2020 was a wild year for the real estate market. The COVID-19 pandemic has affected so many aspects of our society, and real estate was certainly no exception. Along with rising home prices and low mortgage rates, some of the defining themes from this past year have been recording low housing inventory, mortgage forbearance and the foreclosure moratorium. Right after his inauguration, Biden got straight to work requesting federal agencies to extend eviction and foreclosure moratoriums nationwide among dozens of other executive orders since taking office.
The current US housing supply is only at 2.3 months (Washington Post, 2021). This means if no more houses were listed for sale, all current listings would be sold in about 2.3 months. This is less than half of what would be considered a balanced market of 6 months of inventory. One of the reasons for the low housing supply is the fact that mortgage rates are at the lowest in years, with experts saying that they will likely continue to stay low throughout 2021. Low rates, make borrowing money cheaper, and in turn, increases the demand to buy. High demand coupled with a low inventory, causes home prices to skyrocket.
At the same time, COVID-19’s economic impact has caused 2.7 million, or 5.5% of all mortgages in the US to be in forbearance programs as of Jan. 3rd (Reuters, 2021). While this is lower than the peak of 8.6% in June, it still represents a shockingly large amount of mortgages where homeowners are unable to make their payments. What is particularly worrisome is that the homeowners who continue to be in forbearance may be more likely to be in distress as many have been unable to make their mortgage payments for months on end.
Furthermore, the foreclosure moratorium was originally issued on Sept. 4th to help reduce the spread of COVID-19 by reducing homelessness. It has recently been extended until at least March 31st, by the Biden administration (Miami Herald, 2021). This is not the first time it has been extended. In fact, before leaving office, Trump extended the original moratorium that was set to expire on Dec. 31st until Jan. 31st. The question now is: What will happen after March 31st? It is possible that there could be another extension. If so, we will probably continue to experience a low housing inventory. However, if the moratorium does not get another extension in March, we could possibly see millions of foreclosures hit the market in the following months.
This potential increase in supply may cause housing prices to flatten out or even decrease in the months after the expiration of the foreclosure moratorium. Furthermore, it may also provide prospective homeowners and investors more opportunities to find deals, which have been increasingly difficult in many competitive markets. To keep up to date with real estate-related news, and to learn more about real estate investing check out more blog posts and podcasts at https://bulletproofcashflow.com/.
There are so many ways to invest in real estate. You can buy and hold, or Fix and Flip. Some focus on cash flow, while others prefer appreciation. You can invest in residential or commercial real estate. Just as there are many ways to invest in real estate, there are many ways that an investment can go wrong if not carefully executed or managed. Many investors that do not have the time or knowledge to actively invest, opt to invest in real estate syndications. Some of main advantages of investing in real estate syndications include passivity, professional management, and reduced risk.
First of all, it is important to define what a real estate syndication is. The word “syndication” is defined as “the transfer of something for control or management by a group of individuals or organizations”. In the context of real estate, this means that a group of investors will pool their resources together to invest in large deals, such as apartment complexes, shopping plazas, or office buildings. There are many different ways to structure syndications and various minimum investments required, yet the fundamental concept of bringing people’s money together to fund deals remains the same.
Many people think of real estate investing as passive income. While in some cases that can be true, oftentimes it is not. Say you want to buy a duplex and rent it out as an investment. In order to do that you will have to secure funding, find the right property, close on the deal, make any necessary repairs, fill vacancies, and manage the property’s day-to-day issues. As you can see, traditional real estate investment is not so passive as some may think. However, with real estate syndications, the general partner will take care of all the work, while you enjoy the cash flow and appreciation. You will likely have to pay acquisition and asset management fees to the syndicator so make sure to read the fine print and understand how those fees will be structured. However, the fees are typically small enough that you still get a great return on your investment providing you chose a solid syndication to invest with.
Professional management is a huge benefit of investing in a syndication. There are many hassles and headaches to deal with when managing your own rental properties. However, the syndication will have a team in place to professionally manage the asset throughout the entirety of your investment. This helps assure that the property will perform at optimum levels and continue providing investors with great returns.
Risk is an inherent part of any investment. However, investing with a reputable syndicator will reduce the risk by dispersing it between investors. Also, by investing in a syndication you are diversifying your portfolio into asset classes that you may normally not be able to afford to invest in. This diversification reduces your risk in the event of an economic downturn or recession.
If you have some money to invest in real estate, but don’t want to do all the work yourself, investing in a real estate syndication might be the perfect way to diversify your portfolio and passively collect some great returns. We currently have an active deal and are looking for investors to fill a few spots in our latest project. Check out https://www.investinbluestone.com/ to find out more. Also, if you want to learn more about real estate investing and keep up to date with related stories, you can find more articles as well as podcasts at https://bulletproofcashflow.com/.
