In today's world, it's more important than ever to think about retirement investing. With traditional pensions becoming increasingly rare, and social security benefits failing to keep pace with the cost of living, retirees are facing greater financial challenges than ever before.
One way to address these challenges is to invest in multifamily real estate. By owning rental properties, retirees can generate a reliable source of income that can help to cover their living expenses. Additionally, by carefully selecting properties in areas with strong population growth, retirees can also create multi-generation wealth by leveraging the appreciation of their assets. When done correctly, retirement investing in multifamily real estate can be a powerful tool for creating long-term financial security.
Yuen Yung, CEO of Casoro Group, Founder and CEO of the franchisor How Do You Roll?
Find Yuen on LinkedIn: https://www.linkedin.com/in/yuenyung/
Casoro Group Website: https://casorogroup.com/
Hanh Brown: Hi, I'm Hanh Brown, the host of the Boomer Living Broadcast. As baby boomers age, they are increasingly focused on maintaining their health and wellbeing. However, they face many challenges, including senior healthcare, dementia care, caregiving technology for seniors, affordable senior living options, and financial security.
Hanh Brown: These issues can be very difficult to navigate alone, which is why the Boomer Living Broadcast was created. So on the show, industry leaders share information, inspiration, and advice for those who care for seniors. Our expert panellists discuss all aspects of senior care, from healthcare to finance and housing.
Hanh Brown: So thank you so much for joining us today. We are all, um, at different stages in our ageing journeys, and we can learn a lot from each other, and that's why we love to hear from you. If you have any questions or comments, please don't hesitate to share them with us. And thank you for tuning in. We hope that you find the conversation informative and helpful.
Hanh Brown: So, today's topic is retirement investing. How to create multi-generational wealth with multi-family real estate In today's world, it's more important than ever to think about retirement investing. With traditional pensions becoming increasingly rare and social security benefits failing to keep pace with the cost of living, retirees are facing greater financial challenges than ever before.
Hanh Brown: So one way to address these challenges is to invest in multifamily real estate. By owning rental properties, retirees can generate a reliable source of income that can help cover their living expenses. Also, by carefully selecting properties in areas of strong population growth, Retirees can also create multi-generational wealth by leveraging the appreciation of their assets.
Hanh Brown: So when done correctly, investing in multi-family real estate can be a powerful tool for creating long-term financial security. So today's guest is Yuen Young. Yuen is a man of many talents and accomplishments. As CEO of the Cassel Group, he's responsible for the overall management of operations, including business development and investor relations.
Hanh Brown: Prior to joining the Cassel Group, I was the founder and CEO of the franchiser. How do You Roll? It's a fast-casual sushi restaurant with over 20 locations in progress and open across North America. So Yuen, welcome to the show.
Yuen Yung: Thank you. It's good to see you. How are you?
Hanh Brown: I'm doing good. So thank you so much for joining me today. Can you share with us a little bit about yourself personally and professionally that maybe others may not know about you?
Yuen Yung: Sure. My pleasure. Thank you. Thank you for asking. Uh, so on the personal side, I've been happily married for 20 years to my wife. Uh, we have two boys—one's 18 and one's about to be 14.
Yuen Yung: They keep us very busy. On the professional side, we do multifamily, and so we aggregate capital to do, uh, multifamily real estate. Uh, the company, KiOR Group, has been around for about 20 years now, almost actually a little over two decades now. Uh, and we specialise in that area. And then more recently, what we've been working on is, uh, creating an impact fund because, uh, we find that the generational wealth gap is a problem in this country, as well as, uh, finding ways, as you stated in your intro, to help people find ways to create wealth over time.
Yuen Yung: And so we are working on creating more diversity in commercial real estate, especially in the multifamily space. So, uh, we created something called the Onyx Impact Fund. And then we also set up a nonprofit organisation called the Coro Group Education Foundation, and that's going to help bring more diversity into commercial real estate.
Hanh Brown: Oh, thank you. And congratulation. Okay, so let's talk about the multifamily sector and where it's headed with regard to the, uh, interest rate hikes. So what are your thoughts on the, uh, federal reserve interest rate hikes, and how would that affect multifamily housing?
Yuen Yung: Yeah, interest rates are definitely a big concern in our sector, in all real estate, really.
Yuen Yung: When you talk about interest rates, it's, uh, when interest rates go up, it's a scary thing. Um, and when you think about that, uh, you know, the anticipation was coming for a while. It's been known that the Fed is going to increase rates for a while, and so we've been trying to anticipate that and figure out how we can still make business plans work.
Yuen Yung: You've got really two dynamics that are happening in this sector overall that make it a little bit challenging. One is that you have pricing going up, and when pricing goes up, that means something called the cap rate is compressed, meaning that your yield on the asset is down because you're paying more to buy that asset.
Yuen Yung: Then, at the same time, if interest rates are going up, what'll happen is that your cost to leverage or your cost to borrow actually goes up as well, which makes cashflow even more challenging. So as a company, it's not the first time we've seen this. We have a long enough history to know that we've got to hedge and do some different things.
Yuen Yung: And so, uh, what we're working on is that we can't stop the Fed from increasing rates, but we have to change the way we underwrite, meaning our business plan has to change. And so what we've been focused on is, okay, uh, do we go to more fixed type, uh, uh, debt lending versus floating rate? Uh, um, or do we proforma where we have floating rates but anticipate hikes over the next three or five years?
Yuen Yung: Uh, and so those are all some of the challenges that the increase in interest rates has had on our business and our business model itself. Mm-hmm.
Hanh Brown: Mm-hmm. Great. So now, what impact do you think this will have on the renter population?
Yuen Yung: Well, the good news for the renter population is that the demand is still very high.
