profession a bad name. My buyer clients if I see TBD etc. we usually will not bid on it. You waste months of time if you are not selected. I go to the brokers instead and say here is our best. If your seller wants it they go with us now in the next week but if not we are not sitting around for 2 months while the seller decides and plays games. Sometimes if it is close to what the seller wants and a strong buyer they will go for it. If it is much below what the seller wants and they are not under a time crunch then the seller will wait 2 to 4 weeks to see what the market will bare from other offers.

Spreads are all relative to what constitutes a deal. Some buyers selling off a 3 cap in California a 7 cap is amazing in a different state for multifamily. A local buyer who has seen it go from a 9 to 7 isn't so happy about the cap.

You make money when you buy. I advise my clients to wait for the right property to purchase. I believe in the long term success of my clients. Some brokers take the short view and sell anyone anything until the investors capital is exhausted to make a quick commission. I want my clients to look back over working with me 5,10,15 years etc. and hopefully point to success with investments.