Do you ever wonder why some people think investing in multifamily real estate is risky but putting money into a tech startup or a Wall Street stock isn’t?
While any investment with the opportunity for a return has some level of risk, the one thing that reduces risk is knowledge. Today, we will talk about the perceptions of the risks of real estate investing.
If this is the first time here, welcome. My name is Agostino and I’m a real estate entrepreneur, syndicator, and investor. In this channel, I share stories, lessons, and advice from my journey in multifamily real estate. If you haven’t subscribed, make sure you push the subscribe button and the notification bell so that you get all the content to stay ahead of the game.
As a real estate investor active on social media, I get calls from time to time from people asking me to invest in their venture or deal. Last time, it was a friend looking for me to invest in their tech venture. This friend has been a successful C-Level executive with several companies and is very familiar with the world of technology and business. He was looking to raise a total of $3.0MM in $100,000 chunks in exchange for a return plus equity in the business. During the conversation, he says, “I know the multifamily real estate you do is very risky as you are handing out some good returns. I figured you may want to invest in something that is not as risky. Maybe you or someone from your investor network may be interested in our tech concept. It’s going to change the world!”
Here is a guy that ran multi-million dollar budgets, international teams and many high-level projects. I’ve known him for a long time and can tell you he is very intelligent. However, he was brainwashed into thinking that real estate is risky. Prior to making my leap into real estate 15 years ago, I didn’t even consider real estate as something to invest in. Besides, the perceived risk level of sitting on a mortgage in the hopes that the tenants would cover it was a scary thought.
I began to understand the nuances of the business once I got into the real estate game. I started with single families and small multifamilies. I studied everything I could about real estate and spoke to mentors to get a deep understanding on how to purchase and operate deals large and small. Today, my team and I run our real estate portfolio as a business. I don’t do e-commerce, bitcoin or own a retail shop. All I do is real estate. My team and I are all in. I don’t consider any investments that deviate from my objectives.
Getting back to the conversation, I decided to address the risk of real estate. I asked him: “When was the building you live in, built?” He responded, “Maybe, 30 years ago”. So, for the past 30 years, that building has been throwing off cash. For 3 decades – every single month there was cash flow. Then I asked him, “Do you think that building will be around in another 30 years?”. He says, “I imagine so”. By that logic, that building will continue cash flowing for another 3 decades. I know where his building is and I know that as long as they operate the property well, it will continue performing.
When I look at an investment, I have two strict criteria: 1) I want capital preservation and 2) I want cash flow. Of course, there are the tax benefits and forced appreciation, but that’s the icing on the cake. I want to know that the cash we are putting into the asset will outpace inflation and still get us cash month over month. This is what we offer our investors as a way to preserve their wealth and offset earned income from the taxman while diversifying from risky stocks and indexes.
To me, stocks are a risky endeavor because I don’t know what kind of return I will expect the first week of the month. But, I can tell you that in my 126 unit apartment deal, I will have $90,000 in rents coming in next month. Your 401k can’t tell you that and neither will your stock. What’s more, if a tornado swept in from the sky and took out that entire building, insurance would not only cover loss of rents but also give us the cash to rebuild that property.
My background is in engineering technology, so I understood the tech my friend was pitching and it’s really interesting, but it’s a somewhat risky proposition. I don’t know if any of my investors would want to invest in something like that – especially since they are looking for reliable and steady cash flow. Sure, a multifamily deal may not be as sexy as a Silicon Valley startup, but the assets we invest in are real and will be around for decades to come.
With that, I told my friend that I would have to pass on the tech venture and will stick to the slow and steady cash flow of multifamily real estate. As I said, it may not be as fun as venture capital investing or trading stocks, but everyone has different risk tolerances.
Anyway, do you think stocks are a safe bet? Let me know in the comments.
And if you liked this content, go ahead and give it a thumbs up and share it. Also, check out the Bulletproof Cashflow podcast on iTunes or Stitcher, and subscribe to our YouTube channel and don’t forget to hit the bell so you get notified when we post new videos. If you are looking for more content or coaching, reach out to us at BulletproofCashflow.com. We are working on getting new content out all the time to help you build your success in the world of multifamily. Be great.
Imagine this. Sixty days ago, you decided to rehab a property. But, you have already put a lot of cash into the deal – about the same as others on the market – and it’s still not done! What’s worse, you think you are still months away from completion. And yet, you are still putting time, money and energy into the failing deal. You may say, “I can’t quit now. I’ve already invested so much into the deal!”
