In this episode, our hosts, Ash Patel, Joe Cornwell, and Slocomb Reed engage in a lively roundtable discussion about the challenges and opportunities presented by the current real estate market, emphasizing the importance of stress-testing deals and being prepared for various scenarios. The conversation touches on topics such as underwriting, creative deal structures, and the shifting dynamics in the Midwest market.
Key Takeaways:
- Stress-Test Your Deals: In the current market, it's crucial to stress-test your real estate deals. Factors like rising interest rates, potential vacancies, and unforeseen challenges should be considered in your financial projections.
- Creative Deal Structures: To succeed in the competitive market, consider creative deal structures. Whether it's negotiating seller financing, concessions, or exploring unique opportunities, having flexibility in your approach can make a significant difference.
- Long-Term Focus: Expect longer hold times for your investments. With uncertainty in the market, planning for a five-plus year window rather than short-term flipping is a prudent strategy to manage risk effectively.
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Transcript
Narrator:
Quick disclaimer, the views and opinions expressed in this podcast are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to bestevershow.com.
Ash Patel:
What could possibly drive the market to go higher? We've got turmoil in the Mideast. We've got a war in Ukraine as well. We've got pressure on the economy, a Fed that's trying to put the brakes on. Why would you bet on the US or any economy today?
Narrator:
Welcome to the best ever show, the world's longest running daily commercial real estate podcast. Our hosts interview commercial real estate experts every day to get you the best advice ever with none of the fluffy stuff.
Ash Patel:
Hello, best ever listeners. Welcome to the best real estate investing advice ever show. I'm Ash Patel and I'm joined today by Joe Cornwell and Slocomb Reed. We are doing a round table episode.
We are in November of 2023 and us three will discuss some of the latest topics today, including the Fed meeting, the current state of investing and the economy. Slocomb, I'm going to let you start. What are your thoughts on the current state of the economy?
Slocomb Reed:
Thank you, Ash. Hey, Slocomb Reed here, best ever listeners. Most of you know that I am an apartment operator based in the greater Cincinnati, Ohio area.
Working in Ohio and Kentucky, so the vast majority of my experience outside of interviewing people on this podcast is specific to my market. And I have to say in the middle of Q4, 2023 here, I am starting to sense some optimism among apartment investors. I know some of the bigger players in our market have gotten back into acquisitions. And I know that there are some other apartment investors who are getting ready to make moves, deals from brokers are starting to make sense. And the consensus is that because it looks like interest rates will stay where they are for the foreseeable future. I'm not the economist who's going to define foreseeable as six months or six years, but because it looks like interest rates are expected to stay where they are now for the foreseeable future, sellers are becoming much more realistic about what their properties are going to sell for.
So the properties that are coming to market or the properties that are being in-boxed to us by brokers are making more sense now. So there's generally speaking, a sense of optimism, at least among apartment investors in Cincinnati, that's more deals, still few, but more than previously are starting to pencil and that we're going to see more realistic sellers coming down the pike here soon, hopefully first half of 24.
Ash Patel:
Joe, what are your thoughts? Current state of the economy.
Joe Cornwell:
I am probably less optimistic than Slocomb. I think that there will be some deal flow. I agree with the sentiment that at least what the Fed is saying recently, that rates are going to stabilize. We're not going to see a continual increase in rates, at least as of now. That could obviously change at any point. I will say that the Fed has pretty much stuck to their word for the past 18, 24 months, which is outside of the historical norm. So that was something different. But, they're saying right now that they're going to wait and see and that rates could increase. I don't think they're signaling at all. And I haven't heard anyone else believing that they're going to drop anytime in the near future, let's say in the next six to 12 months as the near future. So with all that in mind, I think the only thing that's going to change potential deal flow for us as multifamily investors and probably you as well as a commercial investor, Ash, is increased inventory for various reasons of motivation for potential sellers, which we can talk about, or if seller's expectations slowly start to align with the current market.
And I think that's probably our best case scenario is that sellers who have been pretty stubborn in their pricing the last 12 months or so, 18 months, start to become more realistic with the current rate environment we're in. That's what I'm hoping. And I don't think it's going to be a big swath of inventory in the next six to 12 months.
