Interest Rates are finally Falling - What it means for Multifamily Investors

All right, hello and welcome back to Multifamily Strategy Live. We're talking about interest rates today. Also, welcome to my downstairs studio where I am going to be filming today because I am getting some remodels done to the upstairs studio. Uh, but good to see everyone here. Uh, you can always ask questions in the chat here as we get rolling, but today we're going to be talking about interest rates and their effect on the market, uh, most notably how you can prepare and what this means for you if you are getting into the game right now or expanding your existing portfolio. Now, over the last several years— we've been saying this for a while— as interest rates have gone up, we've seen pain in the market, which as a buyer has been fantastic. In fact, has opened up some of the best buying opportunities that I've ever seen. We buy on principles of long-term cash-flowing fixed-rate debt, simply meaning when we buy a deal, we buy where it's making money day one. And because it's paying you day one and rents tend to go up over time and tend to outpace inflation by a little bit, your income will go up indefinitely. You buy a deal, your income goes up, it stays up forever, and you continue to buy more and more deals. We sprinkle in creative finance over this so we can continue to buy deals beyond the amount of money we have, and you're able to expand further, faster, more aggressively. Your income goes up every single time as long as you follow these principles. For those who did not follow those principles, we saw a lot of pain. People bought at a 3% interest rate, they didn't cap their rates, they didn't fix their terms, Things ballooned. People lost property. Interest rates went from 2.75, some cases 2.5, all the way up to 8. Killed deals. Now we see a lot of deals on market, and what we're going to see in the near term, I'm actually quite excited about, but we're now hitting the sunset of lots of deals. There's still time, but we're hitting the back end of it. So here's what we expect to see in the near term. There's been a lot of deals that don't quite work. People want a little bit more price than they can get for them. So there's been a lot of potential sellers who would like to sell who have been on the sidelines. Those deals that were close to working may start to work again. For those who don't know, a few days ago we saw the biggest rate drop we've seen in a year, and it's the start of a trend we expect to see again later this month. Again, in December, we're going to start seeing these start to tick down. We anticipate for most of 2026, this slow and steady drop of interest rates to be the norm. And we're hoping that that continues as we've seen a stronger than anticipated economy, which is great. So a great example, I have a friend who has a deal that's appraised for $1.4 million. However, with where interest rates are, no one wanted to buy it for $1.25 million. It went on market, it got a little bit of interest, but that was the floor of what he could sell it at, and no one could quite justify the numbers because of interest rates. Now that we're back down to about 6.1 to 5.9, somewhere in that range, now that interest rates have gotten a little bit lower for what you can start to get on these products, the deal starts to make sense at the price that they wanted to sell for. So that deal is going back on market. Now that's one example out of thousands that are hitting the market right now. I have run into a unique problem throughout my career. I've always had to spend some amount of effort looking for deals. Right now there's enough hitting the market and there's enough volume over the last few weeks. There's too much for me and my team to underwrite. Every market I'm like, hey, can we find a deal? You know, I'm buying 120— or sorry, 225 units in Abilene, Texas. I was like, hey, uh, these are all light tech, can we sprinkle in a market rate deal? 7 minutes later, broker texts me in, oh, I heard you want a, a market rate deal, we have one. It's, uh, actually needs to sell in the next 2 weeks. We're looking for a buyer. Bank's willing to finance it. It's a bank-owned property. 28 units added to the portfolio. Half-priced real estate. I think we're going to see a wave of this. I think it's going to be very, very, very good for the next— let's call it 90 to 180 days. Now, my crystal ball gets a little murky after that, but what I anticipate is going to happen is rates go down. It— and as deals start going up in volume again, we'll finally, after a roughly 4-year hiatus, we'll start to see some real firepower again. We're going to see a very hungry market for deals, and we'll get back into that balance of buyers and sellers. What we really want to see is a balance of stable interest rates or gradually lowering interest rates until they hit a nice even— let's call it 5. When rates start getting too low, it becomes unsustainable. When they're too high or they rise too quickly, that's where we get the problems that we had in today's market. The ideal market is a stable, medium-priced debt market where lenders can make money lending to borrowers and borrowers can make money leveraging debt. We want a sustainable model. Predictability is good. However, we will not be changing our principles at all regardless of what market— up, down, sideways, uh, you know, best market ever, worst market ever— we're always buying deals that cash flow day one and into eternity. Now we have Cody joining us here on today's live. So we have one