The ValCap Group, LLC

State of the Market- October 24, 2024-Topsy Turvy When Jerome Powell, head of the Federal Reserve Bank, announced the lowering of interest rates by one half of percent it the cumulation of month of speculation and continuing data and reports that the U.S. economy was sliding into slower growth and perhaps even a recession.  Interest rates on bonds and mortgages fell accordingly.  From rates approaching 7% for short term 5 and 7 multifamily loans all the way down to the high 4% range the investment market seemed to feel that sunny days were at last here again.   Money that was not interested in apartment investment seem to come lose from the tight grip of those with funds to invest: family offices, retirement account holders, investment bankers. And then…. dark clouds again. Data came forward that the economy was not slowing down much if at all. Prices on important goods were not going down and were still going up albeit slightly.  And then the sentiment changes. Perhaps the FED has cut rates too much, too quickly, and without enough foresight.  In one of the most interesting economic developments since the Pandemic, consensus was achieved that cutting interest rates actually was going to fuel further inflation. Why? Consumer spending was not slowing down enough to create the conditions where supply exceeded demand enough to drive down prices. So, what of multifamily investing.     With rates going back up it makes less financial sense to buy assets that have lower than the cost of financing. That’s always the case, but multifamily assets have been trading at a return between 4.5% and 6.5% in the last year. As rates climb either sellers must reduce their expectations and give great returns to the buyers or take their property off the market and wait for another day.  This means less deals are going to trade. The other effect of higher rates is that those owners of multifamily holdings who took out expensive floating rate mortgages can not count on lower rates to bail out their situation.  Unless rates take an about face quickly, we should see capitulation by both banks holding sour mortgages and borrowers feeding unprofitable properties.  I expect more brisk trading in distressed real estate deals of all types including multifamily. In conclusion, we see opportunities ahead in multifamily housing for buying and turning around distressed property, cooperating with the government in affordable housing, and in seeking opportunities in communities that have traditionally been overlooked by institutional investors but offer great returns. We continue to pursue value aggressively.

Growing up Multifamily: In 1996 when I was a newby in apartment investing, I encountered a total lack of guidance in the multifamily industry. Nobody wanted to help! Many withheld information, treating insights as closely guarded "trade secrets." Despite this, I've always advocated for sharing knowledge and mentoring others. Here are key takeaways I've learned over the years: - Self-manage your assets where and when possible. Start by purchasing units nearby for easier oversight. - Keep ownership structures simple. Too many entities lead to increased costs. Find a good business attorney who works with investors at your level. - Be hands-on. Personally inspect every unit, handle bills, and approve applicants. Learn firsthand with basic software or Excel. - Remember, due diligence isn't about trust. Hire independent experts for thorough inspections, avoiding recommendations from brokers or bankers who just want to close! - Invest time in finding optimal financing and insurance options. Obtain multiple quotes for the best deals. - Persevere through challenges. Lessons may be costly, but they prevent repeated mistakes. Make your mistakes accretive. - Celebrate successes! Every triumph deserves recognition. Navigating multifamily real estate is a challenging journey, but the resilience and dedication it demands make the victories all the more rewarding. #MultifamilyInvesting #PropertyManagement #RealEstateInsights

Market Update: For all of us looking for salvation in lower interest rates, the reckoning came when the Treasuries moved closer to 5%. Even the Middle East turbulence did not bring the "safe haven" effect it had in the past. Rates stayed virtually flat. Why? U.S. fiscal policy is not in alignment with lower inflation. Government expansion pumps up job reports and increases debt and inflation. Waiting for a new administration would be able to develop a different fiscal policy? Don't hold your breath. It takes 18 months from the start of new adminstration to see a change in fiscal policy. But we all want to do deals? We are deal centric. We all want to grow portfolios. How? One mechanism is the "look back cap rate." The way this works is to create a pro forma with future revenue projections. At Valcap we want to see at least a "look back cap rate" at 2% over the current cap rate. Specifically, I can justify buying a deal at a 5.5% cap rate if in a year or two I can look back and say "using today's numbers the "look back cap rate" is 7.5%. Of course, if you use overly optimistic rent increases you run the risk of being stuck with another underperforming asset. For example, if you are renovating, then use rents comps only of other renovated properties in the market. Perhaps your property is unique and you can acheive extraordinary rents. Great, but it is best not to depend on rents that are not justified in the current market. Recently, we closed on two deals using this method and are already seeing the increase in revenue. Once the look back hits our marker there will be cash flow. In today's world that is truly what matters!!!

2024 is off to a hot start for The ValCap Group, LLC. This deal marks our 8th acquisition in the Tri-Cities region and we are thrilled to continue our expansion in this market. Big thanks to Tyler Hogan for facilitating a smooth transaction and delivering a win for both parties. We have another deal under contract in this market that is closing towards the end of Q1. If you are an accredited investor and want to learn more about the opportunity, feel free to reach out! #multifamilyinvesting

Here are some notes from our team! What are your thoughts on the multifamily space?