Ash Patel:
Yeah, I agree with both of you. With Powell speaking this week, I don't think there's any way to win. If they raise rates, the market's going to take a sigh of relief and say, okay, finally, we're probably done now for a long time. I think the stock market will go through the roof. Investor sentiment will recover quite a bit. If they don't raise rates, I think there will also be a sigh of relief. And people will think, okay, cool, the Fed's tools are working. They're impacting jobs and inflation. So we might be out of the woods. And I think the stock market will go up. So no matter what, I think the market's going up. If they do something drastic to really spook the market, I think everybody is going to be taken back by that. Historically, the market's always had a delayed reaction on whatever the Fed says or does.
But if they come in heavy handed, maybe a 50 points rate rise, that'll take the market by storm. I don't think that'll happen. I think it's going to be either we're going to leave rates alone with a warning saying we're not done. Just like last time, inflation is still here. Rates will stay higher for longer. Or they're going to say, we're going to pause and see what the economy does. I don't know. No idea what's going to happen.
But with deals that are out there right now, I think we're starting to see sellers be more flexible. Prices are coming a little bit more in line or they're still price high, but they're willing to negotiate a little bit more. When we show sellers how their numbers don't work, their sale price makes no sense. We're starting to see a bit more flexibility. So I don't think anything good is going to come out of the Fed meeting this week. I think no matter what, the market is going to take a sigh of relief. I think the Fed is going to either raise a quarter point or they're going to leave things alone. They're going to take a bit of a hands-off approach and try not to spook the markets, in my opinions.
But we also have the World Bank warning that with a conflict in the Middle East, prices of oil will go up to $150 per barrel. And I've talked about this before. The US has the least amount of refining capacity that it's had in many, many years. So when the price of oil goes up, our gas prices go up significantly higher. It's no longer relatively following the price of oil on the graph. There's a lot more distance between oil prices and gas prices. So it's something that people don't really talk about. And it's one thing that in the 2008 recession really impacted consumer behavior, where people were not going out as much, they weren't spending as much, and the amount of discretionary income they had was a lot less.
So what are you guys seeing with the consumers today, job losses, being able to hire people? In your worlds, what do you see? Joe, we'll start with you.
Joe Cornwell:
I would say, there's a couple of points there. When you talk about gas prices specifically, the lower your income, the more it's going to impact you. Let's say from some, Slocomb, in my perspective as multifamily investors, our tenant base is a spectrum of income ranges, but I would say, at least me personally, at least half of my portfolio is lower income tenants. So gas prices are going to affect them in a much more significant way than a higher income tenant or regular people that own homes, the other upper middle class, let's say in America. So it hurts them and it squeezes rents. I think it also puts downward pressure on rent growth because we're already an affordability issue in multifamily where many markets across the country are struggling for their medium income to pay for average rent prices. And then when you talk about other things that affect affordability, like food costs, like gas prices, that creates issues for multifamily investors as well, because tenants are going to have a hard time paying rent.
I can say personally across my portfolio, the last couple months, is the first time in the last six, seven years as a landlord, I've started seeing more consistent issues with tenants paying late, having financial troubles. And that could be a mix of a few factors. My portfolio has grown, so I have a wider sample size. But it's also that tenants who historically have paid, tenants I've had for one, two, three, four years, I know it's not a tenant issue, meaning that they are normally a reliable paying tenant. And they are coming to me saying, I got laid off or I lost wages because of XYZ. You know, everyone has a different issue. And I'm starting to see tenants paying late more consistently and some tenants not paying at all where we're having to do more evictions that I would say were historically a tenant issue, not an economy issue. Hopefully that makes sense the way I'm deciphering this. But that's what I'm seeing. And then obviously we can get into the business side and labor market. We can talk about that too, but as far as from the landlord side, the investment side, that's what I'm seeing in the last couple of months change.
Ash Patel:
Yeah, Joe, that's a great perspective and let's keep the conversation going on that topic of tenants. Slocomb, what are you seeing from tenants?
