And There's the Truth About Current Market!

Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes

This article in the Globe tells the absolute truth about what @Wendell De Guzman - do we buy into the upswing and thus speculate on the power of the wave (and in the process overpay relative to fundamentals), or do we continue to underwrite the exit based on fundamentals in the face of the reality that nobody cares about the fundamentals and in underwriting this way we, while ensuring safety fir our investors, are pricing ourselves completely and utterly out of the current market?

Thoughts?

7 Reply

154 views

Most Popular Reply

Joel OwensBusiness Member

Moderator

Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes

11y

You can't blame brokers really.

Even the ones who know how to analyze numbers. If buyers are clamoring to buy property just to park money SAFELY in their eyes at high purchase levels then the brokers listing for the sellers are all for it.

Syndicates are a very tough nut to pull off. Back when the markets were frozen and you could pull cash together they were the golden child because lenders were not lending. Today too many direct buyers out there with a bunch of cash.

I can tell you what investors tell me. If they are foreign investors they want to park money in the United States. Our worst economy looks amazing compared to the countries they are in. Even though they might like or love their countries they do not want to hold their long term wealth there. Many countries are tightening money restrictions on their citizens flowing money into the U.S. so it's creating a frenzy for foreign investors to move money while they can. Also the U.S. dollar is strengthening from it's past position so foreign buyers want to capitalize on exchange rates while they can.

Another factor at play is the stock market. Fluctuations in earnings and returns for investors who already have a lot of money ( millions ) is not something they want to stomach. They like the idea of owning a commercial real estate asset with somewhat more predictable returns and corporate tenants.

With stock one day it can be worth 30 a share and the next 15 a share when something bad happens. With a physical asset in real estate you at least know what it is. With these stock companies you have to worry about what are they HIDING that you don't know about that will make values plunge.

It's a roller coaster ride many who are already wealthy do not want to take.

I still think there are properties out there that make sense to buy. For syndicators who have to price in extra returns above market conditions to make money for themselves it's a tough sell to sellers.

Think about a single property syndication in a sellers eyes. The syndicate doesn't want to put much down generally. They want more time then market averages from a standard buyer to close. They want outs in the contract because some of the investors might back out at the last second and they have to get back up investors or the deal falls apart on them. The price also has to be much lower to give the returns the investor wants and leave enough meat on the bone to make it worth the syndicators while. All of these factors making closing a deal less and less viable especially if the syndicator has unrealistic expectations in the marketplace.

For example if a syndicator says they want a B asset at a 10 cap then really they are not being very realistic. Their choice is to reassess how they can still do deals and make money in that asset class, buy another asset class at a different point in the cycle that is more advantageous to what they want to do, or wait for the asset class they are in to cycle down to do something ( could be 3,5,10 years - nobody knows for sure ).

Right now debt is really cheap with the oil prices falling. As people clamor to bonds, gold for security etc. the rates are going down. My commercial lenders tell me that once it drops to a certain point they will have a floor they will freeze the rate at. Anything below the floor they will not do a loan or will just wait for rates to go back up because at certain rates they loose money lending or selling off.

So those of you watching the commercial real estate markets and the rates dropping it will soon be at a point where it will not drop further in a lenders eyes. I personally think now is a good time to buy because many buyers come out in the summer time. I am seeing sellers wanting offers now on good properties. The interest rates have dropped 30 to 40 basis points but sellers have not adjusted and have even lowered asking prices. That can give a 100 basis swing in the buyers favor right away.

2015 is a buy year for me. I am looking at possibly setting up a fund myself.

