3 years out - officially a millionaire and one step closer to saying goodbye to EM

[cyanide12345678]

I've enjoyed reading this thread and appreciate that cyanide posts updates. I'm fairly financially savvy and haven't felt I have the time or aptitude to jump into either of these although the fomo is real.
That said, with a single physician salary, using a standard buy and hold stocks and bonds portfolio and aggressive saving, our portfolio/NW trajectory isnt that different from the one cyanide describes. We hit the 1mil at about 3 years out, 1.1 at 4 years now due to having a kid and the market downturn (children are very expensive).

The leverage aspect will eventually juice the returns for cyanide for sure, and it seems he has the knowledge/skills to avoid excessive risk associated with going on leverage. This is not for everyone or even most MDs in my experience. It's not because they are too dumb to learn, but simply bc most of my colleagues at least lack the aptitude for this.

Anyways mostly started this post to encourage continued updates from the OP, kudos to you

That’s impressive with a single physician salary. I’ve had the luxury of a dual physician salary for the last 1 year, definitely has helped. My wife is however slightly bitter about being full time. She’s probably going part time in 7-8 months to 27 hours a week and 3 days of clinic per week.

I think I’m going part time too in 2 years. I’m currently doing 13 shifts a month but feel 10-11 shifts per month is the magic number for maintaining career longevity and happiness.

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[forchinet121]

I guess I'm quoting myself from 5 months ago to give an update to anyone who cares. Maybe this might inspire others to learn to take control of their portfolio themselves.

I literally shared my positions and my trades and that I was anticipating ending the year positive. Answered a bunch of skeptical folks and had my portfolio positions available for anyone to see and I believe I was anticipating/aiming for ending the year 50-60k positive.

Well...5 months later. How did I do?

August of 2022, when this thread was originally created, my account was negative 3.5 percent (10k negative) vs SPY that was negative 13%. I was beating SPY by 10% and I was pretty stoked about that.

Dec 29th, 2022 - SPY is 19.73% negative YTD. The market has continued to slip. I'm up YTD $72393 now (essentially a positive 82k swing in 4-5 months - doing the trades I shared publicly here with everyone). I'm up 17.5% YTD, see below for proof. Which means I'm ending the year beating SPY by 37%.

View attachment 364012

My current portfolio - I'm again attaching a screenshot from my current portfolio - the EWZ position is the big one, the other positions are just temporary, small, and just there to add an extra 1-2 percent total return and are minimal risk positions. They really don't matter, and these smaller positions will be closed once 30-40% profit is achieved. The EWZ position will likely be held for 366+ days for long term capital gains since the tax difference between long term capital gain vs short term capital gain alone will be 45k on that position (total $219k premium and profit if that position expires worthless). And this one position is 95% of the portfolio essentially.

View attachment 364013

Why I'm bullish on EWZ - Very high premiums, lowest price to earnings ratio in history, cash cow brazilian stocks making A LOT of money, literally 12-13% dividend right now; stock mostly taken a beating due to political instability. EWZ price to earnings is far below of EEM (emerging market peers) and their dividend is so high because of being so damn under valued. Now take something that's already undervalued and sell puts on a strike price that is essentially the lowest price point in many many years, then you're getting into "excellent return while very reasonable risk" territory.

Plan for 2023 - Hold current EWZ position to 366+ days and close to expiration (January 2024 is expiration for current position). This should net my account 160k in just slightly over a year as long as EWZ stays above $22 (todays closing price 28.16). That's a 33% return for 2023. If EWZ drops below $22, then I keep rolling my options in time, keep collecting premium, and wait for EWZ to recover above 22, and when that happens my options expire worthless and I walk away with massive premiums.

My biggest winners and losers - I'm attaching a screenshot of my biggest winners and losers for the year as well. Not every trade went accordingly so I think that transparency is important too. I'm learning to stick with my winners more and more and be more disciplined in that regard.