Slocomb Reed:
Thank you, Ash. And Joe, thank you as well. Our businesses are fairly similar in a lot of ways. And so I really just want to add to what you've already said because we're experiencing a lot of it. In part, I'd like to frame this as operational advice for our listeners.
First a reminder that if you are in acquisitions mode right now, you should expect, especially when you get into C class areas and low B areas, that the tenant base you are inheriting likely does not meet your qualification standards. And that probably has something to do with why the seller is selling. I will also say that while we haven't changed our rent qualifications at all recently, we are seeing much higher delinquency in the inherited tenant base than in the ones that we place.
But a couple of things there, one is it is taking longer to find tenants who meet our rigorous qualifications in lower income areas. So where in my operations we may not be evicting as often as is the norm right now, it is taking a bit longer to find a quality tenant to place for us. So we have a little bit higher vacancy with regards to how long it takes to turn a unit from happy tenant to happy tenant.
The other point that I'll add within my portfolio is that whether or not tenants fight to pay the rent, make us highest priority among their bills, has a lot to do with apartment inventory in that sub market or in that neighborhood. We manage some properties where there really just isn't much like what we have or what we manage in that neighborhood. And those tenants are much more eager to break their budget elsewhere and make sure their rent gets paid. Then in a neighborhood, for example, like Mount Washington, where there is plentiful C-class apartments, and we are one of many options that they have, we're seeing that tenants in neighborhoods like that are much more likely to misrent, jump ship, go someplace else, as opposed to neighborhoods, sub-markets, that have much lower apartment inventory, if that makes sense.
Joe Cornwell:
I have one property that I would consider rural, same situation. It is a very limited inventory. And I think proportionally the amount of local residents to inventory is even further skewed than the Cincinnati Metro market. So there's a lot of demand for apartments in those areas because there's not a lot of people, but there's also not a lot of housing. So you see that happen in those neighborhoods.
And then the other thing that you mentioned where you're talking about creating a product, for lack of a better term, for your tenant, that they can't get elsewhere. That's also been part of my model. So I want to have the nicest apartments at market rates in that area that I can. That's not always feasible, but when you're able to do that, if a tenant can't just pack up and go down the street, if they're going to pay the same price or more for an inferior product, then they're much more likely to make your rent a priority and not want to leave that. And obviously there's a lot of factors providing good customer service, being a good property manager, being a good landlord if you're self-managing. Those are things that are gonna help you keep tenants. But when we're talking about macro economic factors that are putting downward pressure on tenants, it's not always necessarily a choice for a tenant whether they wanna pay rent. If they get laid off, if they can't find a job, if we do start seeing unemployment increase, then there's gonna be a swath of issues that our tenants are gonna be dealing with that may be out of their control whether or not they pay rent. And hopefully that doesn't become the trend like it was back in '08, '09.
Ash Patel:
It's an interesting perspective. I never would have thought that the amount of supply determines the quality of tenants paying rent to really the motivation of the tenant paying rent, interesting.
Slocomb Reed:
I was gonna say given the things happening in the economy right now, the possibility of oil prices spiking, your tenants are where our tenants spend their discretionary income. What are you seeing right now?
Ash Patel:
All of our office tenants are fine. Retail, we are seeing a delay in filling vacancies. We've had one tenant that's in the south that asked if they can get out of their lease early. They've got multiple locations. They've got plenty of money. They've indicated that they may want to get out before the Fed started raising rates. And I think the increased rates, a pressure on the economy, has finally brought them to a decision where they've asked us if we would give them a buyout. So they've got three and a half years left on a five-year lease. They owe roughly $350,000 on their lease. They have personal guarantee, corporate guarantee, so they have multiple locations all under one LLC. They can't just close up shop and leave. They are obligated to pay rent. So we are looking at solutions where maybe we get 50 cents on the dollar upfront for the remainder of their lease and we let them out.
