It can be difficult to decide the right multifamily real estate syndication to passively invest in. Not only are there many options to consider, choosing the right team to invest in is easier said than done. One of the most effective strategies an investor can utilize is to have discussions and ask the right questions of a sponsor or syndicator before making a decision.
Tim Lyons, Principal with Cityside Capital LLC and host of “The Passive Income Brothers Podcast” joins to share his tips for passive investors entering conversations regarding multifamily deals and more.
Watch On YouTube
- What lessons and experiences from 15 years as a veteran of the New York City Fire Department (FDNY) have helped Tim in real estate investing.
- What markets Cityside Capital feels strongly about for multifamily, and why.
- How smaller, often overlooked, markets such as York, PA, Maudlin, SC, and Granger, Indiana, can offer compelling opportunities for multifamily investment.
- What a cost segregation study is, and why it’s important for passive multifamily investors to be familiar with it.
- Why secret shopping multifamily matters.
- The value of asking a syndicator “What don’t you like about this deal” before investing with them.
- How likely capital calls are in multifamily deals.
- The key to understanding the “worst case scenario” in any multifamily deal.
- Why multifamily still a strong asset class for passive investors looking for compelling returns and consistent cash flows, regardless of the economic landscape.
Featured On This Episode
- 101 Questions To Ask Before Investing In A Real Estate Syndication (Cityside Capital)
- How the Latest Rate Hike Impacts Multifamily (Multi-Housing News)
- Passive Income Brothers Podcast (Apple Podcasts)
Today’s Guest: Tim Lyons
About The Multifamily Investor Podcast
The Multifamily Investor Podcast covers trends and opportunities in the multifamily real estate universe. Host Scott Hawksworth discusses passive investment offerings in the space, including direct investments, DSTs, opportunity zones, REITs, and more.
Scott Hawksworth: Hello, welcome to the Multifamily Investor Podcast I’m your host Scott Hawksworth, and we’ve got a great one today where we’re going to really be addressing must ask questions before investing in a syndication.
There’s a lot of questions that passive investors may have, and they want to ask the right ones and have the right conversations so we’re going to dive into a lot of that. Joining me to offer his insights on this is Tim Lyons, and he is principal at Cityside Capital LLC.
And he’s also host of The Passive Income Brothers podcast so we got another podcast host here and yeah Tim, welcome to the show.
Timothy Lyons: Thank you so much for having me i’m really glad to be here, thank you.
Scott Hawksworth: Absolutely, thank you for being here excited to dive into everything.
You know, to kick things off I just think you have a fascinating background, you know you are going to get this right 15 year veteran of the New York City fire department so FDNY and you currently serve as lieutenant.
In the Borough of Queens and you’ve also worked as a nurse in the Level one trauma room, I mean this is fantastic, and thank you so much.
For all the work you’ve done there obviously as a first responder that’s just so important, what are some of the lessons or experiences from that part of your career.
That you’ve really brought to the real estate investing world and have helped you.
Timothy Lyons: Yeah I think there’s really two things that stand out to me the most and the first thing is, I was doing a lot of trading time for money.
And I was working you know 60 7080 hours a week, and while I like to work I you know in my 20s it wasn’t a big deal in my 30s when I had three little girls.
You know, it became a big deal right.
A lot of tears, a lot of Daddy where you going you just got home and I started to feel trapped in that w to grind so really you know I always kind of i’ve always been a finance buff i’ve been reading the Wall Street Journal since college every day.
You know, but really I mean we were fine we had benefits we had two vacations a year, you know the bills were paid Max it out to 457 account.
But I just felt like there was something more right and when i’m in stuck in the grind doing two jobs that I actually really enjoyed I mean, I still love being in New York City firefighter.
i’m a happily retired, you know yeah er nurse, for the last couple of years now since I got into real estate, but you hear about real estate you’re about buying businesses as two ways to really kind of grow wealth and create wealth.
And sometimes like a lot of people I just didn’t know how to get started right or I was scared to get started, and I had analysis paralysis and.
You know and.
You know, really, the magic happens when you break through that and come out on the other side, so so really Those are the two things right, I was trading my time for money and I just knew that I had to get into real estate or buying a business for both.
Scott Hawksworth: Absolutely, and so, as you got into real estate and you know you’re you’re looking at investing in deals, you know you’re getting.
you’re getting into this whole new world were there things from your time as a firefighter that have I guess helped you in terms of whether it’s relationship building whether it’s.
I don’t know being able to to sniff out the the the great opportunities i’m just curious if there’s any kind of cross over there.
