This is a YouTube video titled "Is Real Estate Still A Good Investment?" containing a multi-speaker discussion focused on real estate investment strategies, market conditions, and risk management. The speakers analyze cap rates, interest rates, and market trends, providing insights into navigating the current real estate environment. The content appears to be an informative discussion rather than a casual conversation, and there is no indication that Jim Dahle is one of the speakers.
The rule of thumb is that your cap rate is supposed to be higher than your interest rate. When interest rates go up 4%, that puts a lot of pressure on that. How much have cap rates gone up in the last 18 months in your space?
It depends on who you ask. You still see deals in New York City. So historically, Manhattan has always been kind of under 4%. It's always been kind of that trophy.
Asset that everyone wants, kind of an appreciation play almost.
Yeah, long term. Brooklyn, Queens, the outer boroughs, were usually in the fours to fives. Now they're six. You'll see some that are further out in less desirable areas or less gentrified areas, or if they have issues with rent control, rent stabilization, they're pushing towards 7% caps, which is nice to see because people are finally acknowledging where the market is. You see one every couple days. Really, that's at 4.5%, 5%. Someone's still holding on to thinking they're going to get that price. But I think little by little it's coming around. But I think when people are pricing these deals in the sixes or seven, they can make sense. Then you can really kind of pencil them out where for us, you're buying it at a six. And we're planning to renovate right away. So we'll probably add most of our value in the first 12 months. And then it's kind of refining the asset as we go. So it's. I think there's opportunities and I think it's an interesting market. When things are going really well and everyone loves getting into real estate, that's usually when the. Things are overinflated. When everyone's scared of it is usually the best time. So it's just once you get over the initial fear of it, you look at the numbers and you analyze a deal on the real data that you have in front of you, you can make the proper adjustments.
Yeah, a lot of people are feeling a little burned on real estate. You know, at least anything that's been mark to market, you know, that suggests that returns going forward are going to be dramatically better. But what do you say to those people who are like, why did I bother investing in real estate at all that maybe got into it two or three years ago?
Well, it's a fair point. It comes up a lot in conversations where with us, you know, we try to keep investors in the loop of where we are because you have really two parts of the dynap. You have your quarterly distributions which can equal Treasuries. At this point, it's like, well, why am I going to invest in real estate for a 5 or 6% annual return when I can get the same thing from a CD or something like that? Which is a fair point. But the goal for real estate in general is that long term or mid to long term capital appreciation, where you're not doing it just for the quarterly distribution. The quarterly distribution is that nice piece that comes with it, but you're really doing it for the exit and where you can get. That's where you kind of achieve your higher high teens, low 20s on the annualized return. And I think when like with some of our deals that we're kind of looking at now, your quarterly distribution in the first one to two years might be a little bit lower than what we might have been used to in the past. But as long as your exit is realistically aligned with the market and you can reach those metrics, then we feel more comfortable with it. The nice thing about this market, when it tightens up is bank scrutiny is a lot more difficult or a lot more detailed than normal. So they're kind of really looking into the details. So it's almost like a second set of eyes looking at a deal to make sure it pencils out and you're not missing something. But I think if your exit is aligned right with your valuations and today's cap rates, I think you could still do well. I think you just have to be careful and you have to know what you're doing. I think a lot of people came into the last three, four years trying out real estate for the first time, which sometimes you get burned that way. But for us, we've been around it for a while, for better or worse. I've seen the good and the bad and you just learn how to navigate it. You build in your protections and your margins and your contingencies on any deal that you look at to so you know what you're getting into and how to protect capital. Ultimately, that's what you want to do. You got to protect capital and have an exit that works. And always try to have a backup.
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