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23 Offers on this - thoughts?

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JustAskBenWhy

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So we put an offer in on an apartment community. There were 23 offers. 7 made it into highest and best.

Our offer was $300,000 than broker's original guidance. It was also higher than his guidance during our site visit when it was clear that there'd be a lot of interest. We went $100,000 EMD. $50,000 hard on day 1. $50,000 hard in 30 days at the end of DD. In short - this was a strong offer. Especially considering that this is a totally destabilized asset, down units, and all...not turn key at all. $2.5 MM rehab.

This was 4 days ago, and I am still waiting to hear.

Here's the thing, guys - I am totally bullish on multifamily. But so, it seems, everyone else. Everyone is offering. Where are you at? @JScott ?
 

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jon.a

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So we put an offer in on an apartment community. There were 23 offers. 7 made it into highest and best.

Our offer was $300,000 than broker's original guidance. It was also higher than his guidance during our site visit when it was clear that there'd be a lot of interest. We went $100,000 EMD. $50,000 hard on day 1. $50,000 hard in 30 days at the end of DD. In short - this was a strong offer. Especially considering that this is a totally destabilized asset, down units, and all...not turn key at all. $2.5 MM rehab.

This was 4 days ago, and I am still waiting to hear.

Here's the thing, guys - I am totally bullish on multifamily. But so, it seems, everyone else. Everyone is offering. Where are you at? @JScott ?
I'm cautious because we are so deep into the cycle nationally. There is a lot of dumb money chasing deals. There may still be some "deals" out there but they are far between.
 
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JustAskBenWhy

JustAskBenWhy

Silver Contributor
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I'm cautious because we are so deep into the cycle nationally. There is a lot of dumb money chasing deals. There may still be some "deals" out there but they are far between.
Obviously I think this is a deal, Jon, or I wouldn't be chasing it. 16% IRR to partners on a 5-year hold. 14% IRR on a 10-year hold. Top 15 city. Lot's of upside in my opinion. But, judging by the 23 I am not the only one with that opinion...
Jon - you've known me a long time. I don't get excited. I would love to take this one down.
 

samgrooms

New Contributor
Jun 28, 2016
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I'm cautious because we are so deep into the cycle nationally. There is a lot of dumb money chasing deals. There may still be some "deals" out there but they are far between.
I agree Jon. They are definitely far between and it takes a lot (read weeks) of underwriting to find the right deal. Ben and I spent 8-10 hours a day for weeks looking at deals before finding this one. And even then, it's going to take multiple offers before you can get one under contract. Now, there are things you can do to increase your odds there, like aggressive terms with hard money on day one. But that's what most people are doing now. You just have to be prepared to look at a lot of deals and make quite a few offers. Consistency is key right now.
 

jon.a

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Obviously I think this is a deal, Jon, or I wouldn't be chasing it. 16% IRR to partners on a 5-year hold. 14% IRR on a 10-year hold. Top 15 city. Lot's of upside in my opinion. But, judging by the 23 I am not the only one with that opinion...
Jon - you've known me a long time. I don't get excited. I would love to take this one down.
I wasn't implying specifically that you were dumb money. Just remember to stick to your rules.
 

JScott

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Here's the thing, guys - I am totally bullish on multifamily. But so, it seems, everyone else. Everyone is offering. Where are you at? @JScott ?
I know a lot of people don't agree with me, but personally, I think the apartment market is going to crash and burn in the next 3-5 years...

Interest rates are almost certainly going to rise, which means cap rates will increase, and a lot of investors will get caught upside down on their low-cap purchases the past couple years. Additionally, 10-year FNMA loans will start to come due on all the deals purchased from 2012 onwards, and with low-cap purchases and higher interest rates, owners won't be able to refi (without bringing a lot of cash to the table). So, there will be a glut of sellers willing to sell below market to avoid foreclosure.

Plus, once we see a downturn in the market and lower single-family housing prices, I have a feeling we'll see a lot of Millennials deciding to buy instead of rent. Finally, with the rise in group homes and assisted living facilities, I think a lot of baby boomers are going to start moving out of traditional residential real estate, and we'll see vacancy rates drop.

