I recently came across a Midwest multifamily deal that was for sale.
I had seen the seller around social media. How could I not? The seller routinely shows off his private jets and how many millions he is making for his investors (which I don’t doubt since he was in multifamily since 2013).
Watching the marketing material, you get the impression that he just “does it better,” and CANNOT fail.
Overall, very glamourous…
Until you look under the surface.
I took the T12 and rent roll, and tried to make sense of the price he was asking for. I couldn’t.
The property was bleeding money. And not due to renovation-induced vacancy, but because of an ever increasing bad debt and collections issues.
After a year of operating the property, their NOI was dramatically LOWER than when it started.
And after doing my own back of the napkin underwriting to determine what the property is actually worth (taking into consideration what my cost of debt would be), I came to a number that was about half of what the seller was asking.
Here’s the bad part.
I looked up the seller’s basis in the deal using Reonomy, and it became clear that the seller’s basis in the deal is WELL ABOVE what it’s worth. They were barely looking to turn a profit on the sale, and were practically trying to sell it for what they bought it. Which means… they’re in trouble.
Even the debt (floating rate bridge) was significantly higher than the value of the asset that I came to.
I immediately thought about the investors. They thought they were investing with the best operator out there.
Maybe they were. What do I know?
But it could be that they were also wooed by a cult of personality, and didn’t look into the risks of the opportunity out of misplaced trust in a man who seemed unstoppable.
So they invested in a deal at an inflated price using high leverage floating rate debt. Unfortunately, they may not have any equity left to show for it.
The lesson is simple. Having a nice offering memorandum, and an ostentatious operator don’t necessarily translate to good investing.
In fact, because so many people want to invest in their deals, these types of owners may be most incentivized to overpay. They could raise the capital anyhow, after all.
I wish the best for everyone, and I hope I’m wrong about the asset’s value… for the investors’ sake.
Bio: Jonathan Livi is the managing principal of Livi Kapital. Livi Kapital sources investment opportunities for family offices, UHNW individuals, and private equity funds. He could be reached at firstname.lastname@example.org. To receive investment opportunities, you could sign up here https://www.livikapital.com/contact-us/.