I've seen restaurants in smaller towns start closing. So there's some pressure on retail for sure. Nonetheless, retail has the lowest vacancy today than it has in over 20 years. So neighborhood retail is very healthy. Wall Street Journal yesterday had an article that said retail is the new king of real estate. So those neighborhood mom and pop strips, the dog groomer, the optometrist, the pizza place, the deli, those are typically internet resistant and recession resistant businesses.
So I still see a lot more pressure on the horizon. I'm probably older than both of you. So I've seen maybe one cycle more than you. And I can tell you that I don't think there's such a thing as a soft landing.
I know when you watch these cable news financial programs and read some of these papers, there's indications that there might be a soft landing. I don't think there's ever been a soft landing to a recession in history. I don't know where they come up with these terms, but the Fed has to kill jobs. They have to put the brakes on the economy. And they've indicated that they're not done until they start killing jobs. What happens when you kill jobs? People have less discretionary income, rents won't be paid, lease payments won't be paid. You're not spending as much when you go out. So I think we are in for some significant pain. That's my opinion.
I do want to talk about investor sentiment. I know both of you raise capital from investors. Who wants to start? And I'm happy to start as well, if you pick me, but I want to dive into the current state of investor sentiment, what you're seeing with investors' appetites to invest in real estate. Any thoughts? Or you want me to go?
Joe Cornwell:
Go ahead, start us off.
Ash Patel:
It took the easy way out, Joe. I don't know that we've raised capital in probably six months or so. However, I'm doing a fair amount of education with our investors to prime them. And I think a great piece of ammunition that all of our listeners can use is reference the stock market. There's no reason stocks and equities should be near an all-time high. The Fed has publicly announced they are trying to kill the economy. They're trying to kill jobs. Yet we see stocks just increasing higher and higher. It makes no sense.
Part of it, I think, is because of inflation. Inflation will boost earnings reports, and that will in turn boost stock prices. But going forward, inflation has already been taken into account.
My advice, and this is not just for potential investors, my advice for anybody who's got the majority of their retirement or the majority of their funds, their net worth in stocks, is take a lot of that money off the table. I don't care if you invest with us or not, but I think that we're in for a rough ride when it comes to stocks. So why not take your money off the table when we are at an all time high almost?
What could possibly drive the market to go higher? We've got turmoil in the Mideast. We've got a war in Ukraine as well. We've got pressure on the economy of Fed that's trying to put the brakes on. Why would you bet on the U.S. or any economy today? So my advice to potential investors or anyone I speak with is take some chips off the table, look at alternative investments.
We are also very fortunate in that we don't invest in multifamily or residential. So I'm seeing a lot of multifamily investors. Joe, don't smirk. I'm just speaking the truth, man. I'm seeing a lot of investors that I speak with want to diversify away from multifamily. They've had a great run in multifamily and now maybe they've got some pause distributions or they're seeing that the returns are no longer as great as they were five years ago.
2015-16 wasn't uncommon to get 25-30% IRR upon sale. And those numbers have come down across the board. So we get a lot of phone calls from investors asking if they can invest in industrial or retail with us. So that's my take on investor sentiment.
Joe Cornwell:
Yeah. Okay. I'll follow up. So there's a lot of different things in there I want to touch on. But...
We could probably do an entire call on this, but I'll briefly touch on. I don't think investing heavily in stocks makes sense at all ever personally. That's why I'm a real estate guy. So again, we could have an entire discussion on that. Maybe get some stock investors on here and have a good discussion with them about that. But fundamentally, I don't like any investment that you have zero leverage or control over. And I know you could say, oh, well, I day trade and I pick stocks. But every single long-term investor will tell you that if you do that long enough, historically, you're going to lose over investing index or other vehicles.
So again, I don't want to get into the weeds on that, but I agree with what you're saying. And I think that that's true of almost any market cycle, invest in things that you understand and control.
So as far as investor sentiment, I see it from two sides. So as an agent, I sell a lot of small multifamily to mom and pop type investors. Those are different goals and that's a different dynamic in what their appetite is versus passive investors that I do JV partnerships or raise money with, or do debt structures with. So I haven't seen much of a slowdown in appetite from potential JV partners or debt structure investors because there's still a ton of money out in the marketplace.
