All Forum Posts by: Bobby Larsen

Quote from @V.G Jason:

Quote from @Bobby Larsen:

All good points but I don't think it's realistic to assume one can properly time exiting and entering a market. If you're invested with long term fixed rates, you'd be paying HUGE pre-payment penalties. I thought 2019 was the peak but it was delayed and the market saw a huge rally because of COVID stimulus. What can be done is switching to more risk averse investments (property quality, location and financial structure) during the later stages of a cycle.  Variable rate loans and even high leverage aren't bad, they're just bad when applied to the wrong investments and/or at the wrong time of a cycle. The issue with most syndicators in 2021/2022 is that they used high leverage, floating rate loans on EVERY deal thinking the market was going to continue to take off.

As for exiting in 2021, I would just counter that there are plenty of investments done in 2021 with 10-year fixed rate loans at 3% (and less) that are still distributing strong cashflow and will be completely fine or HUD loans that now have sub-3% for the next 35 years. Investors should understand their own risk tolerance and should align with a sponsor's strategy. Stop chasing the highest stated returns because in order to achieve a 15-20% return, absent cap rate compression, it requires what's referred to as financial engineering (leverage mostly) and significant risk comes along with it.

@Carlos Ptriawan I think you're 100% right regarding 7 to 10 year debt. You avoid market volatility and while short term gains often don't look as impressive, long term gains over a 10 to 20 year period often surpass short term investment strategies because they don't lose capital. I often speak to two types of investor: Investor #1 say "Here's my money, when do I get it back?" and Investor #2 says "Here's my money, please don't sent it back quickly. Keep it compounding." Investor #1 is typically those with a moderate net worth while investor #2 is typically very very wealthy.

 Investor #1 is the typical investor that just got into money. #2 investor I've never heard of.

The very wealthy roll their money, but absolutely will come in and capitalize at times strategically. They never tell you to keep it compounding, they just don't outright say that or instruct that. They do it without saying, because when you least expect it they will be out there realizing their gains. We could be talking about different classes of wealth though.

Very, very wealthy to me is north of half bil. Investor one is someone with something small like 10 or 15 M that just got into inheritance or luck. Or even more small fry like BP real estate investor that focus on $100/mo cash flow in Akron like that one lady.

I frequently have these conversation, more often than Option 1 investors which I agree, tends to be new money or small investors. Probably why 90%+ of our investors roll over investments via our 1031 exchanges each time. I’d categorize ultra wealthy as those with $50-$100 million+ though so that’s probably the difference. At $500m+, you're probably not an LP with 50 other investors. You’re a family office and/or employ advisers trying to earn their salary and/or investing as 100% owner of a TIC (or JV) and can maintain continuous pre-tax compounding even after exiting a position. Most of our investors aren’t trying to time a market and I personally think that’s a fools game. Even if you timed it perfectly, which no one can, market timing does not exceed the benefits of pre-tax compounding. Rather than entering and exiting based on market timing, I prefer to change an investment focus/strategy depending where I think the investment cycle is.

I agree with your approach. Cashflow provides more certain return AS WELL AS downside protection. Appreciation will happen over the medium to long term and will boost returns but cashflow is the lynchpin of a good investment.

All good points but I don't think it's realistic to assume one can properly time exiting and entering a market. If you're invested with long term fixed rates, you'd be paying HUGE pre-payment penalties. I thought 2019 was the peak but it was delayed and the market saw a huge rally because of COVID stimulus. What can be done is switching to more risk averse investments (property quality, location and financial structure) during the later stages of a cycle.  Variable rate loans and even high leverage aren't bad, they're just bad when applied to the wrong investments and/or at the wrong time of a cycle. The issue with most syndicators in 2021/2022 is that they used high leverage, floating rate loans on EVERY deal thinking the market was going to continue to take off.

As for exiting in 2021, I would just counter that there are plenty of investments done in 2021 with 10-year fixed rate loans at 3% (and less) that are still distributing strong cashflow and will be completely fine or HUD loans that now have sub-3% for the next 35 years. Investors should understand their own risk tolerance and should align with a sponsor's strategy. Stop chasing the highest stated returns because in order to achieve a 15-20% return, absent cap rate compression, it requires what's referred to as financial engineering (leverage mostly) and significant risk comes along with it.

@Carlos Ptriawan I think you're 100% right regarding 7 to 10 year debt. You avoid market volatility and while short term gains often don't look as impressive, long term gains over a 10 to 20 year period often surpass short term investment strategies because they don't lose capital. I often speak to two types of investor: Investor #1 say "Here's my money, when do I get it back?" and Investor #2 says "Here's my money, please don't sent it back quickly. Keep it compounding." Investor #1 is typically those with a moderate net worth while investor #2 is typically very very wealthy.

Quote from @Carlos Ptriawan:

 There're two facts that you may not aware (and I just aware of this too) :
- Significant chunk of cash-buyers are now increasing 50-100% in some markets, in fact it is 50% in mid west. You can't do this with multifamily. 
- Again, for residential ; 50% of home buyers are FTHB. FTHB wouldn't chase MFs syndication apartment obviously.

