YOU MUST STICK TO YOUR CRITERIA IN TODAY'S REAL ESTATE MARKET

[Jason Malabute]

The pandemic, inflation, and uncertainty has caused assets including real estate inflated.

I feel like the sexy thing to do in 2021 is to be a real estate investor. Combine that with low interest rates and low inventory (soaring prices) is causing people who have no business in real estate to enter the market. You have people from LA and NY entering lower priced markets and paying double and triple the price of properties (including multi-family). They are comparing apples with oranges.

This is the time for savvy investors to be even more careful than before. Have a strict buying criteria and stick to it no matter what! know the class of neighborhood, property class, property age, occupancy , and price range per unit you are interested in . Don't break your criteria for anyone.

If you will not be hitting ROI and cashflow goals walk away. Never invest on speculation or appreciation. Cash flow and ROI is more important than ever.

I have turned down so many deals that don't meet my criteria .

Remember. What goes up must come down. Be careful.  

[Arn Cenedella]

@Jason Malabute

I understand your frustration and your position about holding to your investment criteria. All of us would love to buy a deal that produces 8% cash on cash right out of the gate (in a growth market). I can’t find anything like that and it disappoints me.

There is merit in that position.

Please let me share a somewhat contrarian position - not saying you are wrong - simply, here’s another way to possibly look at the market.

That being said, an investor must also adjust to changing market conditions good or bad. I don’t think using the same criteria one used 5 years ago is the be all end all best right answer.

Let’s take cap rates. 5 to 10 years ago for MF, cap rates were probably 7% to 8%. An investor could then count on obtaining various return metrics like cash on cash etc. So an investor then develops his or her investment criteria based on those 7% to 8% cap rates.

Those cap rates and return metrics based on those cap rates simply are not available in today’s market. So if one was to hold to those metrics, one will not buy anything at this time.

So one can decide to sit out the market until cap rates return to “normal”. That’s each investor’s choice. In my opinion this decision means one believes the market will return to normal as defined by what happened 5 years ago.

But that is not a sure thing.

I paid 11.75% interest rate for my first house back in 1980. Did anyone foresee 2.5% 30 year fixed home loans would be available today? Did anyone see negative interest rates prevalent in Europe? 

We can’t predict the future, bottom line.

Who knows what the world will be like in 10 years? I certainly don’t. 

For over four decades, my investing approach and criteria has been flexible - it has changed as economic and market conditions change - my criteria adjusts on geography - my investment criteria was not the same buying an SFR in Silicon Valley as it was in Charlottesville, VA. I don't see any other way to do it.

If an investor doesn’t adjust to current conditions, that in my mind is a big mistake.

My approach has been: Does the deal and the property make sense now? Do then numbers work now? Does one have rational reasons to be optimistic about the future of the area and of the property?

If the answers to these questions are Yes, I buy the property.

And then I let life unfold. I made the best decision I could. I have no control over the future. I will need adjust as time moves on.

There is a famous very successful large syndicator who is NOW selling his entire MF portfolio. He believes the market is over-heated and headed for a fall. His perspective is similar to yours. He has his opinion and he is putting his money and property where his mouth is. I say Bravo to him.

Only time will tell if this investor was right.

One final point if you sell smaller appreciates assets now to buy a larger asset - it can be a wash - you are selling at an allegedly inflated price but are also buying at an allegedly inflated price.

Over 40 years, I have bought and sold, continued to invest through all sorts of market cycles. Good investments can be made in any environment.

[Michael K Gallagher]

@Arn Cenedella thank you for this perspective, and detailed write-up! It is quite enlightening, and refreshing to tell you the truth.  Cheers, and thank you!

[Bill B.]

Don’t forget. Almost none of the properties are being sold to out of state cash investors. (MAYBE 10%, probably 5%.). The rest are going to owner occupants (80%?) and 90-95% are getting loans and therefore getting appraisals. So they are paying what the experts are saying they are worth, since that’s all they can borrow. NOBODY is paying 2-3x what a property is “worth”.  10-20% over MAYBE. Especially non-investors. The owner occupants. 

If the payment for their house ends up being $1320 instead of $1200 but they were paying $1400 in rent it just doesn’t matter if they “overpaid” 10%. Maybe their rent was only $1300 but now they have laundry, a garage and a yard and they’re gaining equity. Still a good deal. 

[Barry Goldenberg]

I am a guess what you call a newbie but would like to think of myself as a 'smart newbie' given my long financial career.  My goad is to generate some retirement income so sticking to criteria seems important as per Jason's comments.  At the same time, things change, as per Arn's reply.  Given I am so new to this I guess I am wondering what different criteria people use.  Somehow I got in my head that I should be buying things at a 10% cap rate.  In greater NYC area, that is not at all realistic.  I have identified some smaller cities in the Northeast, like Albany, New Haven, Hartford, Springfield where there are much better opportunities but realize 10% cap not realistic.  What I am trying to understand is if anyone on this thread has any information about the historical cap rates in these types of cities.  Thanks very much for any info you are able to provide.  This is my first time logging in and stumbled across this interesting exchange.  If there is a more appropriate place for me to post this question where people in the northeast would be more likely to see it would appreciate anyone pointing me in that direction!!!  Thanks.

