All Forum Posts by: Spencer Gray

I would suggest staying north of 38th st in the Butler Tarkington neighborhood. South is rough, albeit heading in a better direction than the last 3 decades. 

If we're talking commercial multifamily, then absolutely not. It will only put you at a disadvantage compared to other buyers and you will be tipping your hand showing inexperience. You should be able to facilitate the transaction with your team and attorney. 

Rising rates don't help returns but as @Brandon Plombon mentioned, inflation and rent growth will offset much of the short term headwinds. Now is the time to set up deals to weather the storm and be on the lookout for opportunities. 

We are seeing some slight cap rate expansion and projects under contract be re-negotiated due to interest rates. 

I would consider looking into apartment syndications. Much better economies of scale, easier to force appreciation, and completely passive. The most important step is to do your research on whichever firm you decide to partner with. 

Yes, we have the US bundle. Any specific data you're looking for?

I agree in terms of IRR and equity multiple that forcing appreciation along with increased rent inflation will offset rising rates. Some operators have always done value-add deals with little cash-flow in the early years, so in a sense it's not that big of a change.

When we look at deals we (and our investors) are just as focused, sometimes more, on the cash on cash return from day 1, even in a value add-project. Factoring in rising rates, cash-flow will already be skinny in the early years, and could even be  below breakeven when rates rise if you have floating debt, which may complicate servicing your debt. If you bring on extra carry reserves for this, then you might be OK, but it's a risk. 

We have increased our organic marker rent growth in earlier years to account for current inflation and have also increased our expense growth assumption from 2% to 3%. We're also starting with higher payrolls and higher rehab costs. 

We're also looking at more lower leverage fixed rate agency debt vs. floating bridge at the moment.

The supply and demand imbalance and investor demand will keep real estate afloat. 

That being said one should never underestimate the power of the Fed, and I would not be going in the opposite direction. The be clear, higher rates will and I imagine have already slowed the rate of price growth - which is healthy. If you were modeling 3.5% rate last week and put in an LOI, now rates are 4.5%, assuming the deal tight due to low cap rates, it may no longer pencil which will lower the price ceiling.

Real estate is a lagging indicator, you won't hear about it until after deals have blown up. 

I would not rule out the Fed purposely, or unintentionally, causing a recession to bring in inflation. Apartments typically outperform many other asset classes during a recession, but a recession isn't good for anyone.  

Real estate will not materially decrease in value in a recession due to inflationary and demand pressures, however I could see a flattening or even slight decline before continuing to appreciate. 

@Brian Briscoe and @Brian Burke make great points.

The level of risk related to interest rate volatility has added an incredible amount of additional risk to MF investing, and it is a non-linear change.

@Josh Edwards You're correct that to get higher returns in todays market you need to use floating rate bridge loans with the highest leverage possible. In a declining interest rate environment that was an attractive risk proposition. The increased risk in today's market utilizing that strategy is exponential, it is not linear. You may receive higher returns, however there is substantial increased risk.

The #1 rule is to preserve principal. By using long term fixed debt you nearly eliminate interest rate and market timing risk. Lower leverage reduces returns, however in this market the risk/return profile of a lower leverage deal is much more attractive.

I've syndicated over a dozen MF projects utilizing a floating bridge loan, however in this market we are only closing with fixed rate, lower leverage debt. While we are underwriting for a 10 year hold we will most likely refinance in Y 2-4 in a less volatile, possibly lower rate market.

You can buy a cap for floating rate loans, including bridge loans, however they are very expensive at the moment. 

You can do it "anyway you want" but there's no reason to re-invest the wheel. There's a reason that most real estate partnerships and syndications look relatively similar, with the differences typically being the economics and control.

You'll first need to decide whether you are looking to raise debt or equity. Debt is usually used for smaller properties with the investor/lender being in the first position, essentially acting as the bank. Almost no lenders will allow you to use debt for your downpayment. Debt from individuals is typically harder to raise unless you offer a very high interest rate, higher than a bank would offer. Think hard money loans. 

Most RE investors are equity investors as they want to participate in the upside. The cost of capital is higher, but there is no obligation to repay if a total loss occurs, unlike a loan where you would still be on the hook assuming it's a recourse loan. 

Here is the "typical" structure that can be used from small and large deals alike. I know you said you aren't trying to reach for syndication, but this can be used with just a single, or several investors. 

Investors (Members) receive a 6-8% annual preferred return on their invested capital.

Proceeds in excess of the preferred return is split 70/30 (LP/GP) based upon Members capital contributions.

At the time of sale or capital event, all capital is first returned to contributing members, excess proceeds are split 70/30 (LP/GP). 

It's also typical to charge an acquisition fee (.75-2% of purchase price) as well as an asset management fee (.5-2% of effective gross income).