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#88 Apartment Prices Are Down 30% (Rates Aren't Dropping for 2-3 Years) · Own More Doors

• 0:00
  SPEAKER_01: The apartment market has been getting kicked in the teeth for the last few years, values dropping, property staying on the market much, much longer.
• 0:06
  SPEAKER_01: It is clearly a buyer's market.
• 0:08
  SPEAKER_01: And guess what?
• 0:09
  SPEAKER_01: There's going to be no relief for the next two to three years.
• 0:12
  SPEAKER_01: So what we have right now, get used to it.
• 0:14
  SPEAKER_01: Tune into today's show while Cody Charnel and I go back and forth on if you're a seller, how should you be looking at the next two to three years?
• 0:21
  SPEAKER_01: Because if you were expecting that interest rates were going to drop in the next few months, that's not going to be the case.
• 0:26
  SPEAKER_01: I'm sorry to report that.
• 0:28
  SPEAKER_01: But if you're a buyer, does this mean that you shouldn't buy?
• 0:30
  SPEAKER_01: Probably not.
• 0:31
  SPEAKER_01: Tune in today's interview.
• 0:33
  SPEAKER_01: Cody, so now it's August 2027.
• 0:36
  SPEAKER_01: Um, I know when we were entering the year, I was thinking, and a lot of other people were thinking too, like, okay, this is the year where interest rates are gonna drop, prices are gonna come back up, uh, there's gonna be a lot more transactions happening.
• 0:48
  SPEAKER_01: Obviously, that didn't happen on the interest rate.
• 0:50
  SPEAKER_01: Talk to us about what we're seeing now and kind of what you're expecting when it comes to interest rates for five units and above.
• 0:56
  SPEAKER_00: Yes, interest rates have been on the climb recently.
• 0:59
  SPEAKER_00: You know, oil prices due to this war in the Middle East.
• 1:04
  SPEAKER_00: Uh, we have Japan who has to raise their interest rates, which is pulling money out of our bond system, which makes our bonds more expensive.
• 1:12
  SPEAKER_00: We also have a new Fed share who's not giving any forward guidance, which makes people want to be more conservative and causes rates to go up.
• 1:21
  SPEAKER_00: Um, you know, it's it's a lot of different elements that are pushing and pulling on the prices of bonds, which affects our interest rates.
• 1:30
  SPEAKER_00: Yeah, it's it's really hard to predict what's going to happen.
• 1:33
  SPEAKER_00: Right now, Chase is at 6.6% for five-united properties.
• 1:39
  SPEAKER_00: That's the the quote I've been getting on the most recent escrow that we just opened.
• 1:43
  SPEAKER_00: I think at the start of the year we were around six.
• 1:46
  SPEAKER_00: So yeah, it has climbed a bit.
• 1:49
  SPEAKER_00: Um, who knows where it will go from here?
• 1:51
  SPEAKER_00: But what are your thoughts on it?
• 1:53
  SPEAKER_01: So the last building I bought, the interest rate that I got, and I thought was high.
• 1:56
  SPEAKER_01: So this is like within the last eight months, right?
• 1:59
  SPEAKER_01: So it was 5.875.
• 2:01
  SPEAKER_01: And I thought that was high because I wanted it to be 5.75, right?
• 2:05
  SPEAKER_01: And so it does, it does impact our borrowing power, right?
• 2:10
  SPEAKER_01: So if you if you sell a smaller building, you have$600,000, well, that$600,000 should be able to buy you something.
• 2:16
  SPEAKER_01: But if if they're lending you less because of the increase in interest rates, it's gonna create a problem.
• 2:21
  SPEAKER_01: So um, but what's interesting, I think if people think, if people think, well, the interest rates are so high, Cody just said they're going up even even higher, that means no one's gonna buy.
• 2:31
  SPEAKER_01: But that is not necessarily true.
• 2:33
  SPEAKER_01: We have a lot of our clients are buying, and I think um a report just came out, and just here in Long Beach alone, we we here at Sage Real Real Estate are are representing more buyers right now than ever before in terms of brokerages as we compete with other brokerages, right?
• 2:46
  SPEAKER_01: So we have a lot of buyers now.
• 2:48
  SPEAKER_01: Why are our buyers buying right now, even though the interest rates are high?
• 2:52
  SPEAKER_01: Like what's what's the motivation behind doing that?
• 2:54
  SPEAKER_00: Well, prices are way down.
