Black Rock CEO says a REAL ESTATE Storm is Here

In the last 24 months, Blackstone, the world's largest alternative investment firm, has acquired over $20 billion in commercial real estate debt from the banks. They also just launched an $8 billion real estate debt fund for commercial real estate distressed assets. And what this is doing is it's signaling a major shift in their focus towards commercial real estate. Now, you've probably heard of all the big explosions and implosions in commercial real estate. You've heard of all the loans coming due and what we call the maturity wall. You may have heard about that for the past year or so, but what I want to do is walk you through exactly what is happening in today's market because a lot of people know about it, but they don't know that it's increasing. This is a moment right now where all the debt, supposedly $2.7 trillion in commercial real estate and $1 trillion of that is multifamily. It's coming due by 2027, next year. So right now we're in the pinnacle of it and we're seeing major deals happen. So a lot of people are talking about it. But today I want to walk you through an actual deal that we're buying right now where the seller is actually going to lose $6.6 million from what they paid to what we're buying it for. And how is that happening and how should you be looking at commercial real estate? How are we finding these types of deals? So we're going to walk through that. But the other stat is 14% of all commercial real estate loans right now are in a negative equity position. And what that means is that the property is worth less than the loan amount. All right. So what we're going to do is we're going to talk about loans are coming due, what that looks like. The problem is in 2021 and 2022, there were lower interest rates, so everyone was underwriting for low, low interest rates. All right. And they were assuming that the interest rates would stay the same. They were assuming rents would aggressively grow and refinancing would be easy. But instead, what happened? I believe it was June, somewhere around June 2022, where inflation was super high. It had been skyrocketing. The Federal Reserve got together and they decided that we're going to increase interest rates. Interest rates spiked across the board. And you saw some syndicators, some apartment investors that were stuck, and some of them got away and made millions of dollars because they got out. They exited the property within a few months of the actual implosion or the interest rate hike. Some of them, I know some personally that were actually in contract during that time and it fell out and they lost millions of dollars. So that's what happened was 2021, 2022, people were underwriting with low interest rates and they were assuming it would stay there. They were assuming rents would grow and rents plateaued or rents were flat at best. And now the property's loan balance is actually more than the property is worth. And so now they can't refinance because they would have to come up with money, right? They can't sell because they would be short of cash to actually be able to get all the money back. That they have in it. Now, the opportunity lies with those that know how to find deals and that are well below market rate. All right. So let's get into it. Let me give you an example. So we are buying a deal right now, fully renovated, 90-unit apartment complex, 90 units in Atlanta, Georgia. This property, the seller bought in 2022. For an all-in cost. They put— they bought it for $10 million, put $4 million in renovation. So they are all in. The seller's all in at $13.8 million. Okay. We are buying it. We have it under contract right now for $7.2 million. $6.6 million loss. The seller is now forced to sell and the bank is taking it back. And here's why. What happened? 2 to 3 years later, they were supposed to refinance. The debt was a 3-year term. Again, I'm not going into the details of exactly what happened with this deal, but this is a general assumption, right? Just suppose there was a 3-year term on the loan. So basically what happens when the loan matures and we hit this maturity wall is that the bank is expecting you to refinance the property and pay off the loan Or they're expecting you to sell the property and pay off the loan. So the loan is due, right? And so most syndicators actually want to get out before that term and before the maturity. But interest rates spiked and they went from 4% to 7% and the cost of debt doubled and made it impossible to do that, right? So cap rates expanded from 6% to 8%. Refinance just doesn't work anymore. So because interest rates are too high, they had $13.8 million all-in cost, $10 million in debt. They were not able to get their money back. Even if they could sell, they wouldn't be able to pay off investors. They wouldn't be able to repay the debt. So let's break this down. Let's get rid of our assumptions here. Debt on this property. The seller paid $13.8 million. They got debt for just say $10 million. So the debt's $10 million with interest rate, just suppose at 4%, 4%, 3-year term. All right. So that