Timothy Lyons: yeah you know relationship building is basically you know what business is all about right there’s obviously x’s and o’s and.
You got to dot your i’s and cross your t’s but it’s really a relationship based right people need to know like and trust you before they want to do business with you and I really have that kind of.
Social charisma, I guess, you could say you know, like building rapport with patients in the er is not always the easiest thing right.
Price even the er they’re generally not in the good headspace or they’re not feeling good or they’re in pain and.
To be able to build that relationship with them, you know you can really kind of have a lot of standoffish type conversations you want to you know tackle that.
You know relationship and make it, you know better, on the other end same thing with the firehouse right let’s face it, when people call 911 they’re probably not having the best day right so.
Scott Hawksworth: yeah exactly ideal.
Timothy Lyons: yeah so having you know, having the sense of trying to make people feel at ease when talking to them and just building relationships and not a whole lot of things.
scare me anymore, or you know make me, you know think twice, so you know when I started to get around the right people in real estate and in business, you know.
really what other people think are big deals to me a lot of times are not a big deal right, you can always kind of solve it, you can solve the equation solve for X right.
and take the emotion out of it, so I think you know that’s kind of my position of strength is that you know, being in the trenches and having really bad things happen and seeing a lot of tough things.
It gives me perspective on what is really important, and maybe what is not so important, so.
that’s really I mean that’s really how I approach my business I approach my relationships is is trying to solve for X and just making people feel comfortable.
Scott Hawksworth: yeah I mean I can imagine if you know you’ve got whatever multifamily property and you know it’s a it’s a newly acquired asset there’s some problem pipe bursts, what have you, you probably sit back there and you’re like Okay, we can deal with this i’ve been in an.
Timothy Lyons: You can do it.
We can deal with that that’s the first time ever, breaking into the building right.
Scott Hawksworth: Exactly exactly now city side capital, you have a number of assets across a number of markets, which I find interesting and i’m curious what are some of the markets that you like right now and what do you like about them.
Timothy Lyons: yeah so.
If you see the portfolio on our website you’ll see that we have you know we’ve been in some really small markets and we’ve been in some really big.
Scott Hawksworth: mark right there’s that there’s a.
Timothy Lyons: Big time, so you know really you what I found is that when you have a team, and when you have strategic partnerships, you can really you know accomplish a lot of things so right now we are really heavily bullish in phoenix and Austin Dallas Fort worth.
San Antonio Texas, we are bullish on the west coast and central Florida, and you know we’re also now into the carolinas and Tennessee.
But really you know the places where we can follow the data and find out where the jobs going where’s the population growth where’s the household formation.
where’s the absorption of new units coming online, all the while kind of keeping the macro lens in front of us saying what’s happening with interest rates and.
CAP rate expansion right so we’re really kind of you know it’s it’s it’s a lot to think about but that’s where we’re bullish right now.
With That being said, we’re also into you know, making good decisions for our clients, so you know we have a portfolio in Michigan and Ohio.
We also have 400 units in a suburb of South bend indiana so we really by making these partnerships and and having you know a lot of due diligence and following data we’ve been able to kind of squeeze our way into different markets.
Scott Hawksworth: Right, I mean I think that’s fascinating because you know I talked to so many folks were Okay, as you started off with phoenix i’m like okay that’s the those are the classic hits okay we’re talking.
son now are talking, you know where where there’s been so much growth and development there, but then, when you say you know well, South bend Ohio i’m in Ohio guy.
as well, and I think some people can look overlook those markets and maybe think that they’re a little boring there’s not maybe that exciting amount of growth there, potentially, what about maybe a place like South bend really offers an attractive opportunity, you know, for your investors.
Timothy Lyons: So that particular project was in granger’s indiana and there’s a hospital right across the street and the average annual income was in the six figures and it was a great school district.
And it was a wreath that was selling and they had to sell and it was just too good of an opportunity, it was seven minutes away we’re 10 minutes away from Notre Dame university.
The diversity of the jobs of the resident was incredible So yes, not a sexy market, not one of the ones you see in the top 10 or the top 25 even, but when you kind of zoom out a little bit and you look at all the real fundamentals of why you want to buy and where you want to buy and.
You know, it really made sense and that’s been a you know, a fabulous project, for you know awesome our investors.
And that’s the thing like you know a lot of people, especially the passive investors, you know I feel like sometimes you can fall into a trap, like the the nicest sexiest.
pitch decks right the really cool pool and the really nice and gardens, but your gardens you like man, I really want to invest in this place, I want a piece of that.
