BiggerPockets Real Estate Podcast - 876: Huge Opportunity for New Multifamily Investors As Prices Set to Drop w/Brian Burke and Matt Faircloth

Starting point is 00:00:00 Hey everyone, welcome to the Bigger Pockets Podcast Network. I'm your host today, Dave Meyer, and we're going to be digging into the state of multifamily in 2024. And to talk about this really important topic, we're bringing on two of the best in the business. Honestly, these two investors are guys I've been following for most of my career. There are people I look up to, and I promise you are going to learn a lot from each of them. The first is Matt Faircloth. You've probably heard him on this podcast before.

Starting point is 00:00:34 You've been listening for a while. He's the owner of the DeRosa Group. He's a bigger pockets boot camp instructor. He wrote a book called Raising Private Capital and knows a ton about real estate investing. The other is Brian Burke, who is the president and CEO of Praxis Capital. He has been investing for a long time over 30 years. And he has bought and sold over 4,000 multifamily. units. So if you guys want to learn about what's going on in the multifamily market, these two

Starting point is 00:01:05 are the people you want to be listening to. And the reason we want to talk about multifamily right now is because it's facing market conditions that are very different than the residential market. If you paid attention in 2023, the residential market was kind of flat. There wasn't a lot going on in terms of sales volumes, but things kind of chugged along and honestly outperformed a lot of expectations. But when you look at the multifamily market, things are very different. Prices have dropped anywhere from 10 to 20 percent depending on where you are in the country. And this obviously creates risk for multifamily investors. But the question is, does it also create opportunity in 2024 to buy at a discount and get some

Starting point is 00:01:50 great value? So that's what we're going to jump into with Brian and Matt today. So with no further ado, let's bring them on. We are of course here today to talk about the multifamily market. And so, Brian, I'd love just to have your summary, first of all, about what was going on in the multifamily market in 2023? Well, nothing good was going on in the multifamily market in 2023. You know, I always say that, you know, there's a good time to buy.

Starting point is 00:02:21 There's a good time to sell. And there's a good time to sit on the beach. And so this beach here in the background is just really a demonstration that I live by what I say. And I actually put my money where my mouth is. There's really no reason to invest in real estate in 2023. It's just better to be on the beach or play golf, which is what I think I'm going to do after I get done recording this podcast. Because, you know, I'm not really paying that close of attention to making acquisitions right now because there's just no reason to. You, 2020, I think, was a year of challenge when you had a bid-ask spread between buyers and sellers where nobody could get on the same page.

Starting point is 00:03:03 Buyers wanted to pay less than sellers are willing to take and sellers wanted more than buyers were willing to pay. And there was no bridging that impasse. And I don't think that 2024 is going to look much different, frankly. Matt, what do you think? Would you concur? Well, you know, it's easy when you're Brian Burke. to say I'm going to just chill out and not do anything. But I do, it's through no harm and trying that we didn't do anything either.

Starting point is 00:03:32 We worked really hard to try and do deals last year. But Brian's correct. The bid ask spread was too far apart from most deals to get done. And those that I saw do mid-sized multifamily deals, which is, you know, just what we are targeting and what Brian's targeting as well. Those that were targeting those kinds of deals and that got them, like, likely overpaid. If you look at where the market is now and you look at where things are starting to settle down, I think that we hit the peak in 2023 of the market. I'm not sure Brian disagrees with me on that one or not, but I think that we met, I think that the market hit its apex and it's tough to do deals when that's happening, right? And so now on our way back down, we really spent 2023 tightening up our company. We made a lot of hires, changed a lot of things around and tried really hard to get deals done, didn't. just through no harm of trying, but just the numbers weren't there. What sellers were asking. And what properties are trading for? Other people were buying these properties, just not us. We just didn't make sense.

