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Crazy Cap Rates

When will the next crash happen?

  • 2016

    Votes: 3 17.6%
  • 2017

    Votes: 4 23.5%
  • After 2017

    Votes: 7 41.2%
  • Never

    Votes: 3 17.6%

  • Total voters
    17

Sauce

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I have a business mentor and friend that I am constantly debating the topic of today's cap rates. Today, he sent the following listing over to me with the title "Beverly Hills Trophy 6 Unit Property, Crazy High Cap Rate". I attached the listing below.

http://www.crelisting.net/FhG2x7h3w

This guy is asking for a 3.15% Cap Rate.

If you think that is surprising, Mcdonalds and Chik Fil A are selling in the high 3's to low 4's including ground leases. (see this link for some more sales prices on large tenants).

Is it just me or does this market seem like it is getting over heated? I don't understand why you would deploy your capital at those rates. It does not seem like a sustainable model long term.

So for those of you that have been through a few market cycles, what is your read on the current market? How are you hedging?
 
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lleone

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I've seen some deals here in NYC that have gone off at 1.5%!! Insane. Not to mention when interest rates go up, value is going to drop to adjust for the higher cap rates that will be required. We are in the final throws my friend.
 

SteveO

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I have my last two apartment buildings under contract to sell. Yes, it is crazy.
 

Sauce

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@SteveO I am not sure if you remember, but we met in Scottsdale for lunch before last year's meet up. I appreciated your time and insight.

What CAP rates are A, B and C apartment buildings going for in Phoenix/Scottsdale now a days?

Where is the smart money going to be going?
 
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SteveO

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@SteveO I am not sure if you remember, but we met in Scottsdale for lunch before last year's meet up. I appreciated your time and insight.

What CAP rates are A, B and C apartment buildings going for in Phoenix/Scottsdale now a days?

Where is the smart money going to be going?
Of course I remember. We met at Frank and Lupe's.

I think the smart money is in hard money loans on buildings that you want to own. I don't pay cap rates any attention other than trends. Too easily manipulated and vary by property.
 
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Mineralogic

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I have my last two apartment buildings under contract to sell. Yes, it is crazy.

if fed goes into negative interest rates and sucks all the wealth out of everyone, then what
 

SteveO

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if fed goes into negative interest rates and sucks all the wealth out of everyone, then what
Anyone can cry and crawl in a hole shaking in fear.... Or you can adjust and move forward.
 
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biggeemac

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I think the smart money is in hard money loans on buildings that you want to own.
Can you go into this a little more? I would like to understand it a little better. I closed on a big foreclosure sfh a couple of months ago with a hard money loan, but I am looking to refi into a bank loan once I finish with the unfinished basement renovation.
 

biophase

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Can you go into this a little more? I would like to understand it a little better. I closed on a big foreclosure sfh a couple of months ago with a hard money loan, but I am looking to refi into a bank loan once I finish with the unfinished basement renovation.

I think what SteveO means is that you lend your money to people buying buildings that you want to own on the prediction that you will foreclose on them in the future and then own the building. Obviously you want to make sure that your loan to your future perceived value not to the current value is decent.
 

SteveO

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Can you go into this a little more? I would like to understand it a little better. I closed on a big foreclosure sfh a couple of months ago with a hard money loan, but I am looking to refi into a bank loan once I finish with the unfinished basement renovation.
@biophase is correct that this is what I meant. You go into the deal with the expectation that you will make some money from the deal if it does not default. A couple points and 10% interest would not be bad. If the property buyer puts 35% down, your bet is hedged. If things go south and you end up with the property, there is a bit of equity to play with. It could work out very well if it is a property that you have an interest in owning.

I would not wish ill-will on anyone. But will not complain if they cannot handle their business.
 
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biggeemac

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ahhh yes, if i had that kind of bankroll, i would definitely be doing that right now.
 

SteveO

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ahhh yes, if i had that kind of bankroll, i would definitely be doing that right now.
I do believe that the question was "where is the smart money going?". :) My answer was intended as an alternative to actual real estate investing. It seems to be overheated. The person asking the question is a real estate investor.
 

SteveO

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ahhh yes, if i had that kind of bankroll, i would definitely be doing that right now.
I was working on a deal with a bank where they would loan me money at 6% with the understanding that I would be lending at 10%. I stopped working on this when another opportunity arose. The lender would have had security with the note so it would not have been unsecured.
 
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Sauce

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@biophase is correct that this is what I meant. You go into the deal with the expectation that you will make some money from the deal if it does not default. A couple points and 10% interest would not be bad. If the property buyer puts 35% down, your bet is hedged. If things go south and you end up with the property, there is a bit of equity to play with. It could work out very well if it is a property that you have an interest in owning.