Well, you know yeah I mean that could certainly be a good deal there’s no doubt about it, but at the end of the day, people need food, clothing and a place to live right.
And if the provider of that affordable housing and you can buy at a reasonable price that a reasonable CAP rate with reasonable debt.
And you know you can provide a service for people really there’s not a lot of downside, if you are checking all your boxes and you’re buying you’re going to buy it right management right and put some good debt on it so and that’s what we ought to do with our partners.
Scott Hawksworth: I love it and I think this is a great segue because.
really what you’re getting at too is you Okay, you can have this this fantastic pitch deck you can be in a market that you know is sexy that everybody’s talking about but.
You can find these other great opportunities if you really dig in and maybe you’re asking the right questions and you’re looking at.
It you know, on a number of factors, not just Oh, is this, you know i’ve heard everything about you know Dallas Fort worth okay great.
More hey it’s across from a hospital hey it’s it’s seven minutes from Notre Dame you know these are these are kind of when you’re digging into it right, and you wrote an article.
You know seaside capital had published us it was 101 questions to ask before investing in a real estate syndication which I just thought was a fantastic frame for an article, as well as just great great topic to explore.
So I want to highlight a few of these specific questions and kind of get your perspective there.
So number 88 we’ll start with Ada.
Will you be doing a cost segregation study.
Those who are unfamiliar.
What what is that And why is that an important question to ask.
Timothy Lyons: Yes, so here’s what I found, even the most high net worth individuals that have invested with city said capital.
Not a lot of people understand the tax code and they pay somebody to do that for them, you don’t you don’t have to be high net worth you could just be a regular you know six figure w two guy or girl who has a family and you’re making it happen right, you have all these other you know.
Priorities in life and learning the tax code, maybe isn’t one of them, but you know that realist in the back of your mind either you heard it when you read it somewhere where you learned it in a class or seminar that real estate has tax advantages.
But then people kind of stop right there right they don’t go that next step and say, well, what.
Scott Hawksworth: Okay tax advantages great.
Timothy Lyons: Great yeah check that box right, so you know what are those tax advantages and how can they assist you or how May.
They apply to your specific you know tax situation, so a cost segregation studies so you know when you have real estate a real asset, you can have something called depreciation.
And it’s a priest depreciation is you know, basically, the irs can allow you to write off the cost of the asset over a given period of time.
And before there was cost segregation studies and i’m not the irs I don’t have a PhD in taxation, but before the cost segregation studies were you know.
run of the mill type of thing there was something called straight line depreciation, so a multifamily might be over 27 and a half years.
So you take the maybe 75 to 80% of the asset value basically on rough math back of the napkin math.
And you divide that by 27 and a half and then every year you take the same amount of depreciation and for commercial properties it’s 3939 or 39 and a half years so with the cost segregation study here’s what here’s what happens a an engineer and a CPA kind of come together.
And they break down the component parts of the building, so the windows, the tiling the floors the faucets the light fixtures the outwits the flooring the doors, the door knobs everything that she rocks the roof everything.
gets broken down and it gets broken down to a five year bucket of a seven year bucket in a 15 year bucket.
And those three buckets are accelerated over that time frame, so the five year bucket is accelerated over the five year period and the seven year bucket gets appreciate over seven same thing for 15.
But in 2017 there was something called the tax cuts and jobs act and, at the time, President trump through a bone to the real estate lobby, I guess, and he said that you can apply what’s called bonus depreciation to.
To this cost segregation study right so now, you can take the five year bucket the seven year bucket in the 15 year bucket you can add them all up and take that entire loss in year one.
Which is insane.
Scott Hawksworth: Right yes.
Timothy Lyons: it’s it’s an incredible incredible have a phantom or what’s called a paper loss so you’re not actually losing money but you’re taking this paper loss which is super super valuable to.
Specifically real estate professionals, if you can qualify for real estate professional status, but if you can you know the rules and income threshold that’s why you got a really the CPA that knows real estate.
To see how this passive loss can offset your passive income and potentially other income as well, so.
Does that answer the question.
Scott Hawksworth: I think that does and bottom line if I were kind of putting a bow on it really that shows the importance of understanding those those tax implications and the the apparatus the apparatuses.
that are available, and when you are talking.
To a sponsor you’re looking at deal, these are the big kinds of questions that can really have a material benefit right.
Timothy Lyons: No doubt about it and they you know the the Casa companies is about 40 or 50 out there in the country that I know about so far.
