Why 2025 will be the Biggest Real Estate Opportunity in Decades!

One of the biggest opportunities in real estate is happening in 2025. And it's not short term rentals, single family homes, wholesaling fix and flipping, etc, etc. It is in commercial real estate. And it's a specific type of situation that I want to break down today. And it's across all commercial real estate. $1.5 trillion of commercial real estate debt is coming due by the end of 2025. Private equity firms and real estate investors are turning their focus right now to rescue funds and distressed funds, meaning capital partners are also looking for these types of deals. So if you understand this simple structure that I'm going to break down right now, you will be able, even as a newer investor, as a small investor, you will be able to come up fast and be able to take advantage of deals in 2025. If you don't know who we are, my name is Jonathan Cronin. My partner and I buy large multifamily properties. We have accumulated a large portfolio in the past few years and have been able to avoid a lot of the issues that's happening right now. So I want to walk you through a structure where you can implement right Now. So in 2022, interest rates were a lot lower. And this is the crux of the whole issue is that interest rates in 2021, 2022, or around 3 or 4%. And so we were able to get deals at a much faster pace in the market. So what I'm going to do is break down right here, 2022. Let's suppose this is an example deal valued at $10 million. Just say this was a 100 unit deal right here. Okay? So the value of the deal was $10 million. We paid $10 million for the deal. Okay, the debt, the bank is typically going to give you between 70 and 80% debt, maybe even less now. But just say at the time, 75% loan to value, meaning we got 75% of that $10 million or the purchase price. So loan to cost. So that would be $7.5 million. Okay. The equity on the deal, meaning what we raised from capital partners. And again, this is an example deal, I'm saying we just to help you come along the journey. But $2.5 million was needed to put up in the deal. Okay? So capital partners would put this money up and allow us to meet the $10 million needed. Okay. Now the NOI on this deal is $400,000. So what is NOI? NOI is your net operating income. So that is the profit. It's simply income minus your expenses equals your profit. Okay, so this is the number that the bank is looking at whenever they decide how much they're going to lend. There's a term called dscr, which is your debt service coverage ratio. And that means that the bank is looking for a multiple of what you're getting a loan to. So if, if the interest NOI is 400,000, they're not going to loan you 400,000 or any more. Right, because they need insurance. They need to know that you're going to be able to pay their debt first and foremost to pay the payments and service that loan as a priority. So they typically want at least 1.25x the debt payment terms of noi. So your noi needs to be 1.25 times the debt service payment month to month, year to year. Okay, so our NOI is 400,000. Our interest rate is 4% at the time. And so it would be just roughly $300,000 per year. So 4% of your 7.5 million dollar debt is, is 300,000. Obviously that's not amortized, that's not the actual number. But just giving ballpark figures here, the cash flow is 100,000. So your NOI, your profit after you pay your debt is now at $100,000 that you have free and clear that you can stick in your pocket, right. Or that you can pay to your investors. Okay, so the cap rate. Now let me explain cap rate, Cap rate can often confuse people, but it's not that complicated, okay? Once you understand cap rate, you understand commercial real estate, because commercial real estate is valued based off a cap rate. And what that simply means is the NOI divided by the market value of your property. Okay? So just as a business, if you were to go sell a business, you would want to buy it based off or to sell it based off the profit. So a buyer would want to know how much are you profiting and that would be the value of your business. Right? So it would be the profit times a multiple would be give, give the investor or the buyer an idea of what it's worth. Right? So same thing in apartments. It's the profit divided by your cap rate, your market cap rate. So noi divided by the market value, the market value determined based off the competition. Right? Based off who wants to buy it, how many people are willing to pay for it, and what are they willing to pay. And interest rates influence this. So that's why what has happened, and I'm going to go through what's transpired over the last three years, since 2022. And what's going to happen in 2025? But the cap rates have increased because there's higher interest and less people that want to pay that price. Right? So there's, it's going to increase to get more people. Right? So typically your cap rate is higher in a market that's less competitive. Right. So it has less buyers. Right. Or in a geography location where there's very few investors, it's going to be a higher cap rate, typically. Right. And