means, just suppose this is interest only, this loan has to support and this deal has to support $400,000 in debt service. All right. So the debt service on this deal, it has to be at least $400,000. The deal has to support that. What does that mean? And how does the bank approve this loan and say they can get $400,000? They do it by what's called a DSCR, right? Debt Service Coverage Ratio. It's how the banks decide to lend on this property, which means the NOI of this property must be 1.25x of the debt service. So $400,000 times 1.25x, that's what our NOI on the property has to be. So your NOI is your net operating income. The income of the property has to be $600,000 for this to get approved. All right. Now the seller, just suppose they had a $600,000 NOI, they got approved for $400,000 in interest-only debt. Obviously this would have to be the term. So for a $10 million loan. Okay, so now the seller probably had plans to increase NOI. They would have to do it by a lot of money to really get to where they need to be and not experience the intensity of this correction. But just say $600,000 NOI. So now 7% is the new interest rate. 2 years later, they need to refinance. And now the bank is saying they're gonna give them $700,000. Just suppose it's interest only. Just suppose it's interest only. We're being optimistic. Uh, interest only on this $10 million loan. They need to justify $700,000 in debt service on this deal, assuming no principal right? Just interest only. We're being optimistic. So that means based on the DSCR being 1.25x the NOI, the $700,000 is what they're willing to give us on debt service for a $10 million loan. Now, the NOI based on a DSCR of 1.25x needs to be $875,000. All right. So 7%, now the bank, in order to get this loan at $700,000 in debt service, you know, because interest rates are now 7%, the seller has to have this NOI at $875,000. Suppose the seller did go in, increase the value a little bit. He was able to increase rent $75 or he was able to increase the value or increase the NOI $75 a unit. Well, now his new NOI, this is going to be the needed NOI, current NOI. The current NOI is $650,000. This doesn't work. No bank is going to lend on this property, or no bank is going to lend on $10 million, and this is just not going to work. Okay, so how does someone like you or me come in this property, and how do we find this type of deal? What are we looking for? How much can we pay for this property? Well, first we need to know what will the bank give us on the $650,000. Now our current NOI, our income, is $650,000. Just suppose, you know, cap rates went from 6% to like 8%, you know, all across the board. But just suppose in this situation we're at 7.5%, 7.5% cap rate. At 7.5%, the value of this property is now worth $8.6 million. $8.6 million is the value of this property now. That is $5.4 million less than what the seller has in it. And it doesn't even cover the $10 million in debt that's currently on the property. He can't even pay this property the loan amount off, right? So now how much debt can we actually get on this property? Well, based on a $650,000 NOI, what it— based on the DSCR rule, What would that mean our maximum debt service is going to be? Max debt. If that has to be 1.25 times our debt service, that means our debt service is actually going to be $520,000. So our debt is $520,000. And if you want to calculate how much of a loan can we get on this property, we can take this number and what you do is you divide it by what's called a mortgage constant. All right. So a mortgage constant, you take a rough mortgage constant, right? It's not going to be the exact thing. There's going to be a lot of different plays as far as exactly how they're going to size this loan up. But just say a mortgage constant would be based off the amortization period, the interest rates, and say in this situation, 7% interest rate, 30-year amortization period. We're gonna see just say an 8.06% mortgage constant, right? Let's just take it at 8% for simple numbers. So you're gonna divide this number by 8% and you're gonna get new debt on this property is gonna be around, what is that? $520,000 divided by 8% is gonna be $6.5 million. $6.5 million is the new debt. So obviously you can calculate that's 75 to 80% of what we could actually pay for the property, right? And so we were able to get in at $7.2 million. $7.2 million. We were able to pay for the property. We'll probably put some renovations in there. We'll probably put— obviously it's fully renovated, so there's gonna be very little of that. But just say our all-in cost is $8 $14 million for this property. So that's typically what you can pay. Now, next steps. What are your next steps when you come across a situation like this? Again, seller's all-in cost is $14 million. The current loan is $10 million. The new loan is— they can only get us a $6.5 million loan. That means the seller needs to come up with $3.5 million in equity just to try and refinance the property. They have to actually pay to be able to do that? It's not gonna happen. So what's gonna actually happen? There's going to