Episode Summary:
Overview of Episode 63
Danny Hirschberg explains the concept of return on cost spread over exit cap rates. This metric reflects unlevered yield, which is critical for assessing investment opportunities. For instance, if you buy a property for $100 per foot, you can expect a 10% return if market rents are $10. Consequently, a stabilized cap rate of 7.5% would create a 250 basis point spread.
Evaluating Quality and Risk
Hirschberg emphasizes that acceptable return spreads depend on asset class and market conditions. For example, you wouldn’t expect the same return on a Class C multifamily property in a tertiary market as you would on a Class B multifamily asset in a prime location. Therefore, high-quality assets often warrant lower spreads due to their reduced risk profiles.
Recent Multifamily Acquisitions
In the multifamily sector, Hirschberg shares their recent purchases. They successfully acquired three deals this year, with each offering unique profiles. One notable acquisition was a 184-unit property that generated cash flow from day one. Additionally, they seek opportunities in the 40 to 80-unit range, which offers favorable competition dynamics.
Strategies for Finding Deals
The team employs various strategies to locate multifamily investments. They primarily work with multifamily brokers rather than relying on wholesalers. By maintaining relationships and staying in touch with owners, they identify deals before they hit the broader market. This proactive approach helps them secure valuable assets.
Financing Approaches in Multifamily
For financing, Hirschberg’s team typically utilizes agency financing for cash-flowing properties. They also consider bridge loans for properties needing stabilization. Their focus remains on achieving non-recourse loans as quickly as possible, thus minimizing risk.
Looking Ahead in Multifamily
Looking toward the future, Hirschberg anticipates increased opportunities in the multifamily market. Many investors overpaid during the market’s peak, creating a potential wave of distressed assets. As rates fluctuate, some owners may struggle to refinance, leading to more opportunities for savvy investors.
Insights on the Lending Landscape
Jack BeVier discusses the current lending environment. He notes that restructuring is becoming common as investors seek to reconcile market realities. If capital structures don’t align with today’s conditions, challenges will arise. Therefore, maintaining relationships with lenders is vital.
Conclusion
In summary, the multifamily investment landscape presents both challenges and opportunities. Hirschberg and BeVier highlight the importance of understanding financial metrics and asset quality. Additionally, their proactive strategies in deal sourcing and financing position them well for future growth. Overall, as the market evolves, those who adapt will thrive in the multifamily sector.
