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3200-Units Foreclosure Key Takeaways for Operators and Passive Investors

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Passive Investors from Houston Multifamily Foreclosure As the whole Multifamily Industry knows, there was a foreclosure of 3200 Units with $229 million of debt in Houston by Arbor Realty from a private Deal Sponsor from Dallas. These properties were bought between August 2021 and April 2022. The Deal Sponsor defaulted on their mortgage payment. The investors from that deal have alerted their friends about the potential foreclosure two weeks before it came out on Twitter . This news eventually came out in Wall Street Journal.  As per Trepp Inc, these properties’ cash flow went from 3.8% to more than 8% due to the rapid interest rate hike by FED. While the interest rate hike by the Fed has caused this property to be further under distress, many other factors have caused these Deal Sponsors to face foreclosure. We have a written 10-series article that we wrote so that any passive investor can learn and avoid investing in this kind of Deal Sponsors. Bridge Loan with No Rate Caps As per the chart below from Howard Mark’s book “The Most Important Thing”, Non-Recourse Bridge Loan stacked with Preferred equity without a rate cap.   As you can see it’s considered the highest risk deal type. Preferred equity is a private institutional group that acts like a lender but holds a second position in the capital stack. Preferred equity usually charges a fixed 12-14% interest rate with 1%-2% when the deal is initiated and exited. Usually, preferred equity is used behind common equity (normal retail investors) to boost back-end profit. It’s also used when the sponsor can’t raise a large sum of equity from retail investors. The pitch to the investor is the deal has a lot f upside that even after paying the fixed return to the pref equity group, there will be a lot more upside to common equity.  I attended a webinar where the presenter declared using preferred equity is the way to do deals in 2021. To survive market fluctuations an operator needs to be disciplined and stick to their stringent underwriting criteria. However, when the buying spree seems to be forever, many operators start to do deals at any cost. This includes taking Bridge loans for a deal that does not have significant value-add. I call it a misuse of loan type. I see many cash-flowing deals with thin upsides were bought using bridge loans. Of course, when the Deal sponsor raises the capital, they declare their deals are value add. The question is how big is the upside? In the worst case, some Deal Sponsors did not even take a rate cap insurance.  After the year 2020 to mid-2022, the value of the multifamily assets has gone beyond its intrinsic value. Fannie Mae and Freddie Mac lenders have almost gone out of business as the only way to make any deal work is to get a bridge loan since it’s a forward-looking upside loan. Furthermore, many Deal sponsors didn’t realize that the rate is variable. When the interest rate skyrockets, most of them are caught unprepared. The smarter and more conservative one invested in rate caps insurance since it was affordable then. The aggressive or less sophisticated Deal Sponsors decided not to buy rate caps due to ignorance or they even can’t raise the capital for equity. Most lenders will require rate cap purchases as a mandatory requirement. In the Houston Foreclosure case, looks like the lender didn’t require the sponsors to buy rate caps. Furthermore, Bridge loans were used for Deals that is not for value add. At Achieve Investment Group, James Kandasamy Texas, we are proud to say that we only have 1 bridge loan (with a rate cap of course) out of our 15 multifamily deals that we have and have done. Even that bridge loan is a true Deep value add deal. We could have done many more deals from 2020 to 2022 by taking Bridge Loans for all kinds of think upside deals as many passive investor capital were easily available. We were well aware that Bridge loans pose risk and need to be used appropriately for true-value add deals. I wrote about this on page 68 of my 2019 Bestselling Book “Passive Investing in Commercial Estate”.    Action Item for Passive Investors For passive investors, it is important to consider passive real estate investing as a potential option, Make a list of your investment to identify bridge loans, whether there are rate caps, when the rate cap expires, and whether the deal has a preferred equity between You (common equity) and the Senior Lender. I am sure you will be surprised! 