And I have been telling people this for the past two years, and I think it's still true. There's still, in my opinion, more money out there than deals to put them into. So I think that most people that raise money and invest in real estate full time would agree with that. It's not an issue to find people willing to invest. It's not an issue to find people willing to lend money on real estate. It's finding deals that match with that potential investor or finding deals in general that pencil out and make sense. Like we opened the call with. So I think that's probably the hardest part, at least for me and the type of deals I invest in.
So we could get into what deals make sense in this current market, but first Slocomb, you want to add your feedback on investor sentiment?
Slocomb Reed:
I'm also experiencing that there is more capital than deals to put them in. A couple of takes on that. First, the real estate investors who are taking chips off of the real estate table specifically are the ones who are more passive investors who are experiencing capital calls. From what I have learned through the interviews on this podcast and through my own experience is that passive investors who are handling capital calls are the ones who are pulling out of the market right now. That being said, there's still a lot of people who have their chips sitting on the sidelines looking to get deployed for some kind of return that they deem to be safe while also providing some growth.
And most recently, I would say that I'm connecting with capital raisers and deal finders within apartment syndication who are looking for local expertise on my market. That's why they're reaching out to me. I'm sure there are people reaching out to operators in other markets across the US, especially the Midwest, who are finding deals that are starting to pencil and then are starting to underwrite and coming to people like me and Joe, I believe as well, to figure out, do our numbers make sense and is this a business plan that you could execute on? And those conversations are happening more and more often where that's where my optimism at the beginning of this episode is coming from that more of the deals brokers are putting in front of apartment investors are starting to make sense. And the amount of capital looking to get into deals like that is still vastly outnumbering the opportunities for it.
Joe Cornwell:
Yeah, I agree. And I think one thing that you mentioned, and this is something I wanted to talk about, and I'm hearing this on a lot of the other groups that I'm a part of and I follow, where the Midwest market is starting to be very appealing to most investors, even big syndicators, because people want cash flow.
So the surge we've seen in pricing on the coast, in the south, in the southeast, it has created an environment where seven, 8% interest rates don't make sense anymore at the current valuations. And we have no idea how long it may take for you to the incomes to match expectations for seller expectations to drop or for potential losses to happen where people overpaid for properties in the past couple of years. And now you have bank repos or other things that happen where properties are being re-traded at a lower price.
So with all that said, I think a lot of people are turning to the Midwest because there is cash flow in the Midwest. Obviously all three of us have most of our holdings in the Midwest markets. So I'm not just saying that because it's good for me. I think it's just a fact of the market we're in where there's not a lot of places you can still go and buy properties that could cash flow. And I think the Midwest has a big opportunity in the next, let's call it two to five years to be a place a lot of money continues flowing.
So anyway, I don't know if you guys have any different take on that, but that is what I'm seeing when I talk to people who would have typically and historically invested in more appreciating markets that are not in the Midwest.
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Ash Patel:
I agree with all of your points. There's certainly money on the sidelines. Midwest is just awesome. And Joe, that's a great point in that you're seeing some of the sunbelt in the coastal states. Rents are starting to come down and there's a lot more pressure on those assets because they had a parabolic rise. So there's a lot of coastal money coming into the Midwest. We've always been great for cash flow. We don't have the big spikes and busts of other areas.
You mentioned, Joe, we can talk about what deals make sense. Can you elaborate on that?
Joe Cornwell:
Yeah. From my personal experience, the deals that I'm buying myself as an investor in the deals I'm selling as an agent, usually have things in common that are making them make sense in today's environment. So most of them have some sort of creative element to them, whether they're being creatively financed, whether the seller is giving concessions that allow it to be appetizing for the buyer. So that could be rate buy down, that could be credits for repairs or other things like that.
I have not seen any in the last, let's call it nine months, so most of this year, 2023, I have not seen what I would have considered the traditional transaction that has happened at least in my personal experience the last six, seven years. So it's not listed with a broker, listed on the MLS, listed on LoopNet. And then you go in, you pay at or above asking price with probably multiple offers. The seller accepts your offer and you move through your due diligence and your closing. And then you're getting traditional financing, commercial financing or agency debt on the asset.