Yuen Yung: We're just getting to the peak of the millennials, uh, and where they are in their lives. Uh, and so, uh, I don't know if you recall, but the millennials are the biggest wave of people coming through since the baby boom generation. And, uh, so the baby boom generation, of course, has their needs; they're going into more senior living, and, and, and, and.
Yuen Yung: Different types of living needs, but then millennials are the group right behind us. So with the combination of the boomers and the millennials, the demand for renting is probably the highest it's ever been. Now that interest rates are going up, it doesn't help the conversation of people wanting to purchase either.
Yuen Yung: So it makes it even harder for them to purchase, which puts even more pressure and demand on renters. Uh, and so what we're seeing is that it's not on the demand side. Uh, the demand side of renting is fine. It's actually the supply side trying to keep up and provide, uh, the places for these people to live that's the biggest challenge right now.
Yuen Yung: Mm-hmm.
Hanh Brown: So what advice would you give to multifamily investors in this market?
Yuen Yung: Well, I think a couple of, uh, key things Uh, anytime you invest in multifamily, you do want to make sure that the basics of real estate are in place. Number one is location, location, location. Uh, so when you buy assets or buy into assets and invest in assets, it's very important to make sure that you're going into assets that are in good locations.
Yuen Yung: Now, good locations might have different definitions for different, uh, business models. But the overall effect of that is that you want to make sure that it's going to be real estate that's worth something down the road. As you say, really, the capital gains are the biggest return down the road.
Yuen Yung: And so when you look at the overall picture, if you're going to go into multifamily today, I would definitely make sure that the assumptions in the business model are realistic. And more importantly, look for opportunities to invest in multifamily where there's a high concentration of what we call the knowledge workers.
Yuen Yung: Now what do I mean by that? Um, when you think about knowledge workers, these are folks that typically have technical skills or higher. And their ability, uh, to increase income is the highest in the population, so mm-hmm. Uh, they are typically at least associate's degrees, technical degrees, bachelor's degrees, master's degrees, those types of folks.
Yuen Yung: And what you see is the migration of these folks. The change in technology and the increase in AI actually enhance their ability to work. And what you find is that their incomes go up faster, and the real estate around them goes up faster. So if you're going to invest in multifamily, I'd ask that question: is it being invested in a multifamily, uh, property asset that caters to knowledge workers?
Yuen Yung: So something to think about. I agree.
Hanh Brown: You know, when you say that AI increases their work as far as performance expectations, I also think versatility, right? Yes. Because they may be in your apartment working remotely, and that's a key component,
Yuen Yung: That's great. It is. It is. And, and, and you'll find that the benefits, uh, of what they want
Yuen Yung: Are shifting. So we've done some research and some studies ourselves on this knowledge worker demographic. And today, the top thing that they want from a multifamily space that they would rent is, uh, fast internet. Mm-hmm. And the reason why is because they're working from home, right?
Yuen Yung: Number two, the second thing they demanded the most, was space to have a dedicated desk. Or their own little mini-office. So those have now become the two biggest things that they need. It used to be about parking; it used to be about dog parks. Those things are still needed. But the other two things, because of, uh, the pandemic, have now created a higher demand for high-speed internet and, uh, and, uh, space to work from home.
Hanh Brown: True. True. So let's talk about cap rate compression relative to the multifamily sector. So what do you think is causing the cap rate compression?
Yuen Yung: Um, well, I think it's the demand, and people see that. And, uh, I think that in general, the cap rate compression is not happening everywhere in the country, but it's happening in certain places.
Yuen Yung: And, in certain places, the cap rate is compressing because the demographics are changing. So more desirable cities to live in. And what you find is that when those cities attract more people and more workers, what happens is that the cap rates will compress because pricing starts going up. Um, So that becomes a very challenging game, especially if you're investing in multifamily and trying to find new opportunities.
Yuen Yung: What you're seeing today is that the pricing is very high because we know that the demand is there. So people are willing to spend more and pay more for a multifamily asset. And so, therefore, the yields or compression of the cap rate are happening. And so, therefore, that's what you're seeing.
Yuen Yung: So, uh, if you went backwards 10 years ago, you were looking at cap rates around six, potentially 7%; today, you're looking at two to four, if you're lucky. So you can see that there's a big migration and shift from cashflow and yield to valuation and growth, right? And so when you think about, uh, uh, uh, real estate in general, you're usually looking at two components.
Yuen Yung: One component is the income that you can generate. And the other one is the appreciation that you get, right? You get that nice kind of growth and income strategy going, uh, with real estate. Right now, with cap rate compressions happening, the income piece is definitely waning while the growth piece is accelerating.
Yuen Yung: So the expectation should be a little bit different when you're investing in multifamily moving forward.
Hanh Brown: So I guess for folks who are, let's say, in development or refinancing, what do you think, or even new investors coming into this space, how do you think the cap rate compression will affect investor sentiment?
Yuen Yung: Well, I think the advantage, yeah, the advantage on the developer side is that you can kind of set the cap rate yourself to a degree. Um, now the challenge on the developer side is really material costs going up. Making that a little bit more challenging, and then interest rates going up, making the borrowing a little bit more challenging.
Yuen Yung: So, I think that's the challenge, but the opportunity is still pretty good for development. Uh, so for example, we're actually looking at developing a senior living, uh, multifamily, that is going to cater more towards, uh, the baby boom generation. Uh, and that we feel like that gives us the opportunity because that is a captivated audience, right?
Yuen Yung: Uh, that means you can afford to pay a little bit more for more services. So then, in those scenarios, the opportunity is still there. And I think that the effects of the interest rates and everything else can be mitigated because your growth rate and the appreciation of the property over time can keep up.
