My goal is to purchase my first apartment building before the end of 2016 and I have been studying, reading, and listening to everything I can get my hands on. Recently I have come across information from a few different places suggesting that the apartment market is at or near it's peak. As a new investor, I thought it best to reach out and get some feedback from the community. A few specific points that I've heard are: • Many markets are far into the Expansion stage with Hypersupply being the next phase of the cycle • CAP rates are compressing • Great deals are harder to come by • Many deals selling for more than the NOI warrants or at lower CAP rates • Moderate to high new construction in many areas • Many investors going outside of their normal markets to find opportunities • Interest rate hikes on the horizon What are your thoughts on the current state of the apartment market? Is now a smart time to get in? What things should investors keep an eye out for? Are there certain strategies that work better in times like this (i.e value adds, repositioning, longer loan maturity)? What are some of the obvious traps that a new investor might miss? Are certain classes better to own in the event of a downturn? Any other relevant advice? Thanks in advance for all of your valuable insight! THINK BIG...THINK BIGGER...THINK MASSIVELY!

Hate being this guy but I gotta interject. 1.http://www.multifamilyexecutive.com/news/why-older... Millennials are not totally averse to homeownership. Low rates have just driven prices to unaffordable levels for millennials to get into the market. I say this as a 28 year old millennial. 2. http://www.multifamilyexecutive.com/design-develop... Vacancy rates are already starting to slip because of massive new construction. I know I know it's "All class A, all urban core" blah blah blah. You build enough Class A and you're going to end up with class B rents. See Florida in 2009. 3. Hubert, you're 100% correct on your assessments. Average cap rates in NYC on real numbers are sub 2% (on real numbers), same as the Bay Area and most of the gateway markets across the country. Rents have been on a tear but started to cool off even in NYC and if they're cooling off in the most supply constrained market in the country, I would be cautious in your local markets. The real way to protect yourself is underwrite conservatively. At the same time, I don't care what people say, you're probably not going to be able to purchase a sizable deal today without stretching at least somewhat. There's an abundance of foreign money, 1031 exchange money, people cashing out of the stock market, etc etc. Cap rates have compressed around the country dramatically so you'll have to be aggressive in making a deal, gone are the days when you could take your time and negotiate with a seller for an extended period of time. I have a deal I'm looking to sell right now at a 1.8% cap rate on real numbers. Very cheap in terms of price per square foot and price per unit however. I sent it out to my list of buyers and had 4 cash offers come in sight unseen on day 1. This is NOT in core Manhattan but a suburb of NYC. That's who you're competing with in today's frothy market because bubbles make everyone act stupidly. Another way to protect yourself is buy a building with some value-add component, borrow 10 year fixed rate money with 25 year amortization and 70% LTV. You're going to be very safe no matter what happens in the economy because of a large cushion in terms of your DSCR and how quickly you are paying down the debt. Most people who got in trouble in 2008-2010 were in trouble because of refinancing issues, not occupancy levels which never dipped below 85% nationally. 10 year money and a 25 year amortization eliminates that risk. Admittedly you're not going to have the same cash on cash returns available even a few years ago and not the returns you'd have if you used 80% LTV but you'll sleep well at night knowing your investment is "anti-fragile" to quote Nassim Nicholas Taleb.

@Ben Leybovich - I guess I better start looking for that needle in the haystack! Thanks for your input! @Gino Barbaro - As always, thanks for your valuable insight! I agree about becoming a renter nation and would love to see that keep rental demand strong for many years to come. Thanks to everyone who took time to respond to my post. I guess the moral of the story is regardless of where the market is headed, I will be ok as long as I "Buy Right": • Look for apartments with value add opportunities • Find B/C properties that are in A/B areas • Stick to my investment criteria • Underwrite conservatively • Be prepared to pass on a lot of deals since I am looking for a needle in a haystack • Be patient Did I miss anything? Thanks again for all the feedback and knowledge! THINK BIG...THINK BIGGER...THINK MASSIVELY!

@Hubert Washington, I agree with your bullet points. I see local investors in my network looking into different markets which they are less familiar with. At the same time, outsiders pour into my home market and buy deals that locals pass on. I don't know if it's a bubble yet but it sure feels like one. I watched a movie "The Big Short" a couple of months ago and I kept thinking: "These guys figured out how to short SFH market. There ought to be a way to do the same with apartment market as it is ripe for shorting." I don't know if I am right or wrong - time will tell - but I shift from "cautious" to "ultra cautious" mode when I review potential deals. That said, there is always a rare chance of a truly off-market deal offered by a desperate seller who knows one buyer only and that buyer is you (or me :-)), so keep looking and I'll keep doing the same.

@Hubert Washington HI Hubert We started buying about three years ago, and prices have risen. All the brokers say the low hanging fruit is gone. They remember 08-10 when everyone was afraid, there was big risk, occupancy rates stunk and financing was nonexistent. You could buy these assets if you had cash and wait a yr or two to reposition. Now you have to be very selective when looking at deals and choose your niche and focus. As you know, I focus on mom and pops in the 50-250 unit range in a certain market, C to B property, Cap rates 7 or 8 actual. Yo can still buy these assets on actual numbers, but they are not going to be pretty. Most of our properties have some type of problem, whether it is tenant related, deferred maintenance, etc. I think we are becoming a renter nation, and you can see that by rental rate increases and tighter supply. Millennials and Baby boomers are wanting to rent and the job market lends to people being more transient. Plus, money from other investments is pushing real estate up further. There are always pros and cons to prices going up. If you learn how to "Buy right", you limit your downside risk. A smart person once told me: It's not what you buy, it's what you pay. Best Gino

