Podcast Summary
Multifamily Market Challenges in 2023: Few Deals Made: Two investors shared their experiences in the challenging multifamily market of 2023, with a wide bid-ask spread leading to few deals. They remained optimistic for opportunities in 2024, emphasizing the importance of staying informed and prepared.
The multifamily market in 2023 experienced significant challenges, with a wide bid-ask spread between buyers and sellers leading to few deals being made. Brian Burke and Matt Faircloth, two experienced multifamily investors, discussed their experiences in the market and their outlook for 2024. Brian shared his belief that there was no reason to invest in real estate in 2023, while Matt acknowledged the difficulty of doing deals but remained optimistic that the market had peaked and was on its way back down. Both investors focused on tightening up their companies during this time and preparing for potential opportunities in the coming year. Despite the challenges, they emphasized the importance of staying informed and being ready to pounce on discounted properties as the market continues to evolve.
Market conditions making deals harder to pencil: Increased borrowing costs and assumptions of continued rent growth make deals less viable, requiring conservative assumptions and market awareness
The cost of borrowing money and the assumption of continued rent growth have made it challenging for deals to pencil in the current market. Last year, the speakers disagreed about the market peak, with one believing it was in 2022 and the other in 2023. Despite this disagreement, they both acknowledged that the market had become more difficult for deals to pencil due to the increased cost of borrowing and assumptions about rent growth. The cost of money has doubled or more in some cases, making deals that may have been viable at lower interest rates no longer feasible. Additionally, assuming rent growth will continue at rates seen in previous years can lead to deals not penciling out if rent growth has actually slowed or stopped. The speakers emphasized the importance of making conservative assumptions and being aware of the current market conditions when underwriting deals.
Alternative Ways to Invest in Real Estate with Little to No Upfront Capital: Explore alternative methods like DealMachine, Rent to Retirement, or passive investing through Connect Invest for real estate investment with minimal upfront capital. Market conditions may require flexibility and strategic approaches.
There are alternative ways to invest in real estate with little to no upfront capital, such as DealMachine's lead generation platform or Rent to Retirement's no money down turnkey rental properties. Another option is passive investing through platforms like Connect Invest, which allows individuals to invest in a diversified portfolio of real estate projects with a low minimum investment. However, with the rising costs of the entire capital stack and increasing expenses, it can be more challenging for investors to find attractive deals with sufficient returns. As a result, some investors may choose to sit out the market and wait for more favorable conditions. Overall, these alternatives and market conditions highlight the importance of flexible and strategic investing in real estate.
Identifying opportunities in a shrinking income real estate market: Focus on psychological indicators like growing pessimism and increased foreclosures to identify the right moment for investment in a shrinking income real estate market, as sellers may price assets based on outdated market conditions.
The current economic climate presents challenges for investors looking to purchase real estate assets with shrinking income streams, as opposed to growing ones. The key factor at play is price negotiation. Sellers may be pricing assets based on outdated market conditions, leading to potential opportunities for buyers. However, identifying the right moment to invest requires a focus on psychological indicators, such as growing pessimism and increased foreclosures, rather than specific numerical indicators. While some distress is starting to emerge, particularly in specific markets and asset classes, the full extent of the anticipated commercial real estate downturn may not yet have materialized. Overall, the market dynamics continue to evolve, and staying informed and adaptive is crucial for successful investment strategies.
Multifamily Debt Crisis: A Small but Significant Problem: Despite $67B in distressed multifamily debt, a potential crisis looms as maturing loans in large markets may not refinance or sell at current values, leading to potential foreclosures or discounted sales for investors to watch
While there is currently $67 billion in distressed multifamily debt, it represents a small fraction of the overall multifamily debt market. However, when loans on a significant number of properties in large markets like Atlanta mature in the next few years, there could be a reckoning as some properties may not be able to refinance or sell at current market values. Private equity firms are expected to absorb many of these loans, potentially leading to foreclosures or sales at discounted prices. Prices for multifamily properties have already dropped 20-30%, but it remains to be seen if they will continue to decline. Investors should closely watch the market for signs that prices have stabilized before making purchases.
Loan maturities in Atlanta's multifamily market: Approx. 30% of Atlanta's multifamily debt matures in the next 2 years, which is typical for commercial loans, but concerns arise due to high loan volumes taken during price peaks and current low prices.