I would not wish ill-will on anyone. But will not complain if they cannot handle their business.
Thanks Steve, that is an interesting concept. I think the key here is to make sure the person you are lending to has skin in the game. A lot of the guys I work with will lend up to 100% and some of it is non-recourse. That in my opinion is just pure insanity.

My plan is to move away from the rehabs and move in to wholesaling. As more people want to enter in the market, they will overpay for deals. You also are not invested in anything, as you are just moving paper.
 

Sauce

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Of course I remember. We met at Frank and Lupe's.

I think the smart money is in hard money loans on buildings that you want to own. I don't pay cap rates any attention other than trends. Too easily manipulated and vary by property.
What are your thoughts on SFH rentals?

The "research" out there says that millenials don't want to be homeowners. They are weighed down by debt, and also want the freedom and mobility that comes with renting. I think in the short term that may be true, but in the long term, as the millenials get older and start to have kids they will want to become homeowners.

My theory is that SFH will be a good place to park your money and wait for the trend shift with the millenials. I do have some caveats. I only will buy in A or B neighborhoods. And the properties MUST cash flow in the real world. Most of my SFH have rents in the $1k to $1.2K range with a purchase and repair price that is less than $100K.

My theory could be totally wrong, but I know I can count on the cash flow long term.
 

SteveO

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What are your thoughts on SFH rentals?

The "research" out there says that millenials don't want to be homeowners. They are weighed down by debt, and also want the freedom and mobility that comes with renting. I think in the short term that may be true, but in the long term, as the millenials get older and start to have kids they will want to become homeowners.

My theory is that SFH will be a good place to park your money and wait for the trend shift with the millenials. I do have some caveats. I only will buy in A or B neighborhoods. And the properties MUST cash flow in the real world. Most of my SFH have rents in the $1k to $1.2K range with a purchase and repair price that is less than $100K.

My theory could be totally wrong, but I know I can count on the cash flow long term.
I agree with the fact that millenials will start buying houses at some point. The wild card right now are interest rates.
 
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LateStarter

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What are your thoughts on SFH rentals?

The "research" out there says that millenials don't want to be homeowners. They are weighed down by debt, and also want the freedom and mobility that comes with renting. I think in the short term that may be true, but in the long term, as the millenials get older and start to have kids they will want to become homeowners.

My theory is that SFH will be a good place to park your money and wait for the trend shift with the millenials. I do have some caveats. I only will buy in A or B neighborhoods. And the properties MUST cash flow in the real world. Most of my SFH have rents in the $1k to $1.2K range with a purchase and repair price that is less than $100K.

My theory could be totally wrong, but I know I can count on the cash flow long term.

I'm only in multi's right now (duplex/triplex) and don't hold any SFH's mainly because the crazy housing market in Toronto makes it hard to make any significant cashflow with an SFH. But I mainly wanted to comment on my take with millenials.

I believe the research. They're weighed down by debt from the false promise that college would get them a good job. The job market never materialized and largely remains uncertain for most. This reinforces their apprehension to take on a mortgage since their livelihood is often a combination of contract work, self-employment, or lower paying jobs than they anticipated post-college. For this generation The American Dream has been revealed to be a bit of a sham.

Do they still want to be homeowners? Some do but some are happy renting. Who do you think started the whole 'tiny house' movement? Small, affordable homes that can be moved around the country fit their life priorities. Things like travel, life experiences and social interactions matter to them more than accumulating a wealth of material items. The 'keeping up with the Jones' is no longer about material items but about experiences. Desire to have a large and diverse wealth of experiences and social interactions is spurred on by the images of friends doing things on platforms like Instagram, Facebook, and Snapchat. These platforms created the 'FOMO' phenomenon (fear of missing out) for this generation.

So for them, a home is no longer an accumulation of all of their material possessions but instead a place for them to retreat to for private time or smaller social gatherings. Their need for space will grow as their families do and who knows what that future will look like. Perhaps by then the housing market or the job market will have a strong enough of a correction to help them become homeowners. If not, rental life isn't so bad either and I suspect a lot of people will continue to rent in order to pursue a rich life of experiences.

That's just my take on it.
 

Sauce

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I'm only in multi's right now (duplex/triplex) and don't hold any SFH's mainly because the crazy housing market in Toronto makes it hard to make any significant cashflow with an SFH. But I mainly wanted to comment on my take with millenials.

I believe the research. They're weighed down by debt from the false promise that college would get them a good job. The job market never materialized and largely remains uncertain for most. This reinforces their apprehension to take on a mortgage since their livelihood is often a combination of contract work, self-employment, or lower paying jobs than they anticipated post-college. For this generation The American Dream has been revealed to be a bit of a sham.

