415: Multifamily Investing for the Next 12 Months

SHOW NOTES FOR EPISODE 415: MULTIFAMILY INVESTING FOR THE NEXT 12 MONTHS

The multifamily investing market, like everything else, has been impacted significantly by the coronavirus.  But what changes have occurred and how should we respond?  In today’s podcast, multifamily investor with over 6,000 units, podcast host, CEO of SPI Advisory and frequent guest to the Old Dawg’s REI Network Michael Becker shares his expertise on where he sees multifamily going over the next 12 months and what we can do to make the best of what’s ahead.

What You Will Learn

• What are some of the significant changes to the multifamily investment market?
• How the banks have reacted and are expected to react in the future
• Where the best banking deals can be found
• Why Mike is re-financing into variable rate loans
• What are the best markets now for multifamily and why they are also like to best survive the shifts in the economy
• 6 things you can do prepare for what is ahead
• What Mike predicts the market will be like in 10 years

About Our Guest

Michael Becker

Michael Becker (who was featured on Old Dawg’s episode #002 & #067 – “How to Acquire 3,000 units in 36 months“ and “How to Get Bankers to Love You“) has two roles in commercial real estate. He is affiliated with Old Capital Lending as a Senior Director of Mortgage Origination and a Principal at SPI Advisory LLC. SPI Advisory LLC owns and manages over 6,000 plus apartment units in Texas around $750 million in assets.  Michael heads SPI’s Dallas, Texas office where he oversees all aspects of property operations, including asset management, property management oversight, accounting and taxation, capital improvement and renovation projects and investor relations. Michael is a 15 year veteran commercial real estate banker and has originated and managed numerous portfolios of permanent and bridge loans in all major asset classes. Over the last 5 years of his banking tenure, Michael focused exclusively on multi-family properties. Michael is a lifelong resident of North Texas and a graduate of The University of North Texas with a BA in Finance. He is married and has two young children. He is also the co-host of the Old Real Estate Investing Capital Podcast.

More About Mike

• Had a few deals that were in escrow when Covid-19 hit
  • 2 in escrow
  • 1 on the market to sell
• He current has over 6,000 units but he has done of over 10,000 (4,000 units have gone full cycle) over the last 7 years
• Mike has 2 kids – a 2nd grader and a 4th grader
• During Covid, he is working from home
• Mike’s wife is a school teacher so she’s teaching classes from home
• His kids are doing their school work from home
• Get’s a little crazy trying to do work and help the kids with their school work

The Market Before the Virus

• Before the virus hit, Mike had a ton of activity
• Lending was going gangbusters with a variety of great options for borrowers
  • Agencies
  • Bank debt
  • Bridge lenders
  • Life insurance companies
• Extreme amount of capital flowing into the multifamily space
• Dallas and Texas is hot for investors
• If things would have continued, it would have been his best year ever from the volume standpoint
• Although, it was getting difficult, due to such high prices and compressed cap rates, to find deals that made sense
• He was selling more properties to take advantage of the opportunity
• When the virus hit, everything came to screeching halt

The Market Post-Virus

• When lending stopped, everything stopped for multifamily
• The money faucet was flowing at full-speed and then, overnight, it just shut completely off
• In the last recession, there was a period of several months where the funding slowed down and stopped
• But this time, it was immediate
• When it was announced that Tom Hanks had Covid-19, within a week funds stopped
• The only real lenders out there now a Agency lenders Fannie Mae and Freddie Mac and they are only still out there lending because of the government mandate
  • They aren’t giving any policy exceptions to their credit policy
  • There are layers and overlays for credit enhancement
    • Now requiring 12 months of additional PITI (principal, interest, tax and insurance) reserves on top of escrow
    • It’s now 5-7% of the loan balance up as additional escrows
    • Which requires more money out-of-pocket
• The debt funds are out of the business (Lifeco, CMBS and most of the banks)
• The funds stopped because there is so much uncertainty and no one has a sense of…
  • Where this is going to go
  • How durable the income stream will be
    • What are apartment operators going to be able to collect?
    • What will be delinquent?
  • Not being able to evict people
• It is really a wait and see approach for most of the lenders
• For other asset classes (i.e. hospitality, retail, etc.)
  • Impossible to transact on now
• Other companies impacted by the halt in multifamily
  • Transactional lawyers
  • Title companies
  • Appraisers

