February 23, 2024

Huge Opportunity for New Multifamily Investors


Multifamily real estate has crashed, but we’re not at the bottom yet. With more debt coming due, expenses rising, incomes falling, and owners feeling desperate, there’s only so much longer that these high multifamily prices can last. Over the past year, expert multifamily investors like Brian Burke and Matt Faircloth have been sitting and waiting for a worthwhile deal to pop up, but after analyzing hundreds of properties, NOTHING would work. How bad IS the multifamily market right now?

Brian and Matt are back on the podcast to give their take on the multifamily real estate market. Brian sees a “day of reckoning” coming for multifamily owners as low-interest debt comes due, banks get desperate to be paid, and investors run out of patience. On the other hand, Matt is a bit more optimistic but still thinks price cuts are coming as inexperienced and overconfident investors get pushed out of the market. So, how does this information help you build wealth?

In this episode, Brian and Matt share the state of the 2024 multifamily market, explain exactly what they’ve been doing to find deals, and give their strategy for THIS year that you can copy to scoop up real estate deals at a steep discount. Wealth is built in the bad markets, so don’t skip out on this one!

Dave:
Hey, everyone. Welcome to the BiggerPockets Podcast Network. I’m your host today, Dave Meyer, and we are 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. They’re 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, you’ve been listening for a while. He’s the owner of the DeRosa Group. He’s a BiggerPockets Bootcamp 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 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 flat. There wasn’t a lot going on in terms of sales volumes, but things 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%, 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 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.

Brian:
Well, nothing good was going on in the multifamily market in 2023. I always say that there’s a good time to buy, 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 I’m not really paying that close of attention to making acquisitions right now, because there’s just no reason to. 2023, 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. 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.

Dave:
Matt, what do you think? Would you concur?

Matt:
Well, it’s easy when you’re Brian Burke to say, “I’m going to just chill out and not do anything.” But it’s through no harm in trying that we didn’t do anything, either. We worked really hard to try and do deals last year. But Brian’s correct, the bid-ask spread was too far apart for most deals to get done. And those that I saw do mid-size multifamily deals, which is just what we are targeting and what Brian’s targeting as well, those that were targeting those kinds of deals and that got them 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 if Brian disagrees with me on that one or not, but I think that the market hit its apex. And it’s tough to do deals when that’s happening.
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 in trying, but just the numbers weren’t there. What sellers were asking and what properties were trading for. Other people were buying these properties, just not us. It just didn’t make sense. 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.

Brian:
Matt and I did a podcast in August together on On the Market, and if you remember, 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 we started selling in 2021, and continued selling into the early part of 2022, and then I think the market started to fall. So 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.

Matt:
I could have been joining Brian on the beach, but I’m stubborn. I kept trying to get deals done. And Brian ended up, 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, but I still think that there were a lot of stragglers, a lot of lasts of the Mohicans, so to speak, for folks trying to get deals done, Brian, in 2023. And I mean, we got bid out on a lot of deals, so there are still people that are literally trying to force a 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, and we got beat at the bidding table. So I, again, don’t think that’s going to happen moving forward, though.

Dave:
So let’s dig into that a little bit, Matt. You said that things were not penciling. You were trying to bid.

Matt:
Yep.

Dave:
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 2022 or 2023, and what is preventing deals from penciling?

Matt:
Well, it’s very simple, in that unless you’re going to go and do a deal and just buy it straight cash, you’re going to have to borrow money. 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 3.5, 4% interest rate is now getting bid at 8% on a bridge loan, if not more. And so that same deal that would’ve maybe made fiscal sense to a degree, maybe even would’ve been pushing the envelope at debt quotes of 2020, 2021 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 2022’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… and you know what happens when you assume, right… That rent growth in Phoenix is going to continue, it may be that deal pencils out, but we weren’t willing to do that. And we 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 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 underwrite a 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. But the deals were still trading at or around asking up until recently.

Dave:
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 got to take a quick break, but when we come back, Brian, I want to hear if you agree with Matt’s analysis.
Brian, what about you? You said that you basically sat out 2023. If you weren’t looking at deals, were there any macro indicators or anything that you periodically peeked in on to know it’s not even worth looking at individual deals at this time?

Brian:
Yeah. 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 the cost of debt has definitely been a factor in 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, three years ago, investors were trying to find places to put their money. And 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 5.5 in a money market. And so taking on a bunch of additional risk to maybe start out at 3% cash-on-cash return, if you can even find a deal that throws that off in year one, followed by 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 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 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 can make any deal out 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 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 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. 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.

Matt:
Well said. I still have perhaps just more optimism. I’m not sure Brian’s familiar with the term, but I have optimism 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 were starting to see more opportunities open towards the end of Q4 of last year. There was one deal that we looked at that was being sold for 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 seller that bit off way more than they could chew, bought way more than what they could handle, and 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 going to see more of that. But you’ve got to have a really small haystack if you want to find a needle. And so our company’s only hunting in a few markets. And we were starting to see a few distressed deals show up in those markets, and I think it’s an indicator of what we’re going to see more of this year.