We're actually considering selling the 38 unit complex we picked up a few months ago, and plan to sit on the sidelines for a couple years until things shake out. In the meantime, we're starting to prepare to buy distressed debt, which I have a feeling will be a goldmine over the next few years.

Again, just my opinion...I know some people disagree...
 

samgrooms

New Contributor
Jun 28, 2016
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Plus, once we see a downturn in the market and lower single-family housing prices, I have a feeling we'll see a lot of Millennials deciding to buy instead of rent. Finally, with the rise in group homes and assisted living facilities, I think a lot of baby boomers are going to start moving out of traditional residential real estate, and we'll see vacancy rates drop.
J, thanks for the input. I'm not sure I agree with the premise that Millennials are renting based solely on prices. It's a lifestyle. They want mobility. The don't want to have a big yard they have to take care of. They don't want to keep a big house clean. Obviously I'm generalizing here, but they don't value those things as much as past generations.

I think it becomes a question of which demographic and area you're targeting in your properties. If you're staying in the $800-$1,000/mo rents with a working class tenant base, in an area where people don't go to retire, and where there aren't cranes in the air, you won't be affected as much.
 

Sauce

Contributor
Jan 16, 2013
69
88
119
Albuquerque, NM
I know a lot of people don't agree with me, but personally, I think the apartment market is going to crash and burn in the next 3-5 years...

Interest rates are almost certainly going to rise, which means cap rates will increase, and a lot of investors will get caught upside down on their low-cap purchases the past couple years. Additionally, 10-year FNMA loans will start to come due on all the deals purchased from 2012 onwards, and with low-cap purchases and higher interest rates, owners won't be able to refi (without bringing a lot of cash to the table). So, there will be a glut of sellers willing to sell below market to avoid foreclosure.

Plus, once we see a downturn in the market and lower single-family housing prices, I have a feeling we'll see a lot of Millennials deciding to buy instead of rent. Finally, with the rise in group homes and assisted living facilities, I think a lot of baby boomers are going to start moving out of traditional residential real estate, and we'll see vacancy rates drop.

We're actually considering selling the 38 unit complex we picked up a few months ago, and plan to sit on the sidelines for a couple years until things shake out. In the meantime, we're starting to prepare to buy distressed debt, which I have a feeling will be a goldmine over the next few years.

Again, just my opinion...I know some people disagree...
I tend to agree with @JScott . This market is getting crazier and crazier. On a podcast I was listening to, they were saying that a lot of the property management companies are lowering their income requirements to 1.5 - 2.0 times monthly rent. Their logic is that if there is access to public transportation, they won't have the burden of a car payment or repairs. This seems like a dangerous game to me.

Also, the fact that properties are selling for 5 caps is also very concerning to me. Its no wonder guys who bought a few years ago are looking like geniuses. If you bought a stabilized property with an NOI of $100,000 at an 8.5 Cap in 2012, did absolutely nothing and sold today you would have "increased" the value by $700K! For reference take a look at the math below.

Cap Rate Sales Price
5.5 $1.81 mm
6.5 $1.54 mm
7.5 $1.33 mm
8.5 $1.17 mm

Interest rates have jumped by half a percent since the beginning of the year, which will further squeeze yields.

Another factor is finding qualified trades people. If you are doing a heavy renovation, you will be competing with all of the new construction and development. In my market, Facebook is building a giant data center and they are pulling thousands of qualified workers to work on their site. I would expect the price of a renovation will continue to increase.

With all of that being said, I exited the flip game and stock market before the Presidential election. I didn't like the uncertainty in the market. I tried to time the market and didn't do very well.

@JustAskBenWhy is one of the most conservative guys I know of. There are still deals out there, you just need to plan for higher interest rates when your loan resets, higher cap rate at exit, and conservative repair and vacancy estimates. If the numbers still work, then go for it.
 

MJ DeMarco

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Maybe @SteveO will chime in, he's only owned about a gazillion apartments in his time.
 

Sauce

Contributor
Jan 16, 2013
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119
Albuquerque, NM
J, thanks for the input. I'm not sure I agree with the premise that Millennials are renting based solely on prices. It's a lifestyle. They want mobility. The don't want to have a big yard they have to take care of. They don't want to keep a big house clean. Obviously I'm generalizing here, but they don't value those things as much as past generations.