View attachment 364014View attachment 364015

Net worth trajectory - Looking back it's kind of amazing to see where I've come from. 3.5 years ago I was worth negative 80-100k when I graduated residency. In only 3.5 years I'm ending 2022 at 1.27M. 2 more years, I think we will be FI if we continue this trajectory, so age 36.

View attachment 364016

Lastly, I'm not a financial advisor or anything, just a guy passionate about personal finance who reads financial information for fun and entertainment, so this isn't financial advice, just an encouragement to read, learn and take control of your portfolio. I have nothing to gain or sell here, I just truly enjoy talking about this stuff (in real life and the internet). I have had dozens of folks send DMs regarding this stuff, so there are people who are interested in this stuff and have benefited from these conversations. So this post is for those people. If you don't like to read this, or are tired of these topics, or don't find value in this, that's fine, it's not for everyone. And seriously, don't ever hold large positions unless you really really really know what you are doing. I hope there was some value in this post to anyone that cares. Good luck everyone.

Come back in 10-20 years when you’re below the market, anyone can get lucky for a few years, this is a marathon not a get rich quick, at some point you’ll get wiped out if you continue this but best of luck to you

 

[cyanide12345678]

Come back in 10-20 years when you’re below the market, anyone can get lucky for a few years, this is a marathon not a get rich quick, at some point you’ll get wiped out if you continue this but best of luck to you

Sure. For someone who sells time and does better when markets do well as a put seller, time is actually on my side as a put seller. This was actually a bad year to be a put seller since that strategy does poorly in a down market hence some massive losses on some positions.

I don’t think you understand how easy it is to beat a 10 percent annual return with a tiny amount of interest free leverage, but using that leverage to drop risk. For example i can sell a qqq put for 1 year with $185 strike, the lowest price point at time of pandemic, get $500 as premium and use only $1850 buying power for that position. That’s a low risk bet, the outcomes are simple:

Qqq stays above $185 in 1 year, i get a 27 percent cash on cash return.

Qqq drops below $185. I hold strike price of $185, turn it into a buy and hold strategy, keep rolling and selling premium and wait for qqq to close above $185. Essentially a buy and hold strategy where I’m paid premium to wait for qqq to close above 185. And when that happens, your market is still down a lot from the top, but I’m back to being massively positive.

 

[ScepticSkeksis]

I plan on using MLM to get out of this profession in 10 years

 

[emergentmd]

Key is to diversify, the more the better.

My current diversification from most to least successful
1. Medical facility ownership
2. Apt Syndication
3 STR, MTR, LTR.

I have looked into other businesses including dog grooming, alternate fuel, oil well, storage, mobile home parks.

Once u get good cash flow, it’s easy to make $$$$. Hard part is getting enough $$$$ to make it snowball.

 

[forchinet121]

Key is to diversify, the more the better.

My current diversification from most to least successful
1. Medical facility ownership
2. Apt Syndication
3 STR, MTR, LTR.

I have looked into other businesses including dog grooming, alternate fuel, oil well, storage, mobile home parks.

Once u get good cash flow, it’s easy to make $$$$. Hard part is getting enough $$$$ to make it snowball.

How old are you?

 

[cyanide12345678]

I plan on using MLM to get out of this profession in 10 years

MLM?

 

[bravotwozero]

Multi level marketing, aka amway style ponzi SCAMS

 

[ScepticSkeksis]

Can I interest any of you in peptides?

 

[Apollyon]

Can I interest any of you in peptides?

I want to talk to you about your car warranty.

 

[Mbekweni]

One thing to keep a close eye on is that various trading strategies rarely work forever, require a high level of due diligence and general attention/stress that can take you away from general life enjoyment. A run of success like what is described here can even be MORE dangerous, as you get more and more confident with your abilities and after several years you are playing with millions of dollars instead of thousands. Underperform the market by 10-50% in a year with a 100k portfolio? As an ER doc you can dig out of that hole pretty quick. Do the same close to retirement with a 5M portfolio, and you are in deep trouble. Some options strategies also leave you with the risk of total loss rather than just relative underperformance.