Starting point is 00:04:32 This didn't pencil out would not have achieved anywhere near the investor returns that we wanted to see. So we tried, but we didn't, we struck out last year. And I don't think that's going to happen this year, though. Matt and I did a podcast in August together on the on the market. And, you know, if you remember, we had a, we had a pact to disagree with one another. So I'll start it off this time. I'm, going to disagree with Matt's 2023 calling the top. I think the top was actually in 2022. And so, you know, we started selling in 2021 and continued selling into the early part of 2022. And then I think the market started to fall. So, you know, while Matt was out digging for needles in haystacks, he could have been out here on the beach with me the whole time. Come on, man. I could have been joining Brian on the beach. But I'm stubborn. I kept trying to get deals done. And Brian ended up this is, I'm not going to say this very often on the show. But Brian was right. that there was not deals to be had. And maybe the market did peak in 2022,

Starting point is 00:05:28 but I still think that there were a lot of stragglers, a lot of last of the Mohican, so to speak, are folks trying to get deals done, Brian, in 2023. And I mean, like, we got bid out on a lot of deals. So there are still people that are, you know, literally trying to force the square peg into a round hole with a very big hammer, trying to hammer that square peg into that round hole to make deals work. And a lot of deals fell out, but they still went under contract.

Starting point is 00:05:50 And we got beat at the bidding table. So I, again, don't think that's going to happen moving forward, though. So let's dig into that a little bit, Matt. You said that things were not penciling. You were trying to bid. Yeah. Prices are starting to come down in multifamily from 2022 until now. What about the dynamics of the market makes you want to bid less than you would have in

Starting point is 00:06:14 2022 or 2023? And what is preventing deals from penciling? Well, it's very simple in that. unless you're going to go into a deal and just buy it straight cash, you're going to have to borrow money, right? And the cost of money, the cost of money has gotten much more expensive. In some cases, it's doubled, if not more, meaning a three and a half, four percent interest rate is now getting bid at 8 percent on a bridge loan, if not more, right?

Starting point is 00:06:43 And so that same deal that would have maybe made fiscal sense to a degree, maybe even would have been pushing the envelope at debt quotes of 2020, 2020, is now subject to debt numbers in the 6, 7, 8, 9% range today. So that's the main thing that makes the numbers not pencil. In addition to that, I think that we were getting beat by folks that were underwriting to 2021 and 2020's rent increased numbers saying, well, let's say Phoenix, Arizona or a market that's seen a lot of rent growth. And I'm not throwing shade at Phoenix. I'm just saying that market has seen a lot of rent growth. And so if I underwrite a deal, assuming, right, and you know what happens you assume, right? Assuming that rent growth in Phoenix is going to continue, it may be that

Starting point is 00:07:37 deal pencils out, but we weren't willing to do that. And we were, we kind of felt like rent had capped and the data now shows that it has, but we were assuming that it had six months ago. And so you go in with, you know, new numbers for debt and not numbers for rent expansion. It's not going to pencil. Now, again, other folks are making other assumptions. And when you underrated deal, you have to make certain assumptions. We were making more conservative ones. And that added up to the numbers coming in at best case, 10% below what the seller was asking.

Starting point is 00:08:08 But the deals were still trading at or around asking up until. recently. All right, Matt. So as you've said, the price of debt and borrowing money has made deals really difficult to pencil in 2023. Now, we've got to take a quick break, but when we come back, Brian, I want to hear if you agree with Matt's analysis. You just realized your business needed to hire someone yesterday. How can you find amazing candidates fast? Easy. Just use Indeed. When it comes to hiring, Indeed is all you need. That means you can stop struggling to get your job notice on other job sites. Indeed's sponsored job posts help you stand out and hire the right people quickly. Your job post jumps straight to the top of the page where your

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Starting point is 00:11:24 it's not even worth looking at individual deals at this time? Yeah, you know, we've been following it pretty closely to see when the right time is to get back in. And Matt's right. I mean, God, I hate to say that. Matt's right. But, you know, the cost of debt has definitely been a factor in, you know, why deals haven't been trading. There's no doubt about that. But it goes beyond just the cost of debt. It's the cost of the entire capital stack. Even equity, when you think about it, you know, three years ago, investors were trying to find places to put their money. And, you know, they were getting a quarter of a percent in a savings account. So these alternative real estate investments looked pretty darn good. Well, now they can get

Starting point is 00:12:05 five and a half in a money market. And so taking on a bunch of additional risk to, you know, maybe start out at 3% cash on cash return. If you can even find a deal, it throws that off in year one, followed by, you know, maybe getting up to 6, 7, or 8% cash on cash return in a few years, the risk premium just isn't there. So it's more difficult for investors to fund these kinds of deals. So I think availability of capital and the cost of the whole capital stack is part of it. The other part of it is expenses are growing. Insurance is getting much more expensive in some markets. Utilities are going up. Payroll is going up. All of those things are getting more expensive. And then layering on top of that, the income stream isn't growing. And really the reason

