Latest / Real Investor Radio Podcast / Ep. 103 | The Case for Buying Multifamily in 2025
Transcript
- Craig (00:12) Hey, welcome back everyone to Real Investor Radio. It's Craig Fuhr along with Jack Bevier again. We're just doing some shorts today. Jack, it's the age old debate, single family versus multi-family. You you've got a lot of real estate investors who gain some experience, start off in single family and they automatically believe that, it's a bigger asset, know, more zeros behind it, you know, more cashflow potential. Jack BeVier (00:40) the real money is made. Craig (00:41) Yeah, yeah, that must be where the real money is made. That's the really smart guys in real estate investing. It's the next rung up the ladder. So Jack, I wanted to take just sort of kind of frame the discussion around sort of like that debate from 2000 to today. So year 2000 over the last 25 years, like, and what's been your take on, you know, why you got started in single family real estate? versus multifamily because you could have done either. Jack BeVier (01:11) Yeah, like when I started in my career, I was doing office buildings and thought that was fun. And the kind of the expression in that market that people like to quote was that commercial real estate investors sleep on nicer pillows, but residential real estate investors sleep better. And, you know, the idea was that like, Hey, yeah, you can make a lot of money in commercial real estate, but the, but the booms and busts are crazy. and you might go bankrupt, you know, and a commercial real estate investor. Craig (01:39) Yeah, how do you like to be in the office market today, Jack? How'd you like to be that? Jack BeVier (01:43) Yeah, right. But like, yeah, you know, commercial real estate investor who's been in for 40 years and hat doesn't have at least two bankruptcies under his belt, you know, has been, you know, has must be playing too much golf. But I like fell in love with a single family real estate asset class, even before, you know, people agreed that it was an asset class, because I look at those opportunities, and it would be like, this house can be bought at what looks to be like an eight cap. And it's in the shadow of a multifamily building next door that's going for a six and a half. And I'm like, it's the same location. It's the same tenant base. So it's the same credit quality of the cash flows. This just seems to be like, you know, a market arbitrage that because the institutional capital doesn't want to go in and deploy capital $100,000 at a time and would prefer to write a $3 million check, they're willing to pay 150, 200 basis points extra for that convenience. And for, know, and there's also, you know, argument for some more operational work, work never scared me. Right. Like that wasn't, that wasn't a deterrent, particularly, you know, when you're in your twenties and thirties. So we fell in love with this, with, with buying single family houses at eight and nine caps. And we're like, these knucklehead multifamily investors are over here paying six and a half and seven and like, that's just, and so we were like, that's just a fee game. Right. Like. The sponsors who were doing that are doing it to create a bunch of fees as the general partner over time. You know, if the market goes up, they get lucky. Great. If the market doesn't go up, they live a comfortable lifestyle and that's fine too. But for us, we just like kind of looked down on it a little bit. It's just like those guys just aren't willing to hustle. They're just not willing to work to grab the extra couple hundred basis points that are just sitting there in the shadow of their multifamily building, you know, in this little house. So that was really like our whole thesis for a very long time as to why the house game was like the best game going. anyway, the reason I bring that up is that another differentiation between the two and driver for the better multi-family, tighter multi-family cap rates was that the financing was tighter, right? Like before the single family. asset class really had Wall Street money behind it on the debt side. had Freddie Mac multifamily financing, was 30 year fixed rate, non recourse, very predictable, very available for tons of brokers and cheap. You also had banks who were very eager to do multifamily term loans. Versus on the single family side, You didn't have quite have as good of financing options. So part of the offset was because, the debt's cheaper in the multifamily world and the desk cheaper in the multifamily world. And as a result, that's a, that's driving cap rates down because the debt's more readily available. All that did was excite me to get into the debt on the single family side, right? Cause I'm like, so you're saying that the debt's overpaid on the single family side. Let's go do more of that then until those, cause those things should be equal. if at best those things should be equal. So if you're telling me a driver behind multifamily cap rates being too low is that single family debt gets paid too much. Well, then I'd love to be the bank over