In medical school and residency the majority of my investments were in Apple, Netflix and Amazon. I thought I was a genius. I have done some stupid things since and have likely underperformed the market all told and would have been better off just working a few extra shifts and investing the proceeds into standard index funds plus saved a lot of stress and heartache along the way.

Cyanide seems well versed in these trading strategies and performance has been great so far, but keep in mind it's a long term game and a few years of good performance alone doesn't do you any good if you don't take the chips off the table. You have to meet or exceed market returns all the way through your career AND retirement. Getting caught upside down on a market trend in the next 50 years seems pretty likely to me, so I would urge some caution since the alternative is simple index investing and with high income physician salary this is all but guaranteed to make you rich at the end of the day. Before making a trade I always think about who I am trading against...and picture a room full of PhD quants and super computers with fiber lines right into Wall Street front running my trades and/or operating with some inside information I'll never have access to. If hedge funds and professional traders with billions of dollars tend not to outperform the market decade over decade how can I expect to?

 

[forchinet121]

One thing to keep a close eye on is that various trading strategies rarely work forever, require a high level of due diligence and general attention/stress that can take you away from general life enjoyment. A run of success like what is described here can even be MORE dangerous, as you get more and more confident with your abilities and after several years you are planing with millions of dollars instead of thousands. Underperform the market by 10-50% in a year with a 100k portfolio? As an ER doc you can dig out of that hole pretty quick. Do the same close to retirement with a 5M portfolio, and you are in deep trouble. Some options strategies also leave you with the risk of total loss rather than just relative underperformance.

In medical school and residency the majority of my investments were in Apple, Netflix and Amazon. I thought I was a genius. I have done some stupid things since and have likely underperformed the market all told and would have been better off just working a few extra shifts and investing the proceeds into standard index funds plus saved a lot of stress and heartache along the way.

Cyanide seems well versed in these trading strategies and performance has been great so far, but keep in mind it's a long term game and a few years of good performance alone doesn't do you any good if you don't take the chips off the table. You have to meet or exceed market returns all the way through your career AND retirement. Getting caught upside down on a market trend in the next 50 years seems pretty likely to me, so I would urge some caution since the alternative of simple index investing with high income physician salary is all but guaranteed to make you rich at the end of the day. Before making a trade I always think about who I am trading against...and picture a room full of PhD quants and super computers with fiber lines right into Wall Street front running my trades and/or operating with some inside information I'll never have access to. If hedge funds and professional traders with billions of dollars tend not to outperform the market decade over decade how can I expect to?

This is exactly correct

 

[cyanide12345678]

One thing to keep a close eye on is that various trading strategies rarely work forever, require a high level of due diligence and general attention/stress that can take you away from general life enjoyment. A run of success like what is described here can even be MORE dangerous, as you get more and more confident with your abilities and after several years you are playing with millions of dollars instead of thousands. Underperform the market by 10-50% in a year with a 100k portfolio? As an ER doc you can dig out of that hole pretty quick. Do the same close to retirement with a 5M portfolio, and you are in deep trouble. Some options strategies also leave you with the risk of total loss rather than just relative underperformance.

In medical school and residency the majority of my investments were in Apple, Netflix and Amazon. I thought I was a genius. I have done some stupid things since and have likely underperformed the market all told and would have been better off just working a few extra shifts and investing the proceeds into standard index funds plus saved a lot of stress and heartache along the way.

Cyanide seems well versed in these trading strategies and performance has been great so far, but keep in mind it's a long term game and a few years of good performance alone doesn't do you any good if you don't take the chips off the table. You have to meet or exceed market returns all the way through your career AND retirement. Getting caught upside down on a market trend in the next 50 years seems pretty likely to me, so I would urge some caution since the alternative is simple index investing and with high income physician salary this is all but guaranteed to make you rich at the end of the day. Before making a trade I always think about who I am trading against...and picture a room full of PhD quants and super computers with fiber lines right into Wall Street front running my trades and/or operating with some inside information I'll never have access to. If hedge funds and professional traders with billions of dollars tend not to outperform the market decade over decade how can I expect to?

