Is Now a Bad time to get into Multifamily Acquisitions?

I currently work for a family office developer that focuses on small rehabs (~50-75 unit residential, retail, mixed-use, condo, etc.). I'm on the acquisitions side working with brokers to source these opportunities, underwrite them, work with mortgage brokers for debt, etc, then toss them over to our project/asset managers. 

I was recently offered a position to lead institutional multifamily acquisitions for a mid-size fund, covering Georgia and the Carolinas, pretty much just value-add/core-plus stuff, 250+ units. The cash comp alone is more than double what I am making at the family office, plus there is carry, it's an extremely compelling offer.

My concern is that these funds are sprouting up all over the place, and value-add multifamily acquisitions is damn near impossible right now. I have a few colleagues on the buyside and brokerage side who have all told me stories of 30+ offers, sub 3% cap rates, millions of dollars of hard money at PSA signing. I feel like i'd be setting myself up for failure. Am I overthinking this? I would appreciate any insight, thanks!

Comments (28)

Nov 5, 2021 - 3:34pm

None of us can tell you if it's good or bad. You'll have to evaluate it. Just like markets heat up, they cool down. MF is hot right now because institutions can't place capital in office at the moment (or retail / hotel). So more capital chasing deals in the MF space. You didn't touch on if you want to keep doing multifamily. So all I basically saw was - 'I currently buy multifamily for a smaller firm. I have a new offer to do the same job on bigger deals and double my pay.' So my question to you is do you want to do the same job? Or do you want to transition to something new? 

Nov 5, 2021 - 4:06pm

I work for an institutional MF broker covering those markets and the insight you mentioned is completely accurate. Unless the firm you're going to is willing to get exceptionally competitive to win a deal against the big boys, you'll be hard pressed to even get in the top 10 offers. We are also expecting cap rates to continue to compress in 2022. Obviously no one has a crystal ball though, but I thought I'd add that as well.

Edit: Not saying any of that to deter you. Given my personal preference for multifamily, if I were in your shoes I would still take the offer. Just wanted to share my perspective on what our team is seeing as well. 

Nov 6, 2021 - 8:55am

Without sharing too much info, I recently built out a MF investment group that invests in these markets. All product types (BFR, garden, mid rise, high rise), all products (JV, debt, mezz) and all vintages. Can explain via DM if you would like.

The team has been very successful, and I have learned a ton. Looking back, I don't know if I could have done it anywhere else.

Two things matter here.

  1. The people you are working for - You need a Key Man. Undoubtably you will face roadblocks from asset management, investment committee and more as you try to push through deals. At some point you will also likely need to make business decisions that expose the company to risk. It's the only way to be competitive. You will need someone internally (ideally who you report to) who you have a great rapport with and will stand in your corner. They need to have a great internal reputation and a lot of trust, so that people then trust you.
  1. Investment mandate. Is their acquisition criteria reasonable? Share with us and we will give you an opinion. Heavy value add? Vintage? Target hold? Target returns? JV? Sponsor types? This goes hand in hand with above. If you find a good deal that fits the criteria, but you need to expose the company to risk (hard money, higher rent growth/lower cap assumptions etc) you're going to be happy you have your Key Man in your corner.
  • VP in RE - Comm
Nov 8, 2021 - 10:39am

Thanks, I do have a Key Man. He is the CIO, a very close friend and mentor. He is the one trying to recruit me over. 

Investment criteria is a bit aggressive: high teens deal-level returns on a 5 year hold, large SE markets, 250+ units, physical value add opportunity. Pretty much what everyone wants. 

Nov 8, 2021 - 9:26am

Is the concern that investments will go bad due to pricing or that you won't be able to buy anything because the people above will turn you down at current prices. If the former, all I would say is if you're buying this stuff and putting cheap, 10-year debt on it, you at least have a 10 year window for the "bad investment" to show up in returns, so your outlook for the near-to-medium term is good. If the latter, that would be a real issue

  • VP in RE - Comm
Nov 8, 2021 - 10:08am

The latter, setting myself up for failure of not being able to find the volume they would expect.

Nov 8, 2021 - 10:44am

Tough proposition. The good news is that you likely would get two years of runway at higher comp and "Head of" title on your resume.

Have you asked what success looks like? Is it a quota of getting deals done or being in the market, making good relationships and being ready when markets turn?

Have they been active in the space recently such that you can see if the deals that they do are replicable?

Nov 8, 2021 - 12:01pm

The latter, setting myself up for failure of not being able to find the volume they would expect.

So think through that.  Why does that matter?  Presumably, because in 2-3 years you aren't generating business and they let you go.  Then what?  You have experience and a nice title on your resume, so you go somewhere else to interview.  If your failure to source deals was a product of a market with thin margins, then you're inability to make it work won't be aberrant, and people will understand.  If most of your peers managed to do it just fine, then the issue isn't the MF market, but you (no offense).  Either way, why wouldn't you take a job with better pay, better title, and better prospects?  I imagine offers like this don't come around that often.  

Even if it's a great MF market (and there is always a reason that things could improve), you still have to outperform your peers.  That's equally difficult in any market.

Nov 8, 2021 - 10:41am

There is one key question I would ask if I were you, "What is your return threshold?". If they say something like we want to hit 20-25% IRR on value-add, when the market pricing is at a 14% IRR, then bail. If they say something like we are competitive and our LP equity desires low single digits IRRs, then go for it.