the lower cap rate happens where there's higher competition. Okay, so that's in simple terms what a cap rate is. It influences what someone's willing to pay. Okay? So in this situation, our cap rate is 4%. It's the 400k divided by your $10 million. Okay? So that is what a cap rate is. Your noi divided by your market value. Okay? So now Fast forward to 2023 after this deal happened. We are 2025, let's put 2025. Now the value is 10 million. We're going to address that in just a second. The debt, 7.5 million. It stays the same equity 2.5. We still have those investors. The noi, the net operating income, $400,000. Now people typically bought this deal based on being able to increase the value of the property. So they took out bridge debt, they took out a loan to be able to do like a three year play of value add. So within three years they typically are going to increase the rents, increase the value, decrease expenses. Right. If we're thinking in terms of a value add, we're thinking how do we increase this noi? Right. How do we increase this number so that our cap rate will allow us to increase the value? Right. If our noi is higher, then our value is going to be higher. Right. So we want to increase the value and create what they call value add plays value add properties. Okay? So in many of our deals, if you've seen any of our videos, this is how we operate, this is what we do. But in this situation and the people who are getting in trouble didn't do certain things. And now what's happening, just one, one good thing, this person did just say they increased $50 a month. Maybe their plan was to come into the property and increase the rent's $150 per month per unit through improving the property. Capex, you know, they put a lot of improvements in. They painted the place, they improved property management, they did all these different things. Well, they came in, increased every single rent $50 a month. Just say there was no Turnover in, in three years the place was fully occupied and we increased $50 a month per unit. And if you do the math, that's 50 times 100 units, right. Times 12 months, right? We're at that's say $60,000. So now we're at 460,000. Okay, that's our new NOI right there. Okay. Now what happened was interest rates went to from 4% to 7%. Okay? So that is your new interest rate. And because that happened now the amount we're having to pay in interest and this only affects variable interest loans, right? So now we're having to pay an interest $525,000. Okay, so that is our new interest. Now what happens to the cash flow? Because now we're having to service $525,000 per year. Our NOI, the profit on the deal is only 460k. So what happens now? We're not doing 100k anymore. We're doing negative 65k. So the property is now negatively cash flowing. The NOI is, is not able to service the debt. So obviously this is a big red flag for banks. And they took out a three year loan prior or when they, when they bought the place, they took out just say a three year loan. It was due in three years. And so now the bank, what happens once you, once a loan is due? They have to go and figure out do we want to renew, do we want to refinance, what, what does that look like for the bank? And what happens is they're going to look at this deal and say no way, we're not doing that deal. And if they can't get their money back, they're going to take it, take it back and it's now going to be on the bank's lending sheet. Okay? So the cap rate, the other thing about it, the cap rate went to 6% or just suppose it went from 4% to 6% remaining. You know, there's less people that want to pay for this deal and now they have to increase the cap rate. The cap rate expands. Okay? So the deal is now worth less because the cap rate went more. So now our cap, our value is actually $7 million. Okay, so no longer $10 million. The value is 7 million. Here's the big thing about this. Now, because it's only worth $7 million if the seller goes to try or the owner tries to sell it, he can't even get back the debt that he owes. So not only so, so, because this deal is worth significantly less due to what happened in the interest rates. Now the seller, the owner, cannot pay the debt. And so the bank is obviously going to take this back on their books. And this deal is not going to is in trouble. It's distress. These are the deals. And this is what's happening both in multifamily across commercial real estate and new construction. This is what's happening in so many, so many people's situations, so many people's business, so many real estate firms, business. Okay? And so this is the big crisis that is going to happen in 2025. So, so what I want to do now is map out your opportunity. Okay? How are you going to benefit from this? How are you going to be able to take this? And first off, you're going to get it at a really good deal, right? You're going to get it at a, at a deal that's obviously a lot less than what it was. But we're going to put safety measures in place because these deals are going to happen all the time. Like I said, $1.5 trillion is being matured in a similar situation by the end of 2025. Now, obviously