“Asian investors pile into U.S. multifamily”
In fact, in 2014 they say that investors from Japan and China have already placed $522 million dollars in the U.S. multifamily market which puts them on a record-setting pace. This story got me thinking back to spring. Every year I evaluate hundreds of properties, put in 15 to 20 letters of intent, and acquire 1 – 4 new properties. Commercial multifamily real estate is simply a numbers game.
Earlier this year, I came across a 400+ unit property in Houston that looked like a promising candidate for possible acquisition. The market is strong and the submarket was nice. It was close to a mall with plenty of retail, restaurants, and grocery store options nearby. Crime scores were low and schools were better than average. This looked like a real possibility.
I have known the listing broker for years, so I sent him an email asking for some more information. I had a look at the offering memorandum (OM), the rent-roll (RR), and trailing 12 (T12) financials. I began to enter the numbers into a spreadsheet and looked at the data. This property really looked good financially. In fact, the broker felt like the property would trade at $40,000 per door or just over $16 million.
Now I was excited. You see, the vast majority of properties I evaluate are overpriced. Not only was this property priced fairly, it was actually underpriced. Of course I didn’t say that to the broker. Instead, I scheduled a time to tour the property. As it turned out, I was already traveling to Houston to do inspections on other properties I’m involved with in the Houston market.
It was a hot and humid late spring day in Houston when I walked the property. It had rained the day before and it felt like it was going to rain again. The property itself showed well. The location was solid as advertised and not a lot of exterior deferred maintenance. The interiors were solid, but dated. After checking rental comps in the area, it was clear that interior upgrades on the turns would yield $75 to $100 more a month in rent.
I was starting to get excited. Truthfully, I hate when this happens as commercial multifamily real estate should be an emotionless business – it’s all about the numbers. However, not only did the numbers work, they sang from the roof tops. At full asking price, I was about to make a few dozen investors a whole lot of money.
After touring the property, my business partners and I went to lunch with the listing broker. Having known the guy for years, it was a comfortable lunch at a nearby P.F. Chang’s. We discussed the market and the submarket. We chatted about local trends and a recent acquisition we picked up that was only two miles from this property. In fact, we even discussed baseball (one of my favorite topics). Towards the end, we expressed an interest in putting in a letter of intent.
I never tipped my hand or asked why the owner wanted $16 million for the property when I knew I was comfortable buying this property at $18 million. Instead, we ended up putting in a full asking price offer at $16 million.
A few days passed while the owner looked at all of the offers. Apparently, the owner had several competitive offers and decided not to accept any of them. Instead, he asked everyone who was interested to re-offer at a higher price. Still hoping to steal the property, we came back with a $17 million offer. At that point, the owner eliminated the bulk of the competitors and narrowed it down to four different groups.
All of us were asked to submit our “best and final” offers. We ended up putting an $18 million offer on the table. At that price, we could get the investors a healthy yield in the form of cash-flow and an overall 16% to 17% overall annual return. Several days had passed until we heard back. I had been confident that we would get the property given our sizeable presence in the Houston market and our track record of closing.
In the end, we were told that the four offers ranged from $18 million to $18.25 million. The owner settled on an $18.1 million offer from an investment group out of China. The deciding factor was that they put $1 million down as hard money starting on day one. For those of you that are not familiar with hard money, it means non-refundable money.
With these transactions, earnest money has to be deposited upfront. Typically that money is “soft” (refundable) during due diligence. Once the due diligence is completed and the contingencies have been lifted, then the money goes hard. The winning bidder went hard without having formally inspected the property.
Now if I was investing with that group, I would be concerned with that type of business strategy. However, it is easy to understand why the seller would accept it. Ultimately, we were beaten out by this group from China. So when I see the headline, “Asian Investors Pile into U.S. Multifamily” I can attest to its truth. Great investments are great investments and that is why Asian Investors are looking to U.S. commercial multifamily real estate. You should too.
To Your Wealth!
Dennis Bethel, M.D.
P.S. To learn more about commercial multifamily real estate investing, download your free copy of Evidence Based Investing, Why Every Health Care Professional Should Consider Investor in Commercial Multifamily Real Estate or schedule a 15 minute call with me to see if this might be right for you.