All Forum Posts by: Ashley Wilson

@Gino Barbaro I would argue in some ways you were smarter:) You got the difficult aspects out of the way first!

@Gino Barbaro I agree without knowing all of the details I think it is impossible to create a blanket approach to anything within mf, vertical integration included. The takeaway point of what I was trying to say is that being motivated to bring management in-house due to cash position isn't typically a good reason. I am guessing when you and your company brought your pm in-house you were in a position that if something did not go right, you had the resources to support the change (financially speaking). The majority of cases I am hearing for bringing pm in-house today are actually due to the contrary. In other words, if it were to fail, there is no fall back. 

Vertical Integration - Savior to Multifamily (MF) Investing?

You have to be living under a rock (if you are a MF investor) to not know the challenges MF is facing right now. Interest rates, insurance hikes, rise in real estate taxes, eviction delays, rising expenses and delinquency are just a few problems investors are encountering. Owners/Operators have to identify new and innovative ways to offset these expenses just to survive.

One of the most common solutions I keep hearing is bringing property management in-house (aka vertical integration). On paper this may look like an obvious solution, however, in practice it can cause more challenges (cost) than it saves for most situations. Before jumping to the challenges, let's talk about some of the positives.

The most obvious positive is the PM fee. The industry average is 3% for large properties, not including add-on fees. Through vertical integration a company can have one in-house PM manage multiple properties, when maybe only 1-2 properties need to off-set that expense.

Another benefit is the higher visibility in the day-to-day operational spend. Most 3rd party PM companies have a spend limit that they are allowed to spend without ownership's approval to avoid delays in operations. Bringing the management in-house would allow real time decision making on the validity of the spend.

While there are other benefits, for brevity this post is just going to focus on the expense.

Looking at the opposite side, there are quite a few challenges to starting a new business, which in essence is what is being done here. For those of you who think it is the same, I would argue that they are similar but not the same. One of the most important roles your PM company provides is knowledge on the legal side of leasing at a national, state and local level. I can guarantee that most owner/operators are not aware of these details.

Clearly there are companies who are thriving with in-house management. I would suspect that these companies did not decide to go vertical when they were cash-strapped, but in a position of financial security to take on this new risk.

PM teams should be adding incredible value to your overall business plan. If they are not, then it might be time to switch companies, or even, dare I say, self-reflect as your team might actually be to blame. If it is the latter, then no new PM company, nor vertical integration will solve your challenges.

Ultimately there are some investment companies that vertical integration is going to be a key part of their success, while others vary from no impact to being the downfall. Regardless of what you decide, I do not believe it is the only action someone will need to take to "survive to '25". Operations is a game of keeping a lot of balls in the air. If you relied on the wind to keep a few of those balls in the air these past years, it then becomes very difficult to figure out how to juggle even if you add an extra set of hands.

Everyone is talking about timing the market to buy at the bottom. Great in theory, but difficult in practice, let me explain.

1. Historically, the average closing time was 75-90 days. In other words, if a deal closes today, it is actually a reflection of pricing 75-90 days prior.

2. While sometimes sales prices are reflected immediately, sometimes there are reporting lags and sometimes prices are not even reported. These reported sales prices impact the trading cap rate. In a volatile interest rate environment the cap rates have significant lag time in reflecting the interest rate at which the property can secure. Thus, the speculation of the trading cap rate (the most common way multifamily real estate is valued) is just that speculation.

3. The traditional closing period lag time coupled with the delay in knowing the true market cap rate due to steep interest rate hikes creates a major, present day, market uncertainty. This is the ultimate reason why the bottom will come and go without most capitalizing on its arrival.

So what do you do? Speculate! Haha, jk, I just wanted to make sure you were paying attention. The real answer is you go back to the fundamentals. Here are just a couple questions you can use to determine whether or not it is a good buy: Does the deal make sense (cash flow) with the current interest rates? How far can you stress test the investment before it would break? Focusing on what makes sense for you and your business plan while factoring in market conditions will land you good buys. While it may not be a bottom of the market acquisition, investments can still be good buys if fundamentals are met!