there, wouldn't I? And that's another big one of our theses for for being in the, you for growing our lending business was we thought we were getting paid well as the debt. Now, this interesting dynamic has kind of occurred or has emerged, though, in the wake of twenty twenty one. that like, feel like almost like no one even saw it. Like no one's, it hasn't, no one's been talking about it, which is if you look at that multifamily project today and you look at that and the cap rate that you can buy that multifamily project today and you look at the house next door, it's inverted. The, the, multifamily properties at 7 % and the, and the house equivalent cap rate is five and a half. And that was never a thing before. that wasn't a thing from 2000. to 2023, you know, that was not a thing, but, 2022 maybe. But over the course of the past three years, one, we've seen a little bit of degradation in cap rates in the multifamily side because of the defaults ⁓ that occurred because of the 2021 activity. But you've also seen a huge run up in housing prices because of the 2021 liquidity that has outpaced rents. But. housing prices, single family housing prices have gone up more than multifamily prices have, even with the equivalent rent, you know, with rents going up at the pretty much the same pace. And so, man, I'm wondering if multifamily is the better play right now, like for the same, you know, unlevered argument. And by the way, multifamily debt is still super attractive. The Freddie Mac multifamily rates are still better than your DSCR loans and your bank rates. So like, Craig (06:28) What kind of leverage do you get? Jack BeVier (06:31) If you're buying one, you put 20 % down, you buy a multifamily building, you put 20 % down, you get a five and a half percent rate, you know, back of the envelope, that's about what it is. versus you do that in the DSCR side and it's a six and a half percent rate. So you're getting, still got that hundred basis point headstart in terms of cost of capital, but I'm not seeing that you're paying a premium for multifamily today. I'm seeing that they're, they're like roughly equivalent or sorry, that, that, that they're, that they're out of whack, that, that multifamily cap rates are higher. So. I think that that's something that no one's talking about that much right now, but that is a dynamic that is going on that real estate investors may want to reconsider. Craig (07:09) Well, let's talk about Jack ⁓ some of the softness that we've been seeing in the multifamily market. And then if you would maybe like let's let's let's talk about sort of the layers like what what class of multifamily are you seeing more of these days? What what what would you not be running towards in terms of multifamily these days? And sort of the transaction environment for you know, A class, B class, C class, D class. Jack BeVier (07:40) Yeah, sure. I'm not gonna, I'm not gonna be a good, I'm gonna just put a disclaimer out there. I'm not gonna be a good reference point for like the couple hundred units and above institutional side of things. I'm not paying attention to those. I'm paying attention to five to 150 units is kind of like the market that I'm paying attention to. So I'm only gonna speak on that, but I think it was last summer. We saw some softness in the multifamily side where we were starting to see like, Hey, these like, you know, price per pound is pretty good. And the cap rates, you know, decent, like this is a creative out of the gate. We don't even need to tell ourselves stories about how we're going to be able to push rents, which we also don't think we're to be able to do. Uh, but, like, know, like you had to do back in 2021 in order to make a deal work. Like these things just kind of, these things just kind of cashflow. Um, they're not sexy, you know, it's like, you know, produce a levered 10, but. you know, but inflation adjusted, know, but inflation hedged because it's real estate and, you know, and there's a shortage of housing. So like, seems like a pretty safe, you know, 10 low teens, you know, return. and so we ended up, we bought, this is just, know, our one person, one investor's perspective. Okay. So like, it was like last summer, we ended up buying two deals and I was like, ⁓ that was, that was fun. Like I've never been able to buy. multifamily before we bought a 20 unit and we bought a 28 and then I'm like, man, maybe this should be a thing like. Craig (09:04) In the DMV jack in the DC Metro, Virginia. Yeah. Jack BeVier (09:09) Yeah. Yeah. Yeah. Baltimore County line. And, and I was like, man, maybe we're just going to buy these. This is, this is going to be the thing that we're doing now, because, you know, I had this idea about multifamily being better, you know, back then. And so I started paying attention to it. And then, man, over the, over the course of the past 10 months, it tightened back up, you know, like, multifamily cap rates. I felt like. squeezed back in and I was getting, you know, I wasn't coming close anymore. And then past like 30, 60 days, I feel like it's softening again. And