2026's "Discounted" Properties Aren't the Bargain They Look Like

0:00Deals are often evaluated on what they could make, but sometimes it's more important to question on what they could cost you and is the juice worth the squeeze. Today, Kathy and I are opening up our portfolio and we're talking about the deals that we're doing today and the ones that we're letting go and passing on. I'm James Daynard. I'm stepping in in the host seat for Dave today with my good friend Kathy Fecky and this is the On The Market Podcast.

0:30All right, Kathy. So I want to know, most importantly, what deal have you passed on recently? And why did you pass on it? Because there's so many opportunities getting thrown people's way right now. Yeah. I mean, we all know that multifamily is an opportunity right now. We're seeing massive discounts. We're seeing foreclosures. The banks are done extending and pretending. So many of these loans now are in default. It's headline news everywhere. So one would think that there would be just a ton of multifamily deals out there, right? If they're down 20, 30, 40 % from what they were. The problem is they're just where they should be.

1:07And even if you're getting a 20, 30 % discount, you might not be getting a deal. And that's what's confusing because, right, somebody just paid too much before. So the fact that you're paying less now doesn't mean you're getting a deal. So it's confusing, right? Are you seeing that too? I mean, right now, because there's so few transactions going on in certain spaces, the opportunities just keep coming your way. But yeah, you look at it and you're like, as investors, we want to shift with the market. And what's coming across doesn't make me want to like, you know, it's like you engage and then you're like, yeah, I'm good.

1:41I'm going to swipe right. I'm moving on to the next deal. Right. Like it really jumped out at you, especially when you're looking at the bigger deals. Now, the smaller ones, we are seeing more opportunities, Like kind of like when you're in that 10 to 20 units, we call it no man's land. It is no man's land. The institutional investors don't want it. You know, it's too small for them. Yeah, it's not worth their time and effort because it is a lot more work. When you're trying to scale a portfolio of 10 to 20 units, it's like flipping a house. You just run into all sorts of different issues. Yes.

2:12Yeah, nothing's been that attractive. Do you remember in 2008, Kathy, when there was like the bank tape where people could buy all these good deals on tape? Yes. And everyone's like, we're waiting for this tape to come out. Doesn't multifamily feel the exact same way? Like it's just not coming. Yes. Because we have a multifamily fund. We were prepared for this moment. We got the money ready. So we thought, boy, when that deal comes, you got to be ready. You got to have the money. You don't have time to syndicate, to raise the money. Like it's got to be in the bank and ready to go. So we've been planning this and we have our fund ready.

2:46And we have been underwriting three or four deals a week. And these are not just any deal. They're the good ones, supposedly, that are being brought to us. And we made offers, but we've had to negotiate the sellers down because it's got to be hard to be the seller saying, but I put this much into it or I paid this much for it. I can't give you a bigger discount. But on the buy side, you're saying it's not working. It's just simply not working. Once you add in the cost of finance, which is three times maybe what they had when they originally bought it, maybe double, just more. And then you've got the higher insurance rates and the higher costs and rents haven't really gone up.

3:30They've gone down in some areas because there was so much new supply added. So when you add that up all together and you forget about what the owner paid at the time, I mean, you just look at, does this pencil, is this going to work? They don't. They don't. Unless, you know, back then when you're talking about the tapes, they didn't really work then either. So the people bought them anyway with foresight thinking prices are low, they're going to go up. It's crazy because you'll see some like some of these discounts they're throwing on these multifamily. It's like$10 million,$15 million less than these people paid a couple of years ago for.

4:05Yeah. And you still look at that discount and it doesn't pencil out. The other thing is that over the COVID boom, the apartment boom, investors weren't necessarily doing apartment investing. This wasn't buy and hold. They were flipping apartments. And a lot of investors didn't understand that. These are not long-term buy and hold. This will never work. The only way this is going to work is because you think you're going to fix it and sell it and raise rents and sell it for more. Now, if you can't raise rents, you're not going to sell it for more. And that's exactly what happened. And then in addition, they had all these extra expenses.

