Lately I've seen a lot of posts about how tough it is to find yield. From rising construction costs to depressed going-in cap rates, nothing seems to be going right for the acquisitions associates.
Everyone knows, however, that deals can be found at any time in the cycle—it just becomes more challenging. So what recent deals have you done—or seen—that you know are fantastic? Obviously, you don't need to go into full detail and give away who you are, but please share enough to give us an idea of why it's such a good deal and what kind of returns were achieved or are expected. I'm especially looking forward to hearing about good new construction deals that are still happening.
For me, the best deal I've recently come across in the multifamily space is a 150+ unit light value-add deal in the Southeast. Sourced off-market by sponsors whom I know well, it's conservatively underwritten (even by my ridiculous standards) to achieve double-digit cash-on-cash returns in year 2, and a 20+ IRR over the 5-year hold. Personally, at this basis, I'd rather not sell and just hold the cash flow, so in my opinion the IRR is meaningless. The demographics are right and the sub-market isn't projected to experience oversupply anytime soon.
Let's hear 'em.
Had a deal with 2 Phases of construction with the second came with a pre-negotiated price if we used the same contractors again. Construction pricing moved up like crazy during phase 1, and got phase 2 built under replacement cost. Refied after completion dont have a dollar of equity left in the deal.
Dynasties are built on cash-out refis.
Probably a dumb question, but could you explain how a developer pockets money from a refi?
The developer builds a project and creates value as it reaches stabilization. The value of the asset is worth more than the cost of building it due to the stabilized NOI and the given cap rate.
At this point...a developer will either exit the deal via disposition or do a pernament refi. Keep in mind that the debt at this point is likely an IO construction loan.
Since the developer creates value through the spread between the actual development cost and the current stabilized value...the developer can refi to pay off the outstanding construction debt and then also have enough remaining proceeds to at least partially recapture the original equity contribution. Alternatively...a developer might be able to use the refi as a way to buy out the LP and therefore keep the entirety of the asset's cash flow moving forward.
Naturally...the amount of the original equity contribution...interest rates...and LTV all play important roles in this equation. Also...at the point of refi...a developer can also release various reserve accounts as cash flow...such as operational reserves and construction interest reserves. Depending on the deal...this could generate an additional $1M+ of dispersible cash at the time of a refi.
New Loan Proceeds - outstanding principal - fees = cash to equity
I developed a town center deal in a suburb over the past 3 years. It recently sold, and in doing so, broke the stick frame $/unit record in the entire market, including the CBD.
It is incredibly difficult to get deals to pencil at the moment, but things will come around. Real estate isn’t an industry for eternal pessimists.
Have you gone back and looked at the original underwriting when you acquired the site? I'd be curious to hear in what ways it exceeded expectations and in what ways you missed your numbers, if at all.
Honestly not yet. Too busy with other things at the moment. We busted by about $100k but more than made up for it with cash flow that exceeded projections and a lower cap rate.
Sold a naive banker 2 grams of cocaine for $10,000, claiming to be from the purest reserve at the highest peak of the Andes Mountains. Was complete bullshit.
Acquired a 90's vintage value add multifamily deal in the Phoenix MSA. The existing owners were a local family who had effectively run it into the ground and managed it (poorly) themselves. We acquired it, invested about $12k per unit in capex and in-unit renovations, totally cleaned out the rent roll over the course of 24 months with the help of competent local management and sold it generating a 2x MOIC and a stupid high IRR. It was a heavy lift as the legacy tenants were pretty rough, but a good property manager goes a long way. We only renovated about 30% of the units and the buyer was planning to complete the renovations we started.
Fuck yeah player, good work!
That's the right strategy, get some yield lift and sell the dream to someone else who will overpay. We saw this executed over and over again when I was in investment sales.
The main reason I lost a lot of those deals was I always looked extensively at the unit mix and determined that the units they renovated we almost always superior either in layout or location, and that premium would not extend to the remaining inventory. Talk about selling the dream - groups that do minimal diligence will always buy it and unfortunately there are a lot of those shops in every market right now.
Double digit cash on cash in year 2 but only 20% IRR over 5 years?
I trend cap rates up over time, even though most of the market doesn't do that anymore.
5 or 10 bps a year?
Hired a couple of supermodel escorts to party all night in town with the new heir of a company we were trying to buy, he gave us exclusivity and we closed the deal.
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