Welcome to the interesting and annoying world of cognitive biases. These cognitive biases only exist in our heads, but they affect everything we do – from how we live, how we work and even how we invest.
As humans, we did not evolve to make logical decisions like a computer. We evolved to survive. Our brains evolved to expend as few resources as possible to conserve energy. To improve our ability to respond to external stimuli efficiently – as an attack by a hungry lion or spending days foraging for food – these biases helped us by providing shortcuts to keep us safe and alive. Think of cognitive biases as mental shortcuts designed to help us survive the hunter-gatherer world from tens of thousands of years ago. In today’s modern world, we do not have these concerns. Many of our scenarios demand more rational calculations than supporting the skills of hunter-gatherers. So, most times, we are left frustrated when what we think is best doesn’t get us the result we want or expect.
While we can’t eliminate our cognitive biases, we can better understand them and even use them to our advantage, not only for ourselves but also as it impacts others.
Here are three cognitive biases that will impact us as investors and some tools that can help you keep them in check. I’m not going to go deep into the science behind why these biases exist – unless you want me to. And if you do, leave a comment and let me know. I can expand on the topic and tell you about other biases that impact how we live.
1) The Anchoring Effect
The anchoring effect happens when we give priority to the first information we encounter – even when the information we uncover later is much more relevant or applicable.
We tend to be overly influenced by the first piece of information that we hear. For example, a broker reaches out to you about a pocket listing and throws out a price. With the anchoring effect, they have now set the expectation of what the sale price should be. That sale price becomes the anchoring point from which all further negotiations are based regardless of what your inspection or appraisal says. This is a common tactic in our line of business. It becomes even more important to bid according to your predefined criteria and not overpay. You need to stick to your metrics and not justify price based on emotion or justifications by the broker.
2) Optimism Bias
The optimism bias is our tendency to overestimate the likelihood that good things will happen to us and underestimate the likelihood of anything bad happening to us. We assume things like a job loss, divorce or even death will happen to someone else, but never to us. On the flip side, it’s worth noting that the optimism bias helps us create excitement for the future, especially as it relates to goal setting. This bias keeps us engaged and moving forward to achieve our goals.
The optimism bias helps us as entrepreneurs to push the limits when it comes to taking risks and driving innovation. Optimism is important to helping us find success, but if we get overly optimistic it can be a huge waste of time, money and resources. For example, you buy into a broker’s report of how a building is in an “up and coming” neighborhood. But, there are rough areas less than one block away. So, while you see great things happening in the nearby neighborhood, there are gunshots and crimes happening nearby. Instead of succumbing to the optimism, you need to be skeptical of the rosy expectations. Anticipate and budget to assume it will be more difficult and expensive than you think. Good ideas need hard work rather than just positive thinking.
3) Sunk Cost Fallacy
The sunk cost fallacy describes our inclination to commit to a project, person or thing because we have invested time, money or resources into it – even if it would be better to cut our losses and move on.
This is the bias I touched on at the beginning of this episode. You commit to personally rehabbing a property. You pour thousands of dollars into the deal and spend nights and weekends working on it. You are still months from being completed yet you have already exceeded the amount you can sell it for today. But you’ve spent so much time and money on the rehab, that you continue to put more resources into it, instead of selling the property to a contractor with the means of finishing it. In such a case, it would probably be best for you to cut your losses.
Commitment is important and required to have any degree of success in business. However, there is a fine line between determination and becoming a victim of the sunk cost fallacy. To avoid getting hit with the sunk cost fallacy, it is best to look for new evidence that it may not make sense to continue and act on it. Follow your projects closely and determine how it’s tracking to budget – especially where there should be a return. If the return does not materialize, it is best to get out of the deal and hand it off to someone that can handle it before it consumes all your resources.
Those are only three of the many cognitive biases that drive our everyday lives. These cognitive biases influence our thoughts, and this translates into our overall decision making. It happens automatically – unless we control what that thought process is and we catch it. Understanding these biases and learning how to control them will help in making better investments.
Anyway, have you ever fallen prey to these cognitive biases? Do you want me to cover others? Let me know in the comments. I can’t wait to chat with you there!
The general consensus among most investors and economists is that there is a recession coming. The question is when. The great thing is that there are ways to prepare for it.
Industry experts say that multifamily occupancy and returns will be fine in a recession. Today, we go into why the experts think this and I will give you three reasons why multifamily makes for a recession-resistant investment.
