“I skate to where the puck is gonna be, not where it has been” – Wayne Gretzky
We hope your trees are twinkling and you are enjoying quality time with family and friends. I am thankful for everyone in my network. Wishing you all the best this holiday season.
My 2022 In Review
While 2022 brought much joy and accomplishments, we also experienced the loss of the following loved ones:
“Your life was a blessing, you memory is a treasure…You are loved beyond words and missed beyond measure.”
- My daughter Micaela graduated from the police academy and is now a Sworn Police Officer in Renton, Washington.
- I was recently promoted to Captain at my W-2 job.
Investment Property Sold For Huge Profit…Tax Free!
With the recent volatility in the stock market, I wanted to share one of my successful real estate investments. We owned this single family rental in Memphis, TN for about 14 months and recently sold it for for a 26% profit. The profits are being tax deferred due to the fact that self-directed IRA funds were used to purchase this investment.
New Real Estate Acquisitions
With the equity from the sale of that single family rental property, we then invested that money as Limited Partners in two apartment complexes.
Addison at Sugarland. Sugar Land, TX – 288 Units
Via de Oro, San Antonio, TX – 150 Units
Real Estate Investing Conferences and Networking
“Your Network is your Net Worth” – Jim Rohn
Over the past few years I have been attending many real estate investing conferences and networking with a lot of like minded people and 2022 was no different. Aside from the many virtual events and training I attended, I also I traveled to Dallas, Austin, San Antonio and Long Beach specifically to educate myself on these markets as well as increase my effectiveness as a real estate professional.
I truly enjoy learning new things as well as meeting new people who share the same mindset and similar financial goals. These conferences and workshops expose me to the latest industry specific data and information while developing relationships with other real estate professionals and business owners adds to my growth as an investor.
Fun & Travel
- I found myself in Chicago a few times during the year and was able to check off a “Bucket List” item that I have had for a long time….Chicago Cubs Game at Wrigley Field. We had a great time!
- My wife and I were able to get away and Relax and Renew on our favorite white sandy beach in the Dominican Republic.
- We were also able to spend several days in Hawaii with our daughters and good friends.
Multifamily Year End Review and 2023 Outlook
Yardi Matrix has released their year-end review of 2022, also providing their outlook for 2023 (You can access their year-end report and national outlook here). They provide market intelligence for investors, lenders, and property managers, including nationwide market and institutional research reports for multifamily properties.
The efforts to curb inflation by design, via the Fed’s sharp interest rate hikes, will remain a cause for uncertainty in 2023, but recent data suggests that the Fed might actually manage a relatively soft landing.
While a recession in 2023 is inevitable, economic fundamentals support that it would be a short and mild one.
The labor market remains tight, with 261,000 jobs added in October, and while the unemployment rate ticked up to 3.7%, it is still near historic lows.
Consumer spending via retail sales was up 1.3% in October, the biggest jump in eight months. Consumers still have a large amount of excess savings, however, it would be used to fund higher expenses due to persistent inflation.
Interest rate hikes have slowed down both single-family and commercial multifamily real estate transactions, as the costs of borrowing and servicing loans have made it more difficult for buyers to purchase at sellers’ asking prices. For single families, sellers do not want to give up their properties for less than what they thought it is worth, and they do not want to trade their mortgages into one for a new property with rates that are three times what they previously were.
This dynamic tilts towards renters, which positively bodes well for multifamily investors, as the supply of both single-family and multifamily homes will remain limited due to the current challenges of financing purchases and developments.
Demand for multifamily rental units remains strong due to the limited supply. There is currently a 600,000-unit shortfall of apartments in the U.S. due to underbuilding after the 2008 financial crisis. An additional 4.3 million units (307,000 units per year) are needed by 2035 when accounting for the current shortfall and projected demand. At the current rate of deliveries, Yardi Matrix predicts the multifamily housing deficit will not be resolved for approximately 10.5 years.
Year-over-year rent increases have decelerated in the 4th quarter of 2022, decelerating from 9.2% in September to 8.2% in October, however, that is the norm with seasonal cycles. Interestingly, the rate of deceleration has been less than that of previous years, highlighting continued demand. Rent increases in 2023 will not be nearly as much as the record double-digit rates in 2021 and 2022, reverting back to closer to historical norms.
So what is the bottom line?
There will be a recession in 2023, however, it will be a mild and short one. The fundamentals of the economy remain strong, with low unemployment, continued consumer spending, and strong individual savings. There will be a slowdown in sales and development of single-family and multifamily properties. This slowdown will continue to increase the demand for residential rental units, given the current shortfall. U.S. multifamily continues to be the “stand out” sector among all U.S. real estate asset types.
Multifamily Investors Fight Rising Rates by Pursuing Properties with Assumable Debt
By assuming existing loans, investors can mitigate the risk from rising interest rates and ultimately underwrite a greater leveraged return, market participants say.
