Podcast Summary
Managing larger real estate projects and investing in commercial properties: Going big in real estate can offer substantial financial benefits, but careful consideration and alternative investment options are crucial.
Going big in real estate, whether it's managing a larger number of units or investing in commercial properties, can be easier and more financially rewarding than one might initially think. Scott Trench, a guest on the BiggerPockets podcast, emphasizes that the work required to manage a larger property is the same as a smaller one, and the financial benefits can be substantial. However, it's important to ensure that taking on a larger project doesn't put you or your investors at financial risk. Additionally, Trench raises concerns about the commercial multifamily space and warns investors to be cautious heading into 2023 due to potential market shifts. He suggests considering alternative investment options, such as investing in a private real estate fund like PPR Capital Management, which can provide passive income without the hassle of property management. Another alternative is investing in turnkey rental properties with no or low money down through companies like Rent to Retirement. And for those looking for rental property insurance, Trench recommends using NREIG to simplify the process and protect your portfolio at the right cost.
Risks of Relying on Rent Growth and Reduced Expenses for Profit: Investors face uncertain market conditions due to unsustainable cap rates, potential rent declines, and increased inventory. A cautious approach and careful consideration of various factors is necessary before making investments.
The current trend of lower cap rates than interest rates in the commercial and multifamily real estate market is unsustainable and risky. This situation means that investors are heavily relying on assumptions of rent growth and reduced operating expenses to make a profit. However, there are significant headwinds to these assumptions, including an unprecedented amount of inventory coming online and potential declining rents. The market's assumption of explosive rent growth might not hold up, and a better bet could be for rents to stay flat or even decline in the next 12 months. The demand side is also uncertain, with household formation being a potential wild card. Overall, the current market conditions require a cautious approach and careful consideration of various factors before making investments.
Multifamily market challenges in 2023: Economic factors like COVID-19, rising interest rates, and potential recession could lead to decreased rent growth, increased cap rates, and declining asset values, impacting multifamily and other commercial real estate assets.
The multifamily real estate market could face significant challenges in 2023 due to various economic factors, including potential household formation volatility caused by the COVID-19 situation, rising interest rates, and potential recession. These challenges could lead to decreased rent growth, increased cap rates, and declining asset values, potentially wiping out a significant portion of equity for investors. This issue is not limited to smaller multifamily assets but could impact commercial real estate assets across the board, including office, retail, and other property types. The uncertainty lies in the duration and severity of these economic conditions, as well as the varying debt terms among commercial real estate investors. It's essential to closely monitor these trends and consider the potential impact on individual investments.
Investing in syndications during a potential commercial real estate deleveraging: Consider holding in current syndications, invest in low-risk debt investments, or find syndicators with no leverage for potential higher returns in a no or low rent growth environment.
The potential for a widespread deleveraging in commercial real estate could create problems for investors, particularly those in syndications. If you're currently in a syndication, holding on and praying is the best option. For those considering investing, it's crucial to ensure the syndication is a "huge winner" even in a no rent growth environment. Another option is to consider debt investments, such as preferred equity or debt funds, for lower risk and better cash flow. If you're investing in an equity deal, finding a syndicator with no leverage could increase returns in a no or low rent growth environment. It's important to recognize that syndicators have a vested interest in raising capital and buying deals, which could impact their perspective on risks in this space. While a potential downturn in commercial real estate could impact residential and other parts of the real estate industry, the extent of this spillover is uncertain.
Concerns over declining asset values in real estate markets: Investors advised to be cautious and consider no-mortgage investments, modest rent growth, and potential cap rate and interest rate increases
There are concerns about declining asset values in both residential and commercial real estate markets. The speakers predict a potential decline of 3-10% for residential and express worry about the sustainability of current low cap rates in commercial real estate. They advise investors to be cautious and conservative, and to consider the benefits of investing without a mortgage. They also suggest assuming modest rent growth and little appreciation, and being prepared for potential significant increases in cap rates and interest rates. The speakers acknowledge that these predictions carry risk, but believe it's important for investors to be aware of the potential challenges in the current market.
