good morning good afternoon good evening
folks michael zuber one rental at a time
back with the one and only anna kelly
how you doing anna i’m doing great
always good to be here with you on
wednesdays so i don’t know if you saw on
my channel uh but i prov this the first
time i’ve ever had a video edited
together
so i just i act i didn’t do it let’s be
clear i paid somebody uh but anna what i
did is
i i saw i was i was actually forwarded a
tick tock video
for whatever reason and it was basically
a video of five guys bragging about
number of units
and total assets
and
as you and i both know neither one of
those numbers mean anything i mean
you don’t know debt structures and cash
flow those two numbers are irrelevant
but what i got as i watched it it’s
about 30 seconds long
as i started having flashbacks in ptsd
to 2006 seven and eight so what did i do
i went back to the movie called the big
sword
and right now oh great movie i found the
exotic dancer scene which is about a
minute long
uh and cleaned it up let’s be clear i
cleaned it up and i stitched those two
videos together because in that big
short movie you hear an exotic dancer
talk about having five homes
a condo
adjustable rate teaser loans
a first and a second
their broker saying you could just refi
out
and she was oblivious to the situation
she put herself in
yes and that again that scene
i saw repeated over and over and over in
real life that’s why i really need ptsd
i saw people worth tens of millions of
dollars lose everything
yes and now i see these guys doing it
today now clearly it doesn’t say it in
the tick tock video but i’ve been around
these are syndicators
very likely these aren’t their units
right they’re the gp on a pile of stuff
and
i just i
that attitude just feels so much like 08
so i don’t know maybe i’m maybe i’m just
out left field what do you think of all
that
no i i agree with you michael you know
there’s been and we see this in every
major economic cycle is before things
crash we have this irrational exuberance
is the technical term right and it’s
being so excited about what real estate
has done and the economy has done over
the last two or three years that you
think this is so amazing i can never
lose the economy’s humming it’s only
going to get better right and i saw that
in 07 when we started a business because
every business consultant said the
economy’s going to keep booming you can
go into all this debt to start a
business it’s only going to get better
right and we believed that because i
wasn’t at that point a real student of
the economy i knew investments but i
didn’t know the economy right and here’s
the thing most real estate investors
don’t watch the economic cycles they
just don’t so they’re watching real
estate they’re laser focused
what’s the cash flow today what do i
think i can get in future rents how do i
think i can cut expenses and let’s
assume that everything keeps going just
like it has rates don’t change so when i
need a refi
i can refi and get all my money out
values don’t go down so i can just
assume that rents will keep going up
values will go up when i want to sell so
i don’t have to worry about this bridge
debt so the key here is
many many syndicators in apartments
especially the last year and a half i’d
say 90 of deals that i’ve looked at
without exaggeration have used bridge
debt so it’s essentially the same as
these adjustable rate mortgages that we
saw back in 06 and 07
where it’s a short-term loan that has to
be paid off in one two three years right
if you get extensions
and if you don’t pay them off at that
time guess what they take your property
not only do they take your property but
they take the money of all the investors
that have invested the money in the
property and so
the danger has been that people have
done these large deals because they were
overpriced michael they couldn’t get
long-term debt through fannie and
freddie government financing if the
number doesn’t underwrite and the rents
that it brings in net don’t cover the
mortgage plus about 25
they won’t qualify for permanent
financing or longer-term financing so in
order to buy the property they have to
get this short-term debt that’s what
causes this risk and the irrational
exuberance says
okay no problem values are going to go
up rents are going to go up we’ll have
no problem refining or selling and
interest rates are never going to go
high again and the argument is the the
us government has a lot of debt they
can’t afford to pay their own debt with
high interest rates so they’ll never do
it right
so this leads people to to buy a whole
lot of units right they can still buy
but they’re paying top dollar
and they’re not de-risking it they’re
they’re going into this bridge debt and
so similar to the strippers you know
back in the big short that you’re
mentioning they’re basically going this
is great i got all these short-term
loans i’ll refi no problem
when things correct it’s significantly
worse than it is for single-family home
buyers right because with single-family
homes your values may come down maybe
you can’t sell maybe there’s a crash
right but with multi-family the value of
the property is essentially tied to
interest rates and big
brokerage firms that sell lots of real
estate will tell you there’s not that
much correlation between interest rates
and the cap rate that determines what
properties go for but historically there
actually really is there’s a lag but we
haven’t seen it in the last 12 years
right so people think it can’t happen so
what happens is as interest rates go up
with what the fed is doing
cap rates start to expand and i’ve been
saying this for a year and a half and
a lot of my friends who are syndicators
i’m like i can’t partner with you
because you have bridged it i won’t do
it i don’t i think we’re heading for
inflation right and now we’re seeing
that even though one of the big brokers
i’ll just say who it is marcus and
milicep just a few months ago said
hey everyone keep buying multifamily
it’s really resilient and the cap rates
aren’t going to expand very much guess
what’s happening in apartments right now
michael
the most recent reports for may and june
are that cap rates are starting to
expand especially in older buildings and
secondary markets so what that means is
if you have a lot of bridge debt and
suddenly
the cap rate goes up meaning the val the
returns required from investors are
higher so they’re going to pay less for
your property and now they have to
borrow at much higher interest rates too