• 2:56
  SPEAKER_00: So uh we're still in this um kind of shakeout period where people who bought between 2020 and 2022, their rates are starting to adjust.
• 3:07
  SPEAKER_00: So, you know, in 2020 to 2022, rates were in the threes and they were fixed for five years.
• 3:13
  SPEAKER_00: If you bought in 2022, you're coming up on a big reset.
• 3:17
  SPEAKER_00: A lot of those people have already experienced it.
• 3:19
  SPEAKER_00: Um, and so some people are just holding those loans and their buildings are not cash flowing.
• 3:26
  SPEAKER_00: Maybe they're trying to sell right now and at least break even.
• 3:29
  SPEAKER_00: But um, you know, we we analyze properties for clients all the time who are in the market buying.
• 3:35
  SPEAKER_00: And one of the things we always look at is, you know, what did this sell for a few years ago?
• 3:39
  SPEAKER_00: And I was looking at one yesterday, it sold for 165 a few years ago.
• 3:44
  SPEAKER_00: They have it on the market at like 125 right now.
• 3:47
  SPEAKER_00: The seller fully renovated the building.
• 3:49
  SPEAKER_00: So, you know, not only are they losing their hold down payment if they're successful in selling, but they're also losing all that money they spent on renovating it.
• 3:57
  SPEAKER_00: So you want to buy when there's blood in the streets, is what they say, right?
• 4:01
  SPEAKER_00: Yeah, and so people are losing money.
• 4:04
  SPEAKER_00: There's a little bit of distress.
• 4:06
  SPEAKER_00: I wouldn't say there's like forced selling so much going on right now, but um, savvy buyers do recognize that.
• 4:13
  SPEAKER_00: It's a lot of people who who own buildings, have owned buildings for a long time, they see the value right now.
• 4:18
  SPEAKER_00: So people are taking advantage.
• 4:20
  SPEAKER_01: I always tell people, look, it's like we go into a department store and we're going straight to the clearance rack, and that clearance rack is full and there's options.
• 4:26
  SPEAKER_01: And and to your point, yes, there's not going to be further markdowns.
• 4:29
  SPEAKER_01: We've already seen a big markdown.
• 4:30
  SPEAKER_01: We've seen up to 25%, in some cases, 30% reduction in pricing, which is terrific.
• 4:36
  SPEAKER_01: You know, I keep telling people and anyone who's working with us, I'm like, look, um, it's a buyer's market, their loss, your gain, get into it now, control the asset, wait for the next five years, and the interest rates will get better.
• 4:48
  SPEAKER_01: I get, I get right now in the short term, uh, the interest rates may not be better, but we're not buying something for the next two years.
• 4:54
  SPEAKER_01: No, we're buying for the next seven, 10 years.
• 4:57
  SPEAKER_01: And once we're able to get back up, then that's where you see the profits.
• 5:00
  SPEAKER_01: And so that's that's where I believe that our I think our I think our clients see you and I doing it.
• 5:05
  SPEAKER_01: And we're buying right now, we're not afraid, right?
• 5:08
  SPEAKER_01: We're we're okay with the interest rates.
• 5:10
  SPEAKER_01: And that's the other side too.
• 5:12
  SPEAKER_01: As as I talk to people and they're like, oh, it looks like they're not gonna lower interest rates again, they might even go up.
• 5:18
  SPEAKER_01: And I'm like, great, because there's two sides to that.
• 5:21
  SPEAKER_01: If if interest rates go up again, it's gonna put pressure on the sellers and on pricing, so we might even get better purchasing power, which there's always a plus side to what's happening.
• 5:31
  SPEAKER_01: Definitely, yeah.
• 5:32
  SPEAKER_01: Cody, right now in today's market, would you say that inventory is up?
• 5:35
  SPEAKER_01: Or or I mean, I guess if we compare it to five years ago, do we have more inventory now, or has is that not not the case?
• 5:41
  SPEAKER_00: Inventory in the five-unit space has increased.
• 5:46
  SPEAKER_00: Um days on market have also increased.
• 5:49
  SPEAKER_00: So we see a lot of stuff just sitting around.
• 5:52
  SPEAKER_00: It is more difficult to move properties right now because you know, there are less buyers out there than there are sellers.
• 6:02
  SPEAKER_00: That's what makes it a buyer's market.