I get that, i 100 percent agree with you as well.

But it actually comes down to the strategy you choose. Options can be extremely risky or even lower risk than owning the sp500. You choose your adventure by the type of trade you make.

For example, i can buy 100 shares of spy for $38300 today, or i can sell a put for $380 strike, 45 day expiration, and receive $900 in cash. So 2.3 percent cash on cash return in 45 days, just to sit around and wait. Effectively if spy drops 10 percent tomorrow, the put seller did better because this is a risk mitigation strategy. So you can use options and execute a strategy similar to just buying SPY while limiting your downside risk - aka decrease the volatility of your portfolio.

And believe it or not, getting a 10 percent annual return with a small sprinkle of leverage is soooo easy, while maintaining an incredibly low risk profile.

For example:

If i had no other positions open id have a 480k buying power right now.

I can sell 70 contracts of qqq for 35 days to expiration and strike price of $225 and receive $4300 in premium. Qqq is at $265 today. That’s about 10 percent annualized return.

So qqq would have to drop more than 15 percent in 35 days for me to even lose money. Otherwise i gained 10 percent annualized.

Let’s say qqq drops 20 percent, and goes down to $212 in 35 days.

If i had bought $480k worth of qqq instead of doing options, my current account value is now $384k, I’ve basically lost 96k.

Now if i had done absolutely nothing during this drop, no risk mitigation whatsoever, didn’t drop my strike price at all, even then my contract would roughly be worth $1300 per contract at expiration, so 1300 x 70 = 91k. So a loss of 91k minus $4300 = $86700. So even with a 20 percent drop in 35 days with significant leverage and no management of the account, i would be better off than buying the underlying shares by roughly 10k.

Now throw in risk mitigation and position management, throw in some understanding of valuations, throw in the fact that i can hold the strike and keep gaining premium and keep rolling puts over time until qqq goes above $225 then I’ve basically gained back everything and have a positive account when qqq is still negative 20 percent.

Moral of the story - selling puts is an excellent strategy and is in fact a risk mitigating strategy most of the time.

 

[HemorrhagicShock]

Now throw in risk mitigation and position management, throw in some understanding of valuations, throw in the fact that i can hold the strike and keep gaining premium and keep rolling puts over time until qqq goes above $225 then I’ve basically gained back everything and have a positive account when qqq is still negative 20 percent.

Moral of the story - selling puts is an excellent strategy and is in fact a risk mitigating strategy most of the time.

I was wondering if you could explain this part a little more. Everything above it is easy to follow and completely understandable for a low-level options novice like myself.

But then you get into the more nebulous weeds of your edge ("risk mitigation, position management, understanding of valuations" along with rolling puts until QQQ gets above $225). This is the part where I could use a little more explanation. How did you learn these things beyond your own trial and error? Is there a specific strategy among these broad categories (i.e. many ways to mitigate risk and to valuate a company, what works for you?)

I understand if this is perhaps a little bit of your trade secret, but this options technique seems too good to be true. As mentioned above this is too easily gamed at multiple levels by quants with GPU/CPU farms and literal geographic proximity to the exchange.

 

[BoardingDoc]

Moral of the story - selling puts is an excellent strategy and is in fact a risk mitigating strategy most of the time.

I get that this strategy works most of the time.
The problem is that you will eventually find yourself in a situation where QQQ drops and your puts are now ITM. You roll over but it keeps falling and falling fairly steadily. The IV goes through the floor, and you need to push out your expiration dates to get enough premium to cover your losses. You are now basically selling LEAP puts. The market now recovers while you're waiting for your puts to expire worthless. You still wind up in the black, but you've made bond level returns while everyone else who simply held the asset are enjoying bull market returns.

