Where smart investors are buying in a “bad” market

Today, new construction is down, rent growth is down. And this is creating a massive opportunity in the market today. And so today we're going to be breaking down, my partners and I, exactly why we are actually more aggressive in today's market than we were even a few years ago investing in multi family apartments. And where should you be looking? So if you're new to the channel, we are here to share our experience in building a 500 million dollar portfolio of apartments. And we're going to help every single person grow their own portfolio, leveraging capital partners to help fund the deal so you can grow much faster. So with that, let's dive in. Make sure to subscribe if you want to continue getting content like this. But we got Randy on here, Larry on here, these are our partners and got a lot of experience in this game. But in the current market there's not much new construction happening due to heavy construction last year. And people are probably looking around, seeing all the buildings going up. Those projects started years ago, you know, and, and not only that, rents are down, you know, at least some they're weighing down, maybe they're stabilizing in a lot of areas. But demand's also down with that. Right. So let's, let's dive in. Randy, what's, what's your take?

Yeah, for sure. I mean again, a lot of times people see the negative news and it feels negative. But like, so you had, you know, deliveries of new construction and apartments last year was based off of activities that took place in 21, right. And the deals that were locked in there, the interest rates were, you know, four and a half, five, six percent. And then rates skyrocketed in 22, which, which pretty much, you know, killed off all the new construction for the most part. So you've got, you know, the last several years the developers have not started a ton of new projects because the mechanics of the numbers didn't work because interest rates were so high. And so, you know, you had a lot of delivery that come into certain markets, not every market everywhere. And then that caused, you know, a bit of rent suppression. The surprising thing is that there was a greater absorption rate than people anticipated, meaning as new apartments came onto the market, people took them. And you know, part of that is also because less people were buying houses, right? I mean, because interest rates are up and it doesn't make sense for them to buy a house. So all of that coming in, you're already starting to see in many markets that, you know, a class new construction pricing is starting to stabilize. But then you know, the value of what, you know, Jonathan's also saying is that in the next two years they're projecting COSTAR and others that you're going to see beginning, you know, dynamic rent growth. And the reason for that is there's been no new construction, no new supply in many of these markets. You still have people that are moving into the markets for job reasons, geopolitical reasons, those kind of things. And because of this elevated interest rate the last three years, it's really put a damper on new construction starts for multifamily. So that's a great thing with which when you look at that, what does that mean? You know, it means that then there's opportunity that's there. Both from the demand proposition that you would expect to see in the market, call it 26 and 27, meaning more people demanding apartments, which fuels rent growth, less properties coming online. And so then that creates opportunity. The other thing, you know, when you look at and talk about distress is that there are projects that were, you know, maybe called finished in 22, and they are struggling because, you know, part of what that is is that they were anticipating potential sale or stabilization with lower interest rates. Lower interest rates haven't materialized. I mean, I was just talking with a partner on a deal that they were looking at that's a 20, 22 year new build. Right, exactly what I just said. It was finished in 22 and it's struggling. And the reason it's struggling is because interest rates are high. And so the economics of it don't pencil out exactly to how they underwrote it back when they built the deal, you know, starting call it in 2019. So, you know, a lot of good mechanics that present opportunity, I think, you know, as you were saying, Jonathan, down, down, down. It's like I felt like jumping and saying up. You know what I mean? Because, yeah, like when everything's kind of projecting negatively, it. You watch it and it makes you feel negative. Yeah, but it's really an inverse, inverse correlation like Warren Buffett said, you know the quote that Jonathan, when there's blood in the streets, that's the time to buy. Most people, you know, don't have the courage or the stones to want to do that. Well, let's wait to see what takes place. And that's where data and understanding those things really can be your friend.

Yeah, exactly. And the market's cyclical. You know, the cycles are going to come back around. It's really not, you know, even the interest rates, they're really not that high compared to, you know, a long time ago. Right. I mean, they're, they're really not that bad. I mean, it's just people, the people who don't like the market are the cynical ones that are just pessimistic anyway. Right.

Well, I mean, so again, it's like, you know, Jonathan's true. It's like interest rates relative to history are not high, but it's, it's high. For like example, that 22, when you're anticipating stabilizing with a four and a half rate and you're ending up in the market at a six and a half rate, you bet your ass you're in trouble because that's a 50% increase in cost of capital. Your money, you went from four and a half to six and a half. That's two points more. It's like 42% higher than you anticipated. So that is a challenge. But for us sitting here going, okay, well hey, let's look at buying that deal. It's not a challenge. It's a mechanic of the price that like, okay, well the price needs to be the equivalency of what the debt is. And so unfortunately their equity gets wiped out or haircut dramatically and now it becomes a good deal.

Yeah. Rates feel real high. If you bought it a four and a half cap rate, your loans do. Right. But if you're starting now and aggressively buying, you can underwrite for the appropriate interest rate. And I think Warren Buffett also said do what everybody else is not doing. Right. So there's no doubt. Feels like to a lot of people, bad time to buy. But. And no doubt transactional volume is down, but a lot of people are sitting on the sidelines waiting for something to happen. But there's still sellers out there that need to sell now. Right. So you just may have to. And they're harder to, you know, maybe a little harder to make the numbers work. That just means you gotta work a little harder. Right. You gotta make more offers.

Yeah.

Look at more deals.

I think one of the chat things that was sent in is like, hey, where's the honeyhole at? Right? There is no honey hole, man. Like the, the, the thing that you're gonna. Hey man, let me find this secret spot where all the gold is that I can just be like the guy on the Lucky Charms commercial and fall into a pot of gold. It's like, that's not real world.