Over the past year plus, multifamily has endured some difficult blows. Most would agree the top three are interest rates, taxes and insurance. Breaking these three down on the direct impact they have had on multifamily pricing: rising interest rates impact your cost of capital, and taxes and insurance impact your net operating income (NOI) which has a multiple effect on evaluations when using the NOI approach for assessing value.

Value, while a simple definition, is a complex concept. There are three ways in which multifamily is evaluated. The most recognizable is the comparable sales approach which uses comp properties to assess value. This is how most tax authorities determine value. The second approach is the replacement value. This is the cost of rebuilding the same product. Insurance companies use this method when determining their policy pricing. The last approach is the NOI approach which is the most common way investors buy multifamily. This method evaluates the business through taking the income minus the expenses and then dividing the NOI by the trading cap rate.

Comparing the three evaluation methods to the three challenges facing multifamily yields different changes to value. Specifically, for most properties the value on both the comparable sales approach and the replacement value has risen, but on the NOI approach it has fallen. This creates a stalemate as buyers are forced to make a decision on whether or not they want to change their approach on how they evaluate multifamily.

So far, it looks like the industry has responded by holding steadfast on their commitment to the NOI approach. But will this last? Or, will a new way emerge? Interested to hear your thoughts on evaluation methods and the future of multifamily transactions in this current environment.

Where are all of the deals everyone said were coming in multifamily?

Over the past six months, numerous people talked and fantasized about all of the discounted deals that they planned to scoop up in multifamily. It was also the reason why many people decided to sit on the sidelines - uncertainty of where the market was headed coupled with the hope that when the bottom presented itself they could maximize their purchasing power.

So where are these deals? Are they still coming? And if so, when?

While I do not believe we have seen the last of the foreclosures, as I recently heard that 60% of multifamily bridge loans nationwide are not paying their mortgage, I am skeptical on whether or not we will see a massive fire sale of multifamily properties. Why? I thought you would never ask.

There is a famous saying by George Santayana, "Those who cannot remember the past are condemned to repeat it" that applies nicely to the situation we find ourselves in today. In 2008, during the housing crisis, banks started foreclosing on houses across the country. While most people thought banks prioritized foreclosing on houses that had not made their mortgage payments in months, banks actually prioritized homes that had a lot of equity. Banks also recognized that in just two years most properties rebounded in value. It is that rationale that has guided my thoughts on what I think is and will continue to happen with multifamily.

Specifically, I think for most distressed properties, the banks are actually going to hold the property. Most people would say to me now, "Banks are not in the business of owning real estate." And I would say, "On most investments they are the largest investor." The difference is they are not the operator. So what do they do about operations? Banks are currently reaching out to good PM companies and Owner/Operators to see whether or not they are interested in taking over the property. In other words, the property will never hit the market during this down cycle, but instead hold steady until the market rebounds.

For any property that a bank wants off their books, most are being sold in a short-sale capacity. What about the properties that are headed to auction? These properties represent the smallest amount of distressed assets.

So if you are waiting for a massive wave of distressed properties to hit the market, you might be waiting for a while...

What are you seeing in your market?

@Jacob Sherman I am good:) Thank you.

A little over a year ago, I wrote a post that received over 10k views. Based on the popularity of the post, I thought it might be worth posting an update, especially because the outcome is quite ironic! Before, I get to the update, here is my original post:

Recently I came across a deal that we previously offered on, but was awarded to another buyer. I did a high level comparison where we differed in our underwriting and here are the results:

1) Rents: They projected over $300/unit rental gains, whereas we projected $140. The differential is due to the comp set. If you do not recognize the true comps to your property (ie. what prospective tenants consider when looking for a place to rent), you can put yourself in a precarious position; one in which you can never get ahead. The reason this is very dangerous is because not only does it impact your cash flow, but it also impacts your ability to exit as pricing is typically based off of the NOI approach.

2) Natural Appreciation: Currently there is some healthy appreciation in the market, however, is that going to continue at today's rate for the next three years? This sponsorship believes it will. In comparison, we underwrote appreciation for Y1, and then scaled back for the subsequent years.