Focus on deeper discounts for profitability: Investors should focus on acquiring properties at deeper discounts due to increasing cap rates, and consider potential returns with and without debt, especially for syndicated opportunities.
In the current real estate market, it is more likely for cap rates to increase rather than interest rates to decrease significantly. This means that investors may need to focus on acquiring properties at deeper discounts to maintain profitability. Another tip for analyzing commercial real estate is to first consider the potential returns with and without debt. Additionally, for those interested in syndicated opportunities, it's crucial to ensure the sponsor is buying at a steep discount, with opportunities for rent increases, and that the property can still generate acceptable profits even with higher cap rates in the future. Overall, it's essential to be cautious in the current market and carefully consider various factors when making real estate investment decisions.
Vetting Potential Partners for Capital Raising: Thoroughly vet potential partners, read Burke's book for guidance, maintain input or control, and underwrite deals as if they're your own to safeguard reputation and investors' funds.
When starting out as a capital raiser, it's crucial to thoroughly vet potential partners or cosponsors before bringing other people's money into their deals. Philip Hernandez, a Bigger Pockets mentee, asked about creating a checklist for this process. Matt Thornhill suggested reading Brian Burke's book, "The Hands Off Investor," for an in-depth guide on vetting operators. Additionally, Thornhill advised having some level of input or control in the deal, and underwriting it as if it were your own to ensure alignment with the sponsor's research. By taking these steps, capital raisers can protect their reputation and investors' funds.
Vetting Real Estate Syndicators and Deals: Thoroughly evaluate operators and deals as if investing your own money, build trust with investors, and consider becoming an active GP partner to protect yourself while raising capital.
When it comes to investing in real estate deals through syndicators, it's essential to thoroughly vet the operator and the deal as if it were your own money on the line. This not only helps ensure the success of the investment but also builds trust with your investors. Additionally, to protect yourself when raising capital, consider becoming an active partner in the GP, allowing you to sell equity without needing a securities license. Remember, the operator is trusting you to help them find the right investors, and your reputation and expertise are the main selling points. Therefore, it's crucial to do your due diligence and act in the best interest of both yourself and your investors.
Becoming a member of the GP and having a board of directors benefits investors by allowing control over key decisions and opportunities for learning: Investors can gain control, learn, and build a strong brand by joining a GP and serving on a board of directors for real estate deals
For those looking to invest in real estate deals, having a seat at the table through becoming a member of the GP and having a say through a board of directors can be beneficial. This setup allows investors to have control over key decisions, such as approving dispositions, capital expenditures, and distributions, among others. It also provides opportunities for learning and gaining more experience in the industry. While the term "board of directors" may seem intimidating for smaller deals, it's important for all partners to have a voice and a vote in the project. Consensus building is typically the approach used to make decisions. By raising capital for an operator consistently, investors can build a strong brand and reputation as a reliable capital source. A real estate project can last up to five years, so it's essential to approach raising capital as a long-term commitment rather than a one-time dabble.
Scaling from small to larger multifamily investments: Understand the complexity of larger multifamily investments, prepare for additional income streams and expenses, and build relationships with trusted partners and mentors.
When scaling from small to larger multifamily properties, the profit and loss statement becomes more complex due to additional income streams like laundry fees, late fees, and payroll for full-time personnel. Expenses also increase in number of line items, including payroll and property management fees. It's important to be aware of these differences and prepare accordingly. Andrew and Eddie emphasized the importance of building relationships with trusted partners and mentors to navigate the complexities of larger multifamily investments. Danny, a small multifamily investor, asked for their insights on scaling from smaller to larger properties. They discussed the differences in revenue and expenses, highlighting the importance of understanding the complexity of larger multifamily investments and being prepared for additional income streams and expenses, such as payroll and property management fees. They also emphasized the importance of building relationships and working with trusted partners and mentors to navigate the process.