These two aspects create more price stability for single family residential.

Lots to go over here.
1) All cash buyers are currently about 32%. This is an increase from the last 10 years but relatively in line with historical norms.

When borrowing costs increase, all cash purchases increase as well so this makes sense. All cash purchases exist in multifamily as well and have similarly been increasing.

The reason for the increase in all cash buyers is not due to primary residence purchases but rather vacation homes and investors.

Investors of homes make purchase decisions similar to how multifamily is evaluated, based on cap rates, cash flow, value-add, etc. Vacation home purchases are very volatile as they’re one of the first assets to be sold in a downturn.

2) The volatility of single family and multifamily are nearly identical. Actually, multifamily prices were less volatile over the last 10 years and showed consistent increases while homes began to show weakness prior to COVID. The charts below illustrate average prices of homes and multifamily since the late 90s. Only difference is homes have a little further to drop in this cycle.

3) FTHB currently represent 32% of purchases. Up from last year's 26% but well below the 38% average seen since 1981. https://www.nar.realtor/research-and-statistics/research-reports/highlights-from-the-profile-of-home-buyers-and-sellers#

Who's S&P has a dividend yield of 5%? I'm jealous, the S&P dividend yield in my world is only 1.36%.

I look forward to multifamily outperforming single family in the next 2 to 3 years. At the end of the day, single family is very much valued with cap rates for investors. I'm not sure how you think Blackstone values their SFR investments. For homeowners, they may not be valuing homes with cap rates but their decision to buy is based on the same underlying factors such as interest rates and affordability. Single family prices have also benefits from a 40 year trend of declining interest rates as will they now be impacted by rising interest rates. Looks at residential home prices in other parts of the world that utilize shorter term loans, the have declined significantly. The US residential market just benefits from 30 year mortgages so the impact isn't as quick to realize but it will still be impacted nonetheless if rates stay at these levels. SFR prices are also down meaningful in many parts of the country.

Quote from @Carlos Ptriawan:

It's also easy to look at historical performance and say that something has performed exactly as predicted. What does your appreciation curve for multifamily and residential values show the next 12 months? 

@Carlos Ptriawan

Please provide support to your claim that rent is more volatile than values. Using two specific points in time is not support, it’s selection bias.

As for if you bought real estate a few years ago, you would have lost money. That is true but you are further using selection bias. You are choosing the exact peak in values and assuming you sold today. A more supportive argument would be to show a rolling 5-year or 10-year average index that tracks values. You could have purchased real estate in 2022 with a 10 year fixed rate loan at 3% and your investment would likely still be distributing 4% to 6% right now and while the value of that investment is down if sold today, you don’t have to. History has shown that residential and multifamily real estate has always appreciated over a 10 year time horizon.

This is a long thread so this may have been said but from what I’ve read, everyone is focusing on appreciation which the often counter argument would be “what if it does appreciate?”.

Price appreciation is not certain which makes it a poor argument. What is more certain is rent growth and taxes.

1) You can buy a CD at 5% or a property at a 5.5% to 6% yield. Day 1 a better yield but not as big of a spread as some might prefer. However, that CD will stay at 5% while the yield on your property will grow. By year 3, most investments we look at have a cap rate (yield) of 7.5% with modest rent growth or 6.5% without rent growth. Much more attractive than a 5% CD.

“What about inflation?” They may ask. Well focus on market will low expense ratios so that rent (the largest component of inflation) is certain to grow faster than expenses. ALSO, very important here, if the fear is inflation, the last asset you want to be invested in during an inflationary environment is fixed income. Fixed income is the worst performing asset class during high inflation.

2) CDs are taxed at ordinary income so take that 5% and subtract your state and federal taxes from it to determine the actual yield. Would be anywhere from 25% to 50% so a 2.5% to 3.75% after tax yield from CDs. Cashflow from rents will be tax deferred and if you’re pursuing this as a business, it can be deferred indefinitely.

Quote from @Scott Trench:

Quote from @Dany Namou:

Does anyone have Any insight into how fund 3 is doing compared to the other two? 

 Looks to me like Fund 3 is a new fund that they are raising capital for. So probably no acquisitions yet.

There's typically a 12 to 18 month overlap between continued fundraising and investing funds so fund 3 very well may have some active investments. I don't know if that's the case for Ashcroft's fund 3 but if it were, the fund would include 2023 and 2024 acquisitions so I would expect it to be performing better. That's obviously a relative term but 2023 pricing was already down 20-30% from peak.

Nobody knows where debt will be 12 months from now. The beliefs range from huge drops to huge increases. Most likely they're slightly lower than they are now but not meaningfully. To assess what Fund 2 should do, you really need to understand NOI growth over the past 12 months and forecasted NOI growth. Rent growth has flatlined and will probably only moderately increase over the next 12 months so it really comes down to NOI growth from renovations and whether it will outpace the 3-4% negative return on cost that the properties are currently seeing.