Yuen Yung: You know, whatever else is happening with the material increases or the interest rate increases,
Hanh Brown: Mm-hmm. Mm-hmm. Now, do you see this trend reversing in the near future?
Yuen Yung: future? Uh, probably not in the near future. Uh, I think that we're, you know, your guess is probably as good as mine, but my thought process is that the way the Fed is hiking interest rates, it'll probably be in the near future, in a couple years, and we're probably looking at 4% as a normal rate for them.
Yuen Yung: Uh, and that wouldn't be a big surprise, especially as they're battling inflation. So I would not change my expectations in the near future. Uh, and when I say near future, I mean two to three years. Uh, I think that you might as well expect that that's going to continue and increase. Um, that does pose a very interesting question in my mind.
Yuen Yung: Which is around what happens to all those projects that had floating rates, and, uh, where are those projects in two to three years when rates have gone up? Uh, there may be a good buying opportunity at that point, and then maybe you start seeing cap rates go the other direction. That could help maybe, uh, buy more value, add core plus-type assets.
Yuen Yung: Mm-hmm.
Hanh Brown: Mm-hmm. So what other factors should we be watching out for in, you know, the coming years with regards to multifamily investments?
Yuen Yung: Yeah, I think we talked a little bit about the macro concepts, right? Which are the demographics. So do the demographics support it? Uh, we talked a lot about supply and demand, and so you just gotta keep watching those trends.
Yuen Yung: and then be able to provide the housing that is needed for those trends. Uh, so right now there's a lot of talk about even single-family homes, right? As people move from multifamily to single-family homes, there seems to be a lack of ability and, uh, dearth of ability to get into single-family homes for purchasing purposes because of interest rates and those sorts of things.
Yuen Yung: And so there's going to be a lot of different demographic changes at the macro level. Then you go into a more regional conversation, which is, you know, which states are doing well, maybe, which cities are doing well. Uh, and being able to see where the migration of people is going with more and more people being able to work from home
Yuen Yung: What you're seeing is that it allows them to live wherever they want. And, and, and we've seen some statistics that even like, uh, uh, Airbnb and V R B O are, are, are verbal, are, are doing well because people literally are moving to a city and living there and working there for, uh, six months a year and then renting that and then leaving and then going somewhere else because they can work from anywhere, right?
Yuen Yung: And so there are some very interesting, uh, uh, changes that I think are happening through that process. And so I think that those things are to be looked at, but then I think that at the core of investing in real estate, it still goes down to the micro level, which is, you know, the roads, the block that you're on, the egress regress of the real estate, the.
Yuen Yung: There are so many little micro nuances that you still have to study, so you can kind of start with a macro and get an understanding of it, but then you filter down, and I think that when you filter down, there's still going to be some very good real estate opportunities at the micro level if you're able to look at the deals at that level.
Hanh Brown: What do you think is the long-term opportunity in multifamily—you know, micro, regional? Just kind of dissect that a little bit more.
Yuen Yung: Yeah. You know, the long-term outlook for multifamily is always going to be fairly strong. Um, we were looking at some of the demographics of the renter profile, right? And the pressures of actually having, uh, high-debt student loans, things like that, put pressure on having more renters, which helps multifamily.
Yuen Yung: But what we find is that there is a huge demand and need for it. And we don't see that trend slowing down. So if you look at some of the, uh, CoStar growth rates for rents and stuff like that, they're projecting rents to grow anywhere from five to 8% per year. So when you think about that, that's pretty significant, and that's pretty dramatic.
Yuen Yung: And then, if you pair that with what our thesis is about the knowledge worker, their incomes go up by 10, 15, or 20%. And so you can imagine the rents that follow with that, which is why we think that multifamily still has some good legs to run for quite a while. Um, then we look at the next generation after millennials, which is the Gen Z, uh, generation.
Yuen Yung: And when we look at the, uh, population there, it's a decent-sized population as well. They won't be as big as the millennials. But there's still a lot of population, and that's your next, uh, uh, wave of renters that come through for multifamily. So we feel like the news is still pretty good. Uh, we don't see overproduction, because sometimes that could happen where you build more than the number of renters that are available to rent.
Yuen Yung: We're seeing just the opposite right now, and it's going to take years for supply to catch up. So that gives us, uh, a lot of good runway long term for multifamily as an asset category. Mm-hmm.
Hanh Brown: So you have the millennial, and I'm sure you also have the Gen Z.And the Boomers. And the Boomers, right?
Hanh Brown: Empty nesters, whether they're single with kids, single without kids, or active living, so to speak, Right? Yes. And active living can potentially be grouped into that multifamily as well.
Yuen Yung: Yeah. So all of those categories, um, you know, it's just a supply and demand thing, right? Um, and when you have more people than housing, then it just affords the ability to increase in value.
Yuen Yung: And so that's all we're seeing. And so I think we're going to continue to see that trend, and that's a great thing for real estate investors. I think the opportunity is still there. Um, I think if you talk about real estate in general, the, the, the categories that are a little bit more, uh, of concern.
Yuen Yung: And you have to be more careful about what is going to be office space because that whole, uh, people working from home and that whole change have really changed the dynamics of office space. I'm not saying that you can't make money doing it; you just have to be very careful about how you do it and make sure that
Yuen Yung: The, uh, living patterns and work patterns of people don't impact it too much. Uh, so I think that there's a lot of talk around what's going to happen with office space and how it's going to work out long term, right? And those folks that are in those sectors are working, uh, with ideas of, you know, the traditional thought process of offices versus maybe co-working spaces or more like a WeWork style.