Starting point is 00:12:49 that people were paying so much money for income streams, which is really what we're buying. Yes, we're buying real estate, but the reason we're buying the real estate is because it throws off an income stream. Income streams were growing and growing rapidly a few years ago, but now they're not doing that. income streams are shrinking, rents are declining, vacancies are increasing. As, you know, we see some trouble in the job market, we'll probably see increases in delinquency. At the same time, expenses are going up, interest rates are going up, the whole cost of capital is going up. So you just can't pay as much for a shrinking income stream as you could pay for a growing one. So really what this whole thing comes down to is price. You know, you can make any deal out

Starting point is 00:13:30 there work at the right price. And the problem that we're seeing is that, Sellers want to price the assets they want to sell based upon the things they were seeing in the market two or three years ago. And that just isn't reality. So, you know, what am I looking at, Dave, in terms of indicators? I'm looking at more of the psychology than I am specific numerical indicators that are very easy to quantify. I want to see when when people start hating on real estate, then that's going to be when it starts to get interesting. When you start to see more foreclosures, that's going to be when it's going to be interesting, especially if no one's bidding on them. When you see pessimism about the economy, it's going to get more interesting.

Starting point is 00:14:14 That's what I'm looking for. I'm not looking for, oh, rates have to hit X and rent growth has to hit Y. And while certainly those factors will make it easier to quantify future income streams, that isn't telling me exactly when I think we've hit bottom. Well said. I still, I have perhaps just more optimism. I'm not sure Brian's familiar with the term, but I have optimism for for 2024 with regards to where things are going to go. Did we hit the bottom? No. But I think that we're going to see more things. And we even, we're starting to see more opportunities open towards the end of Q4 of last year. You know, there was one deal that we looked at that was being sold for what the lower. than what the seller paid for it. The seller paid $90,000 a door for it two years ago. It was on sale for $75,000 a door, pretty much what they owed on it. And this is a buyer that a seller that bit off way more than they could chew, bought way more than what they could handle and were just needed to unload. And they were end up cutting a lot of their equity. That was the beginning of what I think we're

Starting point is 00:15:18 going to see more of that. But you've got to have a really small haystack if you want to find a needle, right? And so we are our company's only hunting in a few markets. And we were starting to see a few distress deals show up in those markets. And I think it's an indicator of what we're going to see more of this year. One of the things I keep wondering about is when this distress is going to come, because it seems like people have been talking about it for a long time. Yeah. You barely go a day without a top media outlet talking about the impending commercial real estate collapse and how much. commercial real estate mortgages are due coming due but it hasn't really happened man it sounds like

Starting point is 00:16:03 you're starting to see a little bit but are you yeah let me just ask you this are you surprised that there hasn't been more distressed to this point well let's comment on that because our lovely friends in the media and dave i just commend you because you've been it you've done a great job on this show and on your outlets and on your instagram channel as well in breaking down a lot of the reports that we see on the real estate market in the media right so um there's a lot of media about this pending title wave of less commercial real estate that's going to be with all this debt that's coming due, right? Okay. That's true that there is a lot of debt that's coming due that properties are performing at lower interest rates, you know, three, four, five percent

Starting point is 00:16:39 interest rates, right? And those properties are cash flowing or just getting by now and then those rates are going to reset, right? That's what they're saying is those rates are not going to go from three, four, five percent up to six, seven, eight percent. True. The thing that they leave out there in a lot of those articles or in folks that are screaming, that out of that from the mountaintop is that most of that debt is retail and office. And that's not a space that Brian and I are in. And I don't want to be in retail and office. There's enough to do in the multifamily space and in a new space that we're trying on that's not like retail shopping centers and office space. So we do believe there's benefit in other asset

Starting point is 00:17:17 classes, but not there. Multifamily is starting to see some shifts, but I don't think it's going to be a blood in the street kind of thing like a lot of folks. are predicting, like a lot of media is predicting it's going to be. It just there's not enough debt that's in distress that's going to come due. The number that I saw was something like Bloomberg issued in article, $67 billion in debt that's marked as distressed, right? The thing is, that sounds like a lot of money, but it's not compared to the amount of debt that's in all multifamily.