4:40So it's all gone whack and upside down. That was a blip in time, right? Where everything went up rapidly. And people made a lot of money flipping their apartment deals. They really did. Yeah. They did it right. And then they got more capital. More people talked about it. And all of a sudden, you go out and, you know, that's the problem with scaling. When you try to scale up, you buy more assets. And then if you time it wrong, it can really come down the wrong way. And I think that's what's happening. But the deals just aren't that good. Have you seen any where you're like, I am going to buy this deal?

5:10Yeah. Yeah. So we have made a lot of offers and we did tie up a property in Kansas City. The location is absolutely incredible. Right by a university, a new building. They had just built it three years ago during COVID. They paid way more. I mean, all the construction costs and everything, they put way more into it than we were offering. And it was all going to work. Actually, the numbers on this were great. They finally were at a point where they had to concede. They had to, their loan is due, right? So either the bank's going to take it or they take our offer. And they did. So then we're like, oh, finally, you know, we got a newer grade apartment.

5:51It's only a few years old. It's by a student housing. It's fully occupied. We could still raise rents. They haven't raised rents. Everything was perfect about it until we got there. And this is what is such a bummer. We talked to the tenants. They're happy. They love it there. but then the inspector comes by and, you know, we're there for the inspection. And he's like, they didn't put gutters on this thing. Like they ran out of money when they were building it because construction costs went up, you know, during COVID. So they had to cut corners, but they cut stupid ones. And one of the corners they cut was they didn't put gutters on this building.

6:25And so when there was rain over the last three years, now the property has foundation problems. And that is not something I'm going to fix. I'm not doing that. We would have to put a new drainage. And that would be fine and not too expensive. But what we don't know is how much the building has settled. And the inspector thought it settled too much. Every building settles. But when you don't have gutters and now you have water, you can't have water around your building. You got to keep the water away from your building. And they didn't do such a simple thing. So we had to walk away because of their negligence.

6:58The way the market is, I know that's what we've done in our offices. We just won't buy certain things now because it's easy to get blinded from a performance sometimes where everything looks beautiful on paper. Oh, it was great. It was a great deal. Yeah. On paper. Yeah. And then like you open it up and you're like, oh, wow, I wish like, why did I buy this? Right. But the paper and the performer told us to buy it. Yeah. For us, that is one thing we've done when the market is more volatile or flat and there's there's less upside where you can't get that pop to cover for unexpected. We definitely get our buy box way more narrowed down.

7:29Like there's certain long permit timelines. We won't mess with them. There's certain buildings now in certain cities in Seattle, we won't buy anymore because we know the tenant relocation is going to be expensive and take a long time, which slows down the deal. And so we've had to update our buy box with just not buying these certain things. Because this had foundational issues, is that just a no-go for you guys anymore? Like in today's market? It was fixable. The inspector told us what we could do and we just put in drainage. The problem is the settling, there was going to be more problems. We knew it and problems that you can't really see yet because the settling was so quick that first year.

8:11And it didn't have to be. I mean, again, buildings settle anyway. And this was a little bit of a different type of build. It was shipping containers. It was a shipping container apartment. Have you seen those? I've seen them. The whole apartment was made of shipping containers. Yeah. So, I mean, I love the concept. I love new stuff. But there's not enough research, I guess you could say, on what happens when these shipping containers settle too quickly, you know, and can they handle that? It just was too unknown. And we're not going to take that risk. We have investors in this. We're not going to give them that risk, you know.

8:43So, you know, we walked away from something that could have been cool, but also could have been a nightmare. We're going to take a quick break. but when we come back, Kathy and I will be breaking down the decisions shaping our portfolio. Most banks will give you a line on your primary residence and stop there. AVEN looks to underwrite the equity in your investment property, the second home you have, the property you hold in your own name, and put a line of credit against it on a Visa card. Same asset, same logic. Think about what this unlocks. Earnest money, the day a deal hits the MLS. A contractor, paid on Friday instead of next month.

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11:43Welcome back to the On The Market Podcast. Let's get back into our portfolio update. What deals are you actively looking, right? You have a bigger fund that is looking for deals. Like what's Kathy's buy box for like a multifamily deal now? Like if you're like, hey, this is the three things we need to hit or it's not what we're looking at when you may have looked at that earlier. For sure. Well, we don't want them too old. I'm not like you. I don't have the guts that you have, James, to go get this old, scary looking stuff. So we want a newer, newer product. I know that's kind of what Ken McElroy has been able to do is by, you know, work with builders who kind of similar situation as I was doing is they just spent too much money building it.

