Apartment buildings are the logical step up for most single-family home investors. And apartments are where many of the “big boys” play.
In a low interest rate world, the cash flows on multi-family properties has attracted gobs of capital…creating a many funding options, but also a lot of competition for viable deals.
In this episode, we visit with a multi-family lender, investor and syndicator to discover what he sees…and what he’s doing…in one of the hottest apartment markets in the U.S.
Taking part in this apparition of The Real Estate Guys™ radio show:
- Your A-class host, Robert Helms
- His C-class co-host, Russell Gray
- Our multi-faceted special guest, Michael Becker
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Apparently Apartment are Appealing
Except for an under cheek sneak rate hike of 25 basis points back in December, the Fed hasn’t been able to pry interest rates off the floor in nearly 8 years.
Since the depths of the Great Recession, investors have been faced with taking their hard earned funds into the Wall Street casinos…OR…putting them into hardly earning savings accounts and bonds.
Once the dust settled after the mortgage bomb went off, apartments emerged as one of the most appealing asset classes…for lenders, investors and institutions. So much so that gazillions of dollars poured into the space…pushing prices UP and cap rates (yield on capital) DOWN.
In spite of that, apartments remain a VERY high demand product type….especially in the right markets.
Apartment Lending Today is as Good as It Gets
Assuming your definition of “good” isn’t indiscriminately lending to unqualified borrowers against poorly performing over-priced properties in pathetic markets (say that fast 10 times…that, that, that, that, that, that…..)
Michael Becker says lending today is as good as you can get. And that’s GREAT news for serious investors.
Becker reminds us that 8 years ago, in the wake of the meltdown, banks were effectively in the fetal position licking their wounds. They weren’t interested in lending. They just wanted to survive.
Today, regional and community banks are actively engaged in commercial real estate lending. Fannie and Freddie have HUGE bucket of over $30 billion to place this year. And even paper asset investors are beginning to have an appetite for CMBS (Commercial Mortgage Backed Securities) again.
That’s all AWESOME…because funding is the fuel that powers your portfolio. It’s hard to go very fast without it.
How To Qualify for an Apartment Loan
The first thing to understand when it comes to apartment loans is that it’s all about the DEAL. Well, at least mostly.
The lender knows the payments are coming from the operations and not from your personal paycheck. Whew!
So the lender will take a good look at the property and especially the income and expenses. If there’s plenty there, getting the loan will be a LOT easier.
But YOU still matter.
The lender wants to know you know how to operate an apartment building. So EXPERIENCE really matters.
Now, just like your first job, you may wonder how do your get your first deal if you have to be experienced. After all, if this is your first deal, then by definition you have no experience.
Sounds like a Catch-22. And it is. Sort of.
The secret is to partner with someone experienced so you get a deal on your resume. Then, “Voila!”…you’re experienced.
It’s not rocket surgery. But you do have to know someone who’ll help you lose your apartment investing virginity.
What Are the Risks of Investing in Apartments?
Big question. The short answer is not knowing what you’re doing. That’s why the lenders want to see experience.
But even when you KNOW what you’re doing as an “operator”, you also need to make sure you’re structured to weather stormy weather. And we’re not talking monsoons or hailstorms. More like financial earthquakes.
So our chat with Becker reminded us of some brilliance we penned in Equity Happens…
“Cash Flow Controls and Reserves Preserve”
It’s really common sense. But when an asset class gets hot, price speculation is SO much more exciting than boring cash flow. And who likes to sit on piles of idle cash for a rainy day?
But sufficient “debt coverage ratio”…a fancy term for Net Operating Income (Gross Rents less Operating Expenses before Debt Service) being MORE than the mortgage payment is not just required…but a good idea. Lenders usually want about 20% more…or more. And so should you.
But besides having enough cash flow to comfortably pay the mortgage, it’s important to have enough cash reserves to handle unexpected capital expenses…like a new roof, sewer or parking lot.
After all, if you can’t maintain the property, you’ll lose tenants…and income. And if you REALLY neglect the property, the regulators might come shut you down completely. That would be bad.
Always Have a Plan A, B and C
Real estate investors tend to be optimists. We buy properties because we expect things to go well. Otherwise, why would we bother?
And most of the time, most things go pretty well. At least well enough to manage. And many of the problems are things we can control…or substantially influence.
But sometimes stuff just happens that’s hard to deal with and outside our control. So in addition to adequate cash flow and reserves, it’s a smart idea to have more than one plan for the property.
As a rule of thumb, you should never get into a deal…or structure a deal…so you don’t have at LEAST two ways out. Call them Plan A and Plan B. And tossing in a Plan C is usually a good idea too.
For example…since we’re on the topic of financing…based on today’s climate (stupid low interest rates) it’s wise to lock in as LONG as possible. Even if you’re plan is to pump up the rents and refinance out all your new equity or sell to the highest bidder in a couple of years.
What if interest rates rise and there are no good loans available to both you or your potential buyer? Are you prepared (Plan B) to stay in the deal and ride out the storm? You should be.
And if you’re syndicating (raising money from private investors) and the property’s doing great (good job!), it can be REALLY tempting to highlight your brilliant investing skills and cut all your investors big, fat checks.
But this drains your cash reserves, and if you fit a speed bump on that rocky road to riches, a little cash can smooth things out. If you don’t have it, then you might need to make a dreaded “cash call” on your investors. Yuck. That’s no fun.
What IS fun is listening to a smart and accomplished guy like Michael Becker talk about how he went from small time to medium large time in just a few years. Over 3,000 doors and counting.
Now THAT sounds like a good plan!
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