Commercial Real Estate Investing From A-Z From a $100M Real Estate Company to $0 - How to Overcome Adversities
How to deal with the worst possible outcome when it comes to real estate investing? Mike Morawski has dealt with the ultimate challenge, he was sentenced to 10 years in federal prison, charged on wire and mail fraud after transferring funds from one syndication to another without notifying his investors. He explains how he has overcome this life changing moment.
You can read this entire interview here: https://bit.ly/366pNSJ
What happened along the way that was a mistake? What were the CAP rates at that time?
I built a $100 million company with 100 employees working for me. We were in five markets around the country with 4,000 apartments. I thought that I had a team behind me that was getting the work done in restabilizing properties, but that wasn't happening. We should have taken a property, got it stabilized, and then gone to buy the next one, but I didn't do that. As an example, in 2007 I closed 17 transactions for 2,700 units, which was a lot of real estate in a quick period of time. I was undercapitalized and didn't raise enough money, I was over leveraged in that I bought all that $60 million worth of real estate at an 85% loan to value.
Cap rates were 12-14%, they were a lot higher than they are now. As a matter of fact, I wrote a book called “Exit Plan”, and somebody was reading the book six months ago, and he called me to ask if I really bought that deal at a 13% CAP. I said yes. The funny thing is that I know the investor who just bought that deal with 4% CAP. It just goes to show you where the market is.
You had a huge buffer with that high CAP rate, people today don’t have that much buffering in case of an additional 10% vacancy rate. Even though you were at an 85% loan to value that CAP rate is pretty high, so what happened after that?
I just want to revisit that 85% loan to value, I don't think anybody should be in a real estate deal that they're not at 65-75% LTV. I've been looking at loans today, and some lenders sent me an email saying that they have loans at 80 and 85% LTV and I thought that's suicide.
I had all this real estate, and 2008 comes around, it was the worst economic crisis that the country has ever seen. What happened was people started to move out of apartments, the market shifted and we had all this bad paper and foreclosures go to the market. My thought was, people are going to lose their house and they're going to need a place to live. Well, that wasn't what happened. People went home and doubled up, so our occupancies dropped. It was like hitting a brick wall, we started to come off of the rails and unwind as a company.
By 2010, my occupancies had dropped and my NOI had dropped as a result of it. We went to some lenders and they helped us re-stabilize deals, but we still couldn't mitigate the storm. I had 38 companies at the time, and I had a number of deals that were very profitable and others that were not as profitable. So I started to take money from my profitable companies and move it into my non profitable companies. And my thought around the whole situation was, this is a recession and it tends to last 18 months. There’s a 12% correction in the marketplace, and then it bounces back. Well, this lasted for seven or eight years, it had a 40% correction in the market and people are still affected by it today. I thought if I move money between companies, and when the market comes back, I can put the money back.
Did your lawyer tell you that you had to disclose that? Did he get charged for guiding you in the wrong direction?
No, that was not ever part of the conversation, and I never thought I was breaking the law. They held me to a different standard because I was a licensed professional / syndicator.
Mike Morawski
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