Dave:
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.

Matt:
Yeah.

Dave:
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 coming due. But it hasn’t really happened. Matt, it sounds like you’re starting to see a little bit.

Matt:
Yeah.

Dave:
But let me just ask you this. Are you surprised that there hasn’t been more distress to this point?

Matt:
Well, let’s comment on that. Because they’re our lovely friends in the media. And Dave, I just commend you, because 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. So there’s a lot of media about “This pending tidal wave of less commercial real estate that’s going to be with all this debt that’s coming due.” Okay, that’s true, that there is a lot of debt that’s coming due. That properties are performing at lower interest rates, 3, 4, or 5% interest rates. 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 3, 4, 5% up to 6, 7, 8%. True.
The thing that they leave out there in a lot of those articles or in folks that are screaming 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 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. 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 an article, 67 billion in debt that’s marked as distressed.
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. So 67 billion in multifamily debt is marked as distressed. But in 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 the strategic outlets of 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 this panic in the multifamily market, and that it’s going to become a space of bad emotion of “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 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 passed around to a small circle. I think that’s where good deals are going to be had, is inside of market niches.

Dave:
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?

Brian:
Well, I think I would say not quite those extreme set of terms, but I saw an article recently, it was talking about Atlanta, Georgia, right? Atlanta, Georgia is a big multifamily market. There’s lots of multifamily units in Atlanta, Georgia. 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 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 wind up in some kind of a distress, but that would be a major market mover, if 30% of the properties 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 really good basis. Or they’ll sell them at current market value, and probably make a profit based on the spread 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. We had a deal that we sold a couple of 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 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 people are like, “Oh, the market’s not going to crash.” No, I’m sorry to tell you, it’s already crashed. Prices coming down, 20 to 30% has already happened. The question is going to be, do they come down another 10 or 20%? 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%. 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 troughed, and that they’re not going to continue to slide downwards before I’m ready to get in. 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 to ride the bottom.

Matt:
Rather not catch a falling knife. Right?

Brian:
Exactly.

Matt:
Yeah. The data that I’m reading, I mean, man, that sounds crazy for Atlanta. That means, first of all, I’m just going to throw it back at you, what you just said, what I heard, 30% of Atlanta traded in the last three years, right? That’s a lot of real estate. And that means that 30% of Atlanta is in a distressed position.

Brian:
Yeah, 30% of the outstanding multifamily debt is maturing in the next two years. That doesn’t necessarily mean that they traded. They might’ve refinanced, but 30% of the debt is maturing in the next two years.

Matt:
Yeah. Here’s what I’ve read, right? Not everybody is scrappy syndicators like you and me, right? There’s way larger corporations than mine and yours that own thousands and thousands of doors, and these guys are putting in loans backed by insurance companies going in at 50, 55% loan-to-value on their properties, because they’ve owned them. These are legacy assets they’ve owned for way more than 5, 10. They’re buy and hold forever kind of companies. 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 low that, “Oh, I can’t refi out at 55. I’ll have to refi up to 60 or 75.”

Dave:
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 if you guys know, what’s the average length of your term on commercial debt?

Matt:
Five to seven years.

Brian:
Or 7 to 10.

Matt:
Wait, wait, wait, 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 5-to-10-

Brian:
Fair enough.

Matt:
… agency. So meet me at five. You accept my terms [inaudible 00:21:43] percentage.

Brian:
All right, I’ll meet you there. You got it. I got it. Five it is.

Matt:
The answer is five.

Dave:
Okay, 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?

Matt:
I’m going to let Brian answer that one.

Brian:
Yeah, well, the problem is that the debt is coming due at a really bad time. Certainly debt is always mature. That happens all the time, but how often does debt mature that was taken 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.

Dave:
I totally agree with that. I just want our listeners to not be shocked by this number of 30%, and that it’s some unusual thing. Because if you consider five to seven years being the average debt, then always, somewhere between 28 and 40% of debt is always coming due in the next two years. So it’s just something to keep things in perspective.

Matt:
I think it’s somewhat of a shocker number, right, Dave? It is one of those things where it’s like, “We’re at 40%.” And it makes people say, “Oh my goodness, that’s so much debt.”

Dave:
And I actually think, I read something that I also think actually, that number 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, 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.

