@Rey Gonzalez First off, don’t get discouraged.
To address what the other investor said to you, while I somewhat agree with him, I think he is probably one of the old-school investor types.
One of my mentors is a 70+ year old veteran owner/operator of rent-stabilized apartment buildings in NY Metro. He currently owns over 3,000+ units & his personal after-tax cashflow is over $700,000/month. (Not a typo)
From 2009-2013 he spent over $150MM+ on multifamily acquisitions.
On his largest portfolio acquisition (500+ units), he acquired a portfolio of distressed buildings with 40% vacancy. He gut-renovated 100% of the units & leased up the buildings over a 2.5 year period, with occupancy stabilizing at 98%.
When he ultimately refinanced the properties, his perm loan not only returned 100% of his equity, but also generated more than $20,000/door in refinancing profits, totaling over $11MM.
Yet from 2014-2018 he only bought ONE deal. So what caused the change of heart?
He told me he lost a bunch of deals during the early 90s S&L Crisis. As a result, he won’t buy a deal where he’s not 100% certain he’ll be able to refinance & pull-out “100% of the initial equity by the end of the 5th year I own it” (His words verbatim emphasized in BOLD)
By being so disciplined, he avoided the speculative purchases which are sinking sponsors all over NYC. Plus his low acquisition basis has allowed him to weather most of the negative effects from the 2019 NYS Rent Control laws & COVID downturn.
Yet this discipline is why he missed over 5 years of profits.
It definitely makes sense to be disciplined when you’re nearing the end of the cycle , prices are very elevated & rates are at historical lows.
(And I won't even discuss what a bubble the SFH market is in right now, seeing as unemployment has DOUBLED from Jan. 2020, yet somehow home prices are up 10%+ nationally. And people want to act like this is sustainable.)
But because real estate is not a liquid market, true price discovery is hampered, resulting in undervalued/overvalued assets in every market.
Each deal is it’s own situation, so even if a “market” is overheated, you may find an objectively great deal, one that would make sense even in a recession.
I closed on a 150+ unit value-add deal in the middle of COVID. We expected to close in February, ultimately delayed until May.
This was a C asset in a solidly A- neighborhood. In Dec. 2019, the neighboring property, a 100-unit property, (exact same vintage as my deal) sold for roughly $120K/unit or 6.3% cap rate. It was a solid B asset, run as a 55+ community, with 96% occupancy. Amenities included a pool & large fitness center.
Our basis, which included the following:
- 3% acquisition fee & 1% financing fee
- 6 months tax & insurance escrow
- 9 months debt service reserve $7,500/unit capex reserve
- 2% loan origination fee (bridge debt)
- Legal, DD & misc. closing costs
was roughly $83K/unit, a 30.8% discount to the neighboring asset & a 22.6% discount to overall submarket comps. Our cap rate on T12 income was 8.3% & T12 YoC was 7.3%+, while occupancy at close was 93%.
Lots of people were saying the market had peaked in late 2019 & buyers were overpaying for deals.
They weren’t wrong (just watch how many class C deals end up as NPLs & REOs in 2022/2023) but I still bought a great property at a great price.
The fact the market is in a bubble doesn’t mean YOU have to participate in the bubble.
The fact of the matter is that when prices collapse like they did in 2008, you can blindly purchase almost ANYTHING & you’ll do alright, simply because a low basis compensates for so much.
On the flip side, when you’re buying deals in a hot market & paying market prices, you need to REALLY know your numbers.
Make sure you underwrite deals extremely conservatively & stress your assumptions to the extreme to see how far the economic outlook can deteriorate before your deal goes bad.
Can the deal survive rents being flat even after completing your value-add biz plan? What if rents drop 10% from here? 15%? How long can you hang on?
If you underwrote 5% vacancy, can you handle 10%? What about 15%? How long can you hang on?