They give you like a 40 to 100 page document you know literally breaking down the component pieces of your property.
And they’ll defend that you’ll they’ll defend you in court and the irs actually has a rule that says, you have to do a cost segregation studies so.
A lot of people still say you know, are we doing cross leg studies and the answer is absolutely yes.
I will say one thing 2022 is the last year that there’s going to be 100% bonus depreciation, and then it starts to sunset over the next five years, so in 2023 it’ll be 80% 2024 60 and so on, unless Congress, you know gets together and they want to keep something like that, on the books.
But yeah it’s just one more thing for listeners to you know start googling you know start start listening to some seminars or other podcasts about you know how powerful that could be an advocate how it may apply to your situation as well.
Scott Hawksworth: Absolutely Okay, there were some other great questions here, I want to move on, I guess, moving up, we have number 67.
Timothy Lyons: mm hmm.
Scott Hawksworth: Have you visited toward and secret shopped the comps in the area.
Can you tell me a bit about secret shopping in multifamily and why that matters.
Timothy Lyons: Yet data is everything right it’s no longer is a good feeling in your belly a good, you know barometer of how to make decisions I don’t know that ever was really but.
Data means everything, so what is the what is the multifamily or the self storage unit down the block what are they charging for a one bedroom one bath one better you know, two bedroom one bath and likewise right.
The good thing in 2022 here is that we have incredible you know analytics companies deprecate provide.
Basically, real time data to us, and some of the property management companies have proprietary software that.
can pull some of these data points in so when there is a renewal coming up, they can see kind of like within the last couple of days, what are other properties trading at.
For you know, for their ones and twos and now they can really kind of dial in and and get a really solid price for their renewal.
So you know secret shopping used to be before the before the technology kind of came into this space you’d kind of walk into the you know next building down and say hey you know i’m interested in the one bedroom how much you know.
So there’s still some of that that goes on, no doubt about it, but a lot of it is technology driven these days, and yes, somebody you know, a representative from our company will always do a site visit.
With a site report, and you know because and, obviously, the main sponsor and they walk every unit that’s one of the thing that we’re really you know.
We really like to say is you know the the lead sponsor walking every single unit during their due diligence period so there’s no surprise when you when you close.
Scott Hawksworth: Absolutely, and you know just comps in general I think as passive investors are looking at deals trying to determine, you know Is this something for me when you have these assumptions in you know rent rate increases when you’re looking at all of these numbers.
The comps come in, because does does, that is, that justified in this area are other buildings getting this right, I think that’s those are those key things that really are important to to ask about hmm.
Timothy Lyons: yeah and when you’re looking as a passive investor me looking at a deal deck and they have a comps page for rent and even for like price per unit, so you really want to make sure you’re comparing apples to apples right if.
you’re buying a 1989 property you don’t want to have a column for.
That property is just not comparable to the 1989 product unless it’s been a wild wild renovation and the last year or two right so.
You know, making sure that you’re you know, looking at the 1989 and then plus or minus maybe five years and vintage you know those are the units, you want to really see what are the rent comps look like and what are the price per door look like.
Scott Hawksworth: Right and then to your point with the rhinos have the idea of Okay, well then now this renovation is happening, will it be up to.
The level that we expect and and then we can command those rents, because okay it’s going to be updated and it’s going to be in line with you know whether it’s you’re trying to take it from a class C to a class B, or what have you right.
Timothy Lyons: exactly right.
Scott Hawksworth: Okay we’ve got another another here we’re moving we’re moving we’re jumping around, but there were so many great.
questions and I wanted to really highlight the ones that I personally thought were so interesting but number 101 what don’t you like about the deal, I just think this is fantastic because of how it challenges the syndicate are really to to not simply cheer on the deal.
i’m curious you know, can you share something that you didn’t like about deals you’ve done in the past and.
Even if they were ultimately successful I guess.
Timothy Lyons: yeah I mean there’s a couple of things that come to mind when I when I hear that question and it’s just because something doesn’t sound right in the beginning doesn’t mean that there’s not a valid answer to it right, and the more.
Data you can get you know you can wrap your head around it so like, for example, Greg and I, we will not invest in a flood.
zone right so when we get a property that we’re going to maybe raise equity, for I go to the fema flood map I type in the address, and if it’s in a flood zone, then we’re probably not going to do the deal.
On something really compelling about the deal, or you know there hasn’t been a flood there in 100 years and the map has it been update or something like that.