Managing Larger Multifamily Properties: Challenges and Opportunities: Scaling up to larger multifamily properties brings new challenges, including the importance of demographics and capitalizing each property as a separate business. Staffing and economies of scale can help optimize performance.
As multifamily properties grow in size, so do the necessary expenses and staffing requirements. While smaller properties may not have full-time staff, larger properties can support them and the jobs they create help optimize the property's performance. However, scaling up from smaller properties to larger ones also brings new challenges, such as the importance of demographics and the need to capitalize each property as a separate business. Additionally, the mental shift from personally covering vacancies to professionally managing each property is crucial. Overall, while bigger properties may seem daunting, they can actually be easier to manage financially as the economies of scale come into play.
Considering Financial Implications of Growing Real Estate Portfolio: As market conditions shift, prioritize cash flowing properties to hedge against downside risk before focusing on appreciation potential.
As you grow your real estate portfolio from smaller multifamily properties to larger ones, it's important to consider the financial implications. While larger properties may offer more stability with vacancies, they also require more units to be leased to make significant cash flow differences. Additionally, larger properties can take a bigger hit from the market without putting you underwater, allowing for budgeting and planning for vacancy. When it comes to balancing cash flowing and appreciating properties, it's crucial to consider market conditions. In a market where appreciation is the focus, one may consider negative cash flow properties with the expectation of future growth. However, in today's market, it's essential to prioritize cash flowing properties as a hedge against downside risk before focusing on upside potential.
Balancing Cash Flow and Appreciation in Multifamily Real Estate: Focus on cash flow and forced appreciation in multifamily real estate, while maintaining reserves for vacancies and market changes.
With multifamily real estate investments, you can have the best of both worlds: cash flow and appreciation. While cash flow is important for hedging against downside risk and providing a steady income stream, a good operator can also force appreciation by increasing net operating income. However, it's essential to have sufficient reserves to cover vacancies or market changes, especially in today's market environment. Furthermore, while appreciation has been a significant factor in many investors' successes in the past, it's important to remember that it's not something you can control. Instead, focusing on cash flow and fixed-rate debt can provide the time and stability to weather market fluctuations. In summary, a successful multifamily investment strategy involves prioritizing both cash flow and forced appreciation, while being mindful of market conditions and having adequate reserves.
Focus on what you can control in real estate investments: Consistently put time and effort into your real estate investments to achieve financial freedom, rather than trying to time the market perfectly.
In today's market, investors should focus on what they can control in their real estate investments, such as operating their properties efficiently and effectively. Cap rates and market conditions are outside of their control, and while there may be opportunities in underperforming properties, it's important to carefully consider the risks involved. Investing in negative cash flow properties or those with low occupancy rates can present opportunities for repositioning, but it's crucial to ensure that the property can be cash flow positive and that the risks are mitigated. Ultimately, the goal is to achieve financial freedom through real estate investing, and the best investors understand that it's not about timing the market perfectly but rather about consistently putting time and effort into their investments.
Connect with local market expert agents on BiggerPockets.com/deals: Use BiggerPockets.com/deals to find local agents, navigate neighborhoods, analyze numbers, and confidently invest in real estate.
BiggerPockets.com/deals offers a valuable resource for real estate investors by connecting them with local market expert agents who can help navigate neighborhoods, analyze numbers, and take confident action. By entering a few details about what and where they want to buy, investors can instantly match with an agent who fits their needs. This free service is only available on BiggerPockets.com/deals and is a crucial step towards getting a deal and moving closer to financial freedom. However, it's important to remember that investing in real estate involves risk, and past performance is not indicative of future results. Always consult with qualified advisors before making investment decisions and only risk capital you can afford to lose. BiggerPockets LLC disclaims all liability for damages arising from reliance upon information presented on the podcast.
