2008 MISTAKES BEING REPEATED AGAIN: Bad Debt Structure, Short Term Loans, Bad Refi Assumptions, etc

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


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


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


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


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


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


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


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


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


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


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


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


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


thank you so much thanks anna thank you

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