Yuen Yung: Those things are all happening. The same thing's happening in retail, right? The big box. Retail, uh, those are starting to disappear. Uh, in the old days, there was Circus City and Best Buy and, and, and, and department stores and, and all those. You're starting to see that start to change. And those malls that have been around for a while are starting to get repurposed for other things because of companies like Amazon or Uber Eats, and those sorts of things have completely shifted the landscape.
Yuen Yung: Of what we traditionally think of that retail piece of it. Because of retail, most of us are now, uh, buying things online versus going to stores. So there's a lot to talk about, even within those sectors, and where the investment opportunity might be. But I would just be careful there and look at that.
Yuen Yung: It's not as simple an answer as housing, which is like, You need a place to live. I have a place to live. I charge you rent, and we go. With those other sectors, you're going to have to really study human patterns, how we're living, and what we're doing to find the opportunity there. Mm-hmm.
Hanh Brown: Mm-hmm. That brings me to the next question. Do you have any tips for acquiring and managing multifamily properties? Uh,
Yuen Yung: It's not easy. Uh, I think on acquisition, there are a couple of tough things. If you're talking about individual investors, The best thing to do is probably join a syndication, uh, invest in a reit, or something like that.
Yuen Yung: Uh, and the reason why is because today it's a lot harder to get into a multifamily asset because of the cost. Uh, so if you think about a, let's call it a, even a, something small, like a hundred-unit apartment complex, those doors in certain cities are going for a hundred, $200,000 a unit. So now you're talking about a potential $20 million deal, of which you need to put at least maybe a third of the equity in.
Yuen Yung: So now you're talking about six or seven million. That doesn't fit into the profile of individual investors anymore, right? So what you're seeing now is that a lot of times individual investors are syndicating, meaning that they're joining together with other folks and putting their dollars together to meet that higher dollar demand in order to do a deal.
Yuen Yung: Uh, so the opportunity for individual investors, uh, the fear that I have is that we're really moving more towards institutional, uh, housing, right? where every deal is owned by an institution, and we see it in our business, uh, and even in our own business model. Uh, so one of the things, which is why we actually, uh, I had mentioned the Onyx Impact Fund, is
Yuen Yung: How do we support maybe smaller minority or women-owned sponsors and developers doing smaller projects that need capital and try to support them that way so that it's not always just going to the institutions themselves, right? Uh, and so we're looking at those dynamics as well. So for the individual investor, I think that
Yuen Yung: I think they need to meet folks and, and, and, and look at maybe local sponsors, uh, and or look at starting to do maybe private REITs or public REITs or something like that that gives them the opportunity to be a part of commercial real estate. Otherwise, the commercial real estate space is going to get institutionalised.
Yuen Yung: It's going to be very challenging, uh, from that perspective, you know, for the 50 thousand, the hundred thousand, those sorts of things.
Hanh Brown: Okay. So, your thoughts on managing multifamily
Yuen Yung: property? Yeah. The management. Yeah. Yeah. Thank you for reminding me of the second part of that question. So I, I, I recommend, uh, not managing, unless you really want to do that as a full-time job, when you talk about housing and, whether it's, uh, duplexes, fourplexes, uh, multifamily, whatever it might be, Managing that housing is today really a professional organisation.
Yuen Yung: Uh, you can do it yourself, but it's really hard to be both good at collecting checks and collecting rent and leasing. Uh, But then, at the same time, handle maintenance or repairs, right? Those are usually the dynamics that happen there. Um, so if you're going to do it and it's something you want to do, make sure that you have the resources and the network that you need in order to make the financial side work as well as the physical maintenance side of it.
Yuen Yung: And if you can make both of those things work, then you can manage it yourself. Otherwise, you're probably better off giving up a couple of percentages and letting a professional organisation manage that for you.
Hanh Brown: True. True. Thank you. Thank you for your wealth of knowledge. I, I, I appreciate your, um, sharing, just, you know, everything that you're doing and also the fun that you're creating, because I think it's very necessary for a lot of folks who may not have the access or want to invest through REITs or institutions, going through your funds is another means.
Hanh Brown: So I appreciate that. Yeah. Yeah. So let's talk about underwriting assumptions for multifamily, which is huge because that's kind of everything, right? It's everything, yeah. The bloodstream, the oxygen, their ability to get your oi, and so forth. Yeah. So let's kind of start with: what's the difference between classes A, B, and C in multifamily?
Hanh Brown: So let's just start with that.
Yuen Yung: Oh, okay. Sure. So, there we're talking about the classifications of assets, meaning it's a way to say, Well, uh, what is the vintage? meaning the year, how young the asset is versus how old an asset is. Also the amenities that are provided, uh, as well as location.
Yuen Yung: And so, uh, what you typically find is that if we call something in class A, What we're talking about is really the nicest properties, uh, the A properties, meaning that they are, they look new; they might not be new, but they look new; they're refreshed; uh, they've been well taken care of. They have all the amenities that people are looking for, and they're in a great location.
Yuen Yung: Then, from there, you kind of shift down to classes B and C. Uh, and we typically don't talk about beyond that, but really, class B and class C, what we're talking about there is maybe they're not in the perfect locations. Maybe they don't have all the amenities, or maybe the upkeep hasn't been as good, and so, you know, are there any opportunities to fix up Class Bs and Class Cs to get them closer to an A?
Yuen Yung: in terms of living standards and that sort of thing. So typically, what you find is that there's no exact definition for A, B, and C, but what you find is that if somebody says it's Class A, they're typically younger properties in better condition, in better locations, and with better amenities. That's usually how you kind of define them.
Yuen Yung: Okay. All
Hanh Brown: right, great. So how do you know if a property is investment-grade or not?