3) Inflation: I have seen this on so many offerings and I am not sure why it is not being called out. If inflation impacts your income, it should impact your expenses. Too many times I have seen underwriting accounts for inflation in income but not in expenses. This was the case in this Sponsorship's underwriting too.

4) Economic Occupancy: Economic occupancy almost always is less than physical occupancy. The Sponsorship's model had economic stabilized occupancy greater than today's current, historic and future forecasted physical occupancy. Typically, the only way to achieve such high occupancy is when the rents are below market. I already mentioned how aggressive their rental gains are, so I am not sure how occupancy can keep up when the rents are so high.

So what does this all mean? When you are vetting an investment opportunity, I am a huge proponent for vetting the team first, the market second and the deal third. However, when the fundamentals of the underwriting do not make sense, that is more a reflection of the team than the deal itself. To translate everything above in an offer price, we offered only 83% of what this Sponsorship paid for the property. This is not the only deal that our offer has been off by ~20%. More and more deals are trading for insane prices. Some may argue we should just sit on the sidelines for a bit or change our underwriting, but we are not doing either. We are sticking to our fundamentals. While we may not get a lot of deals, the deals we do get will be worth the wait!

Ok, so now the update!

So the ($22) million dollar question is how is the property doing? Well funny you should ask! A couple of weeks ago I received a call from one of the partners who bought the property. They told me that they have heard of me from multiple people who said that if anyone can get a property performing it is me, and that they desperately needed my help. While I appreciate the compliment, the situation is quite difficult because they paid way too much basing their price (and business plan) on an unobtainable reality. Just as I had noted a year ago, the rental projections were too high. (Side note: there has been tremendous rental growth over the past year, so the fact that they still couldn’t hit the targets is scary!) The other things I pointed out also came to fruition: natural appreciation is not occurring like it was a year ago, inflation DID impact their expenses too (obviously), and the economic occupancy actual and future projections are aligned with the historics, thus not even close to their projections. So what did I do?

As much as I would love to help this group out, as I have done for other owners/operators, I think this investment opportunity is past the point of saving. Personally, I think the partnership should minimize the loss and be transparent with their investors. Specifically, I think they should arrange a discounted sale even if that means they lose money. As that is a tough pill to swallow (especially on the ego side), multiple investors are opting not to do this. Instead they are holding the property until the very last minute when the lender takes the asset. This is, obviously, the worst outcome that could happen for all parties involved.

There is a very famous saying that has become a key guiding principle in real estate fundamentals: Money is made when you buy. Over the past few years this basic concept has been forgotten. Numerous investors (even very famous ones) were quoted as saying real estate values always go up. Today we are witnessing the fallout from investors who relied more on factors they could not control (interest rates, market demand, inflation & appreciation) than the ones they could (basic operations). In fact, I would even argue that it was their lack of operational knowledge that got them in the predicament in the first place.

*** You can follow more of my thoughts here:)

Take it for what it is worth, but over the past 10+ years I have been in real estate I have noticed one major flaw in this sector - the lack of technological advancement. From the way real estate transactions are conducted, to the construction of both residential and commercial properties, to the way in which real estate businesses, like multifamily, self-storage, etc. are operated, technology was lacking no matter where you looked. Historically the real estate industry has been able to get away with the lack of technological innovation because the market just absorbed the higher expense that these antiquated processes cost. Well, that is no longer the case today.

As the market is at its breaking point with residential real estate teetering on a major housing affordability crisis and commercial real estate being slammed with operational expenses - for example rising insurance rates and tax hikes, it appears that we are nearing or potentially already in a recession. While some may argue that a recession can have some dire consequences, recessions also create opportunity. Tim Ferris said it best when he said, “A recession is very bad for publicly traded companies, but it’s the best time for startups. When you have massive layoffs, there’s more competition for available jobs, which means that an entrepreneur can hire freelancers at a lower cost.” In previous recessions those lower costs meant lower wages, however, today it means something totally different.

Enter Ai. If there is one thing that could propel real estate through this recession, it is Ai. Before you dismiss this statement as a pie-in-the-sky thought, hear me out as I break down where I see Ai emerging victorious.