If you are new here, my name is Agostino and I’m a real estate entrepreneur, syndicator, and investor. I like to share stories, lessons, and advice from my journey in real estate, particularly, multifamily real estate, and I enjoy helping others to get into the business. I do that through the Bulletproof Cashflow social media channels and through coaching, both online and in person. If you haven’t subscribed, do that now and turn on notifications so that you don’t miss anything. Also, I’d love to know who you are and what you’re up to, so say hi on social.
If you’ve gone through an economic crash, you may already know that rising prices, a sharp rise in bankruptcy and high unemployment make people stockpile cash and causes others to panic – and for good reason. There is no predictability. For those that went through the last crash, many of those who lost their entire life’s savings still have not recovered to this day. You need a safer instrument to protect yourself. You need something that is much more predictable.
This means investing in the right asset classes. For instance, vacation homes were hit hard in the 2008 crash and in past recessions. This is because in tough times, an owner will make the payment on their primary residence before paying the mortgage on a second home. It may be possible to do Airbnb, but we have yet to see how that fares in a recession. Another example is small retail. If a small business, like an independent cafe, bookstore or retail shop has a hard time weathering an economic slowdown, you would have a vacancy on your hands. And depending on location, some of those commercial spaces stay vacant for a very long time. This translates into no cash flow.
Investing in cash-producing real estate – specifically multifamily – is where many store their wealth. This is not only for the returns and tax benefits but because of what happens in a recession. People lose their houses or lose their jobs. They need to rent until they get back on their feet.
Reason 1: People rent during a recession, or move to a lower class rental
When we are talking recession-resistant multifamily though, we are not talking Class A deals – those beautiful luxury places with the resort-style pool, clubhouse, fitness centers, and a doorman. If anything, Class A is getting overbuilt and the rents are high. Even today, there is so much competition that people in two-year-old Class A properties are moving to brand new Class A’s. In a downturn, these affluent residents may experience an income hit and move down to a Class B apartment unit.
This is what happened in the previous recession and it is bound to happen again. According to economists at RealPage, they have seen owners of Class A apartments cut their rents to pull renters from Class B properties. This is something to keep an eye out and is an indicator as more of these high-end units are built up.
Even with these weaknesses, during good economic times these Class A’s will find people to move into the units. These new developments are typically in upscale downtown markets, where there are plenty of jobs, local amenities, and nightlife. The major cities, like New York, Chicago, and Miami are attractive places for great talent – something employers need during any market cycle. Things will change in terms of income of the tenant profile when the slowdown hits. This needs to be considered. And this is what makes Class B & C properties recession-resistant.
Reason 2: People losing their houses will move to a rental
No matter what happens in the economy, people will always need a place to live. When there is an economic slowdown or recession, people tighten their belts. Those that are in Class A units move to a Class B. Those that are in a Class B move to a Class C. In the last recession, there was an explosion in foreclosures. People needed rentals because they either lost their homes or just walked away from them. The need for multifamily housing increased. This caused multifamily owners and landlords to keep their rents where they were, to keep vacancies low.
Reason 3: Renting is already popular
Many are forgoing home and condo ownership for the convenience of living without the long term commitment of a mortgage. While the homeownership rate is at its lowest rate since the 1960s, people are migrating to apartment living. Many of these people that are taking on all these apartment units are the Gen Z and young Millenials. This group of people is the up-and-coming workforce looking for workforce housing. They opt for affordable Class B & C properties close to their jobs and local amenities. If they want to leave their jobs, they can break their lease and move across the state for a new job. Needless to say, these B & C properties will always be the best play for multifamily rentals because these less expensive units benefit from very strong demand in good economic times and in bad.
So, what’s my strategy?
These are the properties that my partners and I primarily focus on. Class B & C properties will continue to perform through a cycle without the volatility and risk of a Class A or a Class D – which I just don’t invest in at all. These properties are usually referred to as “workforce housing” because it offers affordable housing to hardworking people that want a safe and nice place to live, raise their families and call home. These B and C units will rent for anywhere between $500 and $1,400, depending on where the property is. In both cases, these people rely on employment income and live a month to month paycheck. For a breakdown on the different classes, I created “A Guide to Multifamily Classifications” and will include a link in the description.
Our acquisition strategy is to control all aspects of the deal to drive revenue and appreciation. We control the acquisition process, renovation, and property management. Through the due diligence process, our experience tells us what is likely to hit our financial targets. And because we are active in the market, we know how to execute on these deals. When we acquire and renovate the property, make improvements that maximize revenue for that specific asset class. Through efficient management, we work to reduce delinquencies and vacancies by improving the community. Over time, the assets we invest in are worth much more than what they were acquired for and that hits the bottom line for our investors. This strategy has mitigated risk and provides a track record of consistent returns while generating cash flow and returns for our investors. This will matter a great deal when we are in the throes of a recession.