Maximizing ROI in Real Estate: A Guide for Investors

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When you purchase a property as an investment, one of the most important metrics is the Return on Investment (ROI). The ROI tells you how much profit you’re making on a property. What is ROI? Return on investment is the money that is made through real estate investments. It is a measure of how much money has been earned compared to the amount of money invested. If a property earns more than its cost, you have an investment that provides a positive return. Conversely, if it costs more to own than what you earn, you have negative returns or losses. Factors that can affect ROI in real estate include property condition, location, market conditions, financing options, and property management. Therefore, real estate investors should consider all these factors when evaluating potential investments and aim to maximize ROI through careful research, strategic buying, and long-term holding. How to Calculate ROI in Real Estate? Return on Investment (ROI) is a measure of the profitability of an investment. For example, in real estate, the ROI is often used to calculate the profitability of property investment. To calculate the ROI on a real estate investment, you need to determine the property’s net operating income (NOI) and the total investment costs. Net Operating Income (NOI): NOI is the property’s income from rent and other sources minus operating expenses such as property taxes, insurance, and property management fees. NOI = Gross Income – Operating Expenses Total Investment Costs: Total investment costs include the purchase price of the property, closing costs, repairs and renovations, and any other costs associated with the acquisition of the property. Return on Investment (ROI): Once you have determined the NOI and total investment costs, you can calculate the ROI using the following formula: ROI = (NOI / Total Investment Costs) x 100 For example, if a property has an NOI of $50,000 and total investment costs of $250,000, the ROI would be 20% (50,000 / 250,000 x 100). Related: Cap Rates vs. IRR in Commercial Real Estate Investments How to Find Your Return on Investment (ROI) Finding your return on investment (ROI) in real estate can be more complex than other investments. However, here are the steps you can take to calculate your ROI on a real estate investment: Determine the property’s net operating income (NOI): NOI is the property’s income from rent and other sources minus operating expenses such as property taxes, insurance, and property management fees. To determine the NOI, you’ll need to know the property’s gross income, which includes all rent and other income, and its operating expenses, which include property taxes, insurance, and property management fees. Calculate the total investment costs: Total investment costs include the purchase price of the property, closing costs, repairs and renovations, and any other costs associated with the acquisition of the property. Make sure to include all costs, including financing costs, such as interest and closing costs. Calculate the ROI: Once you have determined the NOI and total investment costs, you can calculate the ROI using the following formula: ROI = (NOI / Total Investment Costs) x 100 Take into account the holding period: ROI is a metric used for short-term investments; for long-term investments, the internal rate of return (IRR) is a more appropriate metric. IRR accounts for the time value of money and cash flow over the holding period. Analyze the cash flow: Cash flow is the money left after paying all the property expenses. A positive cash flow means that the property generates more income than expenses, while a negative cash flow means that the property generates less income than expenses. Consider the appreciation potential of the property: Appreciation is the increase in the value of a property over time. Appreciation can be caused by factors such as improvements to the property, changes in the local real estate market, and inflation. Consult with a professional: It’s important to consult with a real estate attorney or accountant to ensure that you know all the legal and tax implications of investing in a property. They can also help you to calculate the ROI, IRR, and other relevant metrics for your specific investment. Various Methods for Calculating ROI in Real Estate There are different ways to calculate ROI in real estates, such as the Capitalization Rate (Cap Rate), Cash on Cash Return, Internal Rate of Return (IRR), Gross Rent Multiplier (GRM), Price-to-Rent Ratio, and Appreciation. Each method provides a different perspective on the performance of the investment and can be used depending on the type of investment and the investment goals. Capitalization Rate (Cap Rate): This is calculated by dividing the net operating income (NOI) by the property’s purchase price or current market value. A higher cap rate indicates a higher return on investment. Cash on Cash Return: This is calculated by dividing the annual cash flow generated by the property by the amount of cash invested. This metric is useful for evaluating the performance of rental properties. Internal Rate of Return (IRR): This is a more complex metric that considers the cash flow, the time value of money, and the investment’s holding period. IRR is often used to evaluate the profitability of multiple-year investments. Gross Rent Multiplier (GRM): This is calculated by dividing the property’s purchase price or current market value by the gross annual rental income. A lower GRM indicates a higher return on investment. Price-to-Rent Ratio: This compares the purchase price of a property to the annual rental income it would generate. A lower ratio indicates a better return on investment. Appreciation: This is the increase in the value of a property over time. It can be calculated by comparing the purchase price to the current market value or future expected value. Final Thought The ROI in real estate varies widely depending on the market and the property, but you can find a general benchmark by looking at investment property averages across the nation. By doing research in your area, you can determine if the numbers make sense for … Read more

Top 5 Ways That ChatGPT Will Improve ROI In The Multifamily Commercial Real Estate Market

