Andrew Cushman, a multifamily real estate investor with a background in chemical engineering, dives into the tumultuous world of multifamily investments. He reveals the harsh realities of the current market, where many passive investors face significant losses. Cushman breaks down essential concepts like NOI and cap rates, explaining how rising interest rates are reshaping property valuations. He shares insights on navigating capital calls and the importance of thorough vetting in syndication deals, offering valuable lessons for aspiring commercial investors.
The multifamily real estate market is facing significant challenges due to rising interest rates, leading to negative cash flow for many operators.
Investors must exercise caution and thoroughly vet operators, as trust in their expertise is crucial for the success of multifamily syndications.
While market conditions are tough, high demand for quality properties in reputable areas persists, highlighting the importance of strategic investment choices in evolving markets.
Deep dives
Understanding Multifamily Syndications
Syndications allow investors to pool resources to participate in larger real estate deals that would be unattainable individually. This structure enables limited partners to invest in substantial assets, such as 200-unit apartment buildings, without the need for personal involvement in management or administrative duties. The operator is responsible for acquiring the property, running it, and eventually selling it, distributing profits to investors. It is crucial for investors to trust the operator, as their expertise significantly influences the success of the investment.
The Impact of Rising Interest Rates
The increase in interest rates has led to a significant slowdown in multifamily real estate transactions, creating a challenging environment for investors. Many properties that were acquired with low interest rates are now struggling as they face refinancing at much higher rates, resulting in negative cash flow for many operators. The current market is characterized by stagnant values and decreased demand, with many buyers unwilling to meet sellers' inflated expectations based on historical pricing. This shift has resulted in a freeze in the commercial real estate market, heightening caution among potential buyers.
Recognizing Red Flags in Capital Calls
When operators invite investors for additional funding through capital calls, it raises critical concerns for limited partners. Investors must assess whether to contribute more money to potentially salvage a struggling asset or to cut losses, grounding their decision in the operator's trustworthiness and the property's overall prospects. A significant red flag is the introduction of third-party preferred equity, which can dilute original investors' positions and signal deeper issues in management. Understanding the operating agreement's terms and how the capital is being utilized becomes essential in these scenarios.
Assessing Market Conditions and Property Value
Current conditions in the multifamily space reveal that while the economy and rental market are evolving, prices may not significantly decline. The demand for quality properties in reputable areas remains high, with limited options available slowing down the transaction pace. Market fundamentals, such as operational efficiency and development in underlying neighborhoods, affect growth potential and thus the overall investment appeal. Identifying class B and A properties in areas of positive population growth and increasing median income can lead to stable, long-term benefits despite market fluctuations.
Strategies for Future Investments
Investors entering the multifamily market need robust screening processes and criteria to select operators and properties effectively. A thorough vetting of operators, including background checks and assessments of past performance without solely relying on inflated marketing materials, is essential to ensure a trustworthy partnership. Additionally, examining realistic assumptions for rent growth and property valuation will help in making informed investment decisions. Adopting a conservative approach towards risk while focusing on affordability and location will enhance the likelihood of successful returns in the long run.
Multi family bloodbath! Commercial investors know, but if you focus on residential real estate, you likely have NO idea how bad it is in the multi-family and triple net space-until you watch today’s show. Andrew Cushman, my friend and investing partner, pull back the curtain and share what’s going on in the multi-family space and why people are losing so much money but nobody is talking about. In todays’ show we break down how to understand how commercial property is valued, what terms like NOI and CAP rate mean, and how interest rate fluctuations wreak havoc or create paradise for commercial property operators. We also share how many “passive” investors have lost their entire investment getting into these deals, and how some are being pressured to lose even more than they put in. If you’ve ever been interested in how multi-family investing works, or thought about making the jump from residential to commercial, today’s episode is an absolute must listen. Sharing the info you need with no agenda, today’s episode of real talk real estate will leave you smarter, wiser, and more informed than you were before listening! Invest with David and Andrew: https://www.davidgreene24.com/invest Follow David: @DavidGreene DavidGreene24.com RealTalkRealEstate.com Podcast-The David Greene Show Spotify, Apple Podcasts Book a session with David: Help@DavidGreene24.com Ask a Question: DavidGreene24.com/ask Find me on the “minnect” app Real Estate University: SpartanLeague.com Join my Free Newsletter: Davidgreene24.com/textletter Finance Your Real Estate TheOneBrokerage.com Intake@TheOneBrokerage @theonebrokerage Free Textletter DavidGreene24.com/join STR Management STR@DavidGreene24.com Investor Retreat DavidGreene24.com/retreat
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