• 6:03
  SPEAKER_00: And with the interest rates increasing, it just makes it a little bit more difficult to buy.
• 6:08
  SPEAKER_00: So yeah, I think those are the main reasons that we're seeing the inventory kind of creeping up in that space.
• 6:15
  SPEAKER_00: What do you see?
• 6:16
  SPEAKER_01: I talk to a lot of sellers, and I get it that a seller was told that their building five years ago was worth this much, much, much higher rate than it is now.
• 6:25
  SPEAKER_01: And and sometimes it's hard to accept.
• 6:27
  SPEAKER_01: Some people understand, look, there's gonna be cycles, so there's gonna be their peaks, and and a lot of it is driven by interest rates, right?
• 6:32
  SPEAKER_01: So interest rates are high right now, it's gonna put pressure downward.
• 6:35
  SPEAKER_01: And so I think if you're a seller and if you don't have to sell, then don't sell.
• 6:40
  SPEAKER_01: That's my advice to them.
• 6:42
  SPEAKER_01: Unless, look, a lot of times I tell people, are you okay with owning this for the next two years?
• 6:48
  SPEAKER_01: And sometimes they look me dead in the eye and they say, absolutely not.
• 6:52
  SPEAKER_01: So for whatever reason, they can't stand the building anymore.
• 6:54
  SPEAKER_01: I'm like, okay, because you said that, we're we have no choice but to market the property.
• 6:59
  SPEAKER_01: And we have to price it properly.
• 7:01
  SPEAKER_01: Otherwise, we're gonna be like every other building that's just sitting on the market.
• 7:04
  SPEAKER_01: Are there buyers?
• 7:05
  SPEAKER_01: Yes, but the buyers will come out off the sidelines when it's when it's the perfect price.
• 7:10
  SPEAKER_01: But when it's the perfect price, Cody, it will sell within a week.
• 7:13
  SPEAKER_01: Not everything is you know having to sit on the market for a very long time.
• 7:16
  SPEAKER_01: So when it comes to being a seller, is are we okay with owning it for the next two to three years?
• 7:21
  SPEAKER_01: Because I'll tell you this, Cody, I went to a conference and they and it was mostly off of residential real estate, but they said, look, what we have right now in terms of interest rate, expect this for the next two to three years.
• 7:31
  SPEAKER_01: So if I'm an owner and if nothing's gonna change, because a lot of people are thinking, oh, in a few months interest rates drop, my building's worth so much again, right?
• 7:38
  SPEAKER_01: That's what they want.
• 7:39
  SPEAKER_01: I understand that.
• 7:40
  SPEAKER_01: That's not probably not gonna be the case.
• 7:43
  SPEAKER_01: And that's not what I was I was expecting something different, but now we're looking at a new reality.
• 7:48
  SPEAKER_01: So for the next two to three years, if you could afford to keep it, then keep it.
• 7:54
  SPEAKER_01: Now, here's the other side of it, too, is if you sell right now and maybe you don't get the premium price that you once wanted, you do have hopefully some money left, and now you could go pursue other assets, something better that's also selling out of discount.
• 8:08
  SPEAKER_01: And we've seen that argument as well.
• 8:10
  SPEAKER_01: Cody, as as apartment owners, housing providers, a lot of what we're seeing right now, kind of like the um value add play right now, the best value add pay, in my opinion, is to add ADUs.
• 8:21
  SPEAKER_01: Um, are your clients adding ADUs and and are they getting the benefit from doing so?
• 8:26
  SPEAKER_00: Yeah, yeah.
• 8:27
  SPEAKER_00: I have several clients who are working on ADUs right now.
• 8:30
  SPEAKER_00: One of my clients is doing an AB2533 ADU, which is um a streamlined legalization of a unit that was bootleg.
• 8:40
  SPEAKER_00: So the city is working with them to legalize it, which is great.
• 8:43
  SPEAKER_00: So it's the one of the first ones, if not the first one, in Long Beach that's gonna be completed.
• 8:49
  SPEAKER_00: We're actually having inspections today, so we'll see how that goes.
• 8:52
  SPEAKER_00: So, you know, that new law opens up that as an option for people.
• 8:56
  SPEAKER_00: So having that legal unit makes his building worth a lot more.
• 8:59
  SPEAKER_00: So that's that's gonna be a good result for him.
• 9:02
  SPEAKER_00: Um, I think overall I've seen ADUs slowed down a little bit, just as everything's expensive.