Starting point is 00:17:50 So $67 billion in multifamily debt is marked as distressed. but in like the trillions in multifamily debt that's out there, that is a smidge. And so what I think that we're going to see is strategic outlets of bad, of debts, a bad debt and deals that are going to get released to the market. But is it going to create a crazy market correction? No, I don't think so. I think over time, cap rates are going to go up and sellers are going to have to get real. But I disagree with Brian that there's going to be like this panic in the multifamily market

Starting point is 00:18:21 and that it's going to become a space of bad emotion of like, you know what, multifamily, forget that. I don't want to be in that market. And that's when you really want to buy anything you can get your hands on. But I think that the opportunity is going to be in niches of markets, meaning like if I choose Phoenix as a market I want to target, me just really drilling in on that market and then finding the opportunities, maybe the broker's pocket listings or the off-the-market stuff that is going to be,

Starting point is 00:18:48 you know, passed around to a small circle. I think that's where good deals are going to be had is inside of market niches. And Brian, it sounds like you think there might be more of an inflection point where distress hits a certain level and things start to accelerate downwards, I would say. Well, I think I would say not quite those extreme set of terms. But when you look at – I saw an article recently. He was talking about Atlanta, Georgia, right? Atlanta, Georgia is a big multifamily market. There's lots of multifamily units in Atlanta, Georgia.

Starting point is 00:19:21 And it was somewhere in the neighborhood of 30 or 40% of the properties in Atlanta had loans maturing in the next two years. And a large percentage of those that have loans maturing in the next two years were loans that were originated in this kind of like height of the market period of 2020 through 2022. And so those were bought at very high valuations. Valuations now are lower. And when those loans come due, there's going to be some kind of a reckoning. Something has to happen. Either capital has to be injected into those deals or the deals will end up selling or getting foreclosed. And 30% is a big number. And certainly not all of those are going to end up and wind up in some kind of a distress.

Starting point is 00:20:07 But that would be a major market mover if 30% of the property started going into foreclosure. and that would cause a cascade of negative effects in properties that weren't experiencing loan maturities. Do I think that's going to happen and play out that way? Not really. What I think is more likely is that there's going to be a lot of these loans that are going to end up trading behind the scenes where large private equity is going to come in, absorb the loans, buy them at a discount, and then ultimately either they'll foreclose and take the properties and they'll get them at a really good basis, or they'll sell them at current market value and probably make a profit based on the spread

Starting point is 00:20:46 between the price they purchased the loan for and the price they sold the asset for, which will, by the way, be a lot less than what that asset sold for when it was bought by the current owner. You know, we had a deal that we sold a couple years ago, and the current owner is trying to sell, and I calculated based upon their asking price, it's a $17 million loss in two. two years. So the distress has already begun to happen. Prices have already fallen, whether or not people realize it or can quantify it yet. I don't know because there just hasn't been a lot of transaction volume. So maybe it's being swept under the rug where, you know, people are like,

Starting point is 00:21:27 oh, you know, the market's not going to crash. No, I'm sorry to tell you, it's already crash. Price is coming down 20 to 30 percent has already happened. The question is going to be, do they come down another 10 or 20 percent? And that's what I'm waiting to say. And that's what I'm waiting to see play out, whether or not that happens. Because one could easily argue, oh, prices are down 23 percent. It's a great time to buy. It is unless there's still more downward movement. So what I want to see is I want to see that those prices have troffed and that they're not going to continue to slide downwards before I'm ready to get in. I'd rather, I'd rather get in once they've started to climb and maybe miss the bottom than to get in while they're still falling and then have

Starting point is 00:22:03 to ride the bottom. Rather than I catch a falling knife, right? Exactly. Yeah. The data that I'm reading. I mean, man, that sounds crazy for Atlanta. Like third, I mean, that means like, first of all, I'm just going to throw back at you what you just said, what I heard. 30% of Atlanta traded in the last three years, right? That's a lot. That's a lot of real estate. And that means that 30% of Atlanta is in, is in a distressed position. Yeah, 30% of the outstanding multifamily debt is maturing in the next two years. That doesn't necessarily mean that they traded. They might have refinanced. But, 30% of the debt is coming, is maturing in the next two years.

