How I’m deciding what deals are worth buying right now

The real estate market is in a period of price discovery.

What does that mean?

Nobody knows what to pay and sellers aren’t willing to meet the market. If real estate was a liquid stock that could be bought and sold at a moment’s notice, it would be in free fall.

The most common question I’ve received over the past 2 months:

What makes a deal worth buying right now? What cap rates are you looking for when you make a new acquisition?

I’ll answer that the best I can below.

The true answer is that nobody knows. This is why real estate investing is hard – there is no playbook and no two deals are the same. You have to make a lot of educated guesses and gut decisions.

Not good at making decisions with millions on the line?

Pick a different line of work.

The thing about real estate is that you’re always making decisions based on incomplete information. You’re always making a bet on the future. You’re always estimating future profitability of an asset based on a spreadsheet with 100 guesses and many variables.

Nobody truly knows where the market is headed. We are at a time when the fear is creeping up but we’re definitely not at the peak fear that struck the market during the free fall of 2009.

If interest rates go up from here for another 12-36 months the market is in big trouble and prices will drop. If interest rates stay right where they are for 12-36 months the market will also drop and values will not go up much from here. If the fed reverses track and rates drop the prices will go back up or even out, but who knows when or what will cause that to happen.

Things do seem to be shifting.

I’ve heard the following from brokers the past 2 weeks:

““Let me know if interested at any price point.” “Please submit where comfortable.” “We are looking for offers at any level.” “Deals aren’t moving right now because sellers aren’t willing to meet the market.”

This is a good sign but my offers still aren’t getting accepted.

My buying criteria depends on the quality of the asset. I really love properties in good shape with high traffic and a market that is near 100% occupancy. They are hard to find this time of year because the self storage market is absolutely softening. Occupancy is waning slightly – possibly because of normal seasonality and possibly because of the major housing slowdown or weakening consumer confidence / liquidity.

For those great assets with more than 40,000 sf in a great market we’re looking to stabilize at an 8 cap with a 40% expense ratio. Generally increasing rents by 20% or so upon acquisition. For the locations without much traffic or in a more rural market we need to stabilize north of 8.75% cap rate.

Not many deals are pencilling right now. We don’t have a single deal under contract right now. None of our offers are getting accepted.

We’re planning to close a few smaller deals all cash if we can get them tied up. We’re also working on sellers to provide seller financing. But the thing about seller financing is that the debt still needs to be repaid and the basis is still the basis. You can’t buy things for more than they’re worth to make a seller happy no matter how good the debt terms are.

It’s a crazy time out there. We’ll see what happens.

Onward and upward,

Nick

P.S. Tax season is right around the corner and the folks at RE Cost Seg just let me know their fall / spring schedule is filling up and they’re considering raising their prices. They’ve already delivered 1/2 my cost segs this year and the depreciation is mouth watering. Reach out if you’re in the market – the proposal is free.

Professional engineering reports you can count on, and they do virtual visits to turn them around even quicker. Not sure what a cost seg is? Check out this thread.

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About Me

I started the Sweaty Startup in December of 2018 because I believe the Shark Tank and Tech Crunch culture is ruining the real spirit of low-risk entrepreneurship.