Dec 13, 2022
Multifamily Real Estate Investment w/ John Kobierowski of ABI
BRT S03 EP61 (160) 12-11-2022
Things We Learned This Week
- ABI Multifamily is a brokerage and advisory services firm that focuses exclusively on apartment investment transactions.
- Multifamily properties are usually apartments, but could be as small as a duplex
- Banks want stable deals, 90% occupancy for a minimum of 90 days if not longer.
- ‘Pencils Down’ – current environment is less deals, and investors just waiting
- Phoenix AZ has many good Economic Drivers for a city – entertainment, sports, resorts, events, job growth, corporations moving to Phoenix, livable & affordable city
Guest: John
Kobierowski
President and CEO
ABI Multifamily
https://www.linkedin.com/in/johnkobierowski
ABI Multifamily is a brokerage and advisory services firm that focuses exclusively on apartment investment transactions. The experienced advisors at ABI Multifamily have completed billions of dollars in sales and thousands of individual multifamily transactions. ABI Multifamily incorporates a global approach with regional real estate expertise to successfully complete any multifamily transaction, regardless of size and complexity.
https://neighborhood.ventures/
Neighborhood Ventures is a real estate crowdfunding company that offers ALL the opportunity to be shareholders in our retail & apartment projects.
Notes:
Seg 1
ABI Multifamily is a real estate brokerage firm and have a second company that does crowdfunding real estate investment in-house (has 7000 investors, with 1500 active)
They have regional offices in the southwest from Arizona to Nevada to Denver Colorado to San Diego CA, and looking to expand into Texas. They are opening new offices but not growing through acquisition
They had 150 sales of apartment buildings in 2022 in their real estate brokerage business.
John’s background is in real estate, as an ASU grad he went to work for a real estate broker.
He’s very happy to be in Arizona, as the state is pro business and pro growth, and that’s a huge asset for any company.
They mainly focus on multifamily properties which are typically apartment buildings though it could be any duplex or even four-plex on the smaller side. These are build to rent properties. People have to live somewhere.
Lenders - HUD
They also work could be bulk homes, senior communities, student living or mixed use property.
The last few years has seen a lot of investment in housing apartments from Private Equity and I Buyers like Zillo, or Offer Pad.
Real estate lending from banks who are looking for a stream of rental income, at least 50% - 70% need to be occupied.
The loan breakdown is 25% down payment and then a 75% loan to value. Banks want stable deals, 90% occupancy for a minimum of 90 days if not longer.
Real Estate has many business benefits including tax write offs, expense write offs, different levels of depreciation that can be written off for 29 1/2 years & bonus depreciation to get write off tax benefits sooner.
You also have the ability to sell real estate and use a 1031 exchange to buy a like valued property and defer capital gains taxes.
Real estate is also a tangible investment with the building and renters providing cash flow. It typically will have upward appreciation in value and can be used as collateral in loans.
The last 5 years, money was cheap for investment with low interest rates of 3%. In 2022 interest rates are 6%, which has caused a drop of 30 to 40% of book value of real estate.
This could turn into a liquidity event with some owners needing to sell. This is counter with growth and could last for the next 12 to 18 months.
‘Pencils Down’ – current environment is less deals, and investors just waiting
Seg 2
ABI Multifamily was started in September 2013 with 5 partners. 2022 was a big year where they had 150 sales of apartment properties. They use the 80/20 build rule of business – what is the top 20% in the industry.
The sale negotiation comes down to the difference of bid vs ask on the price. Current real estate investors need to determine their risk tolerance as interest rates are changing.
Apartment rental occupancy rates though are high and rent is increasing. The Phoenix Market in 2023 will have very high demand and builders are not keeping up.
Builders expect to build 12,000 units in 2023, which is the highest ever and still not enough. Mortgage rates in the last year have gone from 2.75% to 7% - costs more to get a home
Arizona real estate market has always been cyclical with cycles lasting 10 years.
Currently the Federal Reserve is looking to push the US economy into a recession to lower inflation. They are doing this by raising interest rates. Still Arizona property values and home values continue to go up.
Historically during inflation hard assets like real estate go up in value.
California is a tough state to run a real estate business as there are rent controls. Basically a landlord cannot raise rent prices.