Looking Ahead

• Mike see’s the lending faucet being turned on slowly and a small trickle of money starting to be near the end of the year
• By the beginning of next year, will be start getting a little bit closer to what may be several years to go as we start clearing some of the problem assets through the system
• Agency is still accepting applications but there is little activity.  Most transactions are on deals that were already in process pre-virus.  Also, possibly 1031 exchanges
• People that were already in trouble financially, this may be the thing to bring you over the cliff
• Banks are still giving forbearance and if they don’t the courts are closed so the lenders can’t do much about it
• It’s going to take many months before we start to see the first deals start flushing through the system
• You’d be crazy to try to sell in this environment
• What Mike’s doing is just pulling back, waiting this thing out, and wait for a better time to go back out to the market – whether that be 2021 or 2023
• He doesn’t have to sell right now because he has no loans coming due or distress with operations
• He is not that involved with Old Capital Lending anymore but he talks with Paul Peebles, his partner there and on the Old Capital podcast, to get daily updates what’s going on in the lending world.  He’s also talking with other lenders too

Where Mike’s at Now

• In his portfolio, which is mainly Dallas and Austin-based, and generally nicer properties, he recently collected 97.5% of scheduled rents (2.5% delinquent)
• They are regularly .5 to .75% delinquent – about 4 times what it normally is but it was much much better than he feared it could be
• He anticipates May at maybe 3.5-4% delinquency
• Residential real estate is still a better place to be than office, retail or hospitality – hospitality being in the roughest spot
• He brought his team together in March to assess the situation
  • They modeled what they thought to be pretty conservative assumptions across their portfolio and shocked it to see what might happen
    • They projected mid 80% on economic occupancy for April and 75% for May and June
    • They looked at that from a liquidity standpoint to see if they could survive that
    • They have since remodeled projections with the actual April data
    • They were pleasantly surprised
    • People tend to fear the worst
• Mike sees an advantage to being in Texas
  • They have been seeing an economic migration for the last couple of decades
  • Everyone is moving out of the overly regulated high-tax states like California, New York, Connecticut and New Jersey and moving to places like Arizona, Florida and Texas
  • Texas doesn’t have a lot of the regulations of other states
    • National rent control
    • Great landlord tenant laws
    • As more jobs shift more from offshore back to the U.S., he sees Texas well-posed to accommodate those companies providing jobs

More Looking Ahead

• He sees the government recognizing the problem and doing what they can to lessen the hit
  • Zero interest rates
  • He wouldn’t be surprised if they came up with a national rent voucher program for tenants unable to pay rent, because…
    • If tenants can’t pay us, we can’t pay the banks
    • If the banks don’t get paid, it starts a whole daisy chain will implode on itself
  • Food and housing are necessities and that seems to be the key government priorities
• Two key areas of concern for him are:
  • Rising property taxes in Texas (his second largest expense item behind payroll)
    • They’re averaging 20% increases each year
    • He usually negotiates them down but they still increase
    • It looks like they are staying flat right now because of the crisis
  • Insurance is another issue
    • Third largest expense item
    • They went up again this year (double digit increase)
• Overall, Mike is optimistic, especially after seeing April’s numbers and the early indications from May
  • He sees the interest rates staying a zero for a while
    • He doesn’t see any way, because of the interest rates, that they don’t create a tremendous amount of asset price inflation
    • Not sure if we’ll see consumer price inflation but we’ll definitely see asset price inflation on real estate
  • If you can survive the first 12 months, you can make the next 10 years
    • If you can make 10 years (by 2030), we’re going to see materially higher multifamily prices – maybe triple the pre-Covid peak was
    • The government is throwing trillions and trillions of dollars at this crisis, while rates are really low
    • He sees similarities to the 1970s economy, minus the consumer price inflation
      • Price of everything in the 70s increased dramatically
      • California real estate prices tripled
      • But who knows as the government is printing more and more money
    • If you can hold on to your real estate, it will certainly we worth a lot more in 10 years
  • He sees more jobs leaving Asia/China and returning to the U.S., especially for critical things like medicine, manufacturing and moving to states like Texas, Arizona and Florida which have business-friendly laws
  • He doesn’t see states without income tax, having difficulty or,all of a sudden, introducing income tax
  • He sees other states having a tougher time, states like Illinois, really suffering from reductions in sales tax, property transfer tax, etc
    • To rectify it, they may have to cut spending, and let go of some of their pensions because they have dramatic unfunded liabilities
    • These have been ongoing issues
  • Mike listens to a number of podcasts
    • One of his favorites podcasts (besides the Old Dawg’s REI Network, of course… haha) is one hosted by Old Dawg guest Jason Hartman (see Old Dawg episode #123)
      • Jason Hartman says economics is a relative game so, if you’re getting poorer at a faster pace than me, then I’m winning at a faster rate than you
      • That illustrates what happening from a state standpoint
      • As people migrate away from high tax states like Illinois and New York, they’re going to retire in places like Florida and Arizona with lower taxes and lower costs-of-living