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The multifamily commercial real estate market is one of the hottest industries in the country. According to data from Yardi Matrix, there are over 20 million units in this space, with more than $1 trillion in transactions taking place every year. This is a highly competitive field, so if you want to stay ahead of the curve, you must do everything possible to improve your ROI (return on investment). Thought you might find the answer interesting in terms of Ai trends in CRE: ChatGPT can potentially improve return on investment (ROI) in this market. ChatGPT is the new and improved version of the classic chatbot. It combines artificial intelligence and natural language processing, enabling it to understand human language and respond accordingly in real-time. ChatGPT provides an incredible ROI in the multifamily commercial real estate market by improving customer service, increasing business productivity, and reducing operational costs. The top five ways that ChatGPT will improve ROI are: Automated property management: ChatGPT and other AI technologies can be used to automate various property management tasks, such as rent collection, maintenance requests, and tenant communications. This can save time and reduce the need for human labor, potentially improving ROI by lowering operating costs and increasing efficiency. Predictive analytics: ChatGPT and other AI technologies can be used to analyze large amounts of data and make predictions about market trends and tenant behavior. This can help investors make more informed decisions about where to invest and how to manage their properties, potentially improving ROI by identifying opportunities for growth and minimizing risk. Enhanced customer service: ChatGPT and other AI technologies can be used to provide fast and accurate answers to tenant inquiries, improving the overall customer experience and potentially increasing tenant retention rates. This can lead to higher occupancy rates and rental income, improving ROI. Improved security: ChatGPT and other AI technologies can be used to monitor security cameras and detect potential threats in real time, improving the safety and security of multifamily properties. This can help protect investments and reduce insurance costs, potentially improving ROI. Better tenant screening: ChatGPT and other AI technologies can be used to analyze tenant applications and other data to identify the most qualified and reliable tenants. This can reduce the risk of defaults and evictions, improving the overall performance of multifamily properties and increasing ROI. Overall, ChatGPT and other AI technologies have the potential to improve ROI in the multifamily commercial real estate market by automating tasks, providing insights, enhancing customer service, improving security, and better screening tenants. However, it is important for investors to carefully evaluate the potential benefits and risks of using these technologies and make decisions based on their own goals and circumstances. Join Us For A Daily 60-second Coffee Break Series For Passive Investing In Commercial Real Estate With James Kandasamy, The Best-selling Real Estate Author And Mentor.

As Interest Rates Climb, What happens to Rental Property’s Bottom Line?

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2022 has brought about some of the highest rates from the Fed in the past 40 years. Which brings about many questions for real estate investors. Will this push us into a recession? What will this mean for the housing market, mortgage rates, and rental investments? To start; as rates increase it’s important to bear in mind that investment loan rates will always be higher than a traditional mortgage to begin with. As a general rule of thumb, you can expect investment loan rates to be approximately 0.50% to 0.75% higher than a primary mortgage rate. In our current market, both home prices AND financing prices are on the rise simultaneously. Which means that people aren’t just being pushed into a less expensive home, some are pushed out of purchasing a home altogether. So, what do they do? They continue renting. Rental markets and the home purchase market are very tightly linked. Therefore, we can determine based on historical data in similar market climates, the coming years will have a large and increasing market of renters. Making having a real estate investment a wise one indeed. The demand for housing will remain high and along with that, high rent prices. This recent Zillow report shows how increased mortgage rates correlate with average rents, moving from $1,600 per month in February 2022 to $2,000 in August 2022. Source: Zillow Economic Research So what does this mean for Rental Property Owners or those involved as passive Real Estate Investors? The bottom line is that when the Federal Reserve interest rates go up, it can actually be a very good thing for real estate investors, particularly multi-family. The first reason is that the market for multifamily apartments will increase as many people will either not qualify or cannot afford a mortgage on a primary residence. The standards for lending go up significantly during this climate of rates increasing. Mortgage lenders who previously pre-qualified home shoppers will have to recalculate, often leaving a lower number of qualified home buyers. The second thing to consider is that while the housing market boom appears to have stabilized, the prices of homes remain at historic highs. Coupling that with the rising interest rates results in rental costs being favored over a mortgage payment. Therefore indicating that real estate investments will continue to perform well. Individuals and families now postponing house hunting still need a place to live. The market for tenants now looking for a place to rent is bigger and will expectedly climb. When you piece together what a rising Federal Reserve rate does to the housing market and mortgage rates- it may signal a great opportunity for potential investors to dip their toe into the real estate investment market or for those already in the game to consider expanding their holdings. The foreseeable future holds a new stream of tenants and a strong future for real estate investment. Historically real estate has always been a strong hedge against inflation. To learn more about our current passive investment opportunities, please Schedule an investor introductory session

