Value add - multifamily ... RENTS, TAXES, WTF??

yoruba123's picture
Rank: Gorilla | 581

I am seeing a ton of shit OMs from brokers labeling everything value-add for multifamily. This is nothing new but who is the potential buyer pool for these shit class B & C assets? To my main question, is it realistic to expect rents can be doubled at a property in 18 to 124 months at a 50 to 150 unit building?

For those with experience acquiring value-add multifamily, how challenging has it been once you implement the value-add strategy of washer & dryer, paint, renovation, etc to double rents at a property?

Brokers are using class A comps for class C shit value-add deals in an inferior location. The only way to make these deals work is to double rents and assume "slight" increase to taxes and insurance which will jump by 30-50% if you are doubling rents. Folks are definitely getting over their head to acquire deals in my market.

Is this the only way to win deals now? Thoughts on rents for value-add?

Thanks in advance!!

Comments (64)

Sep 10, 2018

I assume you have a typo in your first paragraph, because doubling rents in 124 months is not out of the question.

Doubling rents isn't crazy, but here's the issue: you have to put real capital into it to make it work. Take a shitty, run down apartment building and splash some paint on it, and you won't get a bump to justify current cap rates. Put in a washer/dryer in every unit, and a gym, and a marble clad lobby w/ 24 hour doormen, and maybe you'll get there. But then your basis is so crazy that it doesn't matter, obviously.

Long story short, you shouldn't be trusting or expecting anything from brokers in the first place. They often don't know the market their peddling a property in, and even if they do, they don't work for you. You are a sucker and a mark, and nothing more. Of course they're taking rents from TriBeCa and applying them to Bushwick; that's their game, and since they've probably puffed their Seller so full of hot air of how valuable and unique their asset is to win the business, they now have pressure on the other side to keep pricing high.

As a purchaser, brokers don't represent or have fiduciary duty to me, won't represent that what they're showing me is actually true, and take no risk. My view on everything related to investing is that a party with no risk, can't be trusted. Brokers exist to siphon off a few points of every deal to lubricate velocity in an era when that's fast becoming an obsolete and useless value-add. Assume that on every OM, every cash inflow you see is subject to 10% inflation and that at least 20% of the outflows have been left out, and you'll be close to an honest view of a deal.

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Sep 18, 2018

Are brokers really that bad? I was interested in becoming one but I'd love to hear more about what you think

Sep 19, 2018

Some are. Some aren't. However, they totally are not a reliable source for CapEx costs.

Sep 11, 2018

Right now there is a huge boom of syndication groups. (http://www.themichaelblank.com/ , https://thinkmultifamily.com/ , http://nighthawkequity.com/) These "gurus" bring in tons of people to their seminars where they hype them up and tell them how smart they are and how much money they can make buying and rehabbing multifamily properties. If they don't have the time to sponsor these deals, they can still invest their own money into these deals ( they are often unaccredited investors). If you're "lucky" one of the "gurus" will take you into his coaching program where he teaches you how to acquire multifamily properties after you pay him a ton of money. When you finally find a deal that works he will take about 75% of the GP promote and fees.

The sponsors I listed above will each have dozens of bird dogs out there chasing down deals and often competing against each other for these class C multifamily deals. They have literally 0 experience underwriting so they believe whatever the broker tells them. Push rents by 10% in the first year, absolutely. $4k of rehab work equates to $125 per unit premium, sure. You get the idea....

A fund we are invested in just sold an asset in suburban Atlanta and received 3 LOI's from the same group through 3 different parties. All the LOI's had a different price. These idiots are competing against each other needlessly. I sat in on the buyer interviews and listed to these people explain this system first hand. The brokers said the number of these types of sponsors is increasing dramatically.

On the other side of things over the past 12 - 18 months there have a been a lot of funds launched that focus on "work force" housing. These are real institutional players with a lot of capital to deploy and they are adding to the increasing interest in the Class C multifamily space.

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Sep 11, 2018

Out of curiosity I looked into one of their deals and found the return to be above 8%, which is pretty good imo

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Sep 12, 2018

I'd be pretty wary of this. From what I have seen, the spread between the cash-on-cash return the proven sponsors* are offering on a quasi-institutional deal and what some of these yahoos are offering on a 75-unit deal in Spokane doesn't come close to compensating for the risk. I'll take a 7 on a 250 unit deal in riverside all day before I take an 8 for a 1972-built 100-unit deal in boise. The way these deals are leveraged, an unaccounted for roof replacement has the ability to turn your 8 into a zero (or less) pretty quickly.

*Many of the successful syndicators have a glut of capital at this point and will only take accredited investors so that might not be an option everyone. Also, everyone in the apartment industry's record is colored by a 20-year bull-market - rents going up and cap rates going down - I would want to make sure I have a very good operator who is going to keep my deal leased and cash flowing in the case of a market hiccup.