we're starting to get some looks that are decent. And I'm the underbid on some stuff that I was getting blown out by 20 grand a unit before. And so I'm wondering if we're walking into a period of time where, you know, it's not a great time to be a multifamily seller, but it's a pretty good time to be a multifamily buyer. I don't think these deals are like knocking your socks off in terms of like, you're not getting rich off of this stuff. But, but if you're looking for a place to park money into a, you know, great risk adjusted return, it's, know, it's, it's kind of fun to add units 20, 30 at a time as opposed to house at a time. So I'm, ⁓ it's something that we're, paying additional attention to. And, you know, I just wanted to bring it up as something that investors may want to consider. Craig (10:24) I see a fair amount of it as a loan officer with the company, Jack, where we'll get investors from every state in the country that bring us multifamily deals. we'll set the numbers aside, just the neighborhoods, the locations, sort of the quality of the assets vary so widely that I'm wondering if we can... create some sort of story for investors who are listening on the types of assets that they should be looking for and the quality of the assets rather than just running after something because the numbers seem to make sense. Jack BeVier (11:07) scared of the low end of the market in multifamily. I've always been scared of the low end of the market. I'm still scared of the low end of the market. It's where you see a property come out into the market and it's half vacant. You're like, what the hell has been going on? this thing's half vacant. You never see that in a nicer suburban setting, right? but you'll see buildings that have, you know, where market rents are 750 and the thing is half vacant and the broker's like, oh yeah, it was mismanaged. And I was just like, was it like, my God, like half vacant. was this guy, like, did he just move to Australia? Like that's, it's a bit more than mismanaged, you know? But you never see that in a $1,500 a month rent ever. Like that's not a thing. Craig (11:48) Right. Jack BeVier (11:54) So I'm like, yeah, some of it's mismanagement. Some of it is it's super difficult to manage. It's incredibly hard to manage $750 a month, you know, one bedrooms, you know, just credit quality is low. Turnover is high. Maintenance as a percentage of rent is super high. And then you throw a mortgage on top like, oh, like really risk high, you know, high risk profile investing in my opinion. So I'm still scared of that segment. I stay away from it from the multifamily side. Some people were like, yeah, but I work with section eight. And so, you know, I've taken care of that, that, that credit risk issue because I'm getting paid by the government. understand. But I don't, but, just, but you're, if you put section eight in a, in a 40 unit building and you fill it full of 40, 40 units of vouchers, that's called a housing project. And ⁓ the, you know, that hasn't gone very well over the course of the past 50 years. That has not been a, experiment that has worked very well. And so, yeah, you can do it. You can grind it out. It's not how I personally just, Hey, maybe this is just a personal decision. And I'm, and I'm the weak guy now because I'm like getting older, but like, I don't, I don't have the, I don't have the stomach for it anymore, but I don't really want to manage a housing project. just don't. Yeah. So, Hey, call me a, call me a wimp. Craig (13:15) Jack, talk about the term financing for multi units up to 10 and then multi units beyond 10 units. So yeah, I could get myself into a great deal, stabilize it, get good management in place. I've got good cash flow, but what are my alternatives for term financing and above 10 units, frankly, because it ain't DSCR. Jack BeVier (13:40) Yeah, yeah. Above 10 units, you're at the local bank or your small balance, small balance, Freddie multifamily loan, which you can find brokers. It's easy to find brokers who do that. It's a very widely, widely syndicated product. The, because it's kind of the same amount of work to do a $1 million loan as it is to do a $10 million loan, as it is to do a $100 million loan. You see kind of like a filtering of brokers. in terms of professionalism based off of size. It's just a thing, you know, in the market. But it's available. It's out there. You you may pay a little bit. You're going to pay a little bit more on the APR basis for the smaller loan. And so it starts to get, you know, there's less than $3 million balance or less than $5 million loan balances. The bank versus the Freddie Mac multifamily loan is actually worth pricing worth taking a look at both. think credit unions right now are really probably the best option. Their cost of capital never didn't go up as much as the banks. They just don't have the same profit motivation that banks do. And so the most professional, the most savvy, know, hustler investors that I've talked to recently who are doing multifamily on a small balance multifamily are are talking to