ABI is looking to expand especially in the Sun Belt southwest region. This region of the company country has been growing for 20+ years. Currently ABI has offices in Phoenix Tucson San Diego Denver Las Vegas and Reno Nevada. They are looking to open offices in Texas.
ABI Multi is not moving into Florida as there are weather risks like hurricanes which affect property insurance.
Seg 3
Denver, CO seeing real estate growth with more high-rise buildings. Sun Belt is seeing real estate expansion, especially in Texas – Dallas, San Antonio and Houston.
In state migration (people moving to a state) - Arizona’s #1, Texas #2, Florida #3
Deal competition is tighter, if you were selling a building in 2021 you could get 30 offers, in 2022 you get 5 offers.
The Fed is trying to use interest rates to drive inflation down to 2%. There is a lot of uncertainty which is hard for a business.
Previewing inventory in 2024, expected to be tight. Cost of capital will go down. Looking at exit cap rates for selling properties.
The terminal capitalization rate, also known as the exit rate, is the rate used to estimate the resale value of a property at the end of the holding period. The expected net operating income (NOI) per year is divided by the terminal cap rate (expressed as a percentage) to get the terminal value.
Mortgage rates are based more on the 10 year treasury & Frannie and Fannie Mae set the loan rate. Loans from other lenders like Insurance companies may be higher.
Market factors are some of the largest driving forces behind mortgage rates. The Federal Reserve, bond market, Secured Overnight Finance Rate, Constant Maturity Treasury and the health of the economy and inflation all affect mortgage rates.
https://www.mortgagenewsdaily.com/mortgage-rates/freddie-mac
Freddie Mac Mortgage Rates
Frequency: Weekly | Data Source: Freddie Mac
The Freddie Mac Primary Mortgage Market Survey® is weekly mortgage rate survey collected by Freddie Mac since April 1971. Lenders from around the country are surveyed each week, from Monday to Wednesday, and the results are released each Thursday at 10 a.m. EST.
Seg 4
Real Estate investment principles, when there’s a high cap rate you get a lender, when there’s a lower cap rate you sell.
From: https://www.rocketmortgage.com/learn/cap-rate
Cap rates are measures used to estimate and compare the rates of return on multiple commercial or residential real estate properties. In this article, we’re focusing on residential rental real estate – homes with one to four units – held for commercial, or investment, purposes.
Cap rates are calculated by dividing the property’s net operating income (NOI) by its property asset value.
Cap rates can provide valuable insight into a property. But the cap rate is not the only metric used to evaluate a real estate investment. Investors will also want to consider the return on investment (ROI), internal rate of return (IRR) and gross rent multiplier (GRM), as well as a variety of other factors, including the property’s individual characteristics and location.
Banks as well as investors are always analyzing the leverage ratio.
Construction rates are high, because of workers pay, labor cost never goes down. Overall typically business costs don’t come down.
The lumber supply chain issue and 2020 was a rarity.
Classic arbitrage trades, where you trade between markets are not as available. Mean Reversion where the market catches up and profitable deals are not there. The market equalizes with the cost of materials, and compression in land costs.
As an example there was big money in home flipping in 2010. You could go to an auction and there would be 1000 houses for sale. With so much competition and bidders the costs went up and the buyer market squeezed because of competition. Competition squeezes out profits in a market.
Any time you’re selling something and there’s only a 1 buyer market, you get crushed. We have seen this recently with a used car market. When demand is low in a market, the business has to sit and maintain the costs of their supply – carrying costs.
Real Estate Investors have to understand numerous factors when looking at a property – builders, profiles, comps vs other properties, operating cost, rental capacity & occupancy rate.
Working in hotel sector of real estate is very difficult, and different from managing a rental property.
The hospitality industry was crushed during 2020 with Covid. Now hotels and the travel industry seem to be doing well.
Phoenix Arizona is a good example of a city to invest in, as there is a lot going on. People want to move here, job growth, corporations moving to Phoenix, and it is also a very livable & affordable city with lots of events, sports, entertainment, resorts and golf.
When looking for places to expand in business or real estate you look for these types of economic drivers. Phoenix, AZ also is business friendly, and has good regulations – pro growth and pro business.
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