The Federal Reserve and Beer Goggles plus what Financial Repression means for Apartment Building Investments

James Montier, who works at the intersection of value investing and behavioral investing (Author of ‘The Little Book of Behavioral Investing’ on Amazon among others) has a great quote in his latest white paper published by GMO Global Investment Management entitled “The 13th Labour of Hercules:Capital Preservation in the Age of Financial Repression” Note that you may have to register at the site (free).

His paper discusses the effects of financial repression on portfolio stock and bond allocations and by implication the effects on real estate and particularly  apartment building investments. Financial repression is the term used to describe central bank’s strategies for forcing interest rates to zero or negative to spur investment and spending at the expense of saving. Take it away James:

William McChesney Martin was the longest-serving Federal Reserve Governor of all time. He is probably most famous for his observation that the central bank’s role was to “take away the punch bowl just when the party is getting started.” In contrast, Bernanke’s Fed is acting like teenage boys on prom night: spiking the punch, handing out free drinks, hoping to get lucky, and encouraging everyone to view the market through beer goggles. [Emphasis mine]

The paper goes into depth on the effects of financial repression on investments, which grow the longer the repression lasts, up to twenty years. Does the phrase: “… for an extended period” ring a bell? How about QE1, QE2, QE3, and now QE-infinity?

Financial Repression and Apartment Building Investment
Source: James Montier, GMO


Apartment buildings are the real estate equivalent of Continue reading The Federal Reserve and Beer Goggles plus what Financial Repression means for Apartment Building Investments

Q3 Apartment Building Investment Reports Now Available From Marcus & Millichap

M&M covers 39 major apartment building investment markets in the US and have just published their Q3 reports. Here’s a list of the metros they cover:

Marcus & Millichap Q3 2012 Apartment Building Investment Market ReportsThey also provide snapshots of the Office, Industrial, Retail and Self-storage sectors in many of those markets, accessible from the tabs on the page. Note this information requires registration at the website to view.

The 3 Most Important Things You Need To Get an Apartment Building Investment Loan

ALB Commercial Capital has a nice guide for small balance (<$5 million) apartment building investment loans. In it they cover the three most important ratios investors have to clear in order to get a deal funded:

The 3 most important things to get an apartment building investment loan approved


  1. Loan-To-Value Ratio (LTV) = Total loan balances (1st mtg + 2nd mtg) / Fair market value (as determined by appraisal). For Multifamily mortgages, LTVs seldom exceed 80%.
  2. Debt Service Coverage Ratio (DSCR, aka DCR, DSR) = Net Operating Income / Debt Service. Most lenders insist that this ratio exceed 1.2 with a few a allowing 1.15.
  3. Personal Debt Coverage Ratio (PDCR) = Monthly Personal Debt / Monthly Personal Income. The Personal Debt Ratio compares the amount of bills that the borrower must pay each month to the amount of income they earn. Personal Debt Ratios seldom are allowed to exceed 50% in practice.

In addition the guide covers other items that need to be addressed such as Continue reading The 3 Most Important Things You Need To Get an Apartment Building Investment Loan

Find the freight trains in your life and get on them instead of in front of them.- Barry Sternlicht Video via @Michael_MBA

Great advice from Barry Sternlicht plus much, much more on real estate, investment, capital, leadership, opportunity, Europe, China while speaking at the Schack real estate conference. He is one very smart guy while being personable and humble, a  rare but valuable combination. Reminds me a bit of my virtual mentor Tom Barrack, and not just because of the haircut! Barry even mentions wanting to learn how to surf, something Tom could definitely help with.

Here’s the link to the video: Barry Sternlicht at Schack RE Conference For more great video from the conference Continue reading Find the freight trains in your life and get on them instead of in front of them.- Barry Sternlicht Video via @Michael_MBA

Seattle Apartment Building Investment Cycle peaking or just taking a breather?

