By now, many of us in the multifamily world, and in real estate in general know that a Dallas based syndicator recently lost $230,000,000 multifamily portfolio in Houston TX. 3,200 units foreclosed.
It’s very easy to talk about others when it’s not happening to you. Situations like these give real estate a bad name and for me, that’s not acceptable.
Real estate is a rock solid asset class and will continue to be. Don’t blame the horse. The jockey (operator) is equally important
In some cases, situations like these happen due to malice. But malicious intentions aren’t very uncommon on the Wall Street either. Where there’s money, there’s greed.
I didn’t personally know this individual, but in this case, I don’t know if it was malicious intent.
Was it perhaps recklessness, yes. Not underwriting conservatively is definitely reckless.
IMHO here are some lessons learned:
👉🏻 Pick the right mentors.
What kind of message are your mentors conveying? Go big or go home? Going too big too fast comes with a lot of risks!! Real estate is not all about Ferraris and Jets. Its a slow grind….choose who you take your advice from wisely. Listen to people who have survived market cycles
✍🏼Underwrite extremely conservatively
Don't factor in that cashout refi, stress test the deal with higher rates and lower leverage, focus on your exit CAP rate projections, rent growth projections, tax and insurance increase projections. History is not a good predictor of future. Just because you have double digit rent growth in past decade doesn't mean it will continue for eternity. Just because interest rates were at their rock bottom doesn't mean they will always be low.
Conservative underwriting will make you lose 99% of the deals. But that’s the whole point.
🛍️ Buy Right
Going hand in hand with ‘underwriting conservatively’, overpaying for bad properties is a mistake that you can hardly ever recover from. Some people got lucky as the market for helping them but the tables have now turned
💰Finance right
This situation is primarily the result of Floating interest rate debt with no rate cap and very high leverage.
Do NOT over leverage
Try to stick to agency debt that’s fixed for a long term
If going with bridge, try to get fixed interest rate bridge debt with extension options
💪🏼 Manage Right
- Ask how much experience do they have as an operator?
- Does the operator have skin in the deals?
- Is the operator well capitalized and does the operator group have good liquidity?
- Have they grown too big too fast?
- Have they survived and thrived in previous market cycles?
- Do they have solid boots on the ground who have skin in the game?
- Are they vertically integrated? How much control do they have on their deals?
- Do they have experience in the type of asset, in the class of asset and in that market?
There’s going to be a lot of pain on the horizon. This was just the first one, there will be more.
Remember….Pigs get fat, hogs get slaughtered.
#realestate #multifamily #capitalpreservation
#compoundingcapitalgroup
#takeitslow #cashflow #CashIsKing