• 9:09
  SPEAKER_00: A lot of people don't have a lot of equity in their buildings.
• 9:11
  SPEAKER_00: One thing I am noticing is you know, if someone has the option to pay down their loan on a five-unit enough building in order to refinance, or they can invest money in the property to create ADUs, and that additional ADU income helps them qualify for the same loan amount.
• 9:29
  SPEAKER_00: Some people are opting to do the ADU because it makes their building worth more and creates a better asset long term.
• 9:38
  SPEAKER_00: So that's that's one thing I'm noticing.
• 9:40
  SPEAKER_00: Long Beach also created like a seismic retrofit um list where you know buildings that have tuck under parking, they've identified the ones that, if they ever make it mandatory, would have to retrofit and reinforce that tuck under parking just in case there's a big earthquake.
• 9:56
  SPEAKER_00: So some owners are converting those spaces now, getting ahead of the curve.
• 10:00
  SPEAKER_00: Instead of retrofitting, they're just getting rid of parking and creating ADUs because there's more, there's a better return on investment to do that.
• 10:07
  SPEAKER_01: Yeah, I I um on my eight-unit building that I bought about 12 months ago, I remember you telling me, look, Juan, they might make you retrofit.
• 10:14
  SPEAKER_01: And and then we discussed it and we're like, well, if they do, then maybe I'll come out with one large ADU, multiple bedrooms, or maybe two smaller ADUs, maybe studios or a one bedroom.
• 10:24
  SPEAKER_01: So if we are ultimately forced by the city of Long Beach to do this, then it's just gonna force me to make that eight-unit building, hopefully a 10-unit building.
• 10:32
  SPEAKER_01: And so in my mind, I'm like, okay, it's all kind of part of the process of reinvesting back into my property and that kind of stuff.
• 10:39
  SPEAKER_01: Where I've seen a lot of people make mistakes is when they have a four-unit building and they add ADUs, and a lot of times they don't realize that they're shooting themselves in the foot.
• 10:50
  SPEAKER_01: If the goal was to sell in the next five years, and I'll tell you guys why.
• 10:55
  SPEAKER_01: Uh typically, you know, if you have a four-unit building, you're gonna qualify for your traditional 30-year financing, which is perfect, right?
• 11:01
  SPEAKER_01: But once you add that new ADU, now it goes into commercial financing.
• 11:05
  SPEAKER_01: So now all of a sudden, in order for someone to buy it, you're gonna need a larger down payment because now the there's a certain debt coverage ratio that has to be met that was not a requirement when it was a four-plex.
• 11:14
  SPEAKER_01: And so that's that's hurting people.
• 11:16
  SPEAKER_01: And one of the things that I've heard you say, like, look, one, when it's a four-plex, it typically sells for a higher uh gross rent multiplier.
• 11:22
  SPEAKER_01: And as soon as it's a five unit, it's gonna sell for less.
• 11:24
  SPEAKER_01: So and a lot of times, in most cases, it makes sense to add the ADU in most cases.
• 11:29
  SPEAKER_01: But when you're when you're if you had a three unit and you added the fourth, you're still fine, you're still under that residential financing, which is a premium.
• 11:37
  SPEAKER_01: Once you click over to the five, it it's okay to do it if you're gonna keep it long term.
• 11:42
  SPEAKER_01: But if you're thinking you're gonna be selling it, you might be better off selling it as a fourplex and moving on.
• 11:47
  SPEAKER_01: And right now, I'm I currently have a listing in Signal Hill where they added an ADU, so now it's commercial financing and it's literally reduced the pool of buyers.
• 11:56
  SPEAKER_01: It's making it impossible for someone to buy it.
• 11:58
  SPEAKER_01: Had it been a fourplex, we would have sold it a long time ago.
• 12:00
  SPEAKER_01: It's still active today.
• 12:01
  SPEAKER_01: And so it's just one of those things where um I think if you're if you're an owner and you're thinking about doing it, you should reach out to us and say, hey, is this a good idea here?
• 12:11
  SPEAKER_01: And what do you think my property is worth now?
• 12:14
  SPEAKER_01: And is it worth me doing this?
• 12:16
  SPEAKER_01: And in some cases it is, and a lot often, and in other cases it may not be.
• 12:20
  SPEAKER_01: And so it doesn't cost you guys anything to have Cody and I come out, give you guys a free analysis, we'd be glad to do that.