[Justin Goodin]

@Jason Malabute I agree! I was just mentioning this on another post. Having the right and exact buying criteria is very important. 

I think taking the sniper approach instead of the shotgun approach is key. Really drill down on 1 or 2 markets, the size of the asset, year built, class, etc. 

[Arn Cenedella]

@Bill Brandt

If I was currently a tenant, had good credit and a decent job and was paying $1400 a month rent, I would by all means buy a house and lock in 2.5% rate for 30 years. $1400 rent is equivalent to about $1800 a month ownership cost after tax benefits are included. These kinds of payments would purchase a home for $225,000 to $300,000 with very little money down. They can own for less than rent.

I can’t predict the future but I would be willing to bet having a 30 year loan at 2.5% will make the borrower some money simply due to the rate.

[Arn Cenedella]

@Barry Goldenberg

Here is link to CBRE cap rate report.

https://www.cbre.us/research-and-reports/2021-US-Real-Estate-Market-Outlook-Capital-Markets

You will note for the last 12 years, cap rates for multifamily have been closer to 5% than 10%.

Cap rates will vary by market. One can obtain higher cap rates in non-growth or slow growth areas. One will pay more ie buy at a lower cap rate for growth markets.

Hope this helps.

[Michael Hayworth]

I used to think like that. "Amazon doesn't have the fundamentals to support this $400 price point. Wait for it to fall." "Tesla has never turned a profit. How are they worth $300/share?" Thank God I got over that when investing in real estate.

Truth is, many markets simply don't cash flow much anymore. They will eventually, as rents rise. But in DFW, rents aren't keeping up with home prices. If I wait for a deal that meets the 2% rule, or even the revised version, the 1% rule, I'm not going to buy anything but hood houses. Meanwhile, appreciation has built real wealth for me.

"What goes up must come down" is not a real thing. In the 2008 crash, the average drop nationwide was 20%. Here in DFW, it was more like 10%. People who had been consistently buying for appreciation still were way ahead, even post-crash. In today's market, we have 2000 Californians and New Yorkers a day moving into Texas with big cash positions from selling their high-priced homes. (And they're going to vote for political positions that'll ruin our economy, just like they did back home, but that's another topic.) Every one of those people moving in needs someplace to live. If I tell myself to stick to "every house must cash flow $200/mo", I won't buy much of anything. But if I buy as smart as possible given market realities, I'll grow more wealth over the next few years, even in event of a market correction.

[Arn Cenedella]

@Michael Hayworth

Excellent points.

I sold residential real estate in Palo Alto and Menlo Park CA on the San Francisco Peninsula and Silicon Valley from 1978 to 2014. 
And every time, prices increased dramatically, experts would say: “Prices are absurd, they are way too high, how can they go even higher?” This was said in the late 1980s, this was said in the late 1990s, this was said in 2006 - the 2008 subprime crisis momentarily put a halt to the price increases but by the time 2012 rolled around prices were jumping again until Covid hit and then even with Covid, prices have continued to rise. 
Texas cities like Austin, San Antonio, and DFW continue to boom. Apartment buildings in Austin and DFW sell at 4% caps and I suspect soon we will see sub 4% cap rates. I guess one could say the growth in these cities is not sustainable and the bubble will pop. I can’t argue with that because I don’t know the future. But if I was to lay down my bet, I would go “long” and not “short” on those Texas markets.

I’m in Greenville SC and have lived here for 6 years and I see and feel the vibe and the energy everyday. I don’t see this changing anytime soon. I am “long” on the Carolinas too.

[Brian Simpson]

@Arn Cenedella I couldn’t agree more, know your product, your processes and study your successes and your failures every deal has both and every deal is as good or bad as your actions, and foresight meet the properties financial reality.

[Brian Garlington]

Good post jason

[Paul Moore]

This is a CRAZY market!  I would recommend that investors look for assets with significant untapped value. Like a run-down commercial building that could be torn down. Then use the lot to rent to food trucks.  Or a self-storage facility that is not offering U-Haul and maximizing its ancillary retails sale opportunities.  Or a mobile home park that is still paying all the tenants' utilities.  Or a house near campus that could be more (much more!) profitably rent out by the bed than to one tenant.  Good luck everyone!  

[Jackson Babcock]

Originally posted by @Justin Goodin:

@Jason Malabute I agree! I was just mentioning this on another post. Having the right and exact buying criteria is very important. 

I think taking the sniper approach instead of the shotgun approach is key. Really drill down on 1 or 2 markets, the size of the asset, year built, class, etc. 

 I agree with Justin.  Narrowing down a few markets and being an expert in that market may give you a key advantage where you see value that someone else missed.  That little piece of information that you know could be the difference in whether you get a deal or not. 

[Justin Goodin]

@Jackson Babcock Totally agree! You will feel a lot more confident in your underwriting and speaking to investors with that in depth market knowledge. 

[Mike Lorence]

This is exactly why we take a geoniching investment strategy [inch wide, mile deep].  We are geoniched in that we only invest in Florida multifamily.  And on top of that, we only invest in a handful of areas in Florida don't produce positive cashflow (i.e. south FL). There are many successful syndicators who are wide area investors [mile wide inch deep] but I think it may be getting a little harder to make that strategy work since the riches are in the niches.  I might do a podcast on this thread to go deeper on the topic.  What do you think?