here, uh, short-term variable rate debt from Cody. Did I get it right? Negative, Ghostwriter. Cody's actually one who's very good at locking in his debt products and has more seller finance debt than just about anyone we have ever seen. Uh, I think Cody was my original business partner. Uh, to this day he's buying newer properties still seller finance. So he bought a lot of stuff, 1950s, 1960s. I did it right alongside him. Uh, both of us are buying the stuff I'm buying today, even with creative finance, debt or equity. We're buying, you know, I'm buying stuff built in 2006, 2007. Cody's buying stuff built in 2021, and he is stacking a whole bunch of these. Incredible what you can get done. But good seeing you here. By the way, Cody posts on his channel, uh, still Cody, uh, Cody Davis Business Ventures. You guys can check that out, uh, his channel. Uh, he posts I believe 2 times a week, every single week. Great insights. He's on some great podcasts as well. Really fun following him. Good seeing him here as well. But today's, uh, relatively short live is I really do want to focus in on these interest rates because I think there's going to be tremendous opportunity here. When we see a rate drop and we see a sustained plan of how we're going to drop rates— what I really noticed about this one is that while it's a small rate drop to the actual Fed rate, mortgage rates finally took a huge step in the right direction. And what that starts to tell me is that the banks are actually buying in and they're actually expecting this to take off. It's not just a speculative thing. The reaction from the market is, all right, let's start opening up lending again. So this is great news for you if you're getting started. This is the time to learn how to buy deals. This is the time to master all the skills that you need to move forward as fast as you possibly can. Score some of these deals. Uh, the stuff that I'm seeing come available is everywhere from 5 to 100 units, but that mid-sized multifamily, the stuff institutions aren't competing for, you can get in and you can start locking up these deals. If you don't know how to play the creative game give this channel a follow. We talk about creative finance and creative equity structures. $0 is not a reason not to buy real estate in today's market. In fact, arguably, we're in the sweet spot of the best possible time to do it. Also hopping over to Instagram, checking out any questions over there. So if anyone has anything for me on Instagram, let me know. Got one from Tony here. Uh, how much over list price are you willing to buy a property if they're willing to accept seller financing with 10% down and 0% interest? Well, that's going to be subjective to the deal, but I can't answer that question. It doesn't matter the price. What really matters here, and what we're missing, is the term. How long do we have this amazing debt product so we can buy a deal low down? Awesome, I love it. 0% interest, by the way, that may have some tax implications negatively to the seller, but let's assume negligible, the minimum allowable interest. So let's assume it's even 3% interest. That is extremely valuable, and I'm willing to overpay by quite a bit if I can get 3% debt on a 10-year note. My cash flow is going to be ludicrous on that. I'd pay significantly overpriced for that deal. Now, if you're saying, hey, you have 2 years of this amazing debt, well, then it goes to whatever the market is. Overpaying for that deal doesn't make any sense. So price is one thing, terms are everything. If we don't have enough balloon on it, doesn't matter. 15-year balloon at half of the, the rental value. So the other thing you need to look over in this deal is what is the actual upside. So, okay, so we have a 15-year balloon. Ultra conservatively, where's the property going to be in 15 years? By the way, real estate doubles roughly every 15 years on average. So if you're saying, hey, the property's $2 million we can buy it where it's heavily cash flow positive today on a 15-year note. Dude, absolutely. Let's, let's— if it's— if we think it's gonna be worth about $4 million in 15 years, pretty conservatively, of course I'll pay $3 million to get an income stream, a significant income stream for the next 15 years. All we need is a 50% bump to the property Completely reasonable. Now, I'm not advocating just overpaying for everything. If you did every deal like this, you would have the wonkiest balance sheet on Earth. You go to get conventional financing, they're like, why do you have a negative net worth of $3 million? It's like, well, you know, I just have a ton of income. You can retire on that. That wouldn't necessarily be my number one strategy though. Tony, great question. I'm back over to StreamYard from Cody. Uh, live example, uh, if rates dropped 5%, could pull out $500K on one building and his payment would go down to a couple hundred— or go down a couple hundred per month. You see, that's, that's the beauty, is you can actually pull— when these rates change, change— all of those of us who are doing deals in this high interest rate, the deals all worked. So when rates drop, I'm looking at our 44-unit right now, we're shopping the rate. It is possible we might come in sub-6. Our current rate is 7.5 and we're borrowing over $1 million. If you can save about a point and a half on over $1 million, that is amazing to your cash flow. And in Cody's example here, oftentimes I can actually service more debt and still cash flow more. In the case of this, if you refi out you go to 5%, you refinance out, uh, $500,000 