be capital calls to investors. That's one option, which most syndicators aren't gonna be able to do that. Investors are not gonna agree to that because it's still hypothetical, right? You're gonna have, uh, maybe they can try and extend the loan. Again, not gonna happen. The bank is currently knocking on their door. If we don't come in and buy this property, they are going to be foreclosed on. So the bank is going to foreclose this property., and then we're gonna be buying it from the bank. Or you can come in and buy from a distressed seller. They are distressed and we can come in and rescue the deal and, uh, get it at a much lower basis. So seller's all in is like $156,000 per unit. We're coming in and buying it at $80,000 a unit. So almost half of what the seller has in it. Okay. So how do you come in and buy this type of deal? You can come in like we did $7 million,, for a fully renovated property. And it still has massive opportunity because of the seller's distress to come in there and increase the NOI. And that's extremely important, guys. You have to be focused. If there's anything you get on this, it's that you cannot be dependent on market appreciation. All right? So you have to be focused on how can I force appreciate this? Whether the market increases in interest rates, which by the way, there's a new Fed chair in there. Warsh, and you know, people are thinking that there's gonna be an interest rate hike again. But guess what? We're not dependent on the fluctuations of the market. We're coming in at such a low basis, we're coming in at such a low value that we're able to appreciate this property through forced appreciation, and we can even take a loss or take a hit on interest rates and still come out profitable. So just suppose, let's be conservative, Just suppose that the original intention of the seller, the original intention of the seller was probably to get this property $16, $17 million and make a few million dollars on this deal. They put in $13.8 thinking they could get it $16 or $17. Suppose worst case scenario, we come in here, buy it for $7.2. We're all in at $8.5, all in $8.5 million. Pro forma, $10.5 million. Just suppose that is low, that's super conservative. If we can, we can absolutely get it at $10.5 million, probably a lot more, but just suppose we're all in at $8.5 million. Our pro forma is $10.5 million. That means our profit is $2 million. $2 million. And that's conservative, by the way. That's extremely conservative. We're gonna do that in 2 years. So we're gonna make $2 million in equity or profit based on if we sell or refinance. We're gonna do that in 2 years. Now, extremely conservative. More than likely that'll happen in 1 year. More than likely. We always wanna under-promise and over-deliver. But in today's market, you've got to make sure you're underwriting extremely conservative. It's very important. Okay. So if you remember what I said, there's $2.7 trillion in commercial real estate loans coming due. 14% are already in a negative equity position. A trillion of that is in multifamily. Okay. So if you remember, our loan is $10 million, $10 million. That means that we are going to have this happen 100,000 times more. Right? 100,000 times. Now again, some of these loans are $100 million, but just suppose what we're looking at is $1 trillion. If I can even participate, if you or I can participate in just 0.05% of that opportunity, what that means is that we can do the same thing 50 times. We can do this same thing 50 times. That means that we are able to make $2 million conservatively 50 times. What does that mean for the next year, 2 years? That's $100 million. $100 million in equity and profit. If we just do that, if we get 0.05% of this opportunity. If we do what we really think it's going to do, and that's $4 million, we're thinking we're going to get this thing to $12.5, which again, is still under what they have in it. Right. If we even get to $4 million or $12.5, that means that we're still under what the seller has in it. And they thought they could get $16. So that would mean that this number would actually turn to $200 million. You see why this is so exciting, right? Right. Where there's so much opportunity in today's market. This only comes, though, when you're in the right place at the right time and you're positioned correctly. These deals, you have to know how to uncover these types of deals. Look, they, they are distressed. There are opportunities. There is— brokers are wanting to have lunch and dinner with you. But I'm telling you what, there were people coming in making an offer on this deal at $9 and $10 million. So what does that mean? You need to be in a place where you know how to build those relationships, you know how to partner effectively with people who have that credibility, you need to get in and, and steal these opportunities. All right, if you want to see more videos like this, you want to get more live deal breakdowns just like this, make sure to drop a comment, hit like and subscribe, make sure to hit the notification bell so you get notified when we drop videos. All right, God bless.