Podcast Guest on Show #47

NNN Invest53 Reviews

Website View Page

11 Reply

See this reply in the discussion

92 Replies

Jump to latestLatest

Sort by

Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
11y
@Account Closed
you ever considered or built ground up Multi ... Does it make sense on the west coast IN PDX they sure are building a ton of it.. last 3 years.
Podcast Guest on Show #222
JLH Capital Partners51 Review
Website View Page
0 Reply
Ben Leybovich
OP
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
11y
@Jay Hinrichs - can't touch building - not even in this environment. We can indeed buy for half of the price of a new built. Plus, A Class is impossible to cash flow in the midwest. Not to mention we are over-built like crazy - thousands of units sitting vacant
0 Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
11y
@Ben Leybovich
is the over built status a function of population shifts.. Like a Detroit situation? and or the fact that SFR's can be rented for 600 to 800 in the same market and so many SFR's have gone to rental's ... so potential tenants would rather live in a home than an apartment all things being equal?
Funny we have a acute housing shortage here in PDX .. And the big boys play here.. But like you said it does not cash flow ( what ever that means) ... with such great fundamentals Oregon just seems to get looked over.. Although we do get quite a few from CA come up our way to buy.
Podcast Guest on Show #222
JLH Capital Partners51 Review
Website View Page
0 Reply
Ben Leybovich
OP
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
11y
@Jay Hinrichs - it's a bit of all of the above, but mostly economics. To put up an A Class, you are looking at $60 sq.ft. of build cost, and that's if you cut every corner known to man. Then there are the fees, taps, engineering, planning, etc. Al in at no less than $70,000 unit. I mean, someone might be able to do it for less, but not much less...
The rents necessary to cash flow this are in the $1,200 - $1,400 price point. There are only so many people who can afford that in the midwest - even places like Columbus and Indianapolis. There are certainly some, and guys who broke ground in 2010, 2011 are the once ahead of the curve. Those who jumped in later, are having to lower rents to fill units
So - first of all, there are only a few primary and secondary markets in this part of the world where $1,200 rent is a sustainable proposition in the first place. And only for so many...
Now, there's so much empty A Class stuff out here, that B instantly became C, and C is a joke.
0 Reply
Account Closed
Minneapolis, MN · Member since 2014 · 332 posts · 288 votes
11y
@Jay Hinrichs that's how it works for the most part. I'm fortunate that the firm I run acquisitions for has a great reputation. I just spent the past week in Palm Springs at the National Multi Housing Conference hanging out with all the brokers from our target markets. We see just about every deal in the Midwest and south over 150 units that is for sale due to these broker relationships. We just lost an off market Fannie foreclosure to another buyer at the last minute. We were pretty bummed, until we found out his last name was Romney.
2 Reply
Account Closed
Minneapolis, MN · Member since 2014 · 332 posts · 288 votes
11y
Ben Leybovich where is all this vacant Class A? I'd love to know. Most Midwest cities are booming with new development right now. Not sure what market you are referring to, but Minneapolis, Indy, Columbus, etc are building thousands of new units per year. Costs well over $70k/unit (Minneapolis is double that) and rents are over $2.00/SF.
0 Reply
Ben Leybovich
OP
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
11y
@Account Closed - anyplace along 270 in Columbus as far as the eye can see. Vacant - no lights. There simply isn't organic growth in mid west to support this. Momentum - sure, but jobs aren't here for the most part
0 Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
11y
@Account Closed
Interesting how you and Sean look at the same market and have different perspectives.
I have not tracked new construction multi here but I just had a deal presented to me to build out. it was a 10 unit inner city.. I know that's probably much smaller than what you guys do. But it was 300k for the dirt 100k a unit to build and had resale value of ( brokers opinion ) of 1.8 rents 1400 to 1600 a door. Inner city PDX. Not sure how that flush's out in cap rate. or how that would look to an investor.. But those would be brand new units that will basically be 100% rented day one and stay that way for many years to come.
I was thinking of buying the lot building it then just selling it off If I could make say 20% margin on gross build and land costs.. in say 18 months.. I think my bank would give me 90% of costs. so invest 130k or so for 200k gain... Not sure how appealing that is to you guys in the business.
Podcast Guest on Show #222
JLH Capital Partners51 Review
Website View Page
1 Reply
John HornerPro Member
Flipper/Rehabber · Columbus, OH · Member since 2013 · 1k+ posts · 655 votes
11y
Originally posted by @Ben Leybovich:

@Account Closed - anyplace along 270 in Columbus as far as the eye can see. Vacant - no lights. There simply isn't organic growth in mid west to support this. Momentum - sure, but jobs aren't here for the most part
Anyplace along 270? The loop is about 60 miles total. To say anyplace is consistent along 270 for anything would be ridiculous. No lights? A good portion along the west side is still being built, so no light would be correct, but I would bet a good portion are sold. I think it's LC is building most of them, and every unit they've built for the last 5 years (that I've been in Columbus) are full. I know quite a few people living in them.
Jobs aren't here? Compared to what exactly? Take a look at the link below for cities in the US with highest job growth for 2014, Columbus is #20, not too shabby I would say considering the low cost.
http://www.newgeography.com/content/004289-large-cities-rankings-2014-best-cities-job-growth
1 Reply
Brian BurkePro Member
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
11y
I own some land...I got a use permit to build 46 units on it and I also own the land across the street that I just had a preliminary layout drawn for 160 units. I don't plan to build though, it's in your old stomping ground of Clearlake CA and best suited for some type of subsidized housing which isn't my specialty so I'll sell to an affordable housing developer.
If you asked me this question two years ago I would have said no way in hell. But nowadays the thesis for new construction is improving. If you start today it'll be a year or more before nails fly and by then there will be an even more compelling case for new construction in some markets. Certainly here in CA...except that it could take a decade to get a building permit. Lots of risk in development though and the land carry can kill you (I learned this lesson already) so I'd probably only be interested if the land was contributed into a JV.
Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
1 Reply
Brian BurkePro Member
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
11y
Originally posted by @Jay Hinrichs:

