Market Update January 2023 Transcription:
This is the investor mindset podcasts. And I'm Steven Pesavento. And for as long as I can remember, I've been obsessed with understanding how we can think better, how we can be better, and how we can do better. And each episode, we explore lessons on motivation and mindset for the most successful real estate investors and entrepreneurs in the nation. There are still phenomenal deals, there's still phenomenal financing opportunities, and they're still phenomenal returns. With that, when done correctly, you can make great money. It's all about finding the right operating team to work with, and having the patience and understanding of how that operating team is going to execute that business plan, as well as understanding how conservative are they being. Welcome back to the investor mindset podcast. I'm your host, Steven Pesavento. In today's episode, we're going to do a market review, understanding where are we at right now and 2023, in the multifamily investment market, and take a little bit of a look back over the last six to 12 months to understand how we got here, and where the opportunity is going to be moving forward. So today is going to be a phenomenal conversation using and leveraging the experience that we have in the market and sharing that with you so you can understand where that opportunity is for you to invest and what you should be looking for. So let's start out by looking at where we're at. Right now we're in an environment where interest rates are nearly double what they were last year, where we are seeing sellers who have less motivation to sell, meaning they're not in a position of distress, they do not need to sell. And therefore, what we're seeing alongside of that is that buyers and sellers are really in two different camps, sellers are expecting one price, and buyers are looking for another price. Buyers are really in a position of looking for distress being more conservative, maybe looking at where's the upside opportunity, and then rolling that back 2030, maybe even 50% depending on what that opportunity is or where that upside is coming from. And so what we're noticing is that many less deals have been transacted in the last year than the year prior. One of the reasons that there's been so many less sales is because sellers and buyers are really just in two different mindsets when it comes to exiting these properties. And so why is that? Well, many of these sellers have locked in great financing, or perhaps they've been in the project for three, four or five plus 10 years. Therefore, they're sitting on some very strong equity. And they're in a position where they want to capitalize and receive the greatest number for the asset that they have. And so they're really kind of holding out. So as we're talking to brokers, and we're talking to sellers, we're really seeing that their perspective on the world is very different than many of the buyers, right? Buyers are in a position where when you're buying a property, you want to be conservative, while also looking at what's the upside opportunity. And so in a market where there is uncertainty about what's ahead the next three months, the next six months, next 12 months, we don't know how long the Fed is going to continue to raise rates, we don't know when that's going to stabilize, and we don't know what actions they're going to take as far as pumping more money into this economic environment. What we do know is that where we're at right now, we're seeing interest rates, you know, ranging on these deals anywhere between five to six 7%, depending on the deal, most of the time on these types of projects, we're seeing it right in that, that four and a half, five and a half 6% type of range, the lower being very low leverage or a very unique long term loan opportunity fixed rate. With that, where we're going from an economic standpoint, we can't predict the future. But what we can do is we can look at where we're at now and start understanding where could we potentially be. And if we ended up going down the road that takes us down, that takes the economy downward, and therefore asset values and, and incomes and all those things down, then we have to be able to plan for that scenario. But we also have to be able to plan for maybe we're in an environment where things stay flat or where we're going to turn things around in the next 12 months. Many economists are expecting that the next six to 12 months will be what's called a recessionary type period. Many would argue that we're in one Right now, I believe that we're in a recession, we've seen that the economy has been impacted. But the counter argument to that is that employment is now just coming to a point where we're seeing a lot of companies laying off employees. And we think that actually will start to play its way out. Many of those employees that are being let go, are high income earning tech employees in sectors that grew very, very quickly. And as a result of that, you know, this, this.