There is also the problem that this system is just a variation of the martingale system for roulette. You collect some money with very high probability most of the time. In the rare case where you lose, however, you lose massively. If you reach the scenario where you no longer have enough money (or required capital in your account to meet the margin requirements) to roll over your put, you are completely and utterly F***ed. I agree, barring you doing anything utterly irresponsible makes this scenario very unlikely. That said, it's not impossible.

Long term, I think the potential to miss out on bull runs outweighs the steady trickle that put rolling offers.

 

[JacobMcCandles]

I get that this strategy works most of the time.
The problem is that you will eventually find yourself in a situation where QQQ drops and your puts are now ITM. You roll over but it keeps falling and falling fairly steadily. The IV goes through the floor, and you need to push out your expiration dates to get enough premium to cover your losses. You are now basically selling LEAP puts. The market now recovers while you're waiting for your puts to expire worthless. You still wind up in the black, but you've made bond level returns while everyone else who simply held the asset are enjoying bull market returns.

There is also the problem that this system is just a variation of the martingale system for roulette. You collect some money with very high probability most of the time. In the rare case where you lose, however, you lose massively. If you reach the scenario where you no longer have enough money (or required capital in your account to meet the margin requirements) to roll over your put, you are completely and utterly F***ed. I agree, barring you doing anything utterly irresponsible makes this scenario very unlikely. That said, it's not impossible.

Long term, I think the potential to miss out on bull runs outweighs the steady trickle that put rolling offers.

It'll only take time for the strategy to blow up or underperform. People get greedy. Again, if it were easy to continually outperform the S&P 500 and pile on the cash then we'd see A LOT of people/trading houses just making ridiculous amounts of money long term and that just isn't the case. There are tons of smart people/computers/programs out there.

 

[cyanide12345678]

I get that this strategy works most of the time.
The problem is that you will eventually find yourself in a situation where QQQ drops and your puts are now ITM. You roll over but it keeps falling and falling fairly steadily. The IV goes through the floor, and you need to push out your expiration dates to get enough premium to cover your losses. You are now basically selling LEAP puts. The market now recovers while you're waiting for your puts to expire worthless. You still wind up in the black, but you've made bond level returns while everyone else who simply held the asset are enjoying bull market returns.

There is also the problem that this system is just a variation of the martingale system for roulette. You collect some money with very high probability most of the time. In the rare case where you lose, however, you lose massively. If you reach the scenario where you no longer have enough money (or required capital in your account to meet the margin requirements) to roll over your put, you are completely and utterly F***ed. I agree, barring you doing anything utterly irresponsible makes this scenario very unlikely. That said, it's not impossible.

Long term, I think the potential to miss out on bull runs outweighs the steady trickle that put rolling offers.

Yes this is the real risk of a put seller, it’s not the downside, it’s missing on the upside gains as your upside is limited to the premium. This is the real risk.

I personally mitigate that risk by being really heavy on ewz which just has sky high premiums while still being an etf that is diversified across different sectors in large cap value cash producing companies. The sky high premium essentially means that although my upside is capped, but it’s a one hell of a high cap. Think >30%.

The other things you can do, basically you don’t have to wait till expiration, once you have 50 percent profit on the leaps that you were forced to do, you can close your position, start another one with a higher strike, and essentially participate in the bull run by progressively increasing your strike as the market goes up.

 

[Pudortu]

Key is to diversify, the more the better.

My current diversification from most to least successful
1. Medical facility ownership
2. Apt Syndication
3 STR, MTR, LTR.

I have looked into other businesses including dog grooming, alternate fuel, oil well, storage, mobile home parks.

Once u get good cash flow, it’s easy to make $$$$. Hard part is getting enough $$$$ to make it snowball.

I agree with this heartily. I’ve been looking for a facility to have ownership in. I have a significant amount of cash on the side, just no opportunity. That’s where the issue lies at least for me.

 

[cyanide12345678]

I was wondering if you could explain this part a little more. Everything above it is easy to follow and completely understandable for a low-level options novice like myself.

