Category: Apartment Investing

Apartment Trends By Watching Sam Zell

Sam Zell sold Equity Office Properties to Backstone Group in 2007 at the top of the market.

It’s interesting to watch the apartment trends by 2015 Zell’s REIT Equity Residential was selling 23,300 units in South Florida, Denver, DC, Seattle and the Inland Empire (California) for $5.4 billion to Starwood Capital Group.

Rent growth in these areas have surpassed 4% over the past 5 years. The portfolio is mostly class B surface-parking, two to four-story, walk-up, garden-style properties with high Walk Scores.

In 2020, Zell predicts that the apartment market will become a buyer’s market in the near future. Zell through REIT Equity Residential owns more than 300 properties and more than 77,000 doors nationwide. From his experience, Zell is not making major acquisitions right now because he does not think that pricing has adjusted to the new reality post-covid.

When he started as a real estate investors, Zell focused on smaller emerging markets where there was less sophisticated and institutional investors. As his reputation and assets grew, he now focuses more on urban investments in NYC and San Francisco.

According to Zell, apartment investments will remain strong even though he predicts we go through something like the 1930s Great Depression. Zell believes that Retail, Hospitality and Industrial will be the asset classes negatively affected by covid.

For retail, he expects retail spaces converted to offices, warehouses and/or distribution centers. For hospitality, Zell sees an oversupply of hotel room inventory and general decline in prices. Finally, industrial has been hot with an oversupply in inventory including low barriers to entry.

Zell in interviews has articulated that no one can take away the market cycles although Trump “has added extra innings.”

In 2018, 500,000 new apartment units were created and this is the greatest increase in supply since 1971. In suburban markets, apartments are more likely to have an excess or oversupply in inventory. Zell is expecting a market correction in the multifamily sector “anytime now” because inventory rates are too high.

The reason why Sam Zell is the greatest multifamily investors is because he knows when to sit on the sidelines and investment in other things such as manufacturing and health care in the 1980s. He literally sat out the 1980s for investing in multifamily.

In the 1970s, Zell bought distressed multi-family in a massive arbitrage. He took on $3 billion in debt at 6% when inflation was at 9%. He didn’t like the trend in the 1980s away from 25-year fixed-rate loans and emphasis on short -term variable loans. Zell now states that the only mistake he made in the 1980s was not selling anything.

If you follow Zell closely, they don’t invest into development deals. They may acquire stabilized development deals but they don’t do new construction.

1987 saw a massive liquidation squeeze where banks were asking for significant pay downs of existing loans during a time when properties could not sell. Accounting standards were made super stringent as a “mark to market” and the underlying property had to be curried on the books at the current market value. In addition, workouts with lenders vanished.

Zell predicts a massive consolidation. He compares the real estate market in 2020 to the auto market in 1920. There were 200 auto companies in 1920 and in the 1930s there were only 3 remaining.

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Hedge Fund Manager Tips on Apartment Investing

Lesson #1. Don’t wait for the markets to crash. You won’t have an establish track record to get access to deals and capital if you’ve not established it in boom markets. Always be buying apartments.

Lesson #2. Don’t trust look at price and the cap rate. Rather ask yourself, “Will I lose money on this acquisition?”

“What could go wrong on this acquisition that could cause me to lose money?”

“How do I exit from this property?”

“What is the employment market?”

“Is this property cash flowing when the numbers are calculated properly?”

“What value add can I add to this property?”

“Is this property in a great location?”

Lesson #3. Be skeptical of foreclosure properties. If a property failed once, it might be likely to fail again. Buy great properties in great location with great cash flow in great job markets. Again, don’t focus on price or cap rate.

Lesson #4: Look at 100 properties to buy 1 property.

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The “Mega 3” Apartment Forecasting Report: Ray Dalio, Warren Buffet + George Soros On The Economy

Every quarter, I’ll update the economic apartment forecasting that both Ray Dalio, Warren Buffett and George Soros have on the economy.

Ray Dalio

Ray Dalio has been analyzing China for 36 years. Dalio believes the current state of the US resemble the late 1930s prior to World War II. Interestingly, there was no major stock market crash in the late 1930s and 1940s.