12:24And now the numbers don't work. And now they got to get rid of it. But it's fairly new. And the new second owner gets to come in and get all the benefits. So, you know, we'd love that. But those go quickly, right? Then you're competing against institutionals and the big boys. So we are looking, like you said, for something that's out of their radar. So 100 units or less, fairly new. And in growth markets, the kind of the markets that I've been investing in for years, which is more the Midwest or Southeast. But then those are the areas where there was overbuilding in general. So then you're going to see softer rents in those areas.

12:59Yeah. And so you have to kind of like pad that out, right? And how you do that is you want a higher cap rate and you want a higher return going in because - Got to get a better deal. Yeah. Yeah. Things are still sliding in certain, like, especially those high pop growth. Like I know we have like Spokane in Washington. It's Eastern Washington. I love Spokane. I went to school in Spokane. Oh, that's right. Yeah. I did. They got a serious pop on rent growth. Yes. And units during COVID. Now it's retracting because it just, I remember someone sent me a performa on a deal. It's like three years ago.

13:33The rents were at three bucks a foot. I'm like, this is Spokane. this is a dollar 50 a square foot rent market. Like what, how are we up to three bucks? I saw that too. And I was questioning it as well, because everybody's kind of going over to Idaho through Spokane, you know, to Coeur d 'Alene. And so I get to go see my, my school hometown. And, you know, I saw the same thing, like, how have these rents and prices and everything gone up so much? I don't know if this is just sustainable, but you know, if you got in there when it was cheap, then it would have been good. Yeah. Wasn't that? And that's what we've seen is they've gone down back down to two bucks and that's a big drop and then a lot of units got built all at one time yes there's i mean actually if you like spokane kathy i'd look in spokane there's some deals out there for new construction new construction where the builders were expecting higher rents and they're not getting way higher rent trouble yeah okay thanks for the tip james we'll go look but those are the markets that are struggling and it's right there is some new property, but yeah, the institutional and the deals just aren't there.

14:33And, but you have to avoid falling into those numbers traps, which are the old buildings right now. Those look the best on paper, but they are a nightmare inside the walls. And we don't even buy old apartments. You don't. No, we're 1960s or 70s or newer if we're above 10 units, because it is a nightmare. We've, we've bought those properties for 50 grand a door and we thought they were worth 200 grand a door. and the middle just made no sense, right? It takes too long. It costs too much. And then the thing is too, because it takes so long, you can't really know exactly where your rates are. Is there going to be a war going on and energy cost is still high?

15:13Or is it, you know, there's so many different moving parts and if you can't lock the rate, the deal just, you can't perform it outright. And so, you know, that's definitely something we're not buying is those old big buildings because there's too many unknowns in unstable markets. you have to remove the unknowns. Right now I'm doing a post-burr, which is basically I've had a property for 10 years. I haven't really done much to it. Now I'm fixing it up and we're going to flip it. We're going to sell it. So I'm kind of doing, you know what I mean? Like you've held it for a long time and the tenants were fine with it.

15:46Now it's time to make it modern and nice and we'll make hopefully money on the sale now. But of course, this is a very old home and we've got to completely replace the furnace. So there's an extra 10 grand that wasn't originally told to me from the contractor that I feel like I hear James in my ear saying, well, you should have known. You should have known if it's an old house, it's going to need a new furnace. 10 grand for a furnace? Where's this house at? Ohio. Oh, no. I don't like that number at all. Are we paying too much? Well, and AC. I don't know. Oh, AC. Well, that doubles it. So then you're closer.

16:21That makes more sense. It is a good time to be doing those little secondary upgrades. We're actually selling a lot of homes for hedge funds right now. And they're choosing not to dust them up like you're dusting them up. And they're selling them for probably 15, 20 % less than they could. They just don't want to put any more money in these things. And doing what you're doing is the right call because you can get that extra 10 % to 15%. But you can't put out a rental used house. Yeah, we were like, we've had this thing. We paid 50 grand. I don't know. It's like in the middle of Ohio somewhere. And somebody has rented it for 10 years, right?