But then you get into the more nebulous weeds of your edge ("risk mitigation, position management, understanding of valuations" along with rolling puts until QQQ gets above $225). This is the part where I could use a little more explanation. How did you learn these things beyond your own trial and error? Is there a specific strategy among these broad categories (i.e. many ways to mitigate risk and to valuate a company, what works for you?)

I understand if this is perhaps a little bit of your trade secret, but this options technique seems too good to be true. As mentioned above this is too easily gamed at multiple levels by quants with GPU/CPU farms and literal geographic proximity to the exchange.

So let’s say i sold 70 contracts for 35 days expiration for qqq for strike $225 when qqq was 265.

Market goes against me, qqq drops to $235 for example in 20 days. Now there’s 15 days left, but i don’t want to risk it, so i can drop risk with the attached trade - see attached screenshot.



The numbers are not 100% accurate since these are based off qqq being at todays price of 265 rather than a hypothetical $235. But it shows the concept of closing a 15 days to expiration put with $225 strike and using the premium of a new position from further out to do that. In that situation the first leg would cost a lot more since it will be much closer to the underlying price, but similarly the premium of the second leg would be a lot more too for that sane reason, either way, it will regardless still be a net positive trade, meaning you will still gain net positive premium, decrease risk and capital requirement by dropping your strike price to $200 while extending time to 3 months. So your new bet is that if qqq stays above $200 in 3 months, you walk away $5400 + $4300 net positive on the account while the market has basically taken a massive drop.

If the trade keeps going against you, you keep doing the same, extend time, drop strike, collect more premium, drop risk. For example, qqq drops to $210 after 2.3 weeks, you still have more than 2 months left on your $200 strike position. See example:



Now your capital requirements are even lower, and you continue to net positive premium. All that needs to happen is for qqq to stay above $185 in 6 months and your account will end net positive $9500 + 5400 + 4300.

The above trades basically come out net positive in 6 months as long as qqq does not drop more than 30% in 6 months. Basically, you are selling time and making money on time, time is the only predictable variable in the stock market game.

So that’s one way to manage positions and mitigate risk.

Another way is the following:



So still net positive premium, actually more premium than the previous example of dropping the strike, but i dropped capital requirements significantly by dropping no of contracts from 70 to 55. That’s a massive drop in margin maintenance requirement. These are things that keep an account healthy and far away from capital calls while still being net positive premium.

As long as you have a very healthy margin maintenance you can actually keep holding the same strike over time, even if it’s in the money. Keep selling time, your portfolio will perform similar (but slightly better due to premium) to a buy and hold strategy. Read this seeking alpha article:

Selling Puts: The Good, The Bad And The Ugly

What accounts for put-write strategies' under-performance. How to fix put-write underperformance.

seekingalpha.com

Here’s some more literature on what I’ve described above. Chapter 6 of this website kind of illustrates the above concept fairly well.

Selling Puts: The Complete Guide for Finding and Managing Great Put Selling Trades (No Opt In Required)

In my mind conceptually, i can keep dropping strike prices with time, until I’m at a point where I’m comfortable holding the strike in perpetuity and just waiting for the underlying to recover, a buy and hold strategy with the twist of getting paid premiums to wait for the underlying to recover.

If you look at my portfolio below:




My break even price itself is $19.35 for ewz underlying for the massive position i have. The last time that price happened was in 2004. The last time sub $20 happened was the bottom of 2016 - i mean…. Imagine getting $170k of premium for a once in a decade price point. If that happens, i just ‘hold my strike’ like the seeking alpha article and get the biggest premiums of my life while waiting on a etf of 55 large cap companies with a price to earnings ratio of around 5 that currently pays a 13 percent dividend to basically recover above $22……. Yeah i can do that.

 

[cyanide12345678]

I agree with this heartily. I’ve been looking for a facility to have ownership in. I have a significant amount of cash on the side, just no opportunity.

The self storage fund on equitymultiple seems like a reasonable investment. I’m in fund 2 with those guys and have gotten 8 percent rent payments every quarter so far.