So that's not what I'm seeing in the last nine months. It is some sort of combination of creativity that allows it to be a win-win or I'll even call it maybe a partial lose-lose for the buyer and the seller because it's not the seller market that we've had really the last 10 years, but certainly the last three years. And that's what I'm seeing.
So the deal I just bought was put into a creative structure. That was the only way it would have made sense. And again, many of my clients who purchase this year are in the same boat.
Ash Patel:
Yeah. It's a great point of seeing a lot more of those creative deals to make them work. Slocomb, any thoughts on deals that make sense today?
Slocomb Reed:
An important point I think we ought to make. We're all intimately familiar with the Cincinnati market in a variety of ways. Some of them among us, different ways.
I think it's helpful for our listeners to understand because a lot of you are invested in Cincinnati, but a lot of you are coming from other markets specific to small multifamily and the kinds of things that Joe and I sell as agents. First, you need to hear that property values in the small multifamily space have continued to rise at expectation beating rates, not only during COVID, but since COVID and through the interest rate hikes, we're still seeing strong appreciation in small multifamily because the demand for those investment vehicles is still outpacing supply.
So again, I benefit from Joe speaking first, so thank you for creating a platform for me to stand on Joe. But one of the reasons why there's creativity in the deals that we're doing is because in order to buy day one stable cash flow with the property values, the market commands and the interest rates on your lending, you're being driven into worse and worse neighborhoods. And operationally, those are not places that Joe and I really wanna be.
So the deals that make sense for us are the ones that leave a value add component of some kind, which in the smaller multifamily space is almost always mismanagement, poor operation, leading to below market rents. There are plenty of buzzwords here, burned out land, deferred maintenance, those kinds of things that give us the opportunity to buy at what today would still be a discount and force that appreciation ourselves. Those are the deals that are making sense for investors like Joe and me because frankly, property values are continuing to rise regardless of interest rate because demand continues to outpace supply in that space.
Joe Cornwell:
Yeah. I can speak specifically to the deal I just bought was 40 units and a $0.00 let's call it D plus market in Cincinnati. And this was a completely different deal than the last 12, 15 deals I did. And what I mean by that is historically, I have bought extremely heavy renovation deals, like a traditional cookie cutter, BRRRR type of properties where we're doing major innovations. And it's difficult to make those work in today's market because even if you can get them at the right price, the holding costs, the cost of construction, all of those things have escalated even out exceeding the current values and increase in values.
So it creates an issue where if you buy a BRRRR property today, even if it's multifamily and you're doing a major renovation, you have no idea what the market's going to be in six, 12, 18 months when that property is completed. So let's just say hypothetically rates do continue to exponentially increase and 18 months, they're 12%. I don't think that's going to happen, but let's say that did.
It's a lot of risk if you buy a deal today that is predicated on executing a good BRRRR and you have to renovate with the cost of construction today and you have to continue to raise rents up to and above current market value and hoping that rents continue to increase and then go back and refi you have no idea where the market's going to be. So it's a lot of risk.
So back to the main point, the deal that I just bought was different because it was as completely based on executing good operations, new management system, taking over management, raising rents to market value, which is a part of it, but it's not through full gut renovations. It's not a doubling of the rents from the current rate to the market rate, which would historically have been the model. So it's interesting that if you can find deals like that, whether they're small multifamily, large multifamily, and I'm sure in OSHA's world of commercial, it's the same way where the current owner or property manager is not doing a good job executing operations on the deal. That is where you're finding the value to add is through increasing efficiency operations and obviously income as well.
But I don't know what you guys are seeing specifically in that vein, but that's where I'm seeing the opportunities right now.
Ash Patel:
Gentlemen, let's wrap it up with some final thoughts. I'll start because I'm going to do a little poking and I'll give you an opportunity to make a comeback on that.