This time the US is like Europe in the late 1930s and China is like America was in the 1930s. The US like Europe in the late 1930s will feel a lot of pressure to sell bonds and also Dalio believes that the Feds will have limited power to save the economy. He forecasts a flight where capital flees the US but capital restrictions will block it from China.

The world is now divided between countries that have to decide to side with the US or China. If a country needs military protection, they side with the US. If a country needs economic stimulus, they side with China.

In a financial or military crisis, the President of the US will use it’s emergy powers to cut off capital flows to China, freeze payments on debt owed to China and apply sanctions.

Warren Buffet

Warren Buffet raised eyebrows when he bought 21 millions of Barrick Gold worth $563 million while selling Wells Fargo, JPMorgan and Goldman stakes. This is the same Buffett who said about gold just a few years ago, “It has no utility. Anyone watching from Mars would be scratching their head.”

George Soros

George Soros holds the view that Trump has been manipulating the economy to win the 2020 election including the 2017 Tax Cuts and Jobs Act. Soros was correct about a devaluation of the pound, an Iranian regime change, the Argentina debt payoff, a bitcoin collapse and a Democrat win in the House elections. He has not been right yet about a collapse in the European economy and on China.

“That crisis never ended. It just moved in different forms, travelled from one continent to another. But nevertheless it has always been with us. The world never went back to some kind of equilibrium after 2008,” says Soros. “What coronavirus has done, it has deepened and accelerated this never-ending non-stop crisis that began in 2008.”

The “Big 3” Report on the economy will always come out on the second Monday of each month. If you’d like to learn more about apartments, join our free Facebook group at

How We Analyze Apartments

Rule #1: Don’t lose money.

Rule #2: Don’t forget rule #1. This classic Warren Buffet mantra.

Rule #3: Make sure you have cash flow for the property for the trailing last 12-months and trailing 24-months.

Rule #4: Don’t buy on a budget. Find investors.

Rule #5: You must find a superstar property manager and pay them well. The managers knows the neighborhood, loves taking care of the tenants, and they care about the success of the apartment. Lenders will require management history.

Rule #6: Know your locations. Do a ton of research on the location. Where are the jobs? Know the public transit plans and zoning plans. How are the schools? Who are the major employers?

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Understanding Gross Potential Rent and Economic Vacancy

Gross Potential Rent (GPR) is the total number of income that a real estate investor can expect to receive from a purchased property based on “market rent.”

Lesson 1. GPR is based on “market rent” and not “proforma rent.” Don’t let sneaky broker or savvy sellers fool you with imaginary “proforma” rent numbers.

You need a seasoned property manager in the class of apartments that you are investing and rely on their data for market rents today… not market rents in the future. Even better if your property manager is Fannie or Freddie approved as both are the primary source of apartment financing in Fall 2020.

Lesson 2. GPR assumes 100% occupancy and that each tenants is paying 100% of their rent.

And every seasoned investor knows that nothing is ever 100% occupied and tenants never pay 100% of the rents due either due to concessions, late payments or loss to lease.

Economic vacancy can be caused by physical vacancy (empty units), bad debts (tenants not paying), concessions (giving first month rent to attract tenants), and/or loss to lease (rents paid being lower than market rents).

Lesson 3. To calculate Annual GPR, take the market rents times the total number of units * 12. For example, this Vallejo apartment has $1997/month market rents times 24 units * 12 or a Annual GPR of $575,136.

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Why We Love Investing In Apartments

A Class properties are usually newer, white collar, nicer amenities, and low in deferred maintenance. Life insurance companies love buying A Class properties as they have long term appreciation.

B Class properties are about 5% to 7% returns plus appreciation. The gold mine is buying B Class properties in A Class areas.

C Class properties are twenty five-years old, have a lot of deferred maintenance, and usually have lots of cash flow. You want cash-on-cash returns at least 8%. The goldmine is buying C Class properties in A Class or B Class areas.

D Class properties are way too risky and often unsafe. Stay away from D Class properties. More management and labor intensive.

Stay away from properties with declining employment or if they are dying.

Here is why apartments can be attractive:

  • Apartment can’t be easily replaced and it appreciates in value if you pick the right location that has strong employment.
  • Apartments provide cash flow if you buy the right property in the right location with the right use of leverage and the property’s income (and not just your personal income) can be used for debt.
  • Apartments have a multiplier effect because rents rise over time, which means the property value rises.

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