So that’s one thing right, and you know, so you know, does that does that protect our investors, I think it does yeah I mean, could you get flood insurance and pay that extra premium 100% but that’s going to come from somewhere right there’s going to cash flow.
For sure so that’s just one thing.
Number two would be you know lately, in the last 1218 months or so the CAP rate compression in some of these markets has been outstanding.
Scott Hawksworth: Good where I was like well what’s the word for it.
Timothy Lyons: Yes, I mean I don’t even know what the word is crazy to.
say so, you know, in the beginning, when I started seeing some of these compress CAP rates on the going in i’m like holy cow is that even possible like you know.
I don’t know about that right i’m nervous about that, but then you start talking to other people other operators start hearing other you know going to conferences and hearing economists speak about it and.
You know there’s so many factors to know about what that CAP rate actually means and what historically has happened and other recession’s and.
You know, once you kind of wrap your head around some of that data like you’re like okay I wasn’t as long as we’re underwriting for 10 to 20 bits of captured expansion.
per year at a minimum, you know i’m okay with going in at a three plus CAP, you know something like that so over a five year hold say.
But you really have to play a little Defense with that as well, so I mean, so the flood zone, the CAP rates obviously interest rates are big deal right now, so what kind of debt, are we going to put on the property right.
I mean the bridge debt, the three three year you know with to one year extension was very, very popular over the last 12 to 18 to 24 months.
You know, higher leverage, you know not just higher leverage but also loan to cost loans were the norm right so now we’re seeing you know 60 65% ltc ltv loans still some bridge product out there, but with recaps.
So you know there’s a lot of does a lot of questions and a lot of this might be if a brand new passive investors hearing this they might sound.
They might they might think that this sounds like a different language, and it is and that’s why you need to get around people that understand this and will be able to you know either explain it to or you know help you evaluate a deal because there’s a lot that kind of goes into this.
Scott Hawksworth: Absolutely, and I like to that that question of you know what don’t you like, because.
You know, Tim what you’re saying is is yeah asked that question be honest like I I don’t like I didn’t like this CAP rate at first.
But here’s why we’re Okay, with it, you know here’s here’s why we can justify this you know, I think that that is such a key thing because.
If if all you have is just oh it’s positive it’s great this This deals perfect don’t worry about it, I just think that that kind of gives that you’re not getting the full picture.
Timothy Lyons: Right and a lot of times people don’t I wrote you know we have this article, for a reason.
Because passive investors, you know if there’s a you know, two working parents with three kids at home, you don’t have time to understand or maybe you don’t have the time or the will to really dive into what is due diligence even mean right.
So this is really you know that’s that’s kind of why we put this article on the blog was you know hey listen.
You know, ask the questions and if people can answer your questions, then I don’t know that they’re the right people to to go with.
Scott Hawksworth: 100% hundred percent are we’ve got some more here.
jumping back into history.
What are the chances of a capital capital call, and that is of course the sponsors requesting more money from investors have you seen this happen in a deal and is that just automatically a huge red flag in all cases.
Timothy Lyons: So I have, I have not seen it and none of our sponsors that we that we work with and they have you know tons of experience in this space they have you know it’s one of the things that that that they hang their hat on is that we’ve never had a capital call.
right with That being said, you know, a capital call is basically when the partnership runs out of capital to support their operations and they, for whatever reason, you know they can see is up.
You know they didn’t there’s a whole big plumbing issue that they didn’t know about, or something like that, and you burn through your whole reserve budget which is hard to imagine but.
Scott Hawksworth: You know.
Timothy Lyons: I guess it could happen right well there’s a black swan event like Kobe right, I know a lot of operators, you know.
put a halt on distributions and the accrued right with interest and everything but they say listen, we need to have cash on hand to tackle anything that kind of happens so.
But no one that I work with personally or invest with personally has ever had a capital call, but when it did come.
That they would obviously have to be a compelling reason to understand why there was a capital call and then investors need to know that they need to really read the ppm.
The private placement memorandum when it specifically outlines the capital call, and what that means, because a lot of the ppm that we have with our investors, you know you don’t have to participate in the capital call so.
say they were going to raise another 3 million bucks or something like that from 100 investors.
You know you don’t have to participate if you don’t want to yet your ownership.
would be diluted your ownership percentage we get diluted if you know party, a contributed to the capital and party be that not.
So just understanding how the how the inner workings of the partnership is structured and what that means, if you did have to do a capital call get a good story about why you had to do it.
Maybe you’re in a fun, maybe you’re in a $50 million fund, and they do a capital call at the end because they want to buy one more property well that’s not a big deal to me right, I mean i’ll throw in a couple extra dollars be.