Yuen Yung: There's something called due diligence. Uh, and due diligence is serious work. Uh, so when we, uh, look at opportunities, which I'm sure you do as well, when you're looking for opportunities, you have to do good due diligence, right?
Yuen Yung: Uh, and. Some of that conversation also goes to, Do you know what you're looking for? Uh, so in the multifamily space, obviously, when we look, we're looking at both the physical assets as well as the way the property has been handled and managed, as well as the tenant mixture. Uh, there are a lot of pieces to it on the physical side of the real estate.
Yuen Yung: If you get past the conversation of location and class A, class B, and all that stuff, and you say, I want this, and you physically go and look at the asset, uh, number one is on the walks of those physical assets, you want to make sure that you're looking at the right things. You're checking roofing; you're checking foundations, right?
Yuen Yung: You're checking the plumbing. Those sorts of things The easier things to look for that you might need to spend money on would be, uh, landscaping, for example; that's fixable, right? Uh, maybe you need to paint it. Maybe you need to clean up the siding. You know, that sort of thing. The ones that really kill you—the ones that really kill the underwriting—are always going to be roofing.
Yuen Yung: It's always going to be foundation, plumbing, and electrical. If those things are out of whack, you will end up spending a lot of money. No one will see that you spent that money fixing it, and you won't get a lot of benefit for it. And so we spent a lot of time on the due diligence process around that.
Yuen Yung: We're also looking to make sure that the renter and tenant profiles are accurate. We're making sure that, uh, the management team has maintained the property. Uh, have we put, you know, care into maintaining the property? Uh, those things will show up. Uh, those things will show up, uh, across the board, and you'll see that.
Yuen Yung: And so in your underwriting, you have to look at all that and take all that back under assumptions, right? Oh, and sometimes little things might be a problem. Uh, uh, something as simple as maybe the contracts that the previous owner is locked into for the property Well, do you inherit that? Do you not inherit that?
Yuen Yung: Right? So those are the types of things. There are a lot of nuances that have to be checked off before you can say, Yes, this is, this is, this is, uh, something I should buy or invest in. I always equate it to nothing different than buying a secondhand car. You need to know how to pop open the hood. You need to know what the engine looks like.
Yuen Yung: You need to know how to check it. You need to know where the carburetor is, you know, and so on and so forth. If you don't know how to do that well and you just kind of drive it and say, Oh, it must be okay, and it breaks down on you, Then you're putting more money into it. So to me, the upfront work of buying it right and making sure all those components are in place and making sure that you've looked at everything and every aspect of that, that potential investment, is going to be all the difference maker of whether or not, long-term, you can make money off of that investment.
Yuen Yung: So very, very important there. Mm-hmm. I
Hanh Brown: Think of another component that Some folks may not give enough or early enough consideration to insurance.
Yuen Yung: Right? Right. Yeah. So insurance has definitely gone up. So, uh, whether you think it's global warming or climate change or whatever, there definitely has been a huge rise in, uh, claims that have been needed to be made in places where there were like, A hundred, 500-year floodplains and all of a sudden you have a flood, uh, in places where you don't normally get hit as hard for snow or, or, or that sort of thing you do.
Yuen Yung: Um, we experienced that here in Austin, ourselves, back in February, uh, not this year, but the year previous. Uh, I've lived in Austin for 30 years and never seen snow like that before. Uh, so, uh, you know, those things are definitely happening, and those things are, are, are affecting premiums for insurance.
Yuen Yung: So, there are two areas in the underwriting process that are big categories that you always want to dive into. One is the insurance, making sure that the insurance is coverable and has the premiums that you can expect, and then the increases in that premium. The other one is, uh, property taxes. Yeah.
Yuen Yung: Uh, so once you buy the property, that sets the new value of that property, and you better underwrite it in a way that kind of accounts for that increase in property tax, which, of course, if prices continue to go up, guess what? Every year, you're going to have to try to fight that and try to bring it down.
Yuen Yung: So the reality is that that expense line keeps going up. So something to think about or something to worry about when you're investing Mm-hmm.
Hanh Brown: Mm-hmm. So is there ever too much debt on, uh, multifamily property? Oh,
Yuen Yung: yeah. Yeah, definitely. Le Lever, leveraging is a, leveraging is a, a very, uh, tricky game.
Yuen Yung: Um, and so typically what you're looking for is leverage, obviously from a number standpoint. The more leverage that you use, the better the performance because you're putting less money in and letting the bank take most of it. But when you start leveraging too much and you can't handle the debt that is in place, what'll happen is you could potentially lose the asset.
Yuen Yung: Right? Uh, so then that's kind of like a doomsday scenario where, uh, you put too much leverage on it, you can't meet the debt requirements, and, you know, you lose the investment altogether. That's very problematic, and hopefully that doesn't happen. The other thing that you'll see is on the debt side.
Yuen Yung: There are different degrees and game plans for who's willing to lend money for multifamily. Um, if you're talking about the kind of safest lending, which is, uh, agency lending, Freddie, Freddie, Fannie, you know, Fannie Mae, Freddie Mac type lending, when you're looking at those types of lending, what you find is that they'll give you much lower leverage, meaning that they're not going to take the chance.
Yuen Yung: They're going to give you maybe 60–65% leverage, but they'll give you better rates. So that forces you to have more equity and more skin in the game. But they'll give you a little bit better rates overall to make that happen. But then you can, you might go into more, uh, you know, bridge lending, which is, uh, going to give you maybe 70 and even upwards of 80% leverage.
Yuen Yung: And when you look at that, you might be dealing with a floating rate; you might have an interest rate that, uh, increases. You might be worried about, um, you know, the term of it because it's only a couple of years. So all of those things kind of factor into the debt side, so you have to be careful about the debt side.