In his Q4 report on the Seattle multifamily market ARA’s Jim Claeys says:

Vacancies and Concessions UP

Absorption and Rents DOWN

New Construction Pipeline UP 140% from year ago

Also Home and Condo Sales UP 41, 70% respectively

Sounds kind of like the cycle is moving to the next phase doesn’t it? See the whole article here: This may be a good time for developers to reassess their projections

Top 10 Tips for Acquiring Distressed Multifamily Properties

Nice article in MHN Online, good tips and reminders. There are still plenty of properties worth less than the debt, and there are more foreclosures to come. Most of the distressed multifamily properties are B, C and D class properties. These properties can provide great returns with cap rates from 8 percent to 12 percent on existing income, and in most cases have plenty of vacancy for even more upside.

My top two that apply to all properties distressed or otherwise:

Good management: Distressed B, C and D properties require experienced and diligent asset and property management. Your management team should be top notch. Your turnaround plan should be realistic and properly implemented.

Talented leasing staff: Your leasing team should be properly motivated and for lease marketing extremely thorough. You want a well-thought-out, multi-disciplined lease up plan to stabilize properties in this cycle.

See the article here:

Converting Cap Rates to Earnings Multiples

After a recent speaking engagement I was asked about how and why I use the earnings multiple concept when evaluating apartment investments. It was a great question and so I’m sharing my answer here in this blog post.

As a value investor two of the fundamental questions I always ask is what am I buying and how much do I have to pay for it. With an apartment investment (or really any investment) I am buying current income and the potential for appreciation so the second question comes down to “How many years of earnings do I have to pay for these returns?” The question can be answered by converting the cap rate to an earnings multiple. The Cap Rate is the return in current income on an apartment investment you could expect if you paid all cash. To convert a Cap Rate into a Earnings Multiple use the formula: Continue reading Converting Cap Rates to Earnings Multiples

Why are Cap Rate explanations so complicated?

If you listen to any conversation about commercial real estate (CRE) within a minute the subject of cap rates will come up. Those who are just beginning to explore CRE are often thrown off by what one is and how it is calculated.  A cap rate is really a simple thing that is often made overly complicated by the way it is explained. Let’s walk through what a cap rate is and then we’ll look at how they are used so that the next time the conversation turns to CRE you’ll be right there in sixty seconds when they get to cap rates.

A Capitalization Rate or Cap Rate for short is simply what you would earn on a property if you Continue reading Why are Cap Rate explanations so complicated?

Why We Like Apartments- Owning them that is.

Recently I’ve been working with several new clients who are conservative investors looking for better returns than CDs and Treasuries but aren’t interested in taking on the volatile market risk of stocks, bonds and derivatives. I was explaining why apartment investments make sense and there are quite a few reasons but the biggest one is how the math of an apartment building investment works. In this post I’d like to share that with you in case you’re also looking for conservative income producing investments with inflation protection and upside potential.

Here’s the numbers on a typical apartment investment:

In this example is a 100 unit building with 850 per month per unit average rents which is purchased with a down payment of 25% and a 30 year loan for the balance at 5.5% interest. Vacancy is 5% of Gross Potential Rent, expenses total 50% of Gross Operating Income and a cap rate of 7.5% is used. Today in some markets cap rates are higher (buildings less expensive) and in a few others cap rates are lower (buildings more expensive).

Apartment Buildings are valued on the income they produce. (This post is about properties larger than 4 units, smaller properties are valued more similarly to single family homes.) There are several ways to calculate the value based on the income but the most common is the capitalization rate, or cap rate for short. The cap rate is the percent of the property value that the Net Operating Income (NOI) represents: Continue reading Why We Like Apartments- Owning them that is.

Top Ten Reasons To Own Apartments Now

I believe that apartment building investment should be a core holding for every successful conservative investor. Briefly here are the top ten reasons for low risk investors:

1.       Monthly Income. Properly acquired apartments generate monthly checks in 6-8% or higher annual cash on cash returns.

2.      Straight forward, conservative investment strategy. Buying existing apartment buildings with good due diligence means that you know what you’re getting going into the investment. Apartments are not subject to sudden changes in investor sentiment and/or valuations.

3.      The numbers determine the value. Apartments are valued based on rents less expenses (Net Operating Income) and increases in rents can go straight to the bottom line increasing the value.

4.      Inflation protection. Rents rise with inflation and with 12 month leases every year there is the opportunity to adjust rates. With fixed rate financing your income goes up while your biggest cost stays the same. Continue reading Top Ten Reasons To Own Apartments Now