We started GBP two and a half years ago thinking that opportunities in real estate might be “just around the corner. We were wrong. Since opening we have looked at 586 deals, worth over $7 billion, we fully underwrote 74 deals and were only able to contract on one deal, Mercantile Lofts in Milwaukee. A lot of effort for little result.
We stuck to our guns and kept looking for assets we liked that could over 5-10 years return a 12%+ IRR with annual cash flow of at least 7%. In 2023, our preliminary pricing estimates were about 20% below asking prices and in 2024 they were about 10% off. Getting better, but not close enough to transact. Additionally, the properties for sale were mostly lousy real estate: weak locations, poor operational results, or just odd assets. On the nicer ones we discovered that the sellers were just not willing to transact at the market and did not sell the property at all. Very frustrating.
A new perspective:
Coming into 2025, we were pessimistic about the market given geopolitical uncertainties and relatively high interest rates. However, so far in 2025 we have some really high-quality properties that fit our investment goals of creating a long-term multifamily portfolio, as described in our webinar. These are properties we want to own and think will provide income and security over time. They are priced, and we believe they will sell, at levels that won’t fit our old structure. We are therefore adjusting to allow us to compete on these high quality assets.
Since we started syndicating in 2009, our structure has consistently provided 7% or 8% preferred cash-on-cash return with a 70%/30% or 80%/20% split thereafter. Moving forward, we will propose deals structured differently, one that, for long-term investors, treats them more like partners and not just capital. We believe the returns outlined below represent the current market returns for these properties. Given current interest rates, the prospect of significant inflation, the long term housing shortfall and the tax benefits you get from owning real estate, we believe these returns are reasonable.
Key Deal Highlights:
- Focus on High-Quality Assets, A+ locations “Generational Assets”
- Hold period: Long term, possibley15 years+
- Target Investor IRR 10%+
- Investor Multiple: 2-3x
- Annual distributions: 3%-5% (excluding capital events)
- Target average annual cash flow – 8%+ (including capital events)
- Target return of 100% of capital: 7-10 years
- Loan: 65% LTV Maximum
- Deal Size: $2 – $25 Million
- Deal Structure:
- 100% of distributable cash flow goes to investors until their initial capital is fully returned.
- After that 75%/25% between investors and sponsors
- 2% acquisition fee
- 1 ½% annual asset management fee
- Minimum Investment 50K
- Available to accredited investors only
While I recognize these returns are lower than we have offered in the past, we feel this is reasonable given the quality of the real estate. These are stabilized assets in excellent locations. While operations have an impact on returns, they are equally driven by inflation and interest rates when we refinance. We don’t know what either of those things will be, but it looks to us like there will be additional inflation and rent growth. We are also in the interest rates being higher for longer camp, but there will be a time when rates are lower and we will have the opportunity to take advantage of that situation.
Therefore we plan to transact on 2-3 deals in 2025 under this scenario. We have not stopped looking for deals with higher returns, but think now is the time to invest in real estate and we will be investing at market prices for high quality properties and locations.
Next Steps:
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