Timothy Lyons: But if they run out of money and they just mismanaged a place that’s obviously something that’s very concerning so good question to ask the operators that you do.
If you get on their email list and they start sending deals, you know great question a lot of them will have it in their pitch deck that they’ve never had to do a capital call but great question so.
Scott Hawksworth: Absolutely and and I guess you would you would say the way you know the way this question was asked is you know what’s the chance.
Is it the kind of thing where if they say well hey there is zero chance or hey, of course, something could happen, but here’s how we plan is that really the answer you’re ultimately looking for.
Timothy Lyons: you’re looking for it right hey listen, we have $7 million in a good deal we’re doing right now in phoenix we we had $7 million in an account that had no purpose.
That was our reserve account you know so hearing something like that, and knowing that we could pay the bills for all five years.
You know, or at least service, the debt or you know you need to have a compelling reason to have a capital but yeah I mean there’s a risk and everything we do right, I mean no one’s ever going to guarantee you 00 percent chance of something not happening so.
yeah I mean having somebody who’s open i’d rather have somebody who’s open and honest with me then someone who’s going to just paint a very rosy picture and say yeah you know sign on the dotted line, this is a great deal thanks.
Scott Hawksworth: exactly like for me if i’m if i’m talking with someone and it’s a you know, an older building i’m like okay well tell me about the roof.
You know when was the last time that was addressed.
Timothy Lyons: 100% right there’s there’s a whole checklist right, I mean like you know, and the more you’re into this business, the more you’ll find that you know different vintage assets, you know something was built in the 50s and 60s well you got to look at the wiring and the plumbing.
Like those are the two things that come to mind very, very quickly right and if it’s a brick building well does you know, does it need to be reappointing done, and you know.
Structural integrity and everything like that, so you know, knowing the the vintage of the asset when it was built, you know what has been done to it, since having that story, you know brought out and brought to light to the investors is huge.
And then, knowing what kind of reserves do you need if it’s a brand new building well, maybe $250 per you know.
per year would be an adequate reserved budget if it’s a 1950s building well, maybe you don’t want to see that you want to see a lot more in reserves.
Scott Hawksworth: Less in case.
Are there elevators.
Right exactly exactly okay there’s where I think we’ve been dancing around this, but I think that this next question is just so critical and, especially, given what we were talking about you know we’ve got this inflationary landscape.
You know there’s a lot of economic uncertainty.
we’ve kind of had this.
You know kind of come from this CAP rate compression landscape, where there’s just a lot of incredible you know movement what’s the worst case scenario, so this is question number 70.
How are you seeing this landscape impacting deal flow and really as you look across multifamily what’s what is the worst case scenario.
Timothy Lyons: The worst case scenario is that you lose all your invested capital and the building just foreclosed on and that sponsor would never work again.
I mean that’s honestly.
The worst case.
Scott Hawksworth: that’s that’s game over yeah.
Timothy Lyons: that’s game over for the sponsor and that might be game over for the first time investor that just got into passive investing saying hey real estate stinks you know i’m not doing that again.
However, it would take a lot for a very experienced seasoned group to lose a building and lose all investor capital.
So, and he and here’s why you really need to have multiple exit strategies, when you go in and buy a building, you know you’re really not seeing where i’m not seeing any any deals that come across my desk either with my group or outside of my group that have a refinance built in.
A year to like they did, five years ago.
10 years ago right.
You know you have to have these exit strategies, you know, are we going to refinance or we’re going to sell it year three so it your five is going to be a 10 year hold.
You know and basically you know, having an idea of what could happen upon the exit right and then doing the underwriting to have CAP rate expansion.
To have that interest rate expansion up to maybe whatever capital is be doing, you know bridge that you know understanding what those returns net.
will be having all those kind of options baked in but also knowing, you know how many brand new apartment buildings are being you know built in that market what’s the absorption rate right.
If there’s 1000 new units coming on board and.
1200 have been absorbed over the last year well that’s still tells me there’s a ton of demand in that market right, but it is 1000 units coming on board and knowing 100 are being absorbed whoa you know.
That the supply is now getting bloated right so are you going to hit your performers are you going to hit your rent so.
it’s really having a holistic view of the whole entire deal with the multiple exit strategies.
Now that being said, there’s something called a breakeven occupancy right usually it’s in the pitch decks you should really take a look, you know is your breakeven occupancy which means there’s going to be no cash flow.
