Multifamily Buying Window Widens (We’re Already Investing)

0:00We've been saying that it's time to buy. So now it's time to talk about what and where to buy. Of course, different investors will have different opinions, but everyone needs to be informed in this rapidly changing real estate market.

0:17Hey everyone, Dave Meyer here back for another episode of On The Market. And today I am joined by my co-host and friend Kathy Fettke. We're both really excited right now about some new investing opportunities we've seen recently that feel sort of different from the properties that have been available to buy in the last couple of years. I'm personally fresh off an investing trip to the Midwest where I saw much more interesting small multifamily inventory than I've seen honestly in four or five years. Kathy is adding to her apartment portfolio and working on build to rent projects. So today we're going to talk about why we like these particular opportunities, and we're especially going to focus on how to finance them in an uncertain future mortgage rate environment.

1:03Hey, Kathy. How are you? Hi, I'm great. Good to see you. I can't wait to hear about your recent trip and tour. Yeah, it was fun. For those of you listening, Henry and I went on a cash flow roadshow, we've called it. We've been talking about doing this for so long. And we did a show a couple of years ago, maybe, where we were like picking markets we liked. And Henry said he liked Racine, Wisconsin. And for some reason, he and I are always talking about it. So we actually went and we started. We drove around Milwaukee, Racine, went to Chicago, went to Indianapolis, went to Madison, Wisconsin. We had a great time.

1:41Have you been to that area? Definitely Chicago, but not Wisconsin. I need to get there. Yeah, we had a great time. Really interesting real estate markets there. We went to Madison, which is kind of like one of the more like high appreciation, high growth kind of areas, less cash flow, but really fun city, a lot going on. We went to Milwaukee, which people might not know this, but it's the, I think it's the hottest housing market in America right now. Some of the hottest home price appreciation, but also some of the hottest rent growth in the country as well. A lot of economic growth there. And then there's this whole area between Chicago and Milwaukee.

2:17It's like a two hour drive if you haven't been to this area. And like you drive down this road and it's just like Amazon distribution, you know, Wayfair distribution, just like all of this stuff going on there. That's super exciting. So we had a great time there and I highly recommend to people if you're looking for a market to invest in, like from what I saw in Wisconsin, it offers a little bit of everything. Each market, some of them were more cash flow centric, some are more growth centric, but I was excited about everything. I saw there. You know, my team is always looking for the next hot market.

2:51That's what we are obsessed with. And it's just north of Chicago, but maybe doesn't have some of the same issues that Chicago has in terms of high taxes. It may, I don't know. But our team went and checked it out. We found a good team there. The prices were right, but just there was, they just didn't like the city. So maybe they didn't go to the right neighborhoods in the Milwaukee area, but they just didn't see a lot of what we want to see, which is job growth, population growth, and so forth. And I'm not sure if you've got the stats on that, but we didn't pull the trigger and we were wrong on that one for sure.

3:25You know, one of the things that sort of drove me towards Milwaukee, which was pretty interesting was I saw this article is in the Wall Street Journal a couple of days ago, like mid July. And it was showing about where young college graduates were finding jobs. And And Milwaukee was like one of the top five, which I found really encouraging because the other ones were places where you would suspect. It was like Raleigh. There were some places in Texas and California, like, you know, those kinds of places. But Milwaukee, it seems like jobs are starting to move there just because it's super affordable and there are tax incentives there.

4:00But it's definitely, I wouldn't call it like a super economic growth city just yet. But it does seem like a lot of economic activity is moving in that direction from Chicago, sort of like up towards Milwaukee. It's just more affordable. Taxes are definitely better there than they are in Illinois. So there's a lot of good stuff there. Yeah, maybe that was just the issue that my team saw is it's too early, maybe. But if you are a business owner and you own property in Chicago with more and more tax increases, you know, there is definitely incentives to go somewhere nearby. Yeah, for sure. And I would say like if you're looking for more cash flow, some of those markets are definitely cash flow positive.

4:43We went to Racine and Kenosha and just saw on market cash flowing deals. Like some of them were stabilized. You could just buy them right now and they would cash flow. Some of them you could do some value add to and get them even better. So I thought that was encouraging for people who are looking for that. I can't believe I forgot this, Dave, but I actually did invest in Kenosha. Oh, really? I haven't been there. But one of our employees had some credit issues and really found an amazing deal on a property there and needed us to do financing. So we funded his deal. He fixed it up. He lived there for a year and sold it.