Starting point is 00:22:43 Yeah. What I, here's what I've read, right? They're not, there's, there's, not everybody is scrappy, you know, syndicators like you and me, right? Like there's, um,

Starting point is 00:22:54 way larger corporations than mine and yours that own thousands and thousands of doors. And these guys are putting in, um, and, you know, loans backed by insurance companies going in at 50, 55% loan to value on their properties,

Starting point is 00:23:07 uh, because they've owned them. These are legacy assets. They've owned for way more than five, 10. You know, they just, they just hold their, they're buying hold forever kind of companies, right? And the data that I've seen are that those companies are going to be just fine. That if they end up having to take a little bit of a haircut on valuation, their LTV is so

Starting point is 00:23:27 low that, oh, I can't refi out at 55 will have to refy up to 60 or 75. So I just want to say something about the 30% number because that number, is actually not that high to me because if you think about the average length of a commercial loan, I don't know, you guys know, what's the average length of your term on commercial debt? Five to seven years. Or seven to ten. Well, wow, way, way, hang on. You got bridge debt in there, Brian, and stuff like that. So I think that the bridge two to three year product may pull down the five to ten agency. So meet me at five. All right, I'll meet you there. You got it. I got it.

Starting point is 00:24:08 I got it. Five, five, five is the answer is five. If five is the average debt, then doesn't that reason in the next two years, 40% of loans should be due? Because if they come up once every five years, right? I'm going to let, I'm going to let Brian into that one. Yeah. Well, the problem is is that the debt is coming due at a really bad time. Certainly debt is always mature, right? That all that happens all the time. But how often does debt mature that was taking it out when prices were very high and is, maturing at a time when prices are very low. That's the disease. It isn't as much the percentage of loans. It's the timing and the market conditions upon which those loans were originated versus when they mature. That's the problem. Totally. I totally agree with that. I just want our listeners to not be shocked by this number of 30 percent and that it's like some unusual thing because if you consider five to seven years being the average debt, then always somewhere between 28 and 40 percent of debt is always coming due in the next two years.

Starting point is 00:25:08 So it's just something to keep things in perspective. I think it's somewhat of a shocker number, right, David? It's one of those things where it's like 40%. And it makes people say, oh, my goodness, that's so much debt. And I actually think I read something that I also think it might actually, that lumber might be low. It might be higher in the next few years because it sounds like a lot of operators were able to extend their loans for a year or two based on their initial terms,

Starting point is 00:25:35 but those extensions might be running out. And so to Brian's point, we're getting some really distressed or bad situations coming due at an inopportune time. Here's what I'm hurry. Brian and I are plugged into very lovely rumor mills and friends, you know, have lots of other friends in the industry, right? So here's what the Coconut Telegraph is telling us that I hear anyway. Banks are doing workouts, right?

Starting point is 00:26:00 They don't want these things back. Although they're very pragmatic and very dollars and cents oriented, and if you owe $15 million in a property that is now worth seven, the bank's probably going to say, yeah, I'm probably going to need to go and take that thing back and get and collect as many of our chips as we can. But if you are in the middle of a value ad program and you've got some and you've got some liquidity and you're doing what you can do, what I'm hearing is that banks are doing workouts. They're willing, and this is on floating rate bridge deals, right? that's kind of the toxicity that's in the market, these bridge deals. It's not so much someone that's got an agency loan that they've had interest rate locked for the last five years and they got a refi. That person's going to figure it out.

Starting point is 00:26:41 I'm talking about this bridge loan that they bought two years ago on an asset that they needed to do a ginormous value ad program on and try and double the value of the property in a year or two and it didn't work out, right? I'm hearing banks are doing workouts and they're allowing people to, they're negotiating, Brian is what I'm here. You probably heard this too. they're being somewhat negotiable on the rate caps, which are these awful things that are really causing a lot of strain on a lot of owners is these rate cap, which is just an insurance policy

Starting point is 00:27:10 you got to buy to keep your rate artificially lower than what it really is. I've heard that there's that, and I've heard that the banks are cooperating with owners that are, that can show that they're doing the right thing, and they're not so far into the hole that there's no, there's no light at the end of the tunnel. Brian, I'm curious what you're hearing on that. And again, this is my inner optimist. I'm not sure if you want to access that part of the outlook or not. You're more than welcome to give me the other view. Yeah, the other view is that they can postpone their stuff all they want, but what they can't eliminate is the day of reckoning. Sooner or later, something has to happen. They either have to refi, they have to sell, they have to foreclose.