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Sep 11, 2018

Great responses! Lots of dry powder at the peak makes it nearly impossible to make a deal pencil which is very concerning. Sellers want B+ pricing for C- to almost D assets.. the disconnect is insane in a rising interest environment. From my experience, if you miss the proforma rents by $100 to $200 per unit, you are getting pounded in value add. The 15% IRR is now crap. Find it annoying the shoe sale guy type idiot brokers are consistently saying you can charge for parking when none of the comps in that submarket with a nicer product or location are charging for parking or they are CAP RATE BROKERS... put a 6% cap when all the comps are 4-5% but when you do the real analysis and use real value add rents, adjust for taxes, salaries, etc... you are at a 2-3% cap. These fucking idiots can't explain any of their assumptions in a logical manner and just try to get higher prices that will blow up in a couple of years.

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Sep 11, 2018

It's a broker's job to get the best price for their client. It's investors' job to make sense of the information, do their own diligence, and price assets at returns they're comfortable with.

The issue is that buyers are paying up for assets and accepting lower returns because they have to in order to be competitive. When risk and reward is in imbalance, bad things happen.

Brokers don't create bubbles, buyers do.

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Sep 11, 2018
Mark Queban:

It's a broker's job to get the best price for their client. It's investors' job to make sense of the information, do their own diligence, and price assets at returns they're comfortable with.

The issue is that buyers are paying up for assets and accepting lower returns because they have to in order to be competitive. When risk and reward is in imbalance, bad things happen.

Brokers don't create bubbles, buyers do.

No one is disputing that, but the first paragraph tells anyone all they need to know about whether it's realistic to expect the rent increases or opex decreases that brokers promises. Broker's aren't and won't be honest with you as a Purchaser. You should assume that whatever they're saying is an attempt to scam or con you into overpaying for an asset, because as I said in an earlier post, they have no fiduciary or legal duty to represent the truth, and their client is the Seller.

All of this is even more amusing because if you got rid of the broker, Sellers would get to their numbers more easily. And since brokers provide marginal value and basically just leech the upside from deals, I suspect this is the direction in which the market will go.

Sep 12, 2018
Ozymandia]
[quote=Mark Queban:

All of this is even more amusing because if you got rid of the broker, Sellers would get to their numbers more easily. And since brokers provide marginal value and basically just leech the upside from deals, I suspect this is the direction in which the market will go.

This is objectively false.

We ran a market study of all market comps for the past two decades comparing sales prices (including P/SFT, p/unit, p/LSFT, etc) when listing brokers were vs. weren't involved on deals, and broker-less deals traded at HUGE discounts, on average, to listed and marketed properties. Even net of fees, sellers that sold off-market left money on the table.

As a buyer, off-market deals are my wet dream. No competition, no deal visibility, more breathing room. No brokered-up OM's to navigate through.

As a seller, not using a broker is a great way to sell to the lowest-paying possible client. I don't have the time or resources to scour the earth for every investor out there. Frankly, it's to the broker's benefit to get you the highest price possible, so why on earth wouldn't they do that?
If there's some Chinese yahoo in San Francisco in a 1031 exchange willing to pay a 3% cap, why wouldn't I sell to him? And how would I locate him if I didn't have a broker?

Believe me, I full well understand how frustrating buying from brokers can be. We won't compete in best & final deals simply because our market is so hot that we'll be undoubtedly left with winner's remorse. But if you're a seller, not using a broker is stupid. You're only making it easier for buyers to get a good deal.

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Sep 12, 2018

I would disagree as well. Our firm loves off market deals as you can get in at a much lower price than a widely marketed deal.

Agency debt brokers on the other hand...

Sep 21, 2018

So, the question is what value do brokers add and are they worth their commissions?
In my experience, all of their bullshittery and spin to purchasers, in my experience, generally does get purchasers more comfortable with things that initially pop up as big deals. This does translate to higher offer prices.

Do I think their over-paid for this value? Sure. But I do think they end up pushing purchase prices incrementally higher than their commission cost.

Sep 19, 2018

I have never once trusted a broker's assumptions. Model the deal out your own way, find what price works for you, and see what you can get. I probably close 1 deal for every 50-100 OMs I receive.

In my experience you need one of two things to get a killer money making deal, 1) vision to see something that others don't (either in the neighborhood, the structure itself, or something buried in the financials), 2) A combination of luck and a tolerance for high risk.

Nearly everyone who owned real estate in NYC from 2009-2015 thinks they had #1 and are real estate geniuses. But the truth is most don't realize they were just lucky to be in a market where you literally could not lose (#2). As a result, people's expectation have climbed, which sets a dangerous precedent because people start to ignore certain risks. But the market has definitely softened (prices aren't declining, but the ludicrous growth rates have), and I think we'll see a lot more owners & brokers become more realistic and start putting more gettable deals out in the next year or so.

Edit: to add, always take a moment to look at the deal from the seller's perspective. Future values are baked in to sale prices so heavily these days that prices are more often a reflection of where the seller thinks the building will be (often with aggressive aspirations), rather than what it is currently. Sometimes it's just a matter of tempering their expectations.

Sep 19, 2018

My favorite is 2010/11 garden deals where you can "unlock" $100 rent premiums by replacing a lower quality cut of granite with a higher quality cut.

Sep 20, 2018
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