Matt:
Here’s what I’m hearing. Brian and I are plugged into very lovely rumor mills, and have lots of other friends in the industry. So here’s what the coconut telegraph is telling us that I hear, anyway. Banks are doing workouts. They don’t want these things back, although they’re very pragmatic and very dollars-and-cents-oriented. And if you owe $15 million on a property that is now worth seven, the bank’s probably going to say, “Yeah, probably going to need to go and take that thing back and collect as many of our chips as we can.” But if you are in the middle of a value-add program and you’ve got some liquidity, and you’re doing what you can do, what I’m hearing is that banks are doing workouts. And this is on floating rate bridge deals, right? That’s 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.
I’m talking about this bridge loan that they bought two years ago on an asset that they needed to do a ginormous value-add 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, they’re negotiating. Brian, that’s what I’m hearing. 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 just an insurance policy 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 can show that they’re doing the right thing. And they’re not so far into the hole that 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 am 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.

Brian:
Yeah, the other view is that they can postpone this 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. Something is going to have to happen sooner or later. Because even if the borrowers have to pay higher interest rates and delay rate caps, sooner or 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 here’s 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 they’re getting from depositors. Wherever that money comes from, they might be getting pressure, saying, “You 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, “We can’t just kick the can down the road forever. Something’s got to give.” And that day has to come.

Dave:
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.

Matt:
There are a lot of folks that believe that the Feds saying that they were going to cut rates three times this year that read that. I mean, I talked to one person and said, “Well, they said three, so that probably means nine, right?” Like “What?” We’re not going back to the party time of interest rates being 2.5, 3%. That’s not going to happen again. And if the Fed really does cut rates three times, it’s going to be a dent compared to what they’ve done already. 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 3.5, 4%. I don’t think that’s going to happen.

Brian:
Okay, I’ll take that.

Matt:
Oh, what you got?

Brian:
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 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, 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 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. Doesn’t sound like much, but going from a 4 to a 6 is a 50% haircut in value. Mathematically speaking, you have to cut the price of the property by 50% for the income to go from a 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, 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 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. 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 US. 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. 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 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, 2026, 2027, 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.

Dave:
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?

Matt:
Great question, because unless you’re Brian Burke, you can’t just hang out on the beach and play golf, I mean, 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 market, if they want to get involved in what I think is going to be a changing market, and 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, 30% of the multifamilies in Atlanta are going to be refinancing or with debt coming due, just for example, and that’s probably true in most markets, if you stay market-centric, pick a market. Not 2, 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 going to be trading or what sellers are going to be asking is going to make sense. So I think that you need to be the riches in 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, rebid, 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 cashflow, to other asset classes, including loans. Our company’s getting into issuing loans for cashflow. 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 cashflow on a monthly quarterly basis, because cashflow is what got my company, DeRosa Group, through 2008, ’09, ’10. And it’s what’s going to get folks through 2014, ’15, and into the future, is cash-flowing assets. And not 2, 3, 4% cashflow. Significant, high-single-digit cashflow is what you’re going to need to go after. So that’s what I say you pursue.

Brian:
All right, well, challenge accepted, Matt. So not everybody has to sit on the beach for the next year. I can’t make that claim. I might, and I might not. There might be some opportunities out there to buy this year.

Matt:
You’re too itchy, man. But I don’t see you sitting on the beach.

Brian:
Yeah, probably not.

Matt:
You’re going to be doing it, too.

Brian:
I got to do something. I got to do something. There’s no doubt about that. So here’s my thoughts on this are, if you’re just getting started in real estate investing or you’re just getting started in multifamily, you actually have an advantage over Matt and myself. And that may 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 in large multi. Now I’m not going to go out and buy anything less than a hundred units. For our company, it just doesn’t make sense to do that. Matt is probably somewhere in that zone, too. We’re not out in the duplex, fourplex, 10-unit, 20-unit space.
But 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, that quintessential, as they’ve called, the tired landlord that wants to get out. That’s where the people are searching eviction records to talk to the owner to see, “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. They have a ton of equity, versus the mom and pop landlord that’s owned it for 50 years that has the thing paid off. They could even maybe give you seller financing.
If you want to get started, I would suggest getting started right now on two things. One, 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 a hundred miles an hour with your hair on fire. There’s going to be no time to do that.
The other thing, build all of 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. 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 the relationships. And I think that’s really the play right now.

Matt:
Well said.

Dave:
So Matt, tell us just briefly, what are you going to do in 2024?

Matt:
Great question. What DeRosa Group, our company, is going to do is we’re going to continue to monitor multifamily in 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 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, continue to bid it, and hope that we find something that makes fiscal sense for our investors.

Dave:
And what about you, Brian? Is it just golf this year?

Brian:
Yeah, 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 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 signal, then it’s full speed ahead on searching for upside again.

Dave:
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.

Brian:
Can’t wait.

Dave:
On the Market was created by me, Dave Meyer and Kailyn Bennett. The show is produced by Kailyn Bennett, with editing by Exodus Media. Copywriting is by Calico Content. And we want to extend a big thank you to everyone at BiggerPockets for making this show possible.

 

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