Multifamily Investing Advice for Today and the Next 12 Months

• Make sure that the lives, safety and health of your staff and tenants are taken care of by shutting down common areas and places like that
  • However, right now, he’s considering when to open those places up
• Conserve as much cash as possible
  • He stopped all monthly distributions to investors
  • Not doing voluntary upgrades
  • Only handling basic turnovers
    • Not sure what demand will be
    • People may be more price-conscious than historically
  • Increase communication with tenants, staff, investors, etc. and all parties
    • More communication is better than too little – “bad news doesn’t age well”
    • With investors, he is communication twice a week to relay progress in the rent collections process
• If you can survive the next 12 months, in 10 years from now, we could see a major bump in prices
• Get yourself in a position to set your liquidity aside
• Get yourself educated (if you aren’t already educated)
• Establish or maintain existing broker relationships so that when the deal flow gets turned back on, you’ll be in a position or have the kind of relationships to take advantage of it

Debt

• He was fortunate to have just refinanced two deals
  • He went to adjustable rate mortgages
  • Rates are now much lower
• He and his partner, without investors, also had a smaller deal that they just re-financed
  • It was a recourse loan
  • They switched to a Freddie Mac Small Balance Loan
  • He’ll get a little cash out
  • He’ll have 12 months of serves on them (it’s coming out of loan proceeds)
• They have a couple more that they want to re-finance
• He hopes that by the 4th quarter banks will be feeling more confident and open up a bit
• He has a couple of deals where he has 2 or so years left on a bridge loan with a couple of extension options that he hopes to move into longer term deals
  • They have already implemented their value-add strategies on these projects
  • Hopes to get these deals  re-financed before year-end into longer term loans with 5-7 year minimum maturities
• Thoughts on variable rate loans
  • Most multifamily loans usually have a max 10 year term, unless you get a HUD or FHA type loan
    • Long-term fixed rate loans are hard when it comes time to sell
    • Re-financing can be expensive with pre-payment penalties and transaction costs
    • It makes more sense to float or there are derivatives you can buy interest rates caps where your interest rate can never go over a certain amount.  These are really inexpensive right now because rates are next to zero and likely to stay there for the foreseeable future
      • You should be able to get this at a reasonable spread
      • The spread over these, whether by LIBOR or Prime or whatever your index is, has widened out over the last couple of months as people were just trying to slow lending down.  They seem to be coming back to what they were
        • If you can get a good spread and a low index, adjustable rate mortgages make sense if your time horizon is in that medium term of like 2-4 years
          • These make a lot of sense right now instead for trying to fix something for 10 years
• Grace from the Feds
  • The agencies announced that for existing mortgage loans
    • You need to qualify but you can apply for 90-day loan forbearance
      • That was definitely different than the last recession
      • They did that right away
  • Regarding 1031 Exchanges
    • They said if you were in the middle of one, you had to July 15th to identify another deal to go into
    • The reason being is that everything that was on the market got pulled
  • He sees the federal government really trying to accommodate people

Advice if You Are Thinking About Getting Into Real Estate Investing

• Get yourself educated
  • Listening to podcasts like the Old Dawg’s REI Network is a good resource
• Networking
  • It may change now in the world of face masks and social distancing
  • But try to make new contacts
  • If you are a passive investor, develop relationships with sponsors
  • Got to get out, get to know people
• The only thing that’s guaranteed is that things will be different in the future – there’s always change
• Make sure you stay on top of the evolving market
• Stay as knowledgeable as possible
• These are a few things that will allow you to react the best and make great decisions

How to Reach Mike

• His Podcast: The Old Capital Real Estate Investing Podcast
• His Company: SPI Advisory

DISCLAIMER:  Many of the above strategies take knowledge and have a higher degree of risk.  You need to do your research and/or work with someone who is experienced to reduce your risk.

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