Do they still want to be homeowners? Some do but some are happy renting. Who do you think started the whole 'tiny house' movement? Small, affordable homes that can be moved around the country fit their life priorities. Things like travel, life experiences and social interactions matter to them more than accumulating a wealth of material items. The 'keeping up with the Jones' is no longer about material items but about experiences. Desire to have a large and diverse wealth of experiences and social interactions is spurred on by the images of friends doing things on platforms like Instagram, Facebook, and Snapchat. These platforms created the 'FOMO' phenomenon (fear of missing out) for this generation.

So for them, a home is no longer an accumulation of all of their material possessions but instead a place for them to retreat to for private time or smaller social gatherings. Their need for space will grow as their families do and who knows what that future will look like. Perhaps by then the housing market or the job market will have a strong enough of a correction to help them become homeowners. If not, rental life isn't so bad either and I suspect a lot of people will continue to rent in order to pursue a rich life of experiences.

That's just my take on it.
Very insightful post, and you verbalized what I see with some of my friends.

The game changer for millenials I think is when they have kids. At that point, for most of them the opportunity to travel decreases dramatically and most people will want the safety and security of having a home base where there kids will be able to go to school and have their friends and family close by to help out.

The other consideration is the growing number of Hispanic population. In general, I see that these folks have more of a traditional view of life and want home ownership.
 

biophase

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The 'keeping up with the Jones' is no longer about material items but about experiences. Desire to have a large and diverse wealth of experiences and social interactions is spurred on by the images of friends doing things on platforms like Instagram, Facebook, and Snapchat. These platforms created the 'FOMO' phenomenon (fear of missing out) for this generation.

I think this is so true. Instead of showing up at the next party with a new BMW, or showing off you 80" TV during the playoffs, you can do it everyday online. You also don't just show off to your neighbors and coworkers anymore, you can show all your friends in your town, across the USA, all over the world.

So now, instead of material possessions, it's things like vacations, fancy restaurants, concerts, beaches, etc... I don't think I've see any new house or remodelling postings on my feed in a long long time.
 
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biggeemac

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So now, instead of material possessions, it's things like vacations, fancy restaurants, concerts, beaches, etc... I don't think I've see any new house or remodelling postings on my feed in a long long time.
Well, I must be doing it all wrong.....this was us yesterday. We bought this big ol house......took the top two floors for our family, and we are turning the unfinished basement into a four bedroom apartment for our business. No vacations, restaurants, or fun for us. Might go catch the new Star Wars, and might even let the kids order one of the high priced boxes of candy.
 

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LateStarter

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There are a bunch of the big REITs unloading properties. It's all over WSJ and other business news outlets. I prefer to trust the conditions of your local market and not become overly preoccupied with what the industry heavyweights are up to.
 
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JAWS

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Does anybody follow Sam Zell? Looks like he is unloading some of his portfolio. Not sure if he is saving up money for the next down turn or just unloading when people are paying silly prices for CRE. Below is an interesting read.

http://www.businessinsider.com/smart-money-getting-out-of-real-estate-2015-12

Sam does that such a large scale that he can give us insight for macro-market trends. He looks for distressed assets he can buy below replacement cost...on 100x SCALE to most of us. With that, I think following his deal flows (ie SEC filings) and investing in smaller assets can be valuable. There will always be diamonds in the rough, regardless of cap rates. Sam buys based on replacement cost and sells (sometimes) based on cap rates. The lower the cap rate, the better for the seller :)

He recently said that the opportunity for growth is in Sub-Saharan Africa (ie Nigeria, Ethiopia, etc), but he says there is no scale there for his size of investments. Maybe there is for us....
 

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Sam does that such a large scale that he can give us insight for macro-market trends. He looks for distressed assets he can buy below replacement cost...on 100x SCALE to most of us. With that, I think following his deal flows (ie SEC filings) and investing in smaller assets can be valuable. There will always be diamonds in the rough, regardless of cap rates. Sam buys based on replacement cost and sells (sometimes) based on cap rates. The lower the cap rate, the better for the seller :)

He recently said that the opportunity for growth is in Sub-Saharan Africa (ie Nigeria, Ethiopia, etc), but he says there is no scale there for his size of investments. Maybe there is for us....

I'd say Zell might know a thing or two about when to buy and sell apartments or RE in general
 

SteveO

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Does anybody follow Sam Zell? Looks like he is unloading some of his portfolio. Not sure if he is saving up money for the next down turn or just unloading when people are paying silly prices for CRE. Below is an interesting read.

http://www.businessinsider.com/smart-money-getting-out-of-real-estate-2015-12
He must have noticed that I was selling everything.... ;)
 
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vinylawesome

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I'd say Zell might know a thing or two about when to buy and sell apartments or RE in general

"Zell is known by the nickname “the grave dancer.” According to Zell, the term grew out of the headline of an article he wrote describing his strategy of profiting off distressed real estate following the inevitable bubbles of investment enthusiasm.