How To Underwrite a Multi-Family Deal

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underwriting multifamily deals

Multi-family deals are one of the most popular investments for real estate investors. Unlike single-family homes, multi-family properties have several units and can help diversify your portfolio. However, underwriting a multi-family property is different than underwriting a single-family home. The first step is to learn how to underwrite a multifamily property. This includes understanding how to calculate the value of the property, what expenses are involved and how to determine if the tenants will pay their rent on time. Underwrite a Multi-Family Deal in 6 steps Step 1. Cash Flow The first step in underwriting a multi-family deal is to evaluate the cash flow. The cash flow is the difference between income and expenses, which is profit or loss. So, if you take all the expenses and subtract them from all the revenues, what do you get? If that number is positive, then you have a profit. If it’s negative, then you have a loss. The cap rate is a measure of how much the building will earn on an annual basis, expressed as a percentage of its value. For example: Let’s say that your property has 100 units, each with an income of $1,000 per month and expenses of $800 per month. So your total income would be $100,000 per year (100 x $1,000) and your total expenses would be $80,000 per year (100 x $800). Your cash flow would be $20,000 ($100,000 – $80,000). Step 2. Cap rate? The cap rate is the most important metric in real estate underwriting. It is the rate of return you expect on your investment, and it is calculated by dividing the net operating income (NOI) by the sale price of your property. This calculation will tell you how much money will be left over after all expenses are paid. The second step in underwriting a multi-family deal is to determine the cap rate. The cap rate is the ratio of net operating income (NOI) to the value of the property. Cap rates are used by lenders and investors to determine whether a property is worth purchasing. The formula for calculating the cap rate is: Cap Rate = Net Operating Income / Property Value For example, if you have a property that generates $1,000 per month in NOI and it costs $100,000, then your cap rate is 10%. This means that you would need to pay at least $10,000 per year (1% of $100,000) just to cover your mortgage payment and maintain current operations. Step 3. Net Operating Income Ratio (NOIR) The third step in underwriting a multi-family deal is to look at the Net Operating Income Ratio (NOIR). This ratio measures how much of your net operating income goes towards paying for your debt service (including principal and interest). You want this ratio to be as high as possible because it means that you are using less of your income just paying off debt instead of investing it back into your property or throwing it away on other expenses related to operating your business. Net Operating Income Ratio (NOIR) is a measure of the ability of a property to pay its operating expenses. It is calculated by dividing the Net Operating Income by the total value of the property. The formula is as follows: NOIR = NOI/Property Value The higher the NOIR, the better the deal. For example, if a property has an NOI of $50,000 and its value is $1 million, then its NOIR would be 5%. Step 4. Determine occupancy rate One of the most important factors in underwriting a multi-family deal is understanding occupancy rates. If the building is occupied at 90%, that means there are 10% of the units available for rent. If there are 40 units in the building and 10 of them are vacant, that’s only an occupancy rate of 30%. In this case, it’s unlikely that investors would be interested in purchasing the property because they would have to bring in tenants before they could make any money off it. This can be especially tricky if you’re buying a distressed property where tenants have already moved out or been evicted due to non-payment of rent or other issues. The occupancy rate gives you a rough idea of how much revenue will be generated by your property. The higher the occupancy rate, the more revenue you can expect to generate from your investment. The main factors that determine occupancy rate include: Location – A desirable location will have higher occupancy rates than an undesirable one. For example, if you own an apartment building in the heart of New York City, then you can expect much higher occupancies than if you owned one in a rural area without many amenities nearby. Rent levels – The rent level determines how desirable your property is to potential tenants and therefore influences its occupancies rates. High rents also increase your profit margin because less money has to be spent on marketing efforts and rent concessions (such as free months). However, high rents also mean higher vacancy periods which will reduce your overall income from your property over time Step 5. Calculate expenses: When underwriting a multi-family deal, it’s important to understand how expenses are calculated and what they include. Expenses can be broken down into two categories: operating expenses and debt service. Operating expenses include items such as taxes, insurance and utilities. Debt service includes the mortgage payment, property taxes and any other obligations that must be paid on time by the owner of the property. Calculating operating expenses can be complicated because there are many factors that go into determining what a fair rent is for a unit. If you don’t calculate these figures carefully, you could end up paying more than your expected return or losing money on the investment all together. To calculate operating expenses, you must first determine how much income your property will generate each month. This can be done by analyzing similar properties in the area or using an online rent analysis … Read more