Private real estate firms are finding out that renters are becoming “tight on cash,” just as interest rates have hit their highest levels in over two decades. As you can imagine, this is causing heartburn for many of the firms that rushed into the landlord business funded by floating rate debt. Konrad Putzier reports in The Wall Street Journal:
A new crop of private real-estate firms, funded mostly by floating-rate debt and small-investor cash, have become bigger competitors in the multifamily market. Some paid higher prices based on rosy expectations of steep rent increases for years to come. Now, they are having trouble making the numbers work.
Los Angeles-based Tides Equities has acquired more than $6.5 billion in rental property since 2016, mostly lower- and middle-income apartment buildings in Southwestern cities. In 2021, at a property in a Dallas suburb, the company expected to push up rents 44% over the course of three years, ratings-agency reports show.
In June, Tides told investors the strategy wasn’t going as planned. Renters were “becoming too tight on cash,” the company said in a letter. Some properties were no longer earning enough money to cover debt payments, and investors would likely need to put in more money to save buildings from default, the letter said.In an interview, Tides’s co-founders Sean Kia and Ryan Andrade said they were working with lenders on ways to avoid default at properties that faced difficulties.
Houston-based Nitya Capital, owner of about $3 billion of multifamily buildings, notified investors in March that it was slashing profit expectations because of steeper interest rates.
“We are essentially paying the higher mortgage costs instead of making cash distributions,” Nitya Chief Executive Swapnil Agarwal wrote in an investor letter.
Action Line: Fewer cash distributions is never something discerning investors want to hear. Steady, increasing streams of cash flow is what builds a powerhouse compound interest portfolio. When you’re ready to talk about compound interest, I’m here.
