All Forum Posts by: Kevin Dean

"The bottom line, multifamily buyers are wise to evaluate how apartment deliveries and pending development pipelines in their area could impact asset values and operations for them locally and in markets across the country."

Over the last month general market sentiment and predictions for 2019 have changed on a daily basis as new and information has surfaced. I resonate well with the quote above from the article as everything in this business is a function of supply and demand. I believe investors need to think about supply/demand questions such as these listed below in order to evaluate what will happen in their local market in 2019 and beyond. 

How much capital both domestic and abroad wants to enter my market?

How much credit is available for this asset class relative to others in this market?

How does global volatility and demand for US paper relative to other fixed income options effect the long end of the yield curve? 

How does deliveries versus demand in my market look over the next few years?

These questions should serve as a starting place to project more realistic rent growth projections, exit cap rates, and inform availability/relative tightness in credit on the refinance and the sale (AKA where most of the money is made). 

In times like these buyers need to be laser focused not only on the supply and demand questions that affect which tenants stay in their units, but also what a buyer will be willing and able to pay when considering the supply and demand questions above. 

In general I think fundamentals continue to support growth in this asset class. The unknown is whether or not demand for the asset class in conjunction with the macro trends mentioned above will continue to support a favorable spread between cap rates and financing costs. If not, a lot of investors who underwrite to minor cap rate and interest rate expansions may be very upset 5-7 years from now when they want to exit their positions. 

@Landon Brazile I too am a former college athlete and can say that it's been amazing to see my former teammates excel rapidly in the workplace. 

My belief is that as former athletes we have been lucky to develop a mindset that deals very well failure and as a result perseverance is natural. 

My advice is as you have said, to pick a strategy based on your current circumstances and "just go for it". If you can consistently show strong work ethic, enthusiasm, curiosity,  humility and perseverance, people will naturally gravitate to you and as a result a mentor will likely fall into your lap.

@Gino Barbaro Congrats on what sounds like an exciting end to an already great 2018! 

How many deals would you say you and your team are (1) looking at and (2) making offers on in order to close on one deal?

Thanks!

@Andrew Gingerich all great points on being conservative with your underwriting. Also a good article from Scott. His point regarding growing demand for SFR as opposed to renting Multifamily units is pretty interesting and something I think most Investors are not thinking about. We typically assume that because affordability is being squeezed across the board and ownership is a tough hurdle to get over for many potential home buyers, these tenants will stay in Multifamily housing. As mentioned however, that may not be the case long term. Thanks for sharing.

I wanted to put a feeler out for the current state of the market at large. I recognize that Real Estate is local, but interested in hearing investors thoughts on macro, and even micro trends we are seeing right now. Here are a few questions to start the conversation, but feel free to expand. 

1. How will recent Fed actions and global macro trends affect Real Estate over the near term? What about the next few years? 

2. How do you see recent volatility in equities affecting Real Estate?

3. Where is most of the capital within Multifamily flowing to right now? Class A/B/C? Stable buy and holds, mild value adds or deep value adds?

4. Do you see anything currently under the radar that threatens Multifamily investors? What are we as investors not talking about right now?

5. Based on your thoughts above, where does the greatest opportunity lie? 

6. Based on your thoughts above, where will investors get burned in the near future?

I look forward to hearing your thoughts, thanks!

@Shweta Patel sure thing. This article will give you everything you need to know and outlines the details better than I can.

https://themortgagereports.com/14946/fha-203k-loan...

Yes you may be right about being able to get some more income out of the property after implementing those changes. I would figure out how much it would cost in CapEx to make the changes, what the resulting increase in rent revenue would be, and then calculate the ROI for that investment.

For example, a $10,000 investment for an extra $100 a month would be roughly a 12% ROI. ($100 x 12 months) / $10,000 = 12%

If the return meets what you are looking for it than I say go for it! Otherwise you are better off not utilizing the cash to get the incremental rent revenue, and instead putting that money in an investment which meets the returns you are looking for.