If you like my strategy, feel free to follow it on your own, or you can reach out to me to invest in one of our deals or to be coached by me.
Anyway, what do you think? How are you preparing for the next crash? Let me know in the comments. Also, let me know if there’s a topic you’d like me to cover!
And if you liked this content, please give it a thumbs up and share it. Also, check out our social media channels and if you are on YouTube, don’t forget to hit the bell so you get notified when we post new videos. If you are looking for more content or coaching, reach out to us at BulletproofCashflow.com. We are working on getting new content out all the time to help you build your success in the world of multifamily.
Getting the right financing for your property purchase is one of the most important things you’ll do when putting a deal together. Getting the right amount of debt along with the best rates will impact your cash flow and your returns.
Today, we go into what you should look for when putting a deal with your biggest partner in your income-producing deal: the bank.
If you are new here, my name is Agostino and I’m a real estate entrepreneur, syndicator, and investor. I like to share stories, lessons, and advice from my journey in – real estate, particularly, multifamily real estate, and I enjoy helping others to get into the business. I do that through the Bulletproof Cashflow social media channels and through coaching, both online and in person. If you haven’t subscribed, do that now and turn on notifications so that you don’t miss anything. Also, I’d love to know who you are and what you’re up to, so say hi on social.
For starters, this discussion is centered around income producing properties. A home is not part of this discussion because a house does not produce any cash flow. In fact, it is a way for a bank to hold your money hostage and just means dead equity for you. I explain more of that in a video I will link in the description, but in short, you have all that down payment locked up in a house that you cannot invest.
On an income producing asset, like a multifamily property, cash flow is coming to you month over month. This is the reason banks will partner and bring money to your deal. Getting this loan is not just based on your credit, it’s based on the property’s income. While commercial loans are tougher to get than residential ones, they are not impossible.
After you find the deal and negotiate the price, getting financing in place becomes key. Each lender is different and will adjust their rates depending on the deal and how they feel about the risk level.
Conceivably, you already have a banking relationship before you land a deal and you have already vetted the bank and the ability to perform. Doing this work upfront with a banking relationship manager will help in getting any proof of financing you may need when submitting LOIs on your deals.
The bank is going to look for these four things, in order of importance:
Your net worth.
Your personal credit.
Your personal background (bankruptcy, liens, criminal, etc).
Your track record with similar assets, in this case, multifamily assets.
If you are new to the game and are already discouraged thinking that you will never get into your first deal, don’t worry. You can partner with someone that can offset the deficiencies in your net worth or credit. In this case, you can give the partner equity in the deal and the bank will look at their financial background to get the deal done. If you do this, be sure you are also bringing something to the table other than the deal itself, like sweat equity, property management or raising the equity. Ultimately, the bank is looking for certainty when it comes to financing a deal.
If the bank is comfortable with these four things, they will present various financing options. Many times a bank will offer an interest-only loan with only a few points above Treasury rate. These days, many investors are getting up to 4 years of interest only money on larger deals greater than 100 units. This is great for cash flow while you improve the property to raise the NOI and overall valuation. Again, all this depends on the lender and you will need to compare rates to find the best loan and length of term for your deal.
From there, the leverage will come into play. Meaning, how much will the bank lend and what do you need to bring as a down payment. Unlike buying and financing a home, we don’t care too much about paying down the principal. In the case of a commercial loan on a cash producing property, it’s about how much NOI it generates. As the property’s value appreciates, you keep pushing rents up and keep expenses in line, you increase cash flow. This flow covers the debt payment and gives you passive income. There is no value in paying more to bring the debt down. This is why those interest only loans I mentioned a bit ago are so interesting.
Because financing is so important in these types of deals, spend time negotiating financing rather than being so focused on the price. Lenders will sometimes make you believe that these rates and terms are not negotiable. This is not the case, specially on larger deals. This is also why you should vet the bank early and establish a relationship so they can independently underwrite deals you are considering and do the legwork to get the best financing they can. A difference of just a quarter of a percentage point in the interest rate can mean paying thousands of dollars more a year.
Anyway, do you have a good banking relationship already in place? Are you looking for a lender to back one of your deals? Let me know in the comments. I can’t wait to chat with you there!
And if you liked this content, go ahead and give it a thumbs up and share it. Also, check out the Bulletproof Cashflow podcast on iTunes or Stitcher, and subscribe to our YouTube channel and don’t forget to hit the bell so you get notified when we post new videos. If you are looking for more content or coaching, reach out to us at BulletproofCashflow.com. We are working on getting new content out all the time to help you build your success in the world of multifamily.