on a building, and your payments go down. You keep all the cash flow, but the money you refinanced out is tax-free. Now imagine Cody comes in, he locks this in a 10-year bank product. Next 10 years, you're locked in at 5%. You now have relatively cheap debt, you have great cash flow, and you have a pocket full of cash. The only thing you need to do with that building is not sell it, or if you want to sell it, 1031 and on up. Fantastic example. Back over on Instagram here, Lucas Selga. Oh, good to see you, Lucas. Uh, where should I look for partners, investors? I have a 28-unit, 90% seller note. Ooh, this is a cool deal. 5% interest only. That's like my favorite There's no right answer for seller financing. It's all negotiable, but that is like my go-to. 5% IO, 10-year balloon, same owner I bought the 8-unit from last year, raising $300K. For partners and investors, this is what I would look for. Uh, first thing I would do is I would— every local meetup, go around, talk to people, people who are already investing in your area. There's usually one or two online communities that you can't just advertise for raising capital. You can talk about what you're doing. I'd post pictures of it, talk about the deal. You can even make mention of like, hey, my next step is locking down the final partners for this. Super excited about this deal. Just avoid posting anything on like returns or specifically advertising for capital. Uh, don't advertise for capital unless you're syndicating, which in this case you wouldn't. You have a low, relatively low dollar amount to raise. $300K is not too bad. Uh, start hitting your network, get around people who are buying in your market. It's usually the people I found for that size deal, it's people who currently own fourplexes who want to scale up. You now have a deal that a lot of people want to invest in. Uh, my favorite people to go to for that are people who are like, hey, I'm, I'm trying to take that next level, you're doing that deal, what if we took it out together and we both made it there together? Great place to raise capital. Congratulations, Lucas. Lucas is, uh, Lucas is killing it. But seller finance, great terms. A very exciting deal. We can do 50/50 JV. So yeah, anyone has $300K and wants to look into a great deal with a great debt product, reach out to Lucas Selga. Uh, he's here, Lucas Selga on Instagram. Easy. That's a good way to do it too. So Tony just suggested this. I used to do this search all the time. Uh, check with the title company, they can tell you who the buyers are in the area. I know a lot of brokers that this is the only way they prospect. You come in, you reach out to title, you pull a list of all the recent buyers. So all the property that just transacted and the owner search, you skip trace them, you call them, you go, hey, I saw you just bought the insert property here. Anyone who bought a 10-unit around you who's open to JV may want to buy a 28-unit. Great way to find other investors. I like playing with the active people more than I like the people who are just trying to sell everything. People try way too hard to target sellers. Work with your other active buyers in your market. I love that advice. All right, we have, uh, I'll leave this open for a few more questions, but for those just joining, I'm going to summarize this really quickly. Interest rates are dropping, and we did see one of the largest rate drops that we have seen in a long time, at least over a year. And unlike other rate drops the little Fed rate drop had a very significant impact on mortgage rates. We're continuing to see that push forward. So what we are anticipating specifically is we are anticipating a lot of those deals that are right there on price but couldn't quite make sense. Sellers can get that price again when rates go down. So we're going to see things that were on market that didn't move come back. We're going to see a rate market that may allow those deals to cash flow. So I think we're going to see a lot of those base hits, the doubles, you know, maybe not a lot of home runs, but a lot of good deals should come back on market. Things that have been seasoned over the last 4 years that have been waiting for their time for rates. I think we're probably right in the sweet spot. I am personally seeing more deals hit my plate than I know what to do with. So we're getting to be extraordinarily picky, but I can literally pick a market, ask for deals, and same day reasonable opportunities come in and we're underwriting them as fast as we can. Uh, it is a great time right now specifically to start buying real estate. Rates are trending the right direction. Also, we're seeing refi rates on homes, which is a good thing to notice. Um, huge wave of refinances already starting to come in. Personally, I'm going to wait a little bit longer on the refi. I'm going to wait till we see our next downtick. We should get one more quarter downtick, maybe two more this year. If we see those, uh, have a similar effect, it could be prime time to start refinancing out of all those debt products that are anywhere above 7. All right, that's what we have for today, guys. Thank you so much for joining the short live. I appreciate seeing you guys all. Uh, the prayers go out to Charlie Kirk and his family. I just saw that news here earlier today. So that is, uh, regardless of what political side of the spectrum you're on, horrendous, horrendous news today. So I did not want to end this live without at least mentioning that. Prayers going out to them. We will see you guys on the next episode.