**** If you want to read more about my thoughts on Ai, check out my blog and make sure you subscribe as I share my thoughts on a lot of different real estate topics **** https://www.biggerpockets.com/member-blogs/7285-houseitlook-...

I posted this article a few years back, but I think it is worth updating.

Being in real estate these days, it seems like the only question people want to ask me about single family housing is “are we still in a bubble?” The problem with that question is that there are great arguments on both sides. Anyone can pick a graph and quote things like historical trends or current supply vs demand, and make a very convincing argument. While I don’t have a crystal ball, I do have concerns that we have approached the top of the cycle. With the drastic increase in Mortgage Rates, I see people that I know stretching their budget just to get a name on a deed. So I have to ask: Is now the right time to be doing this?

The beauty and the curse of owning a home in this country is that it is the American Dream. Buying that first home has become synonymous with “making it” in life, and therefore at the top of the list of things to aspire. My husband and I have owned plenty of personal homes over the years and currently live in our potential “forever home”. At the same time, I know people who are very smart and are very successful investors who swear that renting a home is the way to go. Which brings me back to the current state of the market. If I believe that annual price appreciation is going to slow significantly or even stop, can I argue that these renters are wrong?

As always when it comes to real estate, we decided to crunch the numbers. While we love our forever home, we are lucky enough to have access to investments that return 10-20% on our money, so the equity in our home could be doing a lot more. Obviously everyone’s situation is different, and the numbers can vary widely in different parts of the country, but we tried to use averages and historical data as much as we could. I will try not to overcomplicate it with things like tax deductions etc, since once again that is situation specific.

For easy numbers, let’s look at a $500,000 home.

Expenses:

Your biggest expense is obviously your mortgage. At a 6% interest rate, your payment would be about $2,400. Contrary to the popular argument of a mortgage “paying yourself instead of the landlord”, about $2,000 of that is going to interest payments in the beginning. So disregarding principal payoff, your mortgage costs you about $2,000 a month.

Property insurance. Based on our experience with houses in this price range insurance is about $150 a month.

Property Taxes. Now here is the huge swing. A $500,000 house in our area costs you about $10,000 in taxes a year. If you live somewhere in the south you may be paying maybe half of that. In our experience with rental properties, the tax man is going to get you one way or another, but for this example to be fair we will go on the lower end and use $6,000 a year for property taxes. That gives us another $500 monthly expense.

That’s everything right? All the rental property owners just chuckled because they know that the constantly overlooked house expenses are repairs and capital expenditures. There are plenty of articles you can read about how much to set aside for these numbers, but for repairs, reserves for major capex items, ongoing maintenance and other expenses it is usually 1-2% of the value of the home per year. Therefore a $500,000 home would cost you another $500 a month on average in upkeep and repairs.

Adding it up we get: $2,000 mortgage interest, $150 insurance, $500 property taxes, and $500 for house expenses. This gives us a monthly total of about $3,150.

Now, if we compare that to a couple of years ago when interest rates were 4% the numbers were quite different. Your mortgage payment was only $1,900, and only $1,300 was being paid in interest. That brought your total down to $2,500 a month instead of $3,150.

Back when I first looked at these numbers I noted how funny real estate numbers can be. While many of us like to use the 1% rule as a guideline on when to buy a rental property, at 4% interest rates, a 0.5% rule may be pretty close to the tipping point when you should rent vs. buy. In other words, if you could find a house that rents for less than 0.5% (for this example, less than $2,500) of it’s value per month, then expense-wise you were most likely coming out ahead. Right now with 6, 7, 8% mortgage rates renting seems even more tempting, and with us living in the Northeast, double the property taxes make it even worse. Instead of a 0.5% rule, it might be more like 0.6% or 0.7%.

So the question is, what did we decide? Looking at rentals in our area, it was easy to find comparable properties to our current home that are renting for less than 0.5% of the value. Plus if we sell, we could invest all of the equity in our home and get returns much higher than we believe our home appreciation will get us. We both agreed that it made the most financial sense for us to sell our home and rent. Will we actually do it? Probably not. I love our house, and I really can see our kids growing up in it. While the numbers determine most of the decisions we make in our lives, what is the point in being successful if you can’t enjoy it a little?

As always, I love to hear your comments.