Trey, I'm in a similar spot, 24 years old in a high cost market (Washington, DC). The way I am thinking about it is the following. 

My first priority is to use my savings in order to reduce my housing costs. This can be done through...

1. Small Multifamily House Hack (FHA loan reduces down payment).

2. 2-3 bedroom condo at a lower price point and rent out the other rooms, but with the intent of turning into a rental after a few years. So I would only do this after making sure the Condo cash flows without you in it.

3. Single Family Home with an unfinished basement. Convert the basement into an English Basement, live in the basement and rent out the bedrooms upstairs. One way this can be achieved is through a 203K loan which allows you to finance the construction costs while putting down a similarly small down payment as the FHA loan. Same thought process goes as the condo regarding cash flow.

With what is left over, I have been investing into opportunities in other markets where the numbers currently make sense. 

Regardless of whether or not the first property you purchase is cash flowing, if you live in it, and if it is reducing your living expenses, you are still better off than renting. You and your roommates will be paying down your own mortgage rather than someone else's. This will enable you to increase your savings rate and allow you to focus on putting that excess in markets with both growth and cash flow where the numbers do make sense. 

Let me know if you would like to discuss more!

Kaden, I think you may be in a better position than you think. The fact that you have been able to save up a sizable chunk of money at a young age is great. Balancing sitting in cash, vs. chasing average opportunities is a tough battle, especially when there is no Real Estate Crystal Ball.

There are a ton of people who have been sitting on there hands for the last 5 years thinking the market is overheated and is prime for a big dip. Eventually they will be right, but who knows when? Those people can attest that the opportunity cost of sitting on the sidelines has been costly.

Yes, there are still deals to be had, keep doing your research, be consistent and try to get in the game with a deal that meets YOUR desired risk/return criteria, while diligently protecting the downside through adequate cash reserves, conservative underwriting and the ability to hold long term. 

In the mean time, keep putting yourself in a position to take advantage of a deal that meets your investment criteria, when it hits your radar, you'll be ready to go. 

Properly underwriting the debt is one of the most important pieces of the puzzle, after all, the lender is usually bringing most of the cash to the deal. 

It seems like most economists I have listened to and read do not believe that the current global debt load can support a dramatic increase in rates, and for that reason the Fed will not stress the current interest environment much further over the near term. The truth is, anyone who believes they know exactly where interest rates are headed are only fooling themselves. After getting a good feel for the current environment, our job as investors is to develop a business plan accordingly, underwrite conservatively and to protect against the downside. 

I would first think about your personal comfort with the debt load you put on any given property. There is something to be said for the peace of mind you receive for a lower leveraged deal with plenty of room for error. This is true for both you and your investors if you are planning on raising money. Yes, you will be sacrificing return, but that's a call you have to make based on the return you and your investors expect for the perceived risk being taken on any given deal. 

Cap rates are generally reflective of three things. 

1. Quality of the market

• Stable job growth, population growth and expected rent growth => lower cap rate.
• Negative job growth, population growth and expected rent growth => higher cap rate.

2. Quality of the asset

• New asset, little deferred maintenance and many amenities => lower cap rate. 
• Old asset, lots of deferred maintenance and no amenities => higher cap rate.

3. Quality of the current operations

• Low vacancy relative to market, low concessions relative to submarket, high quality tenant base, positive online reputation, high quality in place management and no major issues which need to be solved => lower cap rate.
• High vacancy relative to market, low concessions relative to submarket, low quality tenant base, negative online reputation, high quality in place management and no major issue which need to be solved => higher cap rate. 

While these 3 points are generally true, there are reasons for them not to be true. For example, a value add operator may be willing to pay a significantly lower cap rate for a poorly performing, 1960s property with below market rent if they can see tremendous upside after acquiring the property. This may not be the case for a low leveraged turn key operator looking at the same deal.