Array

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  • Associate 3 in RE - Comm
Nov 10, 2021 - 2:24am

Ask them to see the underwriting they did for their last couple of deals in 2021 (internal deal package and sitting at their office to review the proforma).  My gut tells me you are being set up for failure unless your new shop just wants to place capital and get fees.  Is this a new role or replacing someone?  I don't think you can hit mid teens IRR or even 10% IRR without 4-5% rent growth, leaving taxes flat, BS cap ex budget, etc.  The story today is burning off lost to lease with super futuristic BS rents!!  Everything is a 2 or low 3s cap.  If your buddy runs the shop, maybe that puts you in a great position but also understand that if the market turns and your deals don't generate returns, you might be out of a job in 12 months. NO FREE LUNCH!

  • VP in RE - Comm
Nov 10, 2021 - 8:48am

Yes this is exactly my concern. Good idea to review some of their recent deal packages. It does sound like they just want to get capital out the door, but still want to "do deals that make sense". I know they have been active in other markets across the US. The role here would be to help diversify into the southeast. 

Most Helpful
Nov 10, 2021 - 2:48pm

Feel free to email me and we can chat if interested.  I was in this exact same boat 2.5 years ago.  Was told to find mid teens IRR, not even high teens and told I will make $300 to $500K, didn't make $200K year 1 and by year two I had gone to straight commission or I could leave the firm at 2020Q2 (took me 12 months to get out of that hell hole using funds I had planned to buy a house to pay for rent and general living expenses).

Since you are in the industry, and potentially know brokers this company interacts with, you can pick up the phone to ask brokers, lenders and people you trust about their reputation...do they re-trade, is it high turn over, do they have a funny reputation, etc.  I am sure you have costar to look up last few deals they have done and find a "friend of a friend" to make an intro that won't backfire on you to a broker they have worked with.  Avoid the BS of "they are good guys"...DIG DEEP!!  After getting burned twice, I got very smart about asking weird ass questions at the interview that will make doors shot or make people know you are legit.  I would rather a firm not HIRE ME for asking too much than getting screwed later on.

I had my concerns like you and asked all the right questions but people will lie and dangle carrots.  I asked about IRR (they said 15-16%), asked about leverage (said conservative) but I didn't dig further despite some obvious red flags.  Always ask to see underwriting tools and last 2-3 deals to understand volume.  Interview them as hard as they are interviewing you.  After joining the last firm, I realized the sh*t heads only wanted to see 6% stabilized YoC which was closer to a 18 to 20% IRR at main & main locations (think Scottsdale type location when you can't even get that in the hood west of I-17 or north Phoenix, or downtown Austin over some suburban location in North Austin about 20 miles north).  We bought two shit mobile home parks off market from mom & pop through a relationship cold call but wanted me to find deals from brokers at those returns which isn't possible.  I failed miserably because expectations were unrealistic. 

If you join these guys, learn how they underwrite or come out swinging with aggressive underwriting that you can defend even though you know it's f**ked analysis.  If you come out conservative in your underwriting, they might turn the tables on you and ask you to find those deals with BS returns which means you won't buy a deal and get paid!!

For additional context, I do consulting as a side gig and a client has everything "priced to perfection" aka fooooked underwriting on a deal they are about to PSA on this week.  Burning off loss to lease from 30% to 3%, raising market rents 4%, no mark to market on taxes and keeping cap rates flat.  I am only getting paid to help with JV structure and to make sure model works.... I think the deal blows but he has 18% IRR on paper which is at best laughable!!  But again, it's not my deal and I realized that giving a f**k only makes people hate you when their goal is to DO A DEAL AND GET PAID since it's OPM majority of the time.  So know the devil you are dancing with and play that game so you can WIN!!

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  • Analyst 2 in RE - Comm
Nov 12, 2021 - 9:12am

I'll probably get hit with monkey shit but all the comments here is exactly why I was so happy to leave the MF space. Never understood the sexiness of this asset class that others have. I guess maybe because it's the most stable asset class and the fact it's likely the easiest one to venture out on your own? I don't know, but I hated working in the space and found it ridiculously boring/cookie cutter and chasing the same deals as everyone else with the same business plan as everyone else. "My plan is to underwrite to X market rent growth in an urban market with potential for new growth!". So many deals we had some private investor just swoop in pay a ridiculous premium.

Nov 12, 2021 - 11:55am

I'll probably get hit with monkey shit but all the comments here is exactly why I was so happy to leave the MF space. Never understood the sexiness of this asset class that others have. I guess maybe because it's the most stable asset class and the fact it's likely the easiest one to venture out on your own? I don't know, but I hated working in the space and found it ridiculously boring/cookie cutter and chasing the same deals as everyone else with the same business plan as everyone else. "My plan is to underwrite to X market rent growth in an urban market with potential for new growth!". So many deals we had some private investor just swoop in pay a ridiculous premium.

Yeah, but this applies to everything.  If you're executing on the same strategy as the thousand other more established players are, of course it's impossible without taking huge risks on market appreciation.

If you have a niche business plan, well... that's different.  You'll find the same thing in industrial, hospitality, etc.  There is always someone out there with deeper pockets, access to cheaper financing, etc.

  • VP in RE - Other
Nov 13, 2021 - 8:39pm

Yeah, this is no different than the ones specialize in buying 8 cap motels. Regardless of the product type, there is an element of rinse and repeat in this business. 

Nov 12, 2021 - 2:17pm

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