Lloyd Jones Capital recently bid on a small $6 million apartment community in a tertiary market. The property was bank-owned and obviously distressed. It needed extensive renovation. Furthermore, its occupancy had been a very low 85% over the past twelve months, despite having third-party, professional management in place. This was, indeed a troubled property.
Guess what! There were twenty-one bidders for this property. (Typically, we see five or six.) We got to the “best and final offer” stage and sharpened our pencils to what we thought was a very aggressive price. Guess what! We didn’t get the deal. I might have expected this in New York or LA, but not in a small, tertiary market of North Florida. I was flabbergasted!
Another missed deal: the winning bidder offered a $500,000 non-refundable, cash down payment – before due diligence! That’s just not good business sense.
So what does this tell me?
1) It takes a lot of looking to find a really good real estate deal in this environment. Real estate is a local business. That’s why we have put more “boots on the ground” in local markets to track down the best opportunities for you. (This has resulted in five new acquisitions, three of which were off-market.)
2) Now is not the time to be overly aggressive in bidding on multifamily real estate. You’ll be paying too much, and returns (if any) will be minimal. Be patient.
3) We must not over-leverage at this stage of the cycle. Today, I would keep LTV below 75%, stabilized.
4) We need to be realistic in our expectations. Be skeptical of spreadsheets that show 10% yields and 20% IRRs. Such properties exist, but they are few and far between. (Luckily, Lloyd Jones Capital is very good at finding them.)
Don’t get me wrong. Multifamily real estate is still one of the best investments in the world.
But now is the time to be disciplined. There is a lot of capital going after multifamily real estate in today’s market. Don’t get caught up in the buying frenzy. My thirty-five years in the multifamily business tells me this will not go on forever. But for now, be patient, be very selective, and don’t overleverage. If you do these things, multifamily real estate will provide you with handsome risk-reward returns.
Christopher Finlay is Chairman/CEO of Lloyd Jones Capital, a private-equity real-estate firm that specializes in the multifamily sector. With 35 years of experience in the real estate industry, the firm acquires, manages and improves multifamily real estate on behalf of its institutional partners, private investors and its own principals. Headquartered in Miami, the firm has operations throughout Texas, Florida and the Southeast. For more information visit: lloydjones.wpengine.com.