With so many multifamily syndicators having executed value-add business plans over the past several years, there are fewer of these properties available for acquisition.  Additionally, older properties have more deferred maintenance, and therefore are more difficult to underwrite. Most of the time, even with lower prices, the risk is not worth the reward with older properties, and newer properties appreciate more over time. Over the past year, more Class A properties have traded hands.  Neal Bertrand, Chief Investment Officer at 180 properties, has operated assets with different vintages, but is currently acquiring newer assets in Dallas and San Antonio. 

Over the past several years, it’s been difficult to generate cash flow investing in commercial Real Estate equity. There’s been too much investor demand driving the prices up and the returns down. Investing in debt, however, presents opportunities for strong cash flow with lower risk. As bank lending has gotten less accessible over the past couple years, borrowers have been forced to seek out other sources of capital, which has presented great opportunities for private lenders. Paul Shannon, co-founder of Investwise Collective, has recognized the opportunity of investing on the debt side, and has raised debt funds where investors are generating 13-16% returns. 

Acquiring quality multifamily assets has gotten increasingly competitive over the last several years. This is one of the reasons it’s become more profitable to build communities from the ground up. Whereas the economics are enticing, however, there’s commensurate risk. There’s interest rate risk with floating construction loans, there’s construction cost risks with the move in material prices and labor costs, and there’s lease-up risk. Andrew Brewer, Founder of Iron Gall Investments, is building a 360-unit multifamily property between San Antonio and Austin.

The commercial real estate market has seen more activity over the past few months as a result of pent-up demand and optimism that interest rates will decline. Many institutions, Private Equity firms, and other investors have lots of dry powder and are eager to deploy capital. As large Retail and Office have fallen out of favor over the past five years, an insatiable demand for stable industrial and multifamily assets has exploded. Cliff Booth, Founder of Westmount Realty Capital, has been a large investor in value-add warehouses and multifamily for over 35 years and has over $300 million assets under management. Cliff is currently developing Cold Storage facilities to fill the booming demand for this asset class. 

Investing into smaller, consistently profitable, old economy businesses is a great way to generate cash flow and diversify risk. Business-to-business companies with reliable, steady client bases can generate consistent returns. Compared to most other asset classes, including commercial real estate, you can buy these companies at very low multiples of free cash flow with much higher debt service coverage ratios. Jason Ehrlich, managing partner of Fruition Capital, has raise a fund that invests in companies with between $1-3 million on EBITDA. Jason finds experienced individuals searching for companies to acquire, and provides equity for them to take the deals down.  

It’s impossible to time the market, so it makes sense to buy at the right price relative to current markets. If you don’t stay active, you can miss out on great opportunities. It also makes sense to hold for long periods of time, because five years or less is often not enough time to expect precise execution of a business plan given the vagaries that are entailed. Peter Linneman, Principal of Linneman Associates, is a prolific multi-decade investor and founder of Wharton's Real Estate Department and the Zell-Lurie Real Estate Center. Peter Is bullish on Multifamily, despite short term headwinds in many markets.

For steady, predictable cash flow, few assets perform as well as Flex Industrial. There’s a dearth of supply where tenants can operate their businesses, and the cost of relocating is often prohibitive. There’s also little day-to-day management because the spaces are mostly warehouses with a minor office component. Ian Horowitz, Managing Partner at Equity Warehouse, owns 15 properties in the Southeast that are a combination of Flex Industrial and Self-Storage. He’s gradually selling them off to relocate his portfolio closer to Philadelphia and Baltimore, where he’s located. Ian has grown to recognize that it’s easier to manage properties closer to home.

Nothing negatively impacts apartment performance metrics like vacancies. That’s why it pays to take great care of tenants, and to have precise systems and processes to replace tenants when prior ones leave. Many apartment operators take up to 60 days to fill a vacancy. Jered Sturm, CEO of SNS Capitol Group, however, has a meticulously refined process that takes three days to fill vacancies from the day a tenant vacates. As a result, Jered has a 98.5% occupancy across his 1400-unit portfolio. Jered started out as a maintenance tech and has built a vertically integrated operation. The SNS portfolio is located in Cincinnati, where Jered lives and has resided his whole life.

Over 90% of U.S. businesses generate less than $5 million profit per year, yet these businesses are the backbone of our economy and employ the majority of U.S. employees. Whereas the majority of Private Equity investments are in larger companies, many smaller companies are investable and need access to capital and additional expertise to grow. Mason Myers, Founder of Greybull Stewardship, invests in companies with $5 - $25,000,000 million in profit and has a strong track record helping these companies grow and increase their value. He currently has $300 million assets under management.

Running multifamily properties in tertiary markets can have major challenges, especially finding qualified staff and drawing from a smaller tenant base. Despite these challenges, you can still acquire at a low enough basis where big gains can be made. Many of these properties are inefficiently managed by long-term local owners with little or no debt and rents hundreds of dollars per month below market. Seth Teagle, Principal of The Stream Group, vertically manages properties in tertiary markets, and has been able to create immense value through increasing revenue and net operating income.