That's not a snapper. They were looking for red snapper, right? Yeah, not, not apartments.

Yeah, they, they were, they were looking for easy street, easy street, doesn't even exist on the game on Monopoly. Right. You know what I mean? So it's like, yeah, I think the truth of the matter is what Larry said is true. It's like, look, you have to be, yeah, you might have to work harder. And that should be expected right now because of some of the economic constraints that are going on. But when you do find that deal, it's going to be a good deal that presents a great opportunity and then now you're able to execute on it. And then the underwriting of it works at a six and a quarter rate and if you've underwritten it properly and then rent growth goes up as we've talked about, and then interest rates moderate, which is highly likely. You're now getting extra juice in your deal now, so you don't need to underwrite that in the deal. You make the deal work based on just full stone execution. But now you've got the wind at your back that's, you know, gonna even give you a better return.

Yeah, exactly. And I mean the, you know, the way properties are valued guys is, you know, your noi, your how much you are profiting on the deal, right? And so rent concession, you know, the supply is high, high right now, demand is low. That means it's more competitive when it comes to, you know, getting tenants in there. And, and, and so rent concessions play a part in this whole thing, right? People are given three, four months free up front, right. So, so then all of a sudden the noi and the, the, the, the debt, being able to pay the debt makes it hard. And now you're in a distress situation, right? And so there's opportunities out there for, in a high interest rate, the time to buy is when interest rates are high, when vacancies are high, when rent growth is low, right. Like Randy said, when there's blood in the streets, right. So you're buying other people's problems, you're buying opportunities because of, you know, issues that are happening on. And again, we're not endorsing going out and buying a 20% occupied property. We're not necessarily saying, especially for a newer investor, if you're looking to scale using other people's money, we're not saying to do that. But if you can find an opportunity where there is some room to grow, some room for value add, you know, maybe the changing out management a little bit, maybe there's some light to moderate value add opportunities, that is a good deal, right? And so it's just a matter of are you, are you do you understand how to create lead flow? Right. Getting off market deals, finding deals. And so we, we have videos that talk about that. So if you, if you want to know how to generate more deals, go check those videos out. But you know, people ask where are the honey hills? And all that kind of stuff, man, you know, at the end of the day that you got to underwrite each property and look in all areas. Some of the best deals are found in the most unexpected areas. If you're looking for the highest growth areas, you're also in the most competitive areas. You know, you gotta understand like some of these deals are found in a, you know, town of 30,000 people. Right. Or 40.

Everywhere USA.

Right.

For sure.

So, you know, main thought, you know, I was just in one day out not too long ago, I was looking at a property in Atlanta, Georgia is 20, 30, 40 units, something like that. It was like eight or nine million dollars. Same day I'm looking at a deal, 96 units in Birmingham, Alabama for seven million dollars. You know, and it's not to say that the eight million dollar property is better, is, is worse than the seven million dollars property. It's. You just got to look at the situation. You got to look at where's the opportunity, what's the underwriting say? What is the opportunity to ahead?

The honeyhole is found in hard work, my friends. Yeah, that, yeah, like, because again, Jonathan just, you know, hit the nail on the head. Which deal is better? The 20 unit for 8 million or the 96 for 7? You've got to look at the deal each specifically and understand the deal to be able to understand and discern which is a better opportunity or neither. And you know, so if you just put on this hat of like, hey man, I want to go find the honey hole over in XYZ area, you're going to miss the boat because the boat is found, you know, in. Yeah, maybe there's not exactly like Larry said, everywhere, usa. Maybe you've got a geographic target area that encompasses, like Jonathan said, maybe it's two states, three states, whatever. And now you're looking at each of the deals that meet predefined criterion that helps you establish what you're able to execute on and make money. You know what I mean? Like that's the ticket.

And part, no doubt.

I'm just saying part of a group like this gives you resources and traction and peers that are already doing it so that you can more quickly accelerate.

Yeah. And if I, you know, if we're coaching somebody, I think that's Step one or two is defining your buy box. So you definitely want to do that and decide what fits for you. I'm all I'm saying is there's, there's cash flowing multifamily properties in every town in the country, right over whatever population. That doesn't mean you definitely need to define your buy box and have a good strategy. But there's the trick is finding the right deal like y' all are saying based on the underwriting, based on the data, not based on your emotions and excitement.

Right now I'm talking to a guy, he's actively buying and San Diego, I'm like okay, but he lives out there and just what Larry just said is 100 true. He's actively working and creating opportunities in an area that he knows and he's not buying everything but he's buying deals that cash flow and work. And I think he said that even with the rent caps that he had it was like a 9% rent growth this year was the cap that you could put on it. So he's like, that's more than even market, you know, so that's good.

Well yeah, I appreciate you guys joining. Look, if you want to join a group of people that are actively taking deals down in today's market and navigating the times. If you want to join a group of like minded investors that are scaling their portfolios through apartments, whether you have, you know, some real estate experience, fix and flipping, you know, got a few single family rentals, whatever you have going on, or you looking to scale your portfolio to the next level using capital partners and using syndication like structures. There should be a link in the description below. We'd love to chat with you and see if working together would be a good fit, but I hope this was providing value to you guys. We are over here at a Mastermind in Tampa, Florida right now and so we had to step out. We're not in our usual studio here but good to see everybody. Hope you have a wonderful day. Make sure to click subscribe. Thanks for joining.

Thanks.