Yuen Yung: Mm-hmm.
Hanh Brown: Absolutely. So a different angle on that So should you always go for the highest rate of return? One, investing in multifamily,
Yuen Yung: um,
Hanh Brown: very much in both ways. Is
Yuen Yung: that a trick question, hon?
Yuen Yung: Um, you're always trying to maximise, but you have to have an underwriting business plan that is realistic as well. Um, I am of the opinion, and this is how we do it, that we underwrite. I wouldn't say overly conservative, but rather somewhat conservative assumptions that are made inside of the underwriting.
Yuen Yung: The reason why that is, is that there's just in, in, in all aspects of investing there, especially when you're managing the property and you're running the property, there's too many, there's too many, uh, variables. There are too many things that can change and move on. You. And so we like to underwrite something that we feel like, you know, we're not going to be pie in the sky.
Yuen Yung: Hey, you're going to make, you know, 60% or 50% of that sort of thing. But we're not going to be like, Oh, the world's falling apart, so you're only going to make like 3%. Anything like that. We try to be realistic about it and make assumptions that are fair for where we're going. So for example, right now we're working on, uh, some new deals, and when we underwrite, we don't want to overpay for that.
Yuen Yung: So if we lose the deal, we lose the deal, and that's okay. Uh, because that's the right thing to do. And if we lose the deal, it's probably because we were probably a little bit, um, conservative compared to maybe somebody that's underwriting and willing to pay more for the asset because they're expecting it.
Yuen Yung: Six to 8% rent growth—that's an okay assumption. But what if that doesn't happen? I'd much rather look at 3% or 5% on the really pushing it side. And when you do it that way, I think the expectations are better, and it allows you the freedom to have enough working capital to make the project work when you, when you lean it out too much, every little mistake might trip you up completely.
Yuen Yung: And that comes
Hanh Brown: with wisdom, expertise,
Yuen Yung: and reserves. Yeah. That's right. That's right. Yeah. Yeah, it does. I mean, you know, you don't want to make mistakes. You know, wisdom is learning from other people's mistakes, and we see other people make those mistakes. We, we'd rather just not do it ourselves. Yeah,
Hanh Brown: Yeah.
Hanh Brown: Well, hey, I want to acknowledge Ger sin. He is asking Uhhuh, what are the risks involved in real estate investing? Un can you
Yuen Yung: share, oh. Yeah, yeah. There's actually a lot of risk in investing in real estate, just like there's risk in other things. Now, when we're done, we need to break it down a little bit.
Yuen Yung: Um, if we're talking about an individual going into a syndication and investing in a deal, the risk is really in the operation of that deal and the underwriting assumptions that go into that deal.o there, what you're looking for is the risk of the business plan not working out the way you anticipate it to.
Yuen Yung: So if you're investing in an individual deal and you want to throw 5,000, 200,000, whatever it is, into a project with a sponsor, you better double check the assumptions that they make inside of their business model and whether or not those assumptions can be met. Uh, because the moment those assumptions are not met, it starts snowballing.
Yuen Yung: And then, remember, real estate is a long-term investment. So now it's snowballing. It's a year, two, year, three, year, four, year five, and you're not gonna end up where, where, where you need to be. Um, So you're checking it, uh, at a micro level, in terms of the assumptions that are made about what the business plan looks like.
Yuen Yung: Then I would also look at the macro levels. There's risk there as well. Um, is it the right location? Is it the right place? Is it the right asset? Um, all of those things become risks to the projects. Now, most of the time, when investors ask the question about risk, what they're talking about is, Well, can I lose money?
Yuen Yung: Right? Can I lose money on the deal? And I will tell you, real estate is Usually a pretty good category where your basis is pretty covered unless you really screw it up. Um, so most of the time, what we see with real estate is that, yeah, you can still lose money, but they really had to really mess it up in order for you to lose money as an investor, even when the business plan doesn't work out.
Yuen Yung: You tend to be able to at least get your money back, right? And so that kind of alleviates that stress of, like, complete loss because it's a hard asset. The building is still there. And even if somebody didn't operate it well, you can always just sell it and hopefully make some dollars that way and try to cover that.
Yuen Yung: So to me, there's the risk of the operations, and there's the risk of the investment in who you invest with. And then, to me, the final risk is really around the, um, macro level of where the market is. Keep in mind that the risk that you have there is that it is still market-driven. And what I mean by that is, yes, multifamily is doing very well right now, but if you were in office over the last couple of years, you would tell me real estate is terrible because of where the market is.
Yuen Yung: And then the same thing with retail, right? Uh, so you've got to make sure that they're hedging against market risk. So if you go through the list of risks, you have underwriting risk, interest rate risk, rent growth risk, and market risk. I mean, the list of risks goes on and on.
Yuen Yung: So there's always risk, and I think everything that we do is risky. The question is, how do you hedge it? How do you try to minimise that risk, uh, and in hopes of the return that you're going to get for that risk that you need to take? And I always tell investors to always think about not just risk but reward, and make sure you find the balance for yourself between those two.
Yuen Yung: So I would love for there to be some sort of magical investment that had no risk. Maximum return because I want to invest in that one, right? Uh, but it doesn't work that way. And so you just have to understand the risk of real estate, which is, you know, still a hard asset. There's still market subjectivity, there's still interest rates, rent growth, all of those conversations.
Yuen Yung: As long as you understand that, then you're just looking for the right return relative to the risk that you want to take. And you're just trying to find peak performance right there. And so that's my thought on risk and how the real estate market works. Mm-hmm. And that's
Hanh Brown: Why it's important to work with folks like your team
Hanh Brown: Right. And I think, in regards to risk, real estate is very forgiving.
