My partner and I have found two great apartment buildings to put together into a syndication. We’ve been evaluating deals for the past year. Though we’ve sifted through hundreds of deals, we haven’t found the right one. Part of it is that we are so choosy. It needs to be great in order to take the risk with other peoples’ money. The other part is the market. Money is expensive right now. We are getting quotes for interest rates of 7.5% to 8%. The problem is that sellers take time to realize that buyers can’t pay as much.
Two years ago, I got a loan for 5.5%. If I borrowed $1,000,000 at that rate, I’m paying $82,548 a year in mortgage payments. Contrast that with 8%, it’s now $100,368/year. That $18k difference comes directly out of the bottom line. On your profit and loss statement, it comes out after the NOI. This means that the cap rate is exactly the same, but you make much less money, which is why sellers have a difficult time understanding this. That’s also why the cash on cash return can be negative, even when the cap rate is great. Sellers don’t realize that the cap rate changes with the changing markets and they often like to live in the past. Some of them can, but others can’t afford to do so. These are the sellers for whom you are looking.
Off-Market is the Place to Be
Right now, you’re looking for sellers who have some kind of pain point. Money is hard to come by, so they will be willing to decrease their price to get out of their property. They might even be willing to do some creative financing. Off market can be more difficult. You probably won’t have your real estate agent to find the deals for you. You’ll need to get pounding the pavement. Talk to property managers. Send letters. As my dad would say, it’s hard, but if it were easy, then everyone would do it.
That brings me to my next deal. We’ve found one that has great cash flow and will build equity fast. Sure, we will pay a high interest rate, but the price is right. And, it doesn’t matter what interest rate you pay if the price is right.
In the end, try not to worry so much about what the interest rate is, but worry more about what price you are paying. Don’t bank on interest rates going down, but if they do, and you refinance, you’ll make a heap of money. That wouldn’t have been a possibility if you bought two years ago. Keep buying.
