Updated: Jan 9
I’m fortunate to be working in real estate, because I’m doing what I love, as I have a strong
passion for both investing and syndicating multifamily properties. In my former life as a lawyer there was a certain predictability to what I did, but with real estate there are always some unexpected surprises. I wanted to share some of the surprises I experienced when I first started out
Top Surprise #1: People Are Willing to Overpay to Get a Deal Completed
Yes, I know, we’ve all heard that at this stage of the cycle, investors tend to overpay; yet I am always surprised to find out how much others have been paid for properties I either passed on or bid on. When it comes to multifamily properties, it seems that the sky is the limit regarding prices. Over the past several years, prices have soared way above the asking price. The reason: availability. When the great recession happened in 2008, construction of new apartment complexes came to a halt. That meant inventory was dwindling, and the prices of existing properties began to skyrocket.
However, there are other things in play. A lot of too eager or inexperienced investors have started buying these properties, and are willing to overpay just to get a deal done regardless of cost. When you begin bidding on a property, be prepared to see people bidding up the prices just to be able to say, “I got it!”
Another issue is that there is a huge demand. Both retirees and Millennials are postponing the purchase of a single-family home. Baby boomers who are retiring are choosing to rent after selling their home. It’s a trend that’s happening all over the country. And Millennials are choosing to wait on the purchase, because they’re planning to have families later in life. They also have a huge amount of student debt, and they want to live in core urban areas, which drives the price of a single-family home way up.
As both a syndicator and a real estate investor, I take a conservative approach when evaluating a property. I’m not relying on fees as syndicator in order to survive, so I have the freedom to choose the right properties and buy at the right price. I look at the numbers, and make sure that the net operating income (NOI, which is property income minus expenses) can support the debt payment on the property. If it can’t, I walk away. There are other deals out there to explore, even if it takes more time to find them.
To avoid surprises on these high-priced properties, remember that there are ways you can avoid joining the frenzy and overpaying. Be conservative in your underwriting and plan for a moderate rent increase. Even if your current submarket enjoys a 5% rent increase today, and objective professional projections are for a 4% rent increase in the next few years, lower your expectations to 2% or 3%. Focus on the deal’s upside, but be conservative.
Here’s another idea to consider: make sure that the exit cap (the cap rate at which you project to sell the property at the end of the hold period) is higher than the cap rate that is in place when you buy the property. After all, there’s no guaranteed that you’ll meet your forecast of future cash flow, which may pose a risk to investors.
Top Surprise #2: Raising Money is Harder Than You Think