credit unions. So that would be my advice there. Craig (14:58) Interesting. Do you have any indication that the DSCR market will warm up to that sort of like, let's say like 11 units to 50 units multifamily? Jack BeVier (15:12) I haven't heard anyone on Wall Street talking about it. think I agree with them. It's a different underwrite. Sizing a loan off of gross rent, taxes and insurance in a multifamily context is I think a step too far. Even when you get balances over, you get loan balances over a couple hundred grand, it's a little bit of an eyebrow razor that the DSCR underwrite is only based off of. taxes and insurance even. So I don't really see him getting more aggressive and go into a gross rent based underwrite on multifamily. think we're, think, and there's no reason to. Freddie's gonna outcompete that from a rate perspective anyway. So like, as long as Freddie stays in that space, hey, we'll see if Freddie Mac and Fannie Mae get privatized and that. results in rates going up in that product. Maybe things are a bit more on par, but was the DSCR markets already a hundred basis points over the Freddie Mac rates. like even if they offered it, why would you choose it? know, it's Freddie Mac's just the better product. Craig (16:17) Yeah, let's talk about then from financing from a bridge side then. So let's say I'm a relatively experienced landlord. I've got, you know, a small portfolio of single family assets and I want to step up into multifamily. Well, I say step up, but like step into multifamily. And I found myself maybe a 10 or 11 unit and I'm going to stabilize it. And how do we You know, how do you look at those guys today, Jack, in terms of risk and how much we would be willing to finance someone with that type of profile and experience? Jack BeVier (16:51) Yeah, I, um, we love those deals and the, I think the underwrite is the things that matter are being honest around what your expense ratio is. Like you come in and you got a thousand dollar a month rents and you tell me that your expense ratio is going to be 25%. I don't even want to do the low cause you're an idiot. Cause you, cause you're wrong. Cause you're just wrong and you're going to get hurt. And I don't want to be along for the ride as you get hurt, right? Like that's just not what expense ratios are for a thousand dollar a month rentals. They're just not. So, you know, going into the conversation with an, you know, being honest about what expense ratios are going to be, um, I think is like the gate, you know, uh, it's real easy for us to deny loans when someone submits it with a 25 % expense ratio and tells me that, Hey, this is a five and a half cap building and a 25 % expense ratio and the renter $1,100 a month. That's an easy denial real quick. If you're going to have higher, if you're going to have $2,000 a month rents and tell me the expense ratio is 35, we'll look into it. But those lower rents never have low expense ratios. They have high expense ratios. the other mistake, the other pitfall that people do is they underwrite short-term rents and then capitalize them using a long-term rent cap rate. Basically, it's like, I'm going to run a hotel and tell you that it's a multifamily building. Like, no, it's a hotel. Like short term, the short term rental business is more like the hotel business than it is the multifamily business. ⁓ So that's the other like thing that people do and get themselves in trouble. You know, comparing apples and grapefruits. So those are the two things that we're kind of looking out for. But when you got a good deal that Craig (18:16) That's right. Jack BeVier (18:30) you know, it's not in the very low end of the market and you're underwriting it based off of an appropriate expense ratio and a realistic cap rate. We're kind of sizing our loan for 65 % of after repair value because that's what the Freddie Mac takeout is going to be at is 65%. And so a value, but there's a lot, you know, we are seeing more and more, I would say a good value add multifamily opportunities where you can have not a ton of cash stuck. with a 65 % refi, which is exciting. That was not the case in years past and in recent history. So ⁓ yeah, I think we're seeing more and more of those deals that actually do pencil. And we're excited to be able to do the bridge loads on those. Craig (19:17) Yeah, so there's your discussion on multifamily and sort of historically where it's been over the last 20 years, Jack. Anything else you want to add to this quick episode? Jack BeVier (19:27) No, conversation. Stuff that I've been thinking about that I wanted to get off my chest and put out there into the ethos. be excited to see what people think about this dynamic that I'm describing in your local market. Are you seeing multifamily opportunities becoming more attractive than single family? If not, why? What's your sweet spot in multifamily? Would love to continue that conversation in the comments. So don't be shy. Craig (19:53) All right, that's our quick episode on multifamily and sort of where it's been and where it's going. See you on the next one.