@Account Closed
Interesting how you and Sean look at the same market and have different perspectives.
I have not tracked new construction multi here but I just had a deal presented to me to build out. it was a 10 unit inner city.. I know that's probably much smaller than what you guys do. But it was 300k for the dirt 100k a unit to build and had resale value of ( brokers opinion ) of 1.8 rents 1400 to 1600 a door. Inner city PDX. Not sure how that flush's out in cap rate. or how that would look to an investor.. But those would be brand new units that will basically be 100% rented day one and stay that way for many years to come.
I was only there for an hour. I had a meeting then flew on out of there!
Sounds like an interesting deal, Jay.
Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
0 Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
11y
@Brian Burke
I agree I have not built anything like that just single family homes.. whole nother kettle of fish vis a vi insurance and what not. I would think it could be a good diversification for some... PDX is pretty straight forward with permits 6 months or less..
Podcast Guest on Show #222
JLH Capital Partners51 Review
Website View Page
0 Reply
Ben Leybovich
OP
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
11y
@John Horner - from hear say (I know people close to some of the developers on the ground) their knees are shaking. People that could sell already have, and the rest are very worried. Loss to lease is going up. Vacancy is going up. There isn't organic growth to absorb thousands of units still coming online. They are lowering rents, and in doing so they are destroying the C segment. Cincinnati is the same. Indianapolis is stronger economically (more diversified growth) and thus apartment market is stronger...
0 Reply
Steve Olafson
Scottsdale, AZ · Member since 2014 · 659 posts · 536 votes
11y
I have decided that I have much more power to drive values if I stick to the market where I live.
All in all, there are very few strategies that I agree with on this forum. Most work in a very slow and drawn out fashion. Value add or timed purchases are where most of the money is made. This thread talks about these strategies and highlights the thought processes of those that are implementing them. Can this thread be pinned to the top of the apartment section?
@Brian Burke
My strategy is exactly as you describe. But unlike your market, I cannot find a deal these days. Distressed deals seem to be selling on a price/unit that does not allow enough money for fixup. It is tough to pay 50k/unit, put 10K/unit into the deal to only make it worth 63K/unit. Not enough meat on those bones. After the cost of turning the resident base over and managing the process, there is nothing left.
The thing about this is that there are not many people in this market that can fix a unit up for the price that I can. I get incredible prices on flooring, granite counters, plumbing, etc.
The timing part is critical as well. @Serge S. found a lot of deals when they were deals. He is an opportunist which is a strategy that can make you wealthy real fast.
Gross rental income has grown significantly over the past few years. This is what has driven the euphoria that is currently driving the sales market. There is more growth coming in the rent growth area but I cannot imagine that this will drive much more value growth. Most of the future growth seems to already be priced into the current market.
2 Reply
Lynn Harrison
Garberville, CA · Member since 2011 · 184 posts · 6 votes
11y
Just a thought... I've been reading quite a bit about Chinese investment in the US this week. There is an incredible amount of cash coming from China; private, EB-5, and also indirectly with US citizen partnerships. There is suddenly a lot of Chinese investment in the Midwest, even Detroit. There seems to be some industrial factory investment just starting recently as well. Maybe there is a long term plan to develop Midwest manufacturing. If so their residential investments would make sense. Not sure I like the thought of foreign investment owning large job producing companies in the US but that would be a really good large scale investment for Chinese industrialists. If people can afford to buy a car after they pay their rent that is.
0 Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
11y
@Lynn Harrison
In General EB-5 will not work for RE investments.. It is best suited for manufacturing. A sponsor must create enough jobs to qualify and rehabbing or building homes does not do it.
Love Garberville area used to fish the Eel a lot in the day.. Plus I love flying into the Garberville airport the traffic pattern is really fun to fly !!!
Podcast Guest on Show #222
JLH Capital Partners51 Review
Website View Page
0 Reply
Lynn Harrison
Garberville, CA · Member since 2011 · 184 posts · 6 votes
11y
Hi Jay, I haven't done any flying and only know one person who has. The guys at the airport have a radio show on KMUD here. Once a month on a friday at 7:00 PM. They'd probabley love a phone call from you- they love to chat. I usually fish south of here as here is just catch and release.
Actually, there's been quite a bit of RE bought with EB-5 if you google it. I think though there is more money coming from other investment sources in addition. And a good percentage of RE bought with EB-5 is not rented or lived in- just a money holder. I'm not connected in any way with that, just doing a lot of reading lately. There may be political and legal problems with some of that money coming up.
0 Reply

Join the conversationCreate a free account to reply, vote on answers and follow this thread.