And as a result of that, we need to take into account where or how big of an impact that's going to have economically. But when it comes to multifamily, in general, the current demographics, the current demand is still extremely high. Why is that there's a huge lack of housing in the United States, we have not built enough housing in the major metros, where population is growing at the fastest rate. And therefore, there is a huge opportunity to continue to own apartment buildings continue to own multifamily and still expect there to be a strong opportunity. The beautiful thing about owning multifamily is that when you buy it right, when you buy it at either current value or below, and you buy it with the opportunity to improve operations, to improve rents, to be able to renovate the property and improve the experience, what you're doing is you're taking a business that is operating, you know, at 50% of capacity, and you're increasing up to 70, or 80, or 100%. And as a result, you're gonna see a return on those dollars that are invested. But that brings us to what the opportunity is today. And really what we're seeing out in the market. You know, as we're talking to sellers, and we're talking to brokers, we're seeing that they're just in such different places, the really, the seller is over here believing, hey, I want to get every dollar I possibly can look at what properties are selling for 12 months ago, I'd like to be able to get that and buyers are saying I'm looking forward at what the next 12 or 24 or 36 months might be. And I want to be able to cap my downside. Therefore, I want to know that I'm buying at current financials, not what I possibly could earn, which is what many people have been doing for the 12 or 24 or 36 months prior, they were buying future potential earnings. And today, people are looking to buy current earnings. And they're looking to get that upside benefit that buffer that safety, that protection and that upside that goes to investors by doing those types of value add or operational plays. So the real opportunity today, it's going to come down to continuing to source deals out in the market be able to get true off market deals, being able to negotiate favorable terms. You know, we recently bought a property here in Denver, and we were able to buy that property for 15, almost 20% below what the highest previous offer was 12 months prior. Why is that the seller was greedy did not want to pay two commissions and turn down an offer that in today's market looks phenomenal. And so we were able to buy that property for a great basis, we were then able to the second part is negotiate very favorable terms on the financing. And that's going to come either through seller financing, that's going to come through assuming the loan, or that's going to come through working with that bank and lender network to be able to get really good rates that are fixed in and locked on that deal. In particular, we got 65% of the purchase. As a fixed rate 3.75% loan for five years phenomenal ends up creating cash flow. From day one, we're able to renovate and increase rents from 900 to you know, almost $1,500 a month, that is a huge return. And those types of deals are still available. And those types of deals are the types of deals that investors like yourself should be looking for. Where we can either find something that is quite stabilized but has a little bit of upside moving from 900 to 1200 A month 900 to $1,100 a month on a larger property or being able to have a big bump by going in and forcing appreciation by going and doing renovations and bringing things up to market conditions. So that's where things are going to really continue the opportunity in this space. It's going to require patience, it's going to require as an investor for you to be very intentional about the type of investments that you get involved with so that you can be in a position where you know that you're confident about the return you understand the operator and how they're looking at the deal. One of the biggest reasons that there's been so few so much One of the biggest reasons there's been so many fewer multifamily transactions in the last 12 months than the 12 months prior is because sellers are over here saying, I want to get as much for my property as I possibly can, and buyers are looking at it, I want to protect the downside as much as I can, while still creating great return. And so they're just in a different expectation of where they think those prices are. In the last three months, we have started seeing more of an equalization happening where buyers and sellers are starting to come together, especially when there is a need, or a real purpose and reason why somebody is selling really, it comes down to we're finding great deals from operators who've owned the property for a long time they're looking to retire, or we're finding great deals from institutions who are at the end of their investment cycle or period. And they're looking to exit, they're looking to be able to lock in those returns and distribute cash back to their investors. So when it comes to getting involved in 2023, there's still phenomenal deals, there's still phenomenal financing opportunities, and they're still phenomenal returns. With that, when done correctly, you can make great money. It's all about finding the right operating team to work with. And having the patience and understanding of how that operating team is going to execute that business plan, as well as understanding how conservative are they being now? Where is that return coming from? Now? How much reserves are they sitting on in order to continue to make sure they can pay that bank note? And when are they expecting distributions to start? Because in this environment, cash flow and yield is super important. But it's difficult to find great yield alongside really high back end appreciation returns is usually a trade off. And in this market right now, there's more of a trade off than there has been in the near recent past. So with all that said, highly encourage you if you have any questions, please head over to Vaughn finch.com/invest. You can set up a call with one of the advisors our team and they can dive deep into your personal situation help you create a passive investment plan that works for you. And with that, I would love to hear down in the comments below or in the DMS on Instagram or LinkedIn. What do you think about what I'm sharing so far about the experience we're seeing out in the market and what's different? What are you noticing where are you seeing the opportunities? And what are you looking forward to in the year ahead. Thanks for listening, and we'll see you on the next episode.