Yuen Yung: It is. It is. Time heals a lot. Mm-hmm. Mm-hmm. With real estate. Yes. Yeah. With real estate. Yeah. Yeah. And I would say, you know, yes, professionals definitely help. Um, And you want to know that you're working with people who have been around for a couple of cycles.
Yuen Yung: Uh, so if, even for multifamily, they've only been around for 10 years, they haven't seen the whole cycle because they've only been in an upmarket. But when you go back 15 years, 20 years, 25 years, or 30 years, When you get everywhere from, like, the seventies, eighties, nineties, two thousand, have you gone through those markets?
Yuen Yung: You have a little different perspective and experience in terms of how this is supposed to work, right? If you've only been in it for the last five to 10 years, It seems a little unrealistic because it seems like, you know, the expectations are only going up. There's no problem. You know, real estate is great; it just goes up.
Yuen Yung: Uh, but that's not always true, right? Uh, you know, you're from Michigan. Let's think about Detroit, right? And what has Detroit gone through over the last, you know, 20 years? And with the changes that it's gone through, you might be on the wrong side of the street sometimes on those projects, right?
Yuen Yung: So, those are the things to think about and be very careful about when it comes to real estate investing.
Hanh Brown: And that's why the track record is huge.
Yuen Yung: A track record tells you a lot. That tells you a lot. Yeah.
Hanh Brown: Yeah. So I know we've mentioned several things in the conversation, uh, about underwriting. Yeah. But what would you say are the three most important things to remember when underwriting a multifamily loan?
Yuen Yung: Um, I think one is reviewing assumptions. Make sure your assumptions are good. Right? That's a big one. Number two is: what leverage are you using? So there's the assumptions, and then there's the leveraging, um, the assumptions that we've kind of gone over, and it's all the little nuances of how you decide on rent growth and vacancies and all that stuff.
Yuen Yung: But then the debt piece and how you structure that debt piece I think this is a very critical conversation because it does impact what the potential return is down the road, right? More leverage, less leverage; uh, more equity, less equity. How do you structure that equity? So that entire capital piece of it and the underwriting are a big conversation by themselves.
Yuen Yung: So the assumptions, the structure, uh, of debt and equity And then, to me, the final one is the ability to actually execute on that underwriting. So, Even if you put all the plans together, you need to make sure that even if the underwriting is solid, there's a team that can actually execute on that underwriting business plan.
Yuen Yung: If there's anything missed there, then all that work that's done on the front end is almost irrelevant at that point. So to me, those are the big three categories of how I think about underwriting. Mm-hmm. Mm-hmm.
Hanh Brown: Thank you. So let's talk about multifamily loans. So what are the most common mistakes people make when underwriting a multifamily loan?
Yuen Yung: On the loans? On the loan. Oh gosh. Uh, obviously, overleveraging is one of the things that happens. The other one is, uh, doing too much bridge and floating rate and not having an exit plan. So, you know, those things usually come due every three or five years. And if your business plan doesn't work out, then what do you do with that debt?
Yuen Yung: Um, because if interest rates are going up and you're going up with them, then cash flow becomes a concern. Um, The other part is, as an investor, if you're doing your own projects, I think, uh, the guarantees are something to think about, right? Uh, when you know, especially when you're starting out and you're small and they want personal guarantees, as opposed to when you're an older, more established com company, you can do non-recourse debt and that sort of thing.
Yuen Yung: You've got to be very careful with the guarantees because if anything happens, you personally are on the hook. And so to me, those are the things to really think about when deciding who's on the hook. Is the business plan written in such a way that is actually achievable? Otherwise, you're going to be in trouble; you're going to be forking out money trying to get that debt under control.
Yuen Yung: And so those are all things to consider when it comes to the loan side. Mm-hmm. Mm-hmm.
Hanh Brown: Great. So now I've got another question here with regard to being close to any college or university, whether or not Real estate investment is a good decision because students want properly rented property and we need tenants.
Hanh Brown: So what are your
Yuen Yung: take? Yeah. Well, and there's a whole market segment called student housing. Right? And that's the whole play there is, you know, around universities, and for the most part, you should be solid because there are so many renters now, uh, in that sector. Uh, there are some things to consider.
Yuen Yung: One is that, uh, can you, can you, uh, uh, take out the seasonality of the students, right? Spring semester, summer, fall, winter, right? Can you get out some of the seasonality and sign them to longer leases, so even during the summer they're paying rent? You know, those sorts of things. That's one thing to think about.
Yuen Yung: The other thing to think about is that, with the pandemic, what we saw was a lot of students, uh, going to class at home. And so one of the things that the universities are grappling with right now is, How do we get students back in the classrooms? Right? Uh, and I don't see them being able to get them fully back to capacity.
Yuen Yung: Uh, so now this is a hybrid system. Same issue with offices, right? Which is like, not everyone came back to the office. But some people came back to the office with the same conversation about student housing, uh, students now, because even we gotta remember that the cost of universities is going up so much that they come out with a lot of debt.
Yuen Yung: Well, what better way to get rid of that debt than to say, You know what? I'm not going to do housing? I'm going to live with mom and dad. Yeah. And I'm just going to get on and do, you know, University of Texas at Austin online courses. Right. So now it actually shifts some of that conversation. So I don't think it's completely gone.
Yuen Yung: I think you're going to get 80–90% back at some point. But today, that's something to think about. Um, now hopefully we're done with the pandemic and we're moving on. So I think that'll help strengthen that conversation about student housing and renters around universities. But it's something to think about in that time period where all of a sudden you had 40, 50% of your student body all go home and just take classes online, and now they're giving up their leases and their rentals.