Starting point is 00:27:51 Something is going to have to happen sooner or later because even if they, even if the borrowers have to pay higher interest rates and delay rate caps. Sooner later, the borrowers run out of cash. And then the borrowers have to go to their investors and say, can you contribute more cash? And the investors are going, I'm not throwing any more good dollars after bad. No way. I'm not sending you any money. And then something has to happen. The lenders can do what they can do initially, but then the lenders will start getting pressure. And so what a lot of people don't realize is that lenders aren't loaning their own money. Lenders are loaning other people's money as well. And that might be money that they're borrowing from a warehouse line, money that they've raised from investors, money that

Starting point is 00:28:31 they're getting from depositors, wherever that money comes from, they might be getting pressure saying, like, you've got to get this stuff off your books. You're not looking so good. Regulators are putting on pressure. So eventually lenders have to say, like, we can't just kick their can down the road forever. Something's got to give. And that day has to come. Brian, you seem very convinced that the writing is on the wall and a day of reckoning is coming. But Matt, you seem to be more of an optimist. So I'm curious to hear from you. Do you see the same thing? But before we get into that, we have to hear a quick word from our show sponsors. For decades, real estate has been a cornerstone of the world's largest portfolios. But it's also historically been sort of complex, time-consuming,

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Starting point is 00:31:21 that's A-V-A-I-L-C-O-Bigger pockets. Tax season reminder for all the real estate investors listening. If you own rental properties, short-term rentals, commercial buildings, basically anything that's not your primary residence, you need to know about cost segregation. It's an IRS-compliance strategy that lets you accelerate depreciation on your properties, which means you're paying less in taxes this year and keeping more cash in your pocket for your next deal. Cost Segregation Guys is the go-to firm, having done over 12,000 of these studies with $500 million in total depreciation identified. Head to costsegregationguise.com slash BP to get a free proposal and see your potential tax savings.

Starting point is 00:32:06 Real estate investors, the April 15th tax deadline is coming fast. If you own rental property and haven't done a cost segregation study yet, you could be handing thousands of dollars to the IRS that you don't have to. These studies let you write off as much as 25% of your building and generate huge tax deductions. Costsegregation.com is an online self-guided software that makes cost segregation fast and affordable. So it finally makes sense for smaller rental properties purchased for as low as $100,000. With pricing under $500 and an average savings of over $25,000, it's just a no-brainer. What's more, audit support is included by the number one cost segregation. company in the U.S., but you must complete it before the tax deadline.

Starting point is 00:32:52 Go to costsegregation.com and use code tax deadline to get 10% off your first report. Don't overpay the IRS. Head to costsegregation.com before April 15th. There are a lot of folks that believe that the Fed saying that they were going to cut rates three times this year that read that. I mean, I talked to one person to said, well, they said three, so that probably means nine, right? Like, what? We're not going back to the party time of like interest rates being two and a half,

Starting point is 00:33:18 three percent. That's not going to happen again, right? And if the Fed, it really does cut rates three times, that's not, it's going to be a dent in compared to what they've done already, right? So there are folks that believe that by banks cooperating with borrowers that will allow some time for rates to get down to where the borrower needs them to be, probably back down to like three and a half, four percent. I don't think that's going to happen. Okay. I'll, I'll take that. Oh, what did you got? I'll take on that argument. So you're saying that interest rates aren't going to get back down to 2%. I agree with you. Now, when interest rates were at 2%, people were buying multifamily properties and all kinds of commercial real estate at extraordinarily

Starting point is 00:33:57 high prices. And those high prices means that they were low cap rates. And cap rate is a mathematical formula that's used to take the temperature of the market. Some people say, oh, it's a 4% cap rate means you get a 4% return. That's hogwash. We can have a whole show on that. But the bottom line is, is that very low cap rates, this mathematical formula that we're talking about, it means that the market is extraordinarily hot. The market is not extraordinarily hot anymore. So a 4% cap rate that's now a 6% cap rate, what that means is that's a 2% difference. It doesn't sound like much, but going from a 4 to a 6 is a 50% haircut and value.