Says who? I don't have an apartment deal that I'm currently working on, so for this thread, I was using a real example that my team is working on here and now; which is a neighborhood of 51 townhouses we've picked up, and are operating them like an apartment complex, because that's what we do.We don't go around buying up single units, or scattered portfolios of SFH. Everything we have is an apartment complex, or entire batches of side-by-side townhouses.Rents is rent, and cashflow is cashflow. I live in NOVA by DC, it's been red hot forever. At the end of the day, your looking for that property that has deferred maintenance, thus suppressed rents, which normally means they are siloed from the market inflation till the very last minute before the market rolls over. The demand is always at the top end of the market, and the bottom of the market is always the last to respond. This is why your trying to find a B-C property in an A-B area. These two points are very important. So when you have a complex, or a set of units, that you are able to buy, repair, and cashflow with the current rental prices as a B-C property, your going to make a lot of money when yo roll it up to an class A property in an A-B area. If you roll a building up to a class A in a B-C area, it's not going to work out so nicely. e.g. Don't buy that stuff.Another example; The other year I found a small 9 unit building by a college, it netted $85,000 per year, and the owner wanted $1 million for it. Long story short, we picked it up for 845k when said and done with closing and repairs. We could have let the property sit, but we did not. The property just needed the basics; sanding the hardwood floors, paint on the walls and tubs, new vinyl, and appliances. Not much really. It now nets 117k a year, but if the market ever resets so low that we have to net 85k a year.. we are still winning. So yeah, same principals, and same mechanics apply to both building types in an inflated market, or any market frankly. The entire country has been pouring into the capital to find work since 2008.Best,

I don't know how to short apartment market :-) It was just a thought that kept reappearing while I was watching "The Big Short" movie. I underwrite for no rent growth or only 2% growth, use higher economic vacancy, higher expenses, use higher cap rates at the exit.

It all depends on the market, Hubert. Yes, there are many markets around the country that may max out soon, but there are still more really good markets out there. As an example, Orlando is projected to increase employment 4% a year for the next 10 years. All those people need to live somewhere. Of course, there is no crystal ball. Keep doing your research. What websites did you research so far?

As most commentators pointed out the easy hanging fruits have been picked at least in the major growing metros. Most of the deals in those that are getting done now are either by major Pension Funds/VCs that have raised funds and need to put them somewhere and are fine with parking funds for a very long time or the aggressive turn around opportunities. A few members here are from DFW, so to use it as an example the Uptown and Knox-Henderson is bursting at the seams with activity and can probably fit no more cranes as a result the development or re-development (typically a phase that typically precedes new development in urban areas) is getting pushed north all the way and even past the Loop (Loop 12) where the apartments that used to go $15-25k a door just three years ago are now approaching $50-60's as-is and $100s once updated. This movement has displaced a lot of local DFW investors who are starting to look at Wichita Falls or parts of Oklahoma, which is actually undergoing a contraction and Louisiana, where the 7 or 8% cap rates are still feasible and cost per door is much closer to the historic levels that Dallas enjoyed for years, however, by going for the cash flow they have to forgo potentially explosive growth (which can go both ways). @Gino Barbaro , @Chris Soignier and Levi T. As a lender I am always curious what do you use to finance those B/C properties local banks, agencies or FHA and if more than which is your preferred source? Also related to the first question what is your holding period and exit strategy for those assets and how much does it impact your loan decision?

Such a great thread, and filled with valuable information and insight. Real estate is local. National averages simply aren't relevant to the investor. I suggest you follow some data provided for free by Marcus and Milichap, NACREIF and other data aggregators. Best of luck!

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Updated about 8 years ago on 03/20/2017. Most recent reply

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Posts: 90
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Hubert WashingtonPoster

Investor
Jacksonville, FL

Multi-Family and Apartment Investing

Has The Apartment Market Reached The Peak of It's Cycle?

Hubert WashingtonPoster

Investor
Jacksonville, FL

Posted about 9 years ago

My goal is to purchase my first apartment building before the end of 2016 and I have been studying, reading, and listening to everything I can get my hands on. Recently I have come across information from a few different places suggesting that the apartment market is at or near it's peak. As a new investor, I thought it best to reach out and get some feedback from the community. A few specific points that I've heard are:

Many markets are far into the Expansion stage with Hypersupply being the next phase of the cycle
CAP rates are compressing
Great deals are harder to come by
Many deals selling for more than the NOI warrants or at lower CAP rates
Moderate to high new construction in many areas
Many investors going outside of their normal markets to find opportunities
Interest rate hikes on the horizon

What are your thoughts on the current state of the apartment market? Is now a smart time to get in? What things should investors keep an eye out for? Are there certain strategies that work better in times like this (i.e value adds, repositioning, longer loan maturity)? What are some of the obvious traps that a new investor might miss? Are certain classes better to own in the event of a downturn? Any other relevant advice?

Thanks in advance for all of your valuable insight!

THINK BIG...THINK BIGGER...THINK MASSIVELY!

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Ben Leybovich

Rental Property Investor
Phoenix/Lima, Arizona/OH

Ben Leybovich

Rental Property Investor
Phoenix/Lima, Arizona/OH

Replied about 9 years ago

All of your bullet points are correct, but so what? Aside for being correct, they are also equalizing - they apply to you in the same measure as everyone else.

The Essene of what we do can be thought of as finding ways outperform the marketplace. So, now that you know what's going on in the marketplace, all you have to do is find the needle in the haystack which would allow you to out-perform...

I think we have room still to keep compressing for a couple of years. But, this doesn't mean I don't look, and it doesn't mean that there aren't needles in that haystack.

It dies mean that you have to be really, really, really good to play!

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