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Updated over 6 years ago on . Most recent reply
Is This The New Normal?
I recently found a deal in the midwest (area where C class apartments trade between 7.5% and 11% cap rate).
16 units doing about 28k in NOI. (Not very good)
I own a 8 unit in the area that does about 30k NOI so this place has the potential to do around 60k with good management and a bit of reno.
The place sold to a cash buyer for 650k.
How are us "investors" supposed to compete with that??
I will stick to my standards but it becomes very frustrating when you aren't even close to being able to get a deal.
But we slog along...
Most Popular Reply
@Christopher Munn Congratulations for not overpaying or getting into a bidding war. The market is tough as everyone and their dog is "into" real estate.
Stick to your conservative investment strategy, build up your dry powder and aggressively invest during the inevitable downturn (when that happens, I don't know...lol).
Christopher,
We experience the same and thing here in Florida
- Kim Meredith Hampton
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This is the reason people can make so much money in real estate!!! The cycles are the best and worst thing about this investment class. This is why you have to buy right but now everyone thinks real estate is "hot." Give it 2 years and see where we are. There are still deals to be had but they are full and far between and OFF market.
@Christopher Munn Congratulations for not overpaying or getting into a bidding war. The market is tough as everyone and their dog is "into" real estate.
Stick to your conservative investment strategy, build up your dry powder and aggressively invest during the inevitable downturn (when that happens, I don't know...lol).
@Omar Khan is right. You've got to stick to your guns, know your number and not get frustrated if you don't get a deal. Frustration is an emotion and the best investors don't get emotional.
Stay patient and level-headed and you can find deals some deals now, and many deals when things start to cycle.
The guy who bought it for 650k might be thinking what you are. Hey I can turn this thing into a 60k NOI and then it would be 9% cap rate. I am not saying that is the smart thing but there are a lot of investors out there that think like that especially with interest rates where they are.
A question to ask yourself is that if he you had $650k, would this be the best deal that you could get in the market? Put yourself in the other guys shoes and see what answer you come up with. That will tell you if that guy was a fool or if this is where the market is at.
@Christopher Munn . There are people with tons of cash at hand out there and willing to spend it on anything. It is the sad reality here these days. Stick to your numbers.
@Account Closed you're right, he paid for potental value. But thats an Investing 101 no-no. You're supposed to pay what the current numbers (NOI) dictate.... he already pre-paid for all the value he's planning add soooo you tell me..... is his exit strategy to break even? 🤗 I'm not a speculator at all my friend. I learned way too much in 2008 to ever make those mistakes. Stick to your guns!
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#2 Multi-Family and Apartment Investing Contributor
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It's the new normal - for now...markets are cyclical, so what comes up will go down, just how far is the question. Right now finding deals that work is hard. It is so important to stick with your criteria and not get sucked into the frenzy, because if you do, you will be slaughtered when the market dives.
@Carlos Casanueva I wouldn't do the deal either but let me offer this food for thought. There is no cookie cutter way to look at a deal. For example, in the case where an investor is buying an unoccupied property to rehab it and then reposition it, then that property would have a zero NOI. He or she is not going to get that property for free. There is a price that the investor is willing to pay for it depending on their risk profile. If you were to value this investment, you would have to base it on a forecast and discount it for the risk associated with hitting the forecast. Not saying this is what you or I may do but the point is that there is more than one way of looking at an investment and only time will tell if that investor made the right choice.
I agree. When a large Delta between current NOI and potential NOI, you will pay *something* for that potential. Especially if that potential turns into a lot of $. But if the upside is an extra 30k in NOI, I'm not willing to pay for 80% of that, leaving myself with only 20% for me to profit on. But the market is changing and if that's the price to pay, I will have to wait it out or work harder to find off-market deals.
@Account Closed bingo
I will agree as a general rule of thumb. But, I believe that sometimes, looking at the bare numbers doesn't give you the whole picture of an investment. Sometimes, it really depends on the vision of the investor as well as their ability to execute.
Let me ask you this question: Under what scenario would you "overpay" like he did? I know I have overpaid for properties near where I live, because I know the area well and I follow the infrastructure plan year in advance.
I think people here are falling victim to recency bias. 2008 is fresh on the mind so everyone is thinking we are “due” for this wonderful correction and the deals will be everywhere.
I’m not saying you have to take bad deals but what are you going to do if the market keeps climbing for 10 more years? Can’t sit on cash forever.
Did the property have any major maintenance or upgrades done to be considered a B class apartment building just because it will not need any major maintenance for the next decade or so to lower the cap rate?
The current NOI wouldn't even service the debt at 650k. So if you weren't a cash buyer here, I don't even see how a bank would lend on this deal. Broker confirmed that it was 1031'd which I expected. The building needs upgrades to reach 60k in NOI. Cosmetic to the interior. It's a C class through and through though. No way to get it to B.
The seller could probably put 50k in Reno into it. (All in for 700k) Get NOI to 65k at best. And hope to flip it for about an 8 cap.
Exit for 800k and maybe cash flow it for a few years.
I don't think it's the worst deal in the world. Just really skinny to do all the leg work all in an effort to avoid paying the taxes.
Just my two cents.
(Which are only worth just that haha)
I love this thread, because some of the comments are only one step away from announcing a "new paradigm" or a "phase shift" in real estate, where - because of liquidity in the market, new discoveries of uranium in Russia, and theta divided by beta over alpha - it is impossible for real estate ever to down again, so we all must pile in before it's too late and we're priced out forever!!!!
That's usually the last psychological state the bulls enter just before the correction. Happens in every market, in every asset.
Its the new normal in CA.....see this happening everywhere and it makes me think "what the F am I missing here"? People are buying this stuff hand over fist..... what am I missing? Somebody thinks its great....one of us doesn't know sh*t....only time will tell who is right....
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#1 Personal Finance Contributor
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As a seller, I hope it becomes the new norm for a little while...
WA is considering a cap gain tax, so I may move my exit timeline up a year. Will let you know If crazy money like this comes out of the woodwork to buy!
Not saying this is the case here, but there are international buyers who buy just for asset stability. In a phrase, they buy for return OF investment, not return ON investment. I learned years ago that I cannot (or should say will not) play in this scenario. So to answer the OP's question "How are us "investors" supposed to compete with that?" I say you shouldn't.
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Market goes up. Market goes down. Part of what makes the biz so fun.
It is common for one investor to pay more than another. That doesn't mean the person paying more isn't successful. I have been outbid on deals, only to see the investor do really well - better than I thought.
Sometimes other investors see what we don't see. Or it could be a situation where one investor is accepting a lower return than another investor. It happens all the time in business.
It even happened after the crash. I passed on deals that I would kill for today. It is all relative to what the market is doing now.
I have said before that waiting for another crash is a fools game. Crashes like the one in 2008 are a once in a life time opportunity. Find the best deal you can in the market you are in.
But aren't commercial properties at that price point more resilient to downturns? Did the housing correction affect the prices of 16+ unit apartment complexes? I know they affected SFRs greatly as I bought two during that time.
I can't speak for all markets, but in my city the 16+ units sat on the market a long time back in 2009-214. Now they are selling quickly at inflated prices. The problem is that credit dried up, so even qualified buyers had a harder time getting loans. Oddly, the rents went up and unit vacancy was low, so it had nothing to do with the performance of the asset class.