Starting point is 00:34:36 Mathematically speaking, you have to cut the price of the property by 50% for the income to go from a 4-cap 4% cap rate to a 6% cap rate. And that's what we're seeing now. So when these loans finally do come due, and the property is worth half of what it was at the time the loan was originated, what may happen? The lender is really going to force their hand when the value can climb just high enough for the lender to get their money back. They don't care about the owner.

Starting point is 00:35:03 They don't care about the borrower. They don't care about the investors that put their hard-earned money into that deal. All the lender wants is their money back. And as soon as that moment comes, the bank is the bank. is suddenly going to become that much less cooperative. And when that happens, that's the day of reckoning. It has to happen sooner or later. Now, don't get me wrong.

Starting point is 00:35:21 I mean, I have a lot of this pessimism and stuff, but fundamentally, the fundamentals of housing are extraordinarily sound. People need to have a place to live. There's a housing shortage across the U.S. Right now, there's a little bit of a glut of construction. That's going to work its way out because nobody can afford to get a construction loan right now. Banks aren't lending. Pretty soon all the new deliveries are going to stop.

Starting point is 00:35:41 the fundamentals of housing are sound. Housing is a good investment, but timing means something. Buying at the bottom of the market and riding the wave up is so much different of an outcome than if you're buying like, you know, before the market is finished falling and you have to ride through a three or four year cycle to get right back to even. That just doesn't work. So I'm bullish for maybe 2025, 2025, 2026, 27, but short-term bullish, no, I can't get there. The fundamentals are there, but the rest of the equation just doesn't work yet. So now that we've heard your takes on both last year, 2023, and what might happen this year, what advice would you give to investors who want to be in the multifamily market this year?

Starting point is 00:36:26 Great question, because unless you're Brian Burke, you can't just hang out on the beach and play golf. I mean, you know, in that. So let's see how Brian handles that one. For what I think that investors should do, if they really want to get into the multifamily mark, If they want to get involved in what I think is going to be a changing market, there will be opportunities that are going to come up. What I believe you should do is to do what we did, which is stay super market-centric. If it's Atlanta, because according to Brian, like 30% of the multifamilies in Atlanta

Starting point is 00:36:56 are going to be refinancing or with that coming due, just for example, and that's probably true in most markets, if you stay market-centric, pick a market, not two, not 10, a market, and get to know all the brokers in that market, there are deals that are going to come up of that 30% that are likely going to be sold at a significant discount off the market. Is market pricing where it's going to be a big solid yes to get in? No, I don't think it is. I don't think that the market itself, where all the properties are going to be trading or what sellers are going to be asking, is going to make sense.

Starting point is 00:37:32 So I think that you need to be the, you know, riches and the niches, so to speak, to find a market. and then get networked and look for opportunities that may come up. You could also do what we did, which is continue to monitor multifamily, make bids, we bid something like 280 deals last year or at least analyzed 280 deals and bid most of those as well. But we also looked at other asset classes as well. Our company's looking at everything from flagged hotels and that is a solid asset class that makes a lot of cash flow to other asset classes, including loans.

Starting point is 00:38:05 Our company is getting into issuing loans. for cash flow. And the bottom line, guys, is whatever you get yourself into this year, it's got to be a cash flowing asset. It's got to be something that produces regular, measurable cash flow on a monthly, quarterly basis because cash flow is what got my company DeRosa Group through 2008, 9, 10. And it's what's going to get folks through 2014-15 and into the future is cash flowing assets and not two, three, four percent cash flow, significant high single-digit cash flow is what's going to be, is what you're going to need to go after. So that's what I say you pursue. All right. Well, challenge accepted, Matt. So not everybody has to sit on the beach for

Starting point is 00:38:45 the next year. I do a, I can't make that claim. I might and I might not. There might be some opportunities out there to get to buy this year. You too itchy, man. But I don't see you sit on the beach. Yeah, probably not. You're going to be doing it too. I got to do I got to do something. I got to do something. There's, there's no doubt about that. But so, so here's kind of my, my thoughts on this are if you're if you're just getting started in real estate investing or you're just getting started in multifamily, you actually have an advantage over, you know, Matt and myself. And that they seem awful interesting to make that claim. But here's why I say that. I think that you're going to find more opportunity in small multifamily now than you will enlarge multi. Now I'm not going to go out