5:22And we split the profit. And I think we did make like a 25 % return on that one. So I hadn't been there, but he was telling me all about the area. And the beautiful lakes around there. Yeah. The lake was beautiful. That was really cool to see. But look at you. You're investing so much you don't even remember where. It was probably five years ago. But yeah, I'm like, oh, wait, that does sound familiar. That's awesome. Yeah. I mean, I think for me, the cool part of the trip is that it sort of solidified what I'm going to be looking to buy the second half of this year. I've bought a lot of duplexes and quadplexes that are, I don't know if you've done this, like these old like cut up old victorians and they're they can be very profitable but they're kind of a pain in the ass to manage like maintenance can be really hard on them and so the idea of these built to rents or specifically like purpose built two units or four units even if they're not recently built they were built to rent at some point i find that really attractive like at this point in my career where i'm trying to find lower maintenance newer builds than the like 1900 cut up old Victorians that I was like investing in in Denver for a long time.

6:32That wasn't built to be a multifamily. But you just you just explained our last syndication, which is building build to rent duplexes in the San Antonio area. It is so much easier to manage something new because like we said, it's built for that purpose. Are you selling those to investors or owner? I mean, everyone's investors, Is it mostly owner-occupants? No. Most of our build subdivisions are selling retail to homeowners. But this one is our first. We're building it simply to hold it and rent out those units. Yeah, we're keeping it. Oh, nice. Okay, cool. But the nice thing about build-to-rent in that scenario is, let's say the market changes or the investors decide they want to sell.

7:20the plan is to sell in five to seven years but the investors might want to keep it if it's cash flowing so well why sell it yeah but if we wanted to we could sell off some units you know the apartments obviously are great but in a in a horizontal apartment basically a build to rent community there's no rules around that you can you could sell some off if you want and have some retail homeowners in there or sell you know some units to investors or keep it so it's new enough that it would make sense to me to keep it refi, get everybody's money back. But we'll see what the investors decide in five years.

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11:00Welcome back to On the Market. I'm here with Kathy Fecky. We're just catching up talking about the market and what we're both doing with our portfolios. I told you a little bit about what I'm targeting, which is sort of purpose-built two to four units, probably in the Midwest. I'm going to do some other stuff, but that's what we've talked about so far. Kathy, what's exciting you in the market these days? I'm a little too excited, Dave. Part of me wants to retire, but then there's all these opportunities. So, okay. So here's - You're going to retire? I can't. I don't know if it's possible. You deserve it, but I'm skeptical that we'll see the day.

11:40It's probably not going to happen, especially after my conversation yesterday. So we are launching a multifamily fund because my new syndication manager, I mean, he's been with us for a year and a half now, but that is his background. And he has built multifamily. He has renovated. He understands it's much better than me. But the deals that we've looked at, you have to move quickly, right? When there's a good deal in any kind of real estate, you can't sit around and wait and try to negotiate. You've got to jump. You've got to pounce quickly. So for a syndication, if you're raising millions of dollars, you don't have time.

12:19It takes a month just to get the documents in order. And then you need to work with the investors and make sure they understand the deal. So we've missed out on some really good opportunities for that region. You just basically have to have cash. So we are starting the multifamily fund so that the cash is ready so that when we see the next deal, we can pounce. So like what has changed? Like you're just seeing values go down enough that you start to feel like the cash flow is there, the upside is there. Like what has changed from, I don't know, six months ago to now? The deals are getting better.

12:52The prices have come down quite a bit. I think maybe sellers realize I can't hold on forever and banks are not playing the extend pretend game as much. The bigger stuff, the institutional grade apartments, those are getting picked up by companies who do have millions, if not billions of dollars of cash. So we're not trying to compete with the Blackstones of the world. You know, that's not. But the smaller stuff, the family owned under 100 units, that's what we're seeing the opportunity in. You know, I think they've just, you know, how long can you be negative cash flow? How long can you feed a property?

13:30Yeah, that distress is definitely starting to happen. I think on a national basis, multifamily is down 15 % to 20 % off peak prices, pretty significant. And in certain markets, it's like way more than that. Like 30 even. Yeah. Are there specific markets you're targeting? You know, there's so much opportunity, but we're kind of still focused in what we've been doing, which is the Southeast and Midwest. I mean, Southeast, it's like an informed bet that you're making is like, these are overbuilt markets. There's stuff that's happening there that's pushing prices down, but they have super strong fundamentals.