But just enough money to cover the bills at say 85% well that’s a lot like i’m more comfortable in the 50s in the 60s on the break even occupancy.
Maybe even the low 70s, so really having an idea of how much in reserves, so we have what’s our breakeven what are multiple exit strategies, you know what’s the absorption of the market of new units coming on.
Especially if you’re buying class a product right, because if you have if you’re if you’re investing in class a product and there’s a ton of class a product coming on.
Well you’re not going to be the newest kid on the block anymore, so I don’t know that the rent increases are going to be as rosy, as the pro forma was stating so.
I don’t know that was a lot Scott that I even answer the question.
Scott Hawksworth: bringing back in, I think, so I think I think the the big thing is when you’re asking this question.
You know before investing, especially given this landscape has has that worst case scenario kind of changed, have you seen you know with deals or someone were to ask you about a deal.
And, and now we’ve seen rising interest rates, you know the Fed signal that they’re going to continue to do that.
we’ve seen just inflation continue out of control, does that does that change what the worst case scenarios are or maybe what these exit strategies are because really that’s what this question gets that right is is.
what’s your plan.
If things don’t go according to plan right.
Timothy Lyons: So I really I really try to talk to a lot of people even outside of real estate, so that I don’t have confirmation bias when answering a question like this because I still remain bullish on multifamily right.
Right, I really truly feel that you know people need food, clothing and a place to live.
And you know if you’re in a class renter and we go into a recession and you lose your job well guess what you’re going to drop down to the beat class product.
And if you’re a B class renter and there’s a recession, you lose your job or your wages remain stagnant, you might be dropping down to the C class product and.
To the seas, down to the DS so there’s a resiliency there and just right now just looking and if you’re paying attention just a little bit to the macro kind of economic landscape.
house prices have had a incredible run in the last say 24 months so it’s pricing, a lot of people out of the market, but people generally don’t buy on price they buy a monthly payment.
So, even on the monthly payment if they have an idea what they can swing and now the mortgage rates just essentially doubled in the last I don’t know six months.
So something has to give right the purchase price has to give and they have to suffer a decrease in their quality of life right where the quality of the market that they’re going to be buying a moment.
Where they say you know what we can’t afford this and we’re going to go back to renting right, so the renter pool the first time well the the principle is going to increase because the first time homebuyers can afford.
Scott Hawksworth: yeah first time homebuyers they’re there.
they’re out of the game.
Timothy Lyons: yeah there, and right now the millennial generation is coming into their prime home building and.
household formation years, which is typically you know the the home buying years right and a lot of them cannot afford that down payment or that payment.
With the higher interest rates, right now, and I don’t think we’re going to be coming down quite that soon.
So that tells me that there’s going to be an incredible man for rental housing and then, when you look at the supply of rental housing or supply of housing in general.
there’s simply not enough housing units out there to satisfy even a normal market right depends on who you’re talking to we’re anywhere from two to 5 million housing units short of a normal housing market.
So, as you think about that you know even mls if you go to the National Association of realtors website they’ll tell you how much housing stock they have during.
The last 12 months it was hovering around the eight week mark now we’re up to maybe 12 weeks the normal market is about six months of housing supply that’s just to get to a normal market, not a crazy hot market right.
So when you hear all these factors and there’s not enough housing supply.
The builders are not incentivized to really make workforce housing right the builders are going to make a new product they’re going to make a really nice class a Granite countertop backsplashes.
You know, great looking pool and clubhouse gym they’re not making buying large workforce housing, you know, to satisfy the the w two blue collar worker.
or service, you know industry workers so that’s why you know all those things kind of come together, I really feel that if you can provide clean, safe affordable.
And I guess affordable is kind of relative at this at this time, you know, a product that you know real estate, is a real asset it’s cash flowing from day one, I just don’t know that you’re going to find another alternative right now in this space.
Scott Hawksworth: I couldn’t agree more, and obviously i’m biased as well, I host this show but, but I think that I think that that does make such a great point when we are talking worst case scenarios, because you know.
folks need homes, that is, that is not going to change whatever is happening economically and I think, maybe when you.
Have that discussion that’s where it goes into you dive in a bit more to the underwriting side of things, and you look at things like that you look at.
You know time to stabilization and all of these aspects, but as long as when you’re asking a question like this you’re getting the sense that there is a plan that there is an exit strategy.
TIM, do you feel that that is.
That is really what what’s at the core.
Timothy Lyons: 100% yeah and you know what i’d also feel more comfortable at this point in the market cycle being with the operator that has been around the block at least once you know.