Zell said the article shows how “I was dancing on the skeletons of other people’s mistakes.”


Zell, however, also pointed out that the last sentence of the article reads:

“He who dances closest to the graves, always has to be careful he doesn’t fall in.”


Source: http://knowledge.wharton.upenn.edu/...cer-sam-zell-its-all-about-supply-and-demand/
 

MKHB

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I have a business mentor and friend that I am constantly debating the topic of today's cap rates. Today, he sent the following listing over to me with the title "Beverly Hills Trophy 6 Unit Property, Crazy High Cap Rate". I attached the listing below.

http://www.crelisting.net/FhG2x7h3w

This guy is asking for a 3.15% Cap Rate.

If you think that is surprising, Mcdonalds and Chik Fil A are selling in the high 3's to low 4's including ground leases. (see this link for some more sales prices on large tenants).

Is it just me or does this market seem like it is getting over heated? I don't understand why you would deploy your capital at those rates. It does not seem like a sustainable model long term.

So for those of you that have been through a few market cycles, what is your read on the current market? How are you hedging?


Yes valuations are high, very high.

I would be more wary about a MF in Kentucky or Ohio going for a 7 CAP than a 3.15 apartment Beverly Hills. You have enormous barriers to entry in those markets and there is still room for NOI growth in areas that have strong employment growth.

That is why your are continuing to see institutional buyers in the 24 hour markets and you will continue to see them. They are less concerned with cap rates than they are with asset preservation. Afterall if your a fund or a HNW individual where do you put billions of dollars? If rates rise the stock and bond market will get crushed.

And as far as Sam Zell is concerned his moves are sometimes more for show; he sold his apt portfolio to Blackstone in 2007. Most of that was in major markets which are now 20% above their value at the peak in 2007. So did he pay cap gains, if so he paid 15% right of the top and where did he put his proceeds? It is hard to find a safe place to park 2B+ dollars,so most likely he had most of it in cash, so now you add in the TMV decay and the absence of RE depreciation, he is most likely even.

As far as some sort of wholesale crash coming to the high demand areas, it's not gonna happen. There is an ocean of capital looking for a home and can't find it because most owners of valuable real estate do not have to sell and won't; there are no good alternatives.
 

vinylawesome

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Interestingly about Zell and the Blackstone Group deal...


(In 2007 the Blackstone Group completed its purchase of Zell's Equity Office Properties Trust for $39 billion).

……………………………………………………………………………………………………………..


Speaking at the Milken Global Conference Stephen Schwarzman, Chairman, CEO and Co-Founder, Blackstone,


Was Being Interviewed by, Fox Business Network Anchor Maria Bartiromo.


Schwarzman Had this to say about the deal.

-----------------------------------------------------------------------------------------------------------------------

Stephen:


"It was the second biggest real estate deal

in history" (Blackstone Buying GE Capital Real Estate Assets)



"The biggest one we did was called EOP (Equity Office Properties).


Will end up making three times are money despite our friends

in the meda,


Just sort of announcing we would

go bankrupt with the thing. Which is a whole different

issue, apparently."


Maria:

Well that was Sam Zell, basically selling

everything before everything collapsed and

people were speculating.


Why did Steve

Buy this, at a time real estate was about to

collapse?"


Stephen:

"Well, you know...



We were scared to.


So we sold three quarters of what we bought."


Maria:

"Right away!"


Stephen:


"Almost instantaneously, within a month.


So we took are price and moved it up dramatically.


So we would be bomb proof.



And then we kept those assets in

the best markets.


And then invested

in those properties to make them better and better.


So by the time we went through this. It turned out to be a

great success.

………………………………….

You can.


I know this sounds almost Anti-American.


But you can buy something from somebody.

They can be happy and you can do well to.

------------------------------------------------------------
You know.

I know it sounds

like your sort of making it up,
but but…”


Maria:

"Someone always doesn't have to get screwed.”


Stephen:


"Right, you really don't.


Sam got a good deal on that.


That was a high price and we will make three

times are money.


That's not so bad.



And, And..

++++++++++++++++++++++++++++++++++++++++++++

The people who bought from us, of course,


are casualties,



(Laughter from audience).


But nonetheless.


You know, that was not good.


---------------------------------------------------------------------------------------------------------------------------

Source:



https://www.thefastlaneforum.com/co...ilken-institute-global-conference-2015.60005/
 
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