The timing and market conditions of loan maturities can be more important than the percentage of loans coming due. The discussion highlighted that approximately 30% of Atlanta's multifamily debt is maturing in the next 2 years, which might seem alarming. However, considering the average length of commercial loans being 5 to 7 years, around 28-40% of debt is typically due in the next 2 years. The concern lies in the fact that a significant portion of these loans were taken out when prices were high and are now maturing during a period of low prices, leading to potential distress for borrowers. It's essential to keep this context in mind when evaluating the significance of loan maturities.
Banks negotiating with borrowers on floating rate bridge loans: Banks are currently renegotiating terms with borrowers on floating rate bridge loans, but the need for refinancing, selling, or foreclosure remains imminent due to borrowers' cash reserves.
Banks are currently engaging in workouts with borrowers who have floating rate bridge loans, allowing for some negotiation on rate caps. However, this doesn't eliminate the eventual need for refinancing, selling, or foreclosure due to the limited cash reserves of borrowers. Lenders, who are not using their own funds but rather borrowed or invested money, may face pressure to resolve these situations. While some remain optimistic about the situation, others believe that a day of reckoning is inevitable. Regardless, both sides agree that the lenders' ability to delay the issue is limited.
Securing properties with tenants and above-market rents: Invest in real estate by finding motivated sellers and securing properties with tenants and above-market rents for immediate cash flow and long-term equity and appreciation.
Smart real estate investing involves securing properties with tenants and above-market rents for immediate cash flow, while also building equity and appreciation over time. Additionally, finding motivated sellers through tools like PropStream can streamline the process of acquiring these properties. However, it's important to note that interest rates are unlikely to return to the low levels seen in the past, meaning that current market conditions may lead to significant drops in property values when loans come due. Therefore, it's crucial to approach real estate investing with a solid understanding of market conditions and the potential risks involved. In summary, investing in real estate requires strategic planning, the ability to find motivated sellers, and a willingness to adapt to changing market conditions.
Stay market-centric, network with local brokers, and find discounted opportunities: Focus on cash-flowing assets, prioritize market conditions, and learn from experienced investors in a challenging market
While the fundamentals of the housing market and multifamily investments are sound, the timing and market conditions are crucial. Banks are prioritizing repayment of loans over investor relationships, making it essential to focus on cash-flowing assets. To succeed in the multifamily market this year, investors should stay market-centric, network with local brokers, and look for discounted opportunities in specific markets. Additionally, focusing on high single-digit cash flow assets is vital to weather economic downturns. For new investors, the current market conditions may even provide an advantage, as they can learn from the experiences of seasoned investors like Matt and myself.
Starting in small multifamily market: Learn necessary skills, build business, investor base, and broker relationships in small multifamily market for future success.
For those new to multifamily investing, starting in the small multifamily market (duplexes, 4plexes, 10 units, 20 units) is a good place to begin. This is where the opportunities lie, as it's the small deals where you can find mom and pop landlords looking to sell due to evictions or retirement. Building a business, investor base, and broker relationships in this space will set a solid foundation for future success. Additionally, focusing on learning the necessary skills, such as underwriting, and building systems during this time will prepare investors for larger multifamily deals when the market recovers. Matt DeRosa and Brian Peters both plan to continue monitoring the multifamily market closely while also exploring new asset classes and real estate debt investments as a precautionary measure.
Find an investor-friendly agent for successful real estate investing: Connect with local market experts through BiggerPockets Agent Finder for guidance in neighborhoods, number analysis, and confident decision making, advancing towards financial freedom in real estate investing.
Navigating the ever-changing real estate market can be challenging, but the goal of achieving financial freedom remains constant. The best investors understand that timing the market isn't the key to success; instead, it's about consistently being present in the market. If you're looking to enter or advance in real estate investing, finding an investor-friendly agent is the next step. With BiggerPockets Agent Finder, you can easily connect with local market experts who can guide you through neighborhoods, analyze numbers, and help you make confident decisions. This free resource is available exclusively at biggerpockets.com/deals. By securing an investor-friendly agent, you'll be one step closer to making the right deals and ultimately, achieving financial freedom. Remember, the content provided in this podcast is for informational purposes only, and all opinions expressed are those of the hosts and participants. Investing in real estate involves risk, so always consult with qualified advisors before making any investment decisions. BiggerPockets LLC disclaims all liability for any damages arising from the use of this information.
