Broker to me: "Your expectations are too high"

[Mark Neiger]

So I've been painstakingly analyzing multi-family properties for over a year now. It's obviously difficult in this hot market to find anything worth giving a second look. The few properties that have seemed promising to me have sold so quickly and at such ridiculous prices that I wonder if I should even be spending my time in MF right now. The last building that I was recently interested in sold at a 5 CAP at full asking price, 25% vacant and had multiple offers at that price. I've seen hundreds of properties sell in my market and none of them have been anywhere close to my underwriting criteria. Who's buying these places and what returns are they looking for? How and how long can they hold on to these places? When I asked the listing broker why I can't compete with others he told me that my expectations were too high. "Mark, rents have been increasing 10% per year for the past 5 years." OK. How long can that continue and when will interest rates start to go up? How do I deal with that kind of mentality? He makes me feel like an idiot.

He's obviously loving life right now because he's making a killing on his commissions. I had friends in the previous market run-up who were mortgage brokers that were making tons of money too and were cocky about it. They all ended up unemployed and broke when the bubble burst. 

Maybe the MFR market is just too heated right now for a newbie like me. (I currently own SFR) Maybe my focus market is the problem. (Orlando and Central Florida) Many on these forums/blogs/podcasts suggest investing in your own back yard and that's the area I know well but maybe I need to look into other areas.

I've also been guided by many on here that there are certain benchmarks I should aim for; CAP rate 8%, ROI of 12% and DCR of 1.6. The only properties I can find in my market with those kinds of numbers are D class in bad neighborhoods and I don't see any exit strategy.

I really want to expand my portfolio and have the capital to do so but I'm really having a hard time finding anything. Should I try my own marketing rather than brokers? Or should I change focus back to SFR or maybe just hold off on buying anything right now. It just burns me up to have money sitting in mutual funds going nowhere right now and I'm feeling pressure in my 40's to get my financial situation in a better place.

Anyone have any words of encouragement or caution?

[Darrell Shepherd]

Wow, not sure I agree with much of whats been said here.  Reminds me of the .com bubble "its a new market, get with the program".  I tend to share your views, sometimes the best investment is to not invest.

As a rehabber I was on the sidelines much of 2014 because nothing would hit my numbers.  People were saying the same thing, but buying at 75% less repairs is not something I'm willing to do.  

You can build in some appreciation, but that's really speculation, not investing.  Call me crazy, but cash flow investing should be based on cash flow IMO.

If it were me I'd look at less competitive markets or less competitive property types (self storage, etc).  There's big money flowing into multis you just cant compete with.  The hedge funds came in and drove prices through the roof in Atlanta in 2013.  They pretty much made the market that gave them their equity.  Anyway, those guys can borrow at 1%, so they can pay way more than we can for the property and make out.  Plus they have economies of scale.  Just hard to compete with the big guys and apartments are the soup de jour right now.

You can miss some markets being cautious, of course. I had several guys I worked with go into mortgages at the start of the refi boom and I was like "how much more can interest rates go down?"  They were at 7%...that crap lasted like 7 years and they crushed it.  Then got whacked, of course, but no more than I did with what I was doing.

As a newbie, you need to be cautious.  Your agent is right, you may have too high expectations for your market, but that doesn't mean you buy dumb just because everyone else is.