 

[emergentmd]

I didn't do the storage but thought about it. I just don't see it much better than apt syndications and didn't see it as much diversification from apt syndication. But I think overall both are strong.

 

[cyanide12345678]

I didn't do the storage but thought about it. I just don't see it much better than apt syndications and didn't see it as much diversification from apt syndication. But I think overall both are strong.

My syndication portfolio is 60 percent multi family. So I’m diversifying into different asset classes. Plus i haven’t seen any reasonable multi family deals pop up recently on these platforms.

Over the last 15 years self storage was actually the best asset class in real estate - it also did better than every asset class during 2008 - it barely dropped.

The next best asset class is industrial - i have 0 industrial assets, i want more industrial assets

 

[emergentmd]

Over the last 15 years self storage was actually the best asset class in real estate - it also did better than every asset class during 2008 - it barely dropped.

You are correct but the thought of owning storage just seemed so boring. I may jump into it but there are a bunch of syndications coming on my desk that I pass up that are still good deals with 8% yearly distributions.

I am moving away from hard real estate assets and more into syndications. The passivity with similar gains just seem so attractive right now.

 

[LostResident1]

Thoughts on multifamily development syndications? I've seen the ones on CS lately and they generally build in good states with growth (TX, FL, VA). Typically build at a 6-6.5% cap, sell in year 3-5 at a 5% cap and generate 15-17% IRRs. This seems good on the surface but this is typically funded with 3-5 year interest only debt at SOFR plus some margin. This cant be sustainable? I mean this whole MF development thing is based on super low borrowing rates and exiting at low rates. I suppose if the market is not ripe for exit they can always refinance but at higher rates these things would be cash flow negative or neutral. What am I missing? The more I look into things I really feel there has to be some more pain felt before rates come back down.

Edit: Also forgot to mention that I read somewhere that we currently have the most units of MFH under development than any time in history. I would worry this will lead to oversupply and collapsing of rent growth/negative rent growth.

 

[cyanide12345678]

Thoughts on multifamily development syndications? I've seen the ones on CS lately and they generally build in good states with growth (TX, FL, VA). Typically build at a 6-6.5% cap, sell in year 3-5 at a 5% cap and generate 15-17% IRRs. This seems good on the surface but this is typically funded with 3-5 year interest only debt at SOFR plus some margin. This cant be sustainable? I mean this whole MF development thing is based on super low borrowing rates and exiting at low rates. I suppose if the market is not ripe for exit they can always refinance but at higher rates these things would be cash flow negative or neutral. What am I missing? The more I look into things I really feel there has to be some more pain felt before rates come back down.

Edit: Also forgot to mention that I read somewhere that we currently have the most units of MFH under development than any time in history. I would worry this will lead to oversupply and collapsing of rent growth/negative rent growth.

I personally don’t do development deals anymore because of higher risk. I like cash flow and i almost always stick with cash flow positive deals. Though I’ve NEVER seen a development deal with a 15-17 projected IRR. They are usually almost always 20+ IRR.

Where are you getting information about over supply? Housing supply and construction costs took a massive hit with covid, new construction slowed down significantly during those times, and new construction was an all time low for several years after 2008. So if construction is picking up, it’s mostly to fulfill demand that hasn’t been met (which is why rents have ballooned up as well). Plus rental demand has increased with decreasing affordability. A lot of people who were previously looking to buy a house are now renters because they just can’t afford to buy a home. Affordability is also at an all time low in the US.

So I’m not sure you’re going to see any massive vacancies in the next couple of years in multifamily. Maybe a small increase? But nothing massive. Plus most syndications are targeting cities with a lot of positive migration as well.

Regardless, I’m personally not the biggest fan of development deals - i like rental income and positive cash flow. A positive cash flow deal can be held for a long time in a down market. Real estate usually goes up in a long period of time, cash flow means you can continue holding in a down market and wait for reversal. Im in 2 development deals, those were both early deals for me before i developed a better understanding of my risk tolerance in real estate.