That this is maybe not their first indication, I mean, I have a lot of friends that are trying to do their first indication I don’t know that i’ve been messing with them right at the moment, you know I still love them but.
You want to have somebody that’s really kind of been in the trenches has understood what it means to be in a down cycle.
And really had to come out on the other side and have that property management company, you know be really in tune with.
You know connecting the the tenants with any kind of programs or assistant programs if you’re in the sea space or anything like that, because it wasn’t I think we’re headed into a breather into recession or heading into recession right so.
Scott Hawksworth: You know, Tim I think that’s a great point you know, had lots of discussions with folks and.
You know that there’s there’s this thought when you look around it’s like yeah let’s for the last number of years here it’s been pretty hard to lose.
In real estate and you’ve had folks come in, who maybe didn’t have as much experience, but you know what they.
They they picked the right asset, they had some success, and it was really hard to not have that, and so, then, as we kind of look at.
headwinds and you know this looming recession which I personally think we’re already and it’s already happening.
Then, then you can look to you know operators who have seen some of this before they’ve been around the block they have those plans of if things don’t go according to plan right I think that’s where that can maybe give you as a passive investor a bit more reassurance.
Timothy Lyons: Absolutely hundred percent.
Scott Hawksworth: So I think I think we really I by last question was about why Why is multifamily still a strong asset class.
I actually you know you mentioned you guys do self storage as well i’m curious, why do you like self storage and, especially, maybe as part of a portfolio with multifamily they really seem so complimentary, what do you like about self storage.
Timothy Lyons: yeah I mean we’re a consumer nation right, so a lot of people buy a lot of stuff and I, you know there’s something called the four DS when you’re talking about self storage, you know death divorce dislocation and downsizing, thank God, I remembered all those asked.
Scott Hawksworth: yeah good job.
Timothy Lyons: So you know with those four days, those are really you know, the main drivers of why people utilize self storage spaces right they get divorced, they split the House up right, you need to place what’s the downsizing kids move in move out.
You know you get a job transfer Whatever the case may be.
So you know valuing commercial assets is really governed by the net operating income divided by the CAP rate of the area right So if you can find value in these in these commercial assets and self storage being one of them.
When I heard the Stat I was blown away and the Stat was you know from delisa year 18 months old, but it was 25% of the self storage.
You know properties that you see out there, the big ones right story you all this, one that one.
Oh yeah all the big.
Those are really owned by you know REACH.
Corporate you know corporate rate rates so 75% so maybe 70 75% now are owned across the country by mom and POPs right so.
You know, when you hear mom and pop you know they might be doing a great job you know but there’s also mom and POPs out there that are using marble notebooks and you know, doing the honor system when paying the monthly rent you know.
So there’s an a ton of value that can be uncovered and maybe they’re just you know getting older, now they don’t have anybody to pass on the business to, and they want to exit plan and.
You know, we can be that solution to them by paying them a fair price, but now, maybe you know we look for.
You know value add right you always see the word value add so we look for buildable square footage you know, can we put three to 10,000 square footage.
You know square footage of new units on here we’re climate controlled or bring into your whole service or you know rv and both storage is huge in the southeast and across the sun belt right so.
You know where the value of drivers that maybe those mom and POPs and those you know privately owned self storage facilities weren’t really maximizing.
So when you kind of put that together it’s a very valuable piece of real estate that maybe isn’t maximized so you know we can come in and we can implement systems and software and technology and.
All that stuff so and then maybe do some some buildable you know units and we can really drive that net operating income up and create a ton of value in the self storage side.
Scott Hawksworth: Right, so I mean, I think that that really puts a fine point on on how it can work as part of a portfolio with multifamily and they really are complimentary and a lot of ways.
Tim, I want to thank you so so much for joining me on the show today.
going through some of these fantastic questions that you have, and of course we’re going to have a link to that article on our show notes, because I do think it’s just a great a great primer.
For really any passive investor, even if you’ve invested previously to just go through and make sure.
That you’re asking the right questions before you invest in your next deal and Tim if folks want to find out more they want to connect see what what all exciting projects you guys have going on, where can they do that.
Timothy Lyons: yeah so you can check us out on our podcast it’s called the passive income brothers podcast you can come to our website at city side CAP calm and among all the major social media, you know Ellis as well.
Scott Hawksworth: Fantastic and, once again, we will have links to all of that, on our show notes at multifamily investor COM thanks again Tim.
Timothy Lyons: Thank you for having me Scott, have a great day.