IILIFE

Everyone’s a Star

April 29, 2022
Investing
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Everyone’s a Star

If you’re new to real estate investing you’ve likely attended the typical weekend seminars, bootcamps, and networking events, as well as connected to other investors on social media.  You may even be in awe of how many people appear to be achieving so much success and how easy it all looks. Everyone’s a star.

Are they really?

Coming out of The Great Recession, which lasted from 2007 through 2009, apartment occupancy rates rebounded quickly while apartment market rents slowly, over a period of two years, began to increase. Since roughly 2012 the multifamily market performance, due to many economic factors has been on a steady growth rate which increased exponentially around 2019.
There is an adage, “A rising tide raises all boats”, and this is what you are witnessing. On the surface so many new general partners, with more access to capital than experience, can posit themselves as successful multifamily investors. But let’s look behind the scenes.
First, most of these new syndicators are using elementary level underwriting models that do not allow for a thorough, detailed analysis of all factors that should be considered when purchasing a multifamily asset. These inferior underwriting models produce inflated returns making deals appear sounder than they are.
Second, because these underwriting models produce inaccurate and inflated returns, and because “gurus” provide advice such as “It’s okay to overpay for a deal, the market will catch up”, too many people purchase deals over-leveraged and undercapitalized.
Third, having been a consultant after the purchase for several syndicators I have personally witnessed how assets struggle with lack of cash flow, 90-day past due invoices, liens, and the inability to pay investor distributions.
Despite these issues and because appreciation in key markets is driving value, many of these syndicators who have not paid a distribution to their investors are able to exit deals and claim success at the time of sale.

Real estate is cyclical. History repeats itself. Those who don’t learn from history are doomed to repeat it.

Overpaying for assets is never a sound investment strategy. One shift in the market can quickly push a property into short sale, or worse foreclosure, leaving investors holding an empty bag.

If you’re new to real estate investing, learn from institutional investors, learn from those who have a 20+ year track record in the industry, learn through the Institute of Real Estate Management (IREM) and question everything.

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