Welcome to “Tarl's Weekly Insights," my take on real estate today.
In these newsletters, we'll dive deep into the real estate world, share valuable investment strategies, and explore the craziness that life has thrown my way. Whether it’s my struggle and journey of overcoming flipping, deciphering the insanity of the market, successful strategies being used in REI, or just me making fun of social media real estate investors...
I can't wait to share it all with you.
The MBA (Mortgage Bankers Association) estimates that over $1.2 TRILLION in commercial and multifamily mortgages are MATURING in 2024 and 2025. What does that mean!?
High interest rates and high cap rates have owners of commercial and multifamily properties sweating right now, especially those that purchased in the last two years or those that have debt maturing now and within the next two years. But why?
Commercial/Multi-family 101: your property is valued based on the net operating income, and the assigned cap rate (simplified version of valuation, I know there can be more to it). Essentially a property with a $100,000 annual NOI and a 5% cap rate, means the property can be valued at roughly $2,000,000 (100k divided by .05). BUT when your cap rate increases to 7.5% overnight, and your NOI remains the same, your valuation becomes $1,333,333 (roughly). That's a 33% DECREASE in value on a property that operationally is still performing the same. THE OWNER DID NOTHING WRONG but their value still dropped because the market cap rate changed. Many people buy at a “high cap rate” with the hopes of improving not only the NOI, but also the quality of the property and "compressing" the cap rate, thus increasing the valuation from multiple angles.
Add in High Interest Rates to the increased cap rates...with interest rates skyrocketing since March 2022, debt cost has soared for commercial loan borrowers. Add in significantly higher debt cost, plus significantly lower property valuations...and we have trouble looming for those with maturing debt at the moment...
Will there be more distressed properties (aka opportunity)? My belief, yes! Only after the banks do their best to figure out solutions to NOT take these properties back. With so much debt maturing, no bank wants to take a 200 unit apartment complex, or a high-rise commercial building, thus taking a major hit on their financials. It is believed that many banks will try their best to 'extend' maturing debt, and figure out creative ways to keep the property off their books. There are many borrowers who will just have to dump a bunch of CASH into their properties and pay down the debt, refinancing at higher rates, and surviving as best they can...yet! Many investors do not have the liquidity to do this...
There will still be a lot of distress, which will force repricing, which is much needed. The real challenge is “will there be enough dry powder on the sidelines” to pick up the distressed assets? Remember...when deals are prevalent, money is hard to come by.
My final thoughts: prepare today. We never know when the best opportunities to invest are until sometimes years later. Did the investors of 2009 think they were getting screaming deals? NO! They thought they were just getting slim to ok deals, yet today, they look like geniuses. This is a different game when you think 10+ years out.
Why am I starting to buy out of state...again?
Within the last few weeks, I have traveled to two separate markets to not only investigate the market but also meet as many people as possible in the real estate industry in each of those markets. Why? Because it's time to start buying!
Between 2011 and 2014 I did mostly out of state, many people are not aware of how I really got started flipping houses. It's far easier to break down over an hour-long video someday, so I won't write too much here about the specifics. What's most important to note is that in that time period, I got really good at creating teams and processes for buying out-of-state, in pretty much any market. I then used to do what I did for many years in the Seattle/Tacoma market.
How am I identifying my markets?
Where are the jobs going? Specifically for me... blue-collar jobs. Why? White collar recently has had the most disruption and turmoil, the biggest swings, and AI is doing a good job mucking up a lot of high-income careers (which is sorta funny to me). Where are the factories being built? Where are the distribution centers going? Supply chain became a MAJOR issue in the US in 2020, and there are many great entrepreneurs and businesses doing something right now to help bring businesses back to the US. Where are they focusing?
Is there a housing shortage, especially with the new jobs? Seattle had such huge appreciation because of the many tech jobs that flooded its market between 2014 and 2019. Yet was that the main reason the market appreciated there so much? The unique part of Seattle and the surrounding small cities is that they are all surrounded by water with no room to build. You have to tear something down, to build something up. Because of this, existing houses appreciated dramatically, and equity skyrocketed. As a house flipper, it meant that 'nicer' homes were in great demand, thus incentivizing us to flip better quality. There are projects in West Seattle I bought in 2015 for $150,000 that today are worth $800,000...it's insane.
How good are the local investors? This is one data point that you won't find unless you get out and see for yourself. What do I mean by this? Everyone says there is 'so much competition' in their area. Compared to what? There is a big difference between 2 or 3 investors going after the same deal, vs 15 - 20 like it was/is in Seattle. Additionally, are the investors competing on cosmetic rehabs or are they having to get creative on their construction and value add? That's a big one for me. When I go to markets and find no professional wholesalers, and house flippers who have never added a bathroom and are still getting away with Formica countertops on their "high-end" projects...when coupled with my other two points about jobs and lack of space to build...I get excited.
In future newsletters, I will continue to expand on this topic. There is so much to say on this, but these letters are getting a lot longer than I originally anticipated...
Many of you may relate to this video, and most of you have probably already seen it. If you find yourself at home on a Sunday night...alone...scrolling through Zillow, the MLS, or other real estate platforms...you too may be an addict. If this video calls to you, then we can help. Soon, we will have a home for all of us addicts, Flippers Anonymous. Together, we are stronger.
Let's stay connected! Find me on social media at @tarlyarber and stay updated with additional videos and content.
That's it for this edition of Tarl's Weekly Insights! Stay tuned for more each week!
Talk Soon,
Tarl Yarber