Starting point is 00:39:30 buy anything less than 100 units. It just for our company, it just doesn't make sense to do that. You know, Matt is probably somewhere in that zone too. You know, we're not out in the duplex, fourplex, 10 unit, 20 unit space. But if you're getting, if you're new to multi, that's really where you should start anyway. You want to get that experience and that knowledge and figure out how it works. That helps you build an investor base. It helps you build broker relationships. and frankly, in that space, in those small multi-space, I think that's where the needles are going to be found in the haystacks. Because it's the small deals where you have the mom-and-pop landlords,

Starting point is 00:40:09 that quintessential, as they've called, you know, the tired landlord that wants to get out. You know, that's where the people are searching eviction records to talk to the owner to see like, hey, I see you have all these evictions. Do you want to sell because it's a pain in the neck? And people are like, yeah, I'm out. You've got retiring owners that want to get out. That's where you're going to find opportunity, in my view. I don't think you're going to find opportunity in 100 and 200 unit deals because, number one, those buyers are very sophisticated, generally well capitalized. But even if they're not, they've got sophisticated lenders, they've got all kinds of challenges, prices are down. They probably haven't owned them all that long to have a ton of equity versus, you know, the mom and pop landlord that's owned it for 50 years that has the thing paid off. That could even maybe give you seller financing. thing. If you want to get started, I would suggest get started right now on two things. One,

Starting point is 00:41:03 build your business, build your systems, build your investor base, build your broker relationships, because those are all things. There's plenty of time to do. Brokers will return your calls right now because no one else is calling them. You might as well give them a call. Build that stuff now because when you are busy and the market is taking off, you're going to be running 100 miles an hour of your hair on fire. There's going to be no time to do that. The other thing, build all of your your systems, get together your underwriting system, learn how to underwrite, take Matt's classes and BP's seminars and all this different stuff, learn how to analyze deals and get ready, and then go out and look for smaller multi where all the deals are. That's going to be a great way to start.

Starting point is 00:41:43 Then when all the big multi comes back in a year, two, three, however long it takes, you'll be more ready for that because you'll have all this experience and you'll have all the systems, you'll have their relationships. And I think that's really the playwright. right now. Well said. So, Matt, tell us just briefly, what are you going to do in 2024? Great question. What DeRosa Group, our company, is we're going to continue to monitor multifamily and the markets we're already invested in so we can continue to scale out geographically in those geographic markets. We're going to pursue new asset classes. Like I said, flagged hotels is an asset class that we're going after aggressively. And we also have a fund that just puts money into

Starting point is 00:42:22 hard money, just a debt fund that's just an easy way to turn money around and produce easy cash flow. So we're keeping our investors funds moving in other asset classes while we monitor multifamily very, very closely and continue to bid it and hope that we find something that makes fiscal sense for our investors. And what about you, Brian? Is it just golf this year? Yeah, you know, I'm not that good of a golfer. So I'd like to say that, yeah, I could just play golf all year, but I'm really not that good. So I think, no, we'll do more than that. Just like Matt, we are watching the multifamily market extremely closely. We're looking for the signs and signals that we've reached the bottom and it's time to invest. Meanwhile, we're investing in real estate debt. We have a debt fund

Starting point is 00:43:03 where we've been buying loans that are secured by real estate to professional real estate investors. I think right now the play for us is we're more of watching out for downside risk than trying to push upside. So that's going to be our play for 2024. And then as soon as we see the right then it's bull speed ahead on searching for upside again. All right. Well, thank you both so much for joining us. We really appreciate your insights and your friendly debates here. Hopefully we'll have you both back on in a couple of months to continue this conversation.

Starting point is 00:43:37 Can't wait. Thank you all for listening to the Bigger Pockets Real Estate podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday, and Friday. I'm the host and executive producer of the show, Dave Meyer. The show is produced by Ian K, copywriting is by Calicoe content, and editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up for our free newsletter, please visit www.biggerpockets.com.

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BiggerPockets Real Estate Podcast - 876: Huge Opportunity for New Multifamily Investors As Prices Set to Drop w/Brian Burke and Matt Faircloth

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