Blog | Real Estate

Why I’m Selling Almost $200 Million Dollars’ Worth Of Properties

Today’s Real Estate Market is Being Taken Over By THIS Giant

I get asked a lot about today’s real estate market. People come to me, scared about investing, because they hear whisperings of another housing bubble coming down the pike.

I don’t see that happening anytime soon. It’s still a really good time to own property. The market is just slowing down. Why? Hot money is flooding the market right now. And when I say hot money, I mean things like pensions, insurance money, private equity and institutional equity from Wall Street. They’re all driving up the prices of investment properties and pushing down the capitalization rates.

That’s why I'm in the process of selling a little over $200 million dollars’ worth of property. Our cap rates are settling in the mid fours, which is considered really, really low. A rule of thumb for investors has been the higher the cap rate, the greater the annual return. Most professional investors shoot between 4%-10% when looking at a cap rate range. But in all honesty, it depends. Some people think 4% is too low and will side-step those deals. But I also know people that will buy properties with a 4% cap rate if it’s in a good area and they know they can fix it up to get more value out of it. So it depends.

But there's so much capital in the market trying to find a home that, people are still buying because they're preserving capital. That’s just not my game.

I got into an interesting discussion while bidding on a big property in Scottsdale, Arizona. I ended up meeting with a $6 billion equity group that was also bidding on the same property, but for a different reason.

I asked them, “What do you think about the exit cap rate?” (On a side note, an exit cap rate is the sale price. There's always an entry cap rate and an exit cap rate, you buy at one rate and you sell at another.)

I said, “If you're buying at a three and a half, what are you going to do?”

And they said, “We're very aware of that issue, but we're bidding on it anyway.”

So, I explained that all the value adds that they do, and it was a very big value add of $35,000,000 or so, could be wiped out with a one to one-and-a-half-point increase in cap rate.

They basically came back with the comment that they had so much cash, they were willing to buy it anyway and hope the cap rate stays low.

As you know, hope is not a good strategy, but that's what the big guys are doing.

Right now, I own roughly 10,000 apartments. It might seem like a lot, but I’m a small player in the game compared to guys that I’m bidding against. In most cases, these guys have 100-500 million dollar funds to pull from. They’re the ones that are weeding out investors, like myself, and driving the prices up.

Last year, my team and I probably analyzed over 600 properties and made between 50 and 60 offers. There's a big process to this that takes quite a bit of time. But the great thing about real estate is, it's slow. It’s not like the stock market where you have to act on your investment immediately.

But even with all the time to research and scope out properties, we lost out on every single deal, except one. That told us that something in the market was happening, and like I said earlier, it was our competition.

People have been outbidding us by $1 million to $2 million per deal. Why? It all boils down to motivation. The guys we’re bidding against are the Wall Street big shots.

My criteria and Wall Street’s criteria on buying investment properties are very different. The guys from Wall Street are trying to preserve capital. I'm trying to produce a return for an investor, and most times, a cash flow opportunity. I sit across the table from my investors, I get their hard-earned money, and I plan to produce a return for them. And usually, it ends up being significantly higher than something that Wall Street's doing.

Another factor and difference is pressure. If you put money into a life policy, pension or a private equity group, there's pressure on that group to invest that money. Why? Because if it just sits there, it's not making any money. There's a real cost for that fund as well. So, for the Wall Street investor, motivation is much different than mine. I'm investing my own money and my investors’ money, so it’s personal. Whereas the other guys don't even see the face of the people whose money their using.

That’s why I always recommend looking at someone’s motivation. Why are they doing it? The guys in Wall Street, they're doing it so they can pay their rent. They don't have a legacy of having a lot of cash in properties like me and my team do. We have over a million dollars of free cash flow every month coming in on our project, so we don't have to do any deals. It's a lot different.

To learn more, read my book The Advanced Guide to Real Estate Investing: How to Identify the Hottest Markets and Secure the Best Deals .