Do You Need To Change Your Investment Strategy In The Market Cycle?

[Gino Barbaro]

What is working well for you now? We've seen seller financing come back in a big way, and I think it will continue as debt continues to be challenging.

Syndication, raising capital for less experienced operators, and those who have challenging deals, will be more difficult in this part of the cycle.

What tools/strategies are you using to close deals today?

Thanks for taking the time to share!

Gino

[Arn Cenedella]

@Gino Barbaro

We are buying smaller BTR product direct from builder at completion - typically projects with 10 to 20 duplexes per property. After all, who is the most motivated seller in any market? Typically it’s a (spec) builder. Builders typically are NOT long term buy and hold investors.they build they sell they take their profit and do another new build, rinse and repeat.

There's still a delta between seller ask and buyer expectations on existing property which makes sense. For example, seller may have 4.5% debt and so current NOI is worth more to seller than a new buyer who has to pay 6.5% debt.

Seller finance is a great tool too.

My only caution is to NOT overpay for a property in exchange for seller finance at an attractive rate.

Here is a hypothetical say market cap is 7.0%.

New conventional debt is 6.5%.

But seller will carry at 5%.

With seller finance at 5%: What price does one pay? What cap rate does one buy at?

In my experience, sellers who offer seller finance often want a premium price in return for lower debt.

What is your thinking on this?

Are you willing to pay a premium in return for lower seller finance debt?

If so, how do you calculate the premium?

The same issues can be raised about assumption deals.