All Forum Posts by: Bobby Larsen

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.

To really be able to assess if debt service will be 1.0dscr by the end of 2024, more information is required. However, the 1.0x dscr that they are referencing is a DSCR with interest rate caps that will need to be repurchased. Factor in the cost to repurchase those rate caps, and that's the true DSCR on the current debt or look at the DSCR based on the equivalent fixed rate debt interest rate.

If you’re looking for high level feedback, I would say that it is extremely likely that fund 2 is heading in the same direction as fund 1. Whether to sell today or wait till “tomorrow” would depend on if there is any equity remaining and if you are class A or class B, assuming fund 2 was structured the same as fund 1. We’re likely in an environment of higher for longer interest rates so just be cautious of anyone saying they’re waiting for more favorable capital markets in the next 12 months.

@Justin R.

I think you misunderstood my comments, I actually completely agree with you. I was commenting on the entire industry being labeled negatively due to a wave of inexperienced sponsors that have entered the industry and unsophisticated equity’s tendency to follow “get rich quick” promises. Sponsors are absolutely responsible for being taking care of their LPs. With that said, LPs also have a responsibility to be more knowledgeable about their investments.

Sponsors should be more transparent about the extreme risk of debt fund executions with 1-2 years of interest rate protection. At the end of the day, high leverage variable rate debt on real estate is similar to investing in a triple leveraged ETF. When the markets good, it’s great but those investments get crushed in downturns. I don’t think many of these retail LPs would be investing in triple leverage ETFs so they shouldn’t be investing in highly leveraged real estate either. With that said, sponsors and the industry needs to do more to disclose risks and LPs should find strategies that align better with their risk tolerance. There are plenty of sponsors that focus on long term, lower leverage, and interest rate protected investments but LPs often object to their lack of liquidity and lower return projections.

@Jay Hinrichs

@jd 

Does your answer change if you’re class A which presumably has 71% of their equity left and about to get diluted to 80% anyways and have their priority position taken away going forward?

@JD Martin