Yuen Yung: So everything has that kind of risk and reward. Uh, so student housing, to me, is an interesting sector. Uh, but one that might be, um, just go into it cautiously, I guess, is the best way to put it. Mm.
Hanh Brown: Mm-hmm. Great. So thank you, carpenter, for that question. Now we've covered the red flags with regard to the asset, right?
Hanh Brown: I think you mentioned there were issues with roofing, electrical, and plumbing that most people don't see, but it's very costly, and you've also identified red flags in the market, tenant selection, and underwriting. Are there any other red flags that we did not cover or something to go in with an open eye?
Yuen Yung: Um, I think if you're on the buy side and you're buying into it, I would just double check things like, uh, who did they use for property management? Uh, what did they do previously for capital expenditures? Um, Where is the rent gross? Um, are there rental capacities? Real, uh, and make sure that, uh, when you're looking at the rent rolls, there isn't any sort of movement of bad debts, uh, off of the balance sheet, you know, from the cash flow to the balance sheet.
Yuen Yung: Because sometimes what you'll find is that someone will tell you that there are a lot of tenants, and they are. 96% occupied, but they're only collecting 86% of the rent. You know, those sorts of things. Right. Uh, so there are a lot of details around that. Uh, and then I, I had mentioned already about contracts and, and assumption of contracts and making sure that, uh, you, you are aware of what you're assuming.
Yuen Yung: Um, I think those are the big things. Um, but aside from that, it's really, really the other basics, right? The physical assets, the, uh,, the, you know, tenant profiles, you know, those sorts of things Um, just trying to think: is there anything else that might be a major concern that we haven't discussed?
Yuen Yung: Right. That's really the question here. Um, I really can't think of a whole lot else that is a major red flag that we would have to worry about. Um, I think the final thing is just to make sure you're careful about overpaying for an asset, right? As cap rates compress, are you going in at some unreasonable cap rate that makes the business plan very, very challenging?
Yuen Yung: Uh, whether or not you're going to make money, you know, doing it To me, these are the big things.nd then, aside from that, you're just watching the market overall. Mm-hmm. So
Hanh Brown: Let's talk about assessing the value of the multifamily property. I know that's common, but there's a discrepancy between what buyers and sellers believe it to be.
Hanh Brown: So how do you go about minimising that discrepancy or reconciling when there is one?
Yuen Yung: Well, I'll tell you that the market that you're in right now is a seller's market. And what we mean by that is that there are more buyers than people who are selling. And so in that scenario, what happens is that prices go up and sellers start saying, Yeah, I don't have to provide this.
Yuen Yung: Um, and you're going to pay this. And oh, by the way, you need to go higher because the next guy's going to go higher. Uh, and so it is relative to the market. Uh, in terms of where you're at right now, Over the last few years, we've been in a seller's market. So from the pandemic on, it turned into a seller's market.
Yuen Yung: So what that basically means is that they dictate pricing. Uh, you don't like it too bad; you know, it makes no sense for your underwriting at a two-cap, but they don't care. They're just going to sell it to the highest bidder, right? And they're just money chasing, chasing that right now. So that's where I would say that if that is happening, you just have to take a step back and be patient.
Yuen Yung: Because at some point it will turn back the other way, and at some point it might become a buyer's market, right? And those market fluctuations will happen because interest rates are going up and cap rates are going down. Those things are happening anyway. Maybe you just need to give it a little bit of time for the market to rebalance itself, and then that might create the opportunity that you're looking for.
Yuen Yung: And keep in mind that with real estate, it's a long-term play anyway, right? You don't have to own something today. Right. And if you want to own something today, then you better make sure it's a good deal. But know that you're probably not going to get a great deal in this market, right? Unless you find it off-market and negotiate a price that's better,
Yuen Yung: So just things to think about in the situation that we're in and where we are. Well, thank you.
Hanh Brown: Thank you so much for your time, your expertise, and your wisdom on this very important topic. I guess millennials all the way to baby boomers and anywhere in between, because we all need housing, and this is one of the greatest assets.
Hanh Brown: So thank you so much. So my pleasure. Yeah. So, in closing, multifamily Sector has been one of the strongest performers in commercial real estate market. Thanksclosing, thecombination of strong demand and limited supply. Obviously thin thee are concerns that the sector will experience. A slowdown as interest rates rise, while higher interest rates make it more difficult to borrow for new development.
Hanh Brown: But they also make refinancing debt more difficult for, um, existing property owners. So as a result, some believe that cap rate compression will eventually limit rent growth, but despite the concerns, the multifamily sector's long-term outlook is very positive. With millennials accounting for an increasing proportion of the rental population, there is still a high demand for rental units.
Hanh Brown: So now, in the coming weeks, we will discuss what venture capitalists look for when investing in senior care products. Another topic that we'll cover is how to maximise your wellness in your later years, regardless of your physical health. Too often, people think that once they reach a certain age, their best years are behind them.
Hanh Brown: This does not have to be the case. There are many things that people can do to stay active and healthy as they age. So we hope that by sharing this information, we can help people live longer and healthier lives. Remember to subscribe to our podcast on iTunes, Living Broadcast, and also subscribe to the YouTube channels, Agent Media Show, and Un.
Hanh Brown: Thank you so much for your time today.
Yuen Yung: Take care. My pleasure. Thank you for having me.
Hanh Brown: Thank you for listening to another episode of the Boomer Living Broadcast. I know you have a lot of options when it comes to podcasts, and I'm grateful that you've chosen this one. Please share this podcast with your friends and family. Write a review on iTunes. Spotify and Google Play It helps Others discover the show.
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Hanh Brown: Thanks for tuning in. Until next time.