 

[cyanide12345678]

Thoughts on multifamily development syndications? I've seen the ones on CS lately and they generally build in good states with growth (TX, FL, VA). Typically build at a 6-6.5% cap, sell in year 3-5 at a 5% cap and generate 15-17% IRRs. This seems good on the surface but this is typically funded with 3-5 year interest only debt at SOFR plus some margin. This cant be sustainable? I mean this whole MF development thing is based on super low borrowing rates and exiting at low rates. I suppose if the market is not ripe for exit they can always refinance but at higher rates these things would be cash flow negative or neutral. What am I missing? The more I look into things I really feel there has to be some more pain felt before rates come back down.

Edit: Also forgot to mention that I read somewhere that we currently have the most units of MFH under development than any time in history. I would worry this will lead to oversupply and collapsing of rent growth/negative rent growth.

And yes, the fed has clearly stated already not to expect any rate drops any time soon. There is probably 1-2 more 0.25 percent rate increases that are pending before the fed will stop increasing it. The sooner the markets feel pain and the sooner unemployment starts to tick up, the earlier the rate drop will come. It will happen, probably not in 6 months, probably by the end of 2023 especially since the labor market is still red hot.

 

[Mbekweni]

I agree. I have a variety of multifamily syndication holdings. Those with variable rate debt have largely stopped with distributions and are holding back money to cover the increased mortgage rates. They still have higher than projected rents and are covering costs so basically treading water. Some look pretty smart now and have locked in fixed rate debt and are cruising along still paying good cashflow and waiting for a potential lucrative exit at some distant point in the future. Valuing them at this point is anyones guess and in the meantime it's all about cashflow.

 

[JacobMcCandles]

Where are you getting information about over supply? Housing supply and construction costs took a massive hit with covid, new construction slowed down significantly during those times, and new construction was an all time low for several years after 2008. So if construction is picking up, it’s mostly to fulfill demand that hasn’t been met (which is why rents have ballooned up as well). Plus rental demand has increased with decreasing affordability. A lot of people who were previously looking to buy a house are now renters because they just can’t afford to buy a home. Affordability is also at an all time low in the US.

 

[cyanide12345678]

I agree. I have a variety of multifamily syndication holdings. Those with variable rate debt have largely stopped with distributions and are holding back money to cover the increased mortgage rates. They still have higher than projected rents and are covering costs so basically treading water. Some look pretty smart now and have locked in fixed rate debt and are cruising along still paying good cashflow and waiting for a potential lucrative exit at some distant point in the future. Valuing them at this point is anyones guess and in the meantime it's all about cashflow.

Same, a couple of syndicators have decreased distributions.

Though almost all of my deals have fixed interest debt or had bought a rate cap. I think the only deal which didn’t have that was a new construction project, the increased cost of debt has essentially wiped out the contingency budget for them. But they are still pretty much on time and should be finished with construction in another 10 months. Given that it’s a 40+ year Sponsor that has never lost investor money, I’m not exactly that worried just yet. After the next couple of rate hikes, per the fed, things are going to be more stable. As long as inflation remains under control, which is definitely heading in the right direction, the fed should start pivoting soon. It’s really a matter of surviving this 1 year.

 

[cyanide12345678]

Even then it’s still hard for rents to plummet significantly. A massive drop in rents will lower inflation and even threaten de-flation, which could itself make the fed pivot. Shelter cost is one of the largest contributors of the CPI number.

 

[JacobMcCandles]

Even then it’s still hard for rents to plummet significantly. A massive drop in rents will lower inflation and even threaten de-flation, which could itself make the fed pivot. Shelter cost is one of the largest contributors of the CPI number.

You can rationale all you want but your initial premise that building was way down is wrong. Rents can go downdemand decrease without inflation plummeting. The Fed won’t pivot anytime soon. Just pointing out the flaw in your post. Hopefully your investment in MFH isn’t