16:55But then she left and my property manager said, you could rent it again, or we could put 20 grand into this and you could sell it for 100 ,000 more. It's like, okay, I'll do that. And I'll just 1031 because this is kind of the nice thing about a post-burr or like a property you've had for a while. We can 1031 it. It doesn't have to be a flip. I don't have to pay those taxes. And we'll be able to buy a couple of newer properties. So I'm like, yeah, let's do it. Let's do it. So I think this is something people could look into is what does your portfolio look like? And can you just sort of make money on what you already have just by doing a few improvements?

17:31What are you guys like, hey, this is on for the in the next 12 months, you feel really confident. You're like, this is what we're targeting. And we know we're going to get this. There's a couple of things. So this is not a I'm doing by myself thing, but we do syndicate. And when we syndicate, we can do bigger deals. So, and then the risk is shared by all those who are investing, but the reward is shared too. One of the things that we're seeing is obviously a great need for new housing, right? A great need for new housing, certainly everywhere, but also in California where it's hard to build. I won't build anymore.

18:08We've built subdivisions in California and the demands are just so high. You know, it's so hard. Just school fees alone and all the fees. I mean, you're in$150 ,000 just in fees and probably more now. So we don't really want to do more building in California, but we have a team that's very good at land entitlement. And for those who don't know what that means, it's taking raw land and getting approval to build something on it by the city or by the county. And that's a, I guess, riskier thing because it's political. You're dealing with neighbors who maybe don't want that developed, or you're dealing with the city council that may be slow growth or pro-growth or whatever.

18:51Or you're dealing with a city council who wants it, but then there's an election and new people come in and then they don't want it. So it's more of a political play, but that is what's needed. And that's supposedly what this new housing bill is trying to help, is trying to make the process of building easier. Well, we have for 15 years been doing entitlement projects. My partners are 40-year veteran land developers. And we've been doing a lot of land entitlement. So we just got some land in Truckee, which is a fast growing area. A lot of tech moguls are moving there. It's right in Lake Tahoe.

19:26And so Truckee has, like I love Truckee, and then it has just grown to be very bougie, like kind of like Park City style, where you take an old town and make it gorgeous. And this parcel is walking distance to downtown. But it's Truckee and it's California and they're slow growth. They And so, you know, of course, I put my feet on the brakes here. Like, we got to make sure the city really wants this, that the people want this. So, of course, one of the things you do is you make sure that a large portion of it is affordable. And that's partly how you get it through is, don't you, you know, don't you want a place for teachers?

20:03Don't you want a place for firefighters? It's Tahoe. You need firefighters to be living locally. So we need to have housing for them. And as long as you carve that out and the city wants it, and it's already approved as a housing subdivision. So it's not like we're having to go through that whole process. It's already that far. Somebody else took the 10, 20 years to get it to that point. So we're, you know, taking it over. So that's, we like doing that because then we don't take on the risk of building. We already have a buyer, a national builder who wants those lots. So land and tile. But that's not something you do on your own.

20:40You got to know what you're doing if you're going to do that. We're taking one more quick break. We'll be back on more deals that we're pursuing, passing on, and why. Tax season reminder for all the real estate investors listening. If you own rental properties, short-term rentals, commercial buildings, basically anything that's not your primary residence, you need to know about cost segregation. It's an IRS-compliant strategy that lets you accelerate depreciation on your properties, which means you're paying less in taxes this year and keeping more cash in your pocket for your next deal. Cost Segregation Guys is the go-to firm, having done over 12 ,000 of these studies with$500 million in total depreciation identified.

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23:54This is the On The Market Podcast. Let's jump right back in. You know, it's funny. That's what I'm seeing the best deals on too, is anything that has to do with land development or dirt moving because builders are getting beat up right now. Rates are really high on your hard money loans. Costs are still rising. We have this energy problem. I mean, I thought construction was coming down, then it went the other way again. You know, things are more expensive. Things are taking more to transfer out. And the absorption rate on new construction is not great in a lot of markets, especially for that starter.