14:03So predicting and counting on a rebound is a good bet to make, which is super interesting. So that makes total sense to me. But I want to talk to you about commercial debt because that's what's causing this. And I want to ask you about how you're planning to finance some of these acquisitions to help mitigate that risk, because this is something I've been thinking about a lot. So if you're going to go out and buy 100 units right now. How are you financing this? Because I may have a controversial take on this, and I want to hear what you think. Well, I'll just give you an example of the build-to-rent community, which isn't an apartment, but it is commercial debt.

14:37So when we underwrote that deal, and my underwriter is excruciatingly conservative, painfully, such that over the past four years, everything was turned down. Even deals people are bringing me today, it's always a no, I just kind of expected. So with our build to rent, it was a yes. And one of the reasons was the numbers still worked when he underwrote it to a 9 % rate. And that's on construction, and then the refi at a high rate too. Now the construction loan came in in the high sixes. So already off the bat, we've saved ourselves hundreds of thousands of dollars. Wow. Construction loan in the sixes?

15:17Yeah. That's pretty darn good. It's our partner in Texas has banking relationships and it is really good. It's shockingly good. But the deal would have still worked at 9%. So now we get to go back to the investors and say, well, we got a few hundred thousand dollars that we might just be able to give right back to you or at least have in reserves. So it's the same with multifamilies. When we're underwriting it, it's going to be very, very conservative. We're keeping the LTV at 65%. So we've talked about 65 % to 70%, but low enough, we're not going to be doing those bridge loans that got everyone in trouble.

15:52The bridge loan is sort of like a, I guess I could explain it like a second lien, right? It's a higher interest rate, and they're not very forgiving. Short term, yeah. So a lot of people got in trouble with those. So we're not, we're going to raise enough cash that we're not going to have to do that. We could do the renovation with the cash. And it's not going to be this knockout of the park thing that multifamily was doing in 2021. But that's okay. You know, people aren't expecting that. And so when you refinance it, are you getting a balloon? Like, is it a traditional commercial loan? Traditional, yeah.

16:25Traditional commercial loan. Okay. That's awesome that you got that commercial debt. My fear about commercial real estate right now, because I went into 2025 being like, I'm going to just buy for myself, you know, a 20 unit something somewhere. And that will be a great retirement piece for my portfolio. And I'm still interested in doing that. But in the recent months, I've just gotten very wary of long term interest rates. I am fearful that three, five, seven years from now, interest rates are going to be higher than they are now. And I know not a lot of people think that, but I am fearful of that.

17:01And so I worry about any sort of variable rate debt, even if you're getting a good deal right now. For me, someone who wants to hold onto this for 20 years, I worry that I would have to refinance at a much higher rate. I'm wondering if you think about that at all, or since you're syndicating, you're going to try and sell this off in a couple of years, or how do you think about that risk? Yes, the plan is to sell it off while we're still in a fixed rate. So I love Ken McElroy and he is the apartment king, right? And he believes that you should just always hold. He holds everything. So that is a different business plan and there are commercial loans that you can get for that business plan.

17:44That's kind of what I'm thinking personally. Yeah, getting like a fixed rate commercial loan, even if you have to pay a higher interest rate. Right. But I mean, I have been a single family investor for over 20 years. And for that very reason, because you can lock it in. So great. It's so great. And you can get up to four units. Yeah. So you're kind of in multifamily, right? You can just take so much risk out off the table. Just so much. It really does. And with every loan we've done, Rich and I will look at each other and be like, oh, we could get such a better rate if we just do a shorter term, you know, an arm or something.

18:20And then it's like, yeah, but then we can sleep at night. So I think you can absolutely retire on the plan that makes you feel better, which might be the one to four unit plan and just sleep at night knowing that you don't have to worry about when you're doing long-term unless you can get commercial loan that is fixed for a much longer period of time. I think it's exactly what you said. You just have to match the debt to the business plan that you have. I invest in syndications that use short-term debt in commercial properties because it's a value-add project that's going to sell in three to five years.

18:52That I'm okay with. But for me, what I'm looking to acquire right now is I'm trying to pick up 10 to 20 units in the next, whatever, six, 12 months in multifamily that I'm going to hold onto for 30 years. And to me, yeah, there's a chance cashflow might be better in the next seven years if I take a variable rate. But frankly, I'm going to keep working the next seven years, like, I don't need the cash flow, I would rather just lock in a rate, and know that that is my rate until I retire, and then it's going to be paid off. And that's that, you know, and I'm, you know, I'm in a fortunate financial position where if that means I have to put 30 % down or 35 % down to carry it in the short term, I'm willing to do that.