The short-term borrowing rate is at its highest level since January 2008 after the Federal Reserve raised its key rate by another 0.75 points to a target range of 3.75 percent to 4.00 percent. The early November increase throws gasoline on the already-burning desire from multifamily investors for assumable debt.
“The greatest risk today in closing a new deal is the extreme volatility with interest rates,” says Matt Frazier, CEO of Jones Street Investment Partners, a Boston-based real estate investment firm that focuses on multifamily assets throughout the Northeast and Mid-Atlantic regions of the country. “Once a deal is under contract, and by the time you lock in debt, who knows what the rate could be? If you can completely remove that risk from the equation, you can focus on the fundamentals.”
Jones Street, which owns and operates a portfolio of roughly 4,400 apartment units totaling roughly $1.3 billion in assets under management, is actively transacting deals by using loan assumptions and scooping up quality properties with in-place fixed rate debt, Frazier notes. At the same time, the firm continues to routinely analyze its portfolio, but with additional scrutiny on properties with assumable debt.
Just two weeks ago, Jones Street closed on a suburban infill apartment community with more than 350 units outside of Philadelphia for more than $100 million. The deal included assumable debt with nine years of term remaining and an interest rate below 4 percent.
By assuming the loan, the firm was able to mitigate interest rate risk and ultimately underwrite a greater leveraged return than would have been possible otherwise, according to Frazier.
The attractiveness of an assumable loan largely depends on the length of the term remaining and an investor’s expected hold period. For example, a short-term hold may not complement the loan assumption’s prepayment conditions.
“It’s specific to the buyer—beauty is in the eye of the beholder,” Frazier says, adding that Jones Street is keen to assume longer terms because of its long-term hold strategy.
Though Jones Street would have been interested in the Philadelphia property without the assumable loan, the existing debt made the deal “very compelling,” according to Frazier. If the firm had needed to obtain new financing in today’s interest rate environment, the debt likely would have cost 5.5 percent or more, he speculates.
“Anyone who is in the market right now, looking at a potential transaction—one of the questions they’re going to ask first is: ‘Is there debt on the property, and is it assumable?’” Frazier says. “They’ll be looking at four things: amount of debt, interest rate, length of remaining term and any remaining interest-only term.”
Lower rates and market-beating terms
Geopolitical and economic uncertainty, coupled with the increasing cost of capital resulting from the rising interest rate environment, have put a damper on multifamily sales activity. Banks, pension funds and even some alternative lenders have pulled back on their financing, making multifamily transactions harder to complete. As investors seek smart, creative ways to transact deals, many have turned to loan assumptions.
Loan assumptions appeal to investors because fixed-rate debt that was secured in prior years is very attractive compared to today’s higher rate environment. If the loan originated prior to June 2022, the rate on an assumable should be far more favorable than the rate a borrower can currently obtain.
Moreover, loan assumptions often allow sellers to avoid prepayment penalties, defeasance or lockout periods, which may be reflected in a lower purchase price for buyers and a more favorable all-in basis, Le notes.
More complicated than assumed
The complexity of a loan assumption varies by the lender and loan type, with some assumption provisions being more restrictive than others. A buyer’s track record and experience are key pieces in a loan assumption.
And even though “assumability” is built into loan documentation, lenders have approval discretion—meaning there’s no guarantee that a buyer will be able to assume a loan.
“There’s also the risk of not being approved by the lender, which can scuttle a deal especially if there’s not sufficient time left before closing or if financing contingencies were waived,” Le says.
That’s especially true today, given that some lenders—banks and debt funds, in particular—would prefer for loans to be paid off so they can put that money back to work.
Last year, when Atlas acquired a multifamily community with more than 800 units in a secondary market, the firm successfully assumed the in-place debt, in part because of its track record and experience. That debt, coupled with the hefty deal size, forced many local players out of the market, according to Le.
Those who hope that assuming a loan is easier than obtaining a new one will be disappointed. Jones Street’s Frazier says the underwriting and approval process is just as rigorous and lengthy, requiring 60 days or more. Most lenders will require the same or stronger credit from the new borrower.
A loan assumption typically leads to lower leverage (loan-to-value). Maximum loan amounts are usually governed by LTV or the income of the property to service that debt, whichever is lower. Today, the LTV test means “nothing,” according to Frazier. “What is constraining loan proceeds right now is the cost of the debt and the ability to service it,” he says.
Low leverage impacts returns and requires a higher equity contribution to assume the loan, according to James Nelson, principal and head of Avison Young’s tri-state investment sales group in New York City and host of “The Insider’s Edge to Real Estate Investing” podcast. Typically, low leverage only works with patient buyers with long-term horizons since low LTV at acquisition can negatively affect returns in the short term.