But again, be very cautious on the deals that you take down. I mentor a lot of people and anytime I see a pro forma where the numbers are going up, the rents are going up. I immediately have them toss that and add in vacancy, add in exit caps that are much higher. So really stress test your deals. You've got to work harder today for everything to win over investors, to win deals, to convince sellers that they need to do some seller financing or come down in price. So just work harder, stress test your deals more.
And I'm glad I am not in multifamily because I wouldn't want to compete with you guys and what you're doing. So I'm grateful that I invest in a far better asset class. I'll give you guys an opportunity for closing remarks.
Slocomb Reed:
Ash, whenever you're ready to have a repeat on that great debate, let me know. There are a lot of points that I'm sure Joe wishes he could revisit and it may make sense to have a moderator next time to keep it clean.
I will say telling people who are looking to underwrite apartment deals to do more to stress test their deals is critically important right now. There are quite a few people who've reached out to me who are newer to apartment investing and still looking to get their first, second or third deal in a market outside of their own. And their underwriting is not sufficiently stress tested.
For those of you in the apartment space, you'll know who Andrew Cushman is. I heard him recently on a different podcast say that he underwrites to a bell curve of possible outcomes instead of trying to predict the future. That makes a lot of sense. I recently underwrote a 59 unit where the operator, the GP, projected that they would only have to turn 20 units during a seven year hold period. And I told them that they needed to prepare to turn 59 units in the first few years. And financially they needed to be ready for that just in case, because the inherited tenant base would be such that with the drastic rent increases they were looking at and making the transition from word of mouth marketing to internet, professional photography, professional, apartment operation marketing for new tenants, they were gonna lose probably all of their tenants. So that's an example of what you're saying about stress testing your models.
That is the curb on the optimism that I am sensing right now is that some underwriters are on the acquisition side are a bit too eager to make numbers work and not willing to project actually possible operational outcomes like much higher vacancy in years one and two. I am seeing construction notes and interest only periods come back the way they were taken off the table last year, which makes it a lot easier to handle that increased turnover. So yes, my optimism is guarded optimism. We still need to underwrite for pessimistic scenarios, but those deals are tending to make more sense now.
And I project in 24, deals are going to make more sense than they did in 23, primarily because sellers are going to be willing to accept the kinds of offers we've been trying to make for the last year.
Joe Cornwell:
Yeah, just a couple things I want to add to that. So Dylan Koch, I just had on the show a few weeks ago, he made a great point where he does a lot of off-market stuff to motivated sellers or potentially motivated sellers. And his conversation with them is always, do you want price or do you want terms? Because you're not going to get both. And that's the reality of the market rent.
So as a buyer, if it's a legitimate deal, you should be able to get one or the other. So that's what I would go about when you're trying to structure off market or creative deals. And as far as underwriting expectations, I think you guys are spot on. When I'm looking at deals, I'm assuming I could be at my current or higher interest rates, I'm assuming very minimal rent growth, and that's because it's specifically in the market we're in. I don't think we've reached a cap, but I don't underwrite for 10 or 20% rent increases that we've had to last three years, I don't think that's realistic going forward.
And I think you have to look at long hold times. Every deal I'm looking at right now is going to be a five plus year window. I'm not looking at anything that I'm buying where I have to turn it in two, three, four years because I think that is going to put you at a ton of risk. So that means getting the right debt in place, having the right operation in the business plan for that property and that means having a longer window for exiting if you do choose to exit your deals.
And that's the same advice I give my clients. Don't buy something thinking you're going to flip it in a year or two, especially if it's multifamily and expect to have the same outcomes that we've had the last five or 10 years. That would be my advice to the listeners.
Ash Patel:
Well, gentlemen, thank you for your time today. Great insight. I enjoy the conversation and best ever listeners. Thank you for joining us.
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Narrator:
Hi, best ever listeners. Joe Fairless here again. One last thing before you go, would you like to receive a short weekly email with proven tips from experienced investors, free tools and resources, and a roundup of the week's most relevant news and best ever content? Well, if so, join the community of nearly 15,000 commercial real estate passive and newsletter, just go to bestevercre.com forward slash access and you'll get the very next one. I hope you enjoyed this episode and as always thank you for listening and have a best ever day.