not all deals are bad, but this is going to create a massive increase because back in 2021, 2022, everyone was buying, right? So let's look at the new buyer, which is you. All right, what is the new opportunity for you? Okay, first off, there's three levers this person who had the property before should have pulled to be able to make sense of the deal and be able to execute on the plan that they had originally intended. So they could have came in number one and bought for a lower price. So if they bought for six and a half million or seven million, they would be fine, Right? They would have made it through okay. And executed their plan and arrived where they needed to be. Or number two, that they could have increased their noi now through two different ways. The first one being income increase, right? So they could have increased their rents, whereas this number represents a $50 per month increase per unit. They could have done $150 per month per unit. So there's room here for another hundred dollars per month in increase, okay. Simultaneously increasing other incomes, whether that's storage lockers, you know, whatever it is, fees for different things, you know. The other way to increase noi and thus make this deal work and make this deal make sense and hit your above $525,000 in interest is you decrease expenses, make the property run efficiently. So another thing that happened here is they weren't running there, they were running their, their expenses at 60 plus percent, right? Which is insane, right? Or even 50% more, you know, we can get it down to 40% and thus increase drastically here and come out. Okay, so here's the structure of the new buyer. So you come in and for this situation, I'm not going to buy it at a different price. It's worth 7 million. Let's just put that in there. Okay, so the price is 7 million. The debt will be, sorry for my handwriting, 5.25 million. Okay, so that's 75%. And then your equity, so what you need to raise from capital partners will be the other 25% of this, which is 1.75 million. Okay? Now your noi, assuming we're taking the property over, this is year one, this is your first, first year of buying it. So your noi does not change from what they had it at. So it is at $460,000. Okay? Now the interest obviously, like we said, it went up to 7%. So you're buying it at the current interest rate, 7%. That means your interest payment, your debt service is going to be $367,000 per year. Okay? So this NOI covers that, right? So our cash flow year one is going to be 93,000. Now this does not include interest only, so not include IO, period. So obviously we would try and come out even better on our year one cash flow if the bank can give you a one year or more interest only period, meaning you don't have to make payments on the principle of that. So then we could increase cash flow here. Okay? Now cash flow year two or year two, year three, whenever it is, we've executed. So here's the big advantage you're going to have and that you've got to pull off is quicker speed to improvements, okay? Quicker speed to getting your noi up, right? Replace that property management. Get in the grind, get in there and work, right? A lot of investors, young investors or newer investors want to just buy a property and have passive income and they just think it's after the close, they've done all their work and now it's just going to do really well. Well, if you are smart and maybe you don't have time, maybe you need to partner up with somebody who can put that kind of time in. But for the most part you need to get in here and make sure it runs properly. If you put the right systems in place, it can be a cash flowing passive income investment. But you first have to have the right systems and you have to get this thing profitable. Okay, so year two to three, whenever you increase those rents, 100 bucks per month, per year, per unit or per month per unit. So year by year two, three, whenever we've increased that noi, decrease the expenses, increase income, we should be at around $213,000. Okay, so that's pretty good, right? That means we've, we've done really well on the value add plan. And then here's the beautiful part and why people get into it. Added equity that you're going to see from you bought it at 7 million. If the cap rate is at 6%, then we're going to see a $3.5 million equity increase within two to three years. That is the beautiful thing about the opportunity. This is just one deal that will change your life, right? That is coming in the pipeline in 2025. So if you can just get a hold of one deal in 2025 similar to this, you can potentially make $3.5 million or whatever that is. You can make cash flow 213,000 a year. This is the opportunity that's happening across the board in commercial real estate. It's happening in just about every, every asset class. And this is something that even newer, smaller investors can, can get into. If you want to see a detailed breakdown of an actual deal that we just bought, check out our other videos. They should be linked around this video right here. Otherwise, we'll see you soon. Hope this helps go out and crush 2,025.