• 12:25
  SPEAKER_00: So it's interesting, you know, a lot of people are adding units now, taking four units into that five-unit and up space.
• 12:30
  SPEAKER_00: But we come across a lot of four-unit buildings that used to be bigger properties that were reduced down.
• 12:36
  SPEAKER_00: So uh back in the early 2000s, late 90s, people would take a five-plus unit building, combine units, so that they're now legally four unit buildings and they qualify for that residential financing, and it had the opposite effect where it made the building more valuable.
• 12:52
  SPEAKER_00: Yes, right?
• 12:53
  SPEAKER_00: That was before my time, and you can't do that anymore, unfortunately, because of the the no-net loss rule.
• 12:59
  SPEAKER_00: Um, but yeah, it's something something that's kind of interesting.
• 13:02
  SPEAKER_00: How people will switch back and forth between the four-unit space, the five-unit space of the building, um, and it changes the value.
• 13:09
  SPEAKER_00: Got it.
• 13:10
  SPEAKER_01: Um, Cody, so what's the advice we're giving to buyers right now?
• 13:14
  SPEAKER_01: Um it depends.
• 13:18
  SPEAKER_01: I'm gonna say he doesn't want to say I'm buy, baby, buy is what I'm gonna say.
• 13:22
  SPEAKER_01: That's that's my honest opinion.
• 13:23
  SPEAKER_01: If you're in a position, I think, if you're in a position where you have a down payment, there's inventory out there, we're buying, guys, we're buying off the clearance rack.
• 13:30
  SPEAKER_01: Who doesn't want to buy off the clearance rack?
• 13:32
  SPEAKER_01: We're not gonna buy, no one's gonna buy off the clearance rack and say, oh my gosh, I wish I would have never bought this.
• 13:36
  SPEAKER_01: They're not gonna say that.
• 13:37
  SPEAKER_01: They're gonna say, I wish I would have purchased more, is my honest opinion.
• 13:40
  SPEAKER_01: So I'm I'm a little more uh, I guess, bullish.
• 13:43
  SPEAKER_01: You know, I just finished buying four buildings in the last 12 months, and so do I want to replenish my funds?
• 13:50
  SPEAKER_01: Yes, so I can go buy more.
• 13:51
  SPEAKER_01: That's that's my opinion.
• 13:53
  SPEAKER_01: But from your perspective, you're saying it it depends, and I'll let you kind of finish that thought.
• 13:58
  SPEAKER_00: Yeah, um, I mean, buyers are coming to us with different scenarios, you know.
• 14:03
  SPEAKER_00: Um, what should I buy?
• 14:06
  SPEAKER_00: How should I finance it?
• 14:08
  SPEAKER_00: Like all of those conversations are happening.
• 14:10
  SPEAKER_00: But generally, I agree with what you said.
• 14:12
  SPEAKER_00: You know, it's a good time to buy, we're getting good values right now.
• 14:15
  SPEAKER_00: Um, I think you have to have a uh a plan to hold the building for at least five years just to be safe because we don't know exactly what's gonna happen in the next two to three years.
• 14:26
  SPEAKER_00: Um, but if if you can do that, I mean there's so many positives right now.
• 14:31
  SPEAKER_00: What do we tell a seller?
• 14:32
  SPEAKER_00: It is a it is a buyer's market, so we have to price a building where you know it'll move.
• 14:39
  SPEAKER_00: It's taking longer to sell buildings, so we're gonna be on the market for longer than we were a couple years ago.
• 14:47
  SPEAKER_00: But if you know, if we have those expectations, we price it right, we do our job well, um, buildings will still sell.
• 14:53
  SPEAKER_01: Yeah, and that'd be my advice.
• 14:55
  SPEAKER_01: And kind of what I said earlier is are you okay with owning this for the next two to three years?
• 14:59
  SPEAKER_01: And if the answer is no, then give us a call and we'll let you know best case scenario what we could do and uh what price and terms we could help you sell at.
• 15:07
  SPEAKER_01: Uh properties are still moving.
• 15:08
  SPEAKER_01: And again, we have at this point, we have one of the largest buyer bases, people that know, like, and trust us.
• 15:14
  SPEAKER_01: And a lot of that came from from doing educational videos.
• 15:16
  SPEAKER_01: But we have buyers, and so um, if you're a seller, please reach out to us.
• 15:21
  SPEAKER_01: We would love to connect with you.