the only thing that can happen to adjust
that is that values come down so all
these people that syndicated deals may
be there here’s a secret
a one percent owner of that gp or one
owner of that gp or of that deal they
will say they have
500 million assets under management but
they may have only raised a million
dollars of capital and have nothing to
do with the operations of that deal day
to day and they’re claiming they own all
these units and have all this assets
under management when their piece of the
pie is so small they’re not cash flowing
until the end
and hear me on this most large
multi-family syndicators of which i am
one
do not make much cash flow at all during
the hold period you’re rewarded on the
front end with the fee and on the back
end if you do well and so if these
things don’t do well the syndicators
aren’t out much right but the investors
that are in those deals
they could be left not seeing their
money back and so it’s a risky gamble
and it’s why i do i’ve done very few
deals over the last year and a half that
are large multifamily i’ve done three
right and they were good risk adjusted
deals but um it can be very very risky i
see it all the time
do not be lured into putting your
investment dollars with someone that
claims a certain number of units and a
certain number of dollars assets under
management because that doesn’t tell the
whole story you need to find out are
they using bridge debt how many of their
deals have bridge debt
and how long have they been doing it
have they lived through a previous
economic cycle and how did they do and
if you don’t have a really good track
record and they’re not telling you that
they’re making all these risk mitigation
moves like you know assuming that rates
go up when they have to sell that they
can’t get top dollar rents you don’t
want to place your money there
yeah again the attitude that i saw in
those two videos i’ll i’m going to put
the link probably it’s comment number
one so people can watch it but
it is it’s the same basically was an
attitude of can’t do any wrong
dangerous
bad debt structure
dangerous and again talking about
numbers that don’t matter i don’t care
if you have 200 units or 45 100 units
first off saying you have that
in many cases a bold-faced lie you may
have one percent of that you may have
forty-five humans right
and that’s why i’m always careful i
actually did a post on this that ruffled
some feathers about a year ago i’m
always very careful to say i have
ownership in
the this number of units i have
ownership in i don’t own those right my
own poor personal portfolio i’ve had
generally speaking about a hundred units
from any given time depending on what
i’m buying and selling and i have a
joint venture of almost 300 units so my
own deals that i really own or own a big
piece of is a few hundred right but i’ve
done and had ownership in thousands of
units right that doesn’t mean i own that
and so
just be careful with that you need to
dig a little deeper the other thing is
you know yes i’ve been i’ve made some
really smart moves and some smart
investments and i’ve been rewarded
handsomely for that
but i cannot
but say that the fact that rates were so
low for so long
allowed me
to grow substantially and we had
apartment complexes michael that we
bought two years ago before the pandemic
maybe two and a half years ago that we
were only halfway into our value-add
updating the units to really force those
values but because values skyrocketed we
didn’t have to do all the work that we
were supposed to have to do to return
our investors the top dollar so we sold
looked like rock stars before we even
finished our deal now yes we managed
through a pandemic we worked really hard
to get us out of that and still profit
but part of it was the market that
helped us be so successful so i’m not
super impressed when someone who’s been
doing this three four five years has
made double-digit returns for their
investors on the sales that they’ve sold
in the last year and a half exactly it
doesn’t mean that they can repeat the
same thing in the future when values
potentially could be coming down because
of what’s happening with cap rates and
with interest rates now again there are
great syndicators out there that have
been in this business for a long time
that i’m actually still investing some
of my passive money with
but it’s few and far between you’ve got
to know them you’ve got to know the
markets you’ve got to know if rents can
keep going up supplying a man and you
better make sure they have fixed up so
i’m not poo pooing syndication i’ll
still do it when the deal is right but
the level of risk that’s out there and
the kind of
um attitude of i can’t lose so let’s
just keep doing more with bridge debt
that’s really the dangerous piece that
you have to look out for yeah and then
the last thing that really
just made me feel icky as i was watching
this video is knowing is if these
individual if they get it wrong i don’t
know these guys from adam i don’t know
anyway but if they get it wrong
they don’t lose they already got paid up
front they got their money up front they
may lose some back in
but it’s not their money it’s not their
money and that just makes me feel
terrible for what might come uh to lots
of uh limited partners uh in the very
near future
yeah
and and there’s some nuances to that
right i mean most of us when we do large
large apartment buildings even though
it’s supposed to be non-recourse that we
are signing a bad boy carve out and in
that bad boy carvate it basically says
if you do any of these things wrong we
can go after you personally if you fail
if we have to take the property a lot of
people say that it’s non-recourse but
it’s really not one of the clauses in
the bad boy carve out is if you miss a
mortgage payment right so you miss a
mortgage payment anna is no longer free
and clear and gives the property back
and lets my investors lose my investors
may lose if they take it back but they
can go after me personally so there is
some level of personal risk um don’t
think that there’s not um but
you know
yes it could harm them but it can harm a
lot of other people yeah uh so anna
where can people find you because you
put out amazing stuff and you are a very
conservative investor which i love to
see
great thank you so much you can find me
here you can find me on my playlist you
can find me at anna kelly rei mom on
social media and my website is
reimond.com
thank you so much thanks anna thank you