19:35But like, that just better suits the business model that I'm looking for, for this particular unit, like, that's what this group of properties I'm trying to acquire. That's the purpose it serves in my portfolio. And I need to find the right debt for that. And I just wanted to call that out because I think a lot of people are looking at multifamily and seeing exactly what Kathy's saying and saying, hey, values are down. And that is true. There's going to be, there are good deals now and they're going to be a lot more good deals. I think that's just clear, but don't just jump into it and make the same mistake that some of these operators made, which is like just taking on short-term debt without considering how risky debt can be when it's variable rate in commercial real estate.

20:18It's just a different, more risky endeavor than residential. Yeah. And all you have to do is do it once to learn that very, very hard lesson, which is why I didn't do it over the last four years when everybody else was, because I did it in 2008. So I know how much that hurts. You had a variable rate. Well, yeah, I wrote about it in my book, my first book, Retire Rich with Rentals, that I got a great deal in a growth market right outside of Knoxville, right? Pigeon Forge. We could see that massive growth 20 years ago, 25 years ago happening in that area. So Rich and I got three homes on the way that I think we paid$150.

21:00I mean, they're probably half a million today, maybe more. And we got into construction loans. And I wrote about it in the book, so I'll just say it here. I was a mortgage broker at the time. I didn't read the fine print. I thought I got a construction to perm, which means that it would automatically turn into a permanent loan. I didn't. I just got a construction loan. So when 2008 happened, those loans, they became due. They balloon, right? They're due. That's what they do. And the market didn't allow you to get any more loans over 10. It used to be before that, you could get an unlimited number of investor loans.

21:41So here we are. It was so hard to find any money anywhere. This was before I was syndicating. And we were just like, we have to come up with like 600 ,000 cash now, which we didn't have. Oh, no. And or hand them back. So these beautiful homes where we put a bunch of money into them, we just had to hand back to the bank. It was very hard. So once you've done a short term balloon note like that, you learn. Yeah, you learn. It's super risky. Yeah. And I mean, I see people do it also in residential with seller financing to everyone loves seller financing, which is great. But like, there's there's risk there, too.

22:15So if you I really recommend, if you want to get into this stuff, understanding it actually in my book, Real Estate by the Numbers, Jay, Scott, and I wrote, I know it's boring stuff, but understanding how loans work is incredibly important to being a real estate investor. So I highly recommend it. Just read one chapter. It's called The Anatomy of a Loan. It will help you understand the different elements that go into them and how to sort of figure out what loans are right for you, given what you're trying to buy and what you're trying to accomplish. So So obviously, Kathy, you've learned your lesson the hard way, but hopefully you all can learn your lesson in an easier way.

22:52Don't have to go through that at all. Just listen to what Kathy's saying right now. Understand the debt. That is so incredibly important. And so many passive investors over the past decade had no idea. They didn't. They're just like, hey, we're invested in an apartment. And that's all they know. Yeah. So understanding the debt structure is incredibly important. Just like with that second apartment that we owned, it was the debt. I mean, we sold the building for millions more and it was the lenders got all the upside. Yeah. Yeah. Yeah. I think, you know, understanding the debt is super important.

23:27Honestly, it's hard, but I think it's an important lesson for those of us who started in the last 15 or so years, just seeing the changes in interest rates are super tough and they're super hard to predict. And a lot of people didn't see rates staying high this long. A lot of people have assumed rates are going to go down. There's a chance they do. I think there's a chance in the next couple of years they go up, you know, like we don't know. And so that introduces risk into being a real estate investor. The asset class is still great. Like prices still go up. You know, we've seen that in the last couple of years.

24:01You can still make money in this. You just have to be really careful with debt. We talk about this all the time. There's good debt, there's bad debt, and sometimes variable debt can help you hit a grand slam. But think about your own risk tolerance a lot before you take out some of these things, especially in this kind of environment. But we do have to take one more quick break. We'll be right back. A few weeks ago, I took a trip down to Pensacola, Florida with my dad and my kids. We spent our days at the beach and the pool. We cooked dinner together one night and I got to experience the simple joy of just watching my dad suck up time with his grandkids.

24:32We played around a mini golf that ended up being the best part of the whole trip. And it was one of those visits where you just slow down with the people you love and realize how much these ordinary days together actually mean. But while I was gone, my house was just sitting there empty. That got me thinking about something I hadn't really considered before. What if I could actually put that space to use while I'm away? That's what got my attention about Airbnb's co-host network. If you've ever thought about listing your space on Airbnb but felt overwhelmed, a co-host can help. They're experienced locals who can create your listing, manage your reservations, message guests, handle on-site support, and even take care of design and styling.