I think it becomes a question of which demographic and area you're targeting in your properties. If you're staying in the $800-$1,000/mo rents with a working class tenant base, in an area where people don't go to retire, and where there aren't cranes in the air, you won't be affected as much.
@samgrooms I am going to have to disagree with you here. As millenials get older, get married, and have kids, they will not want to live in an apartment. They want stability, a great school district, and a safe place (backyard) for their kids to play. I will agree that the type of house and yard will be smaller. Millenials tend to want experiences vs a yard to look after.

I don't think that the american dream to own a home is dead yet, especially if it is "cheaper" to rent than to own. Here is a great example - a 3 bed, 2 bath, 2 car garage home I own as a rental. I bought it 4 years ago for

$97K Purchase Price
$1225 Current Rent
$150K Current Value

It is in a great neighborhood, with some of the best schools in town, and was move in ready when I bought it. An FHA mortgage with PITI on $97K should be about $700. Current rent - $1225. Are you telling me that your tenant base would rather live in a 2 bedroom apartment for $1K per month over owning this home? I don't think mine would.
 
Last edited:

HappyStoic

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Nice thread guys.

I'm no expert on RE but based on my research you can still find deals but they are far harder to find and are sold in a heartbeat.

It could def be a great idea to hold on to cash for a couple of years. Cash will become more valuable than it is now. Some gold to hedge might be very profitable.

Sent from my SM-G935F using Tapatalk
 

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samgrooms

New Contributor
Jun 28, 2016
7
7
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Phoenix, AZ
@samgrooms I am going to have to disagree with you here. As millenials get older, get married, and have kids, they will not want to live in an apartment. They want stability, a great school district, and a safe place (backyard) for their kids to play. I will agree that the type of house and yard will be smaller. Millenials tend to want experiences vs a yard to look after.

I don't think that the american dream to own a home is not dead yet, especially if it is "cheaper" to rent than to own. Here is a great example - a 3 bed, 2 bath, 2 car garage home I own as a rental. I bought it 4 years ago for

$97K Purchase Price
$1225 Current Rent
$150K Current Value

It is in a great neighborhood, with some of the best schools in town, and was move in ready when I bought it. An FHA mortgage with PITI on $97K should be about $700. Current rent - $1225. Are you telling me that your tenant base would rather live in a 2 bedroom apartment for $1K per month over owning this home? I don't think mine would.
Let's be clear: I'm not saying millennials don't buy houses. I'm a millennial and I own a home. They just don't buy houses in the numbers that past generations have (as a percentage of the group; they are still the largest purchaser of homes). I agree with you that as someone gets married, they're more likely to buy a house. But, fewer millennials are getting married when compared to past generations. So the percentage of our population that doesn't want a home is increasing. That's just one aspect. The percentage increases when you include other factors, like what I mentioned in my previous post. Now obviously this part is anecdotal, but of my married millennial friends, roughly half of them own homes. And half of those that own homes, wish they didn't buy. They have moved to different cities and rent out their house, and just rent in their new city. My millennial friends that haven't purchase a home are completely content with never purchasing a home. These are people with great careers, some of them married, that just don't want to be tied to one location. They don't want to deal with upkeep. Back to the issue at hand, I don't think prices going down is going to change their mind about that for a lot of millennials.
 
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JustAskBenWhy

JustAskBenWhy

Silver Contributor
Speedway Pass
Sep 8, 2015
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Lima, OH
Interesting commentary. Thanks guys. A few thoughts, if I may:

Not be it for me to understand/predict what millennials are thinking. I couldn't understand those dumb asses yesterday, I don't understand them today, and I've lost hope of ever understanding them in the future...

Having said this, I think it's wrong to view the market as a whole. For example, if your rents are a weighted blended $525 - sell. I don't care what Cpa Rate you buy this drek at you can't stabilize those tenants even if you pay their rent for them. Long-term there is not enough CF to cover CapEx, which means this is a "bigger idiot" exit, and now is the time to find that idiot. Similarly, if your basis is $125,000/door for product renting to millenials at $1,200 - $1,400 (I see this trading every day) - I don't really get that.

But, I do think there are assets with intrinsic value that will survive cap rate loosening, which is obviously coming. These assets rent for $800 - $1,200, which in most of the country captures folks who are not millenials, are manageable/stabilizable, and an asset class with rebuild cost so much higher than current purchase price that there is very little Class A risk.

In short my, methodology never changed from CFFU. I want to own that which is not only desirable, but attainable to the widest cross-section of my potential audience, yet represents high enough rental qualification barrier to entry so that the people I get are economically stabilizable, and I want to buy same at a basis which makes it difficult to replace with new construction. If I can find it with enough upside, then it's a C into B, and I am bullish.

As to exit cap rate, I think that if I underwrite the ability to hold for 10 years (10-year fixed debt), at some point in that curve I'll hit the exit cap rate hurdle - I really don't care much when.

Incidentally, just heard from the broker. No final decision, but we are in the final. I suppose I'll be happy with that for now since I am not seeing anything else to underwrite today...

Thoughts?
 

samgrooms

New Contributor
Jun 28, 2016
7
7
17
Phoenix, AZ
It could def be a great idea to hold on to cash for a couple of years. Cash will become more valuable than it is now.
I agree. Find a decent deal, force some appreciation up front to make it an even better deal, underwrite to a ten year hold, get long term debt with a fixed rate, have excess cash reserves and you can weather the storm if needed.
 

jon.a

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Is this one that I have seen?
Interesting commentary. Thanks guys. A few thoughts, if I may:

Not be it for me to understand/predict what millennials are thinking. I couldn't understand those dumb asses yesterday, I don't understand them today, and I've lost hope of ever understanding them in the future...

Having said this, I think it's wrong to view the market as a whole. For example, if your rents are a weighted blended $525 - sell. I don't care what Cpa Rate you buy this drek at you can't stabilize those tenants even if you pay their rent for them. Long-term there is not enough CF to cover CapEx, which means this is a "bigger idiot" exit, and now is the time to find that idiot. Similarly, if your basis is $125,000/door for product renting to millenials at $1,200 - $1,400 (I see this trading every day) - I don't really get that.

But, I do think there are assets with intrinsic value that will survive cap rate loosening, which is obviously coming. These assets rent for $800 - $1,200, which in most of the country captures folks who are not millenials, are manageable/stabilizable, and an asset class with rebuild cost so much higher than current purchase price that there is very little Class A risk.

In short my, methodology never changed from CFFU. I want to own that which is not only desirable, but attainable to the widest cross-section of my potential audience, yet represents high enough rental qualification barrier to entry so that the people I get are economically stabilizable, and I want to buy same at a basis which makes it difficult to replace with new construction. If I can find it with enough upside, then it's a C into B, and I am bullish.

As to exit cap rate, I think that if I underwrite the ability to hold for 10 years (10-year fixed debt), at some point in that curve I'll hit the exit cap rate hurdle - I really don't care much when.

Incidentally, just heard from the broker. No final decision, but we are in the final. I suppose I'll be happy with that for now since I am not seeing anything else to underwrite today...

Thoughts?
 
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JustAskBenWhy

JustAskBenWhy

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Is this one that I have seen?
Nope. This one is three times the size and way better market. Top 15 MSA. I am really pulling for this one
 

levijean

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The market is nuts right now. I'm getting outbid on everything I look at. On the other hand, stuff I'm selling flies off the shelf at crazy prices.
 

SteveO

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Maybe @SteveO will chime in, he's only owned about a gazillion apartments in his time.
With @JScott . That is why I sold out. Not sure if it will be a crash, but a correction seems to be forthcoming. I feel that most people in the west are purchasing based on pro formas that are not there. The hot potato could buzz soon.
 

SteveO

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It could def be a great idea to hold on to cash for a couple of years. Cash will become more valuable than it is now. Some gold to hedge might be very profitable.
I like the way this guy thinks.
 

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JustAskBenWhy

JustAskBenWhy

Silver Contributor
Speedway Pass
Sep 8, 2015
336
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Lima, OH
With @JScott . That is why I sold out. Not sure if it will be a crash, but a correction seems to be forthcoming. I feel that most people in the west are purchasing based on pro formas that are not there. The hot potato could buzz soon.
Totally agree with both. Still a buyer though, as long as it's a very specific asset type.
 

SteveO

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Totally agree with both. Still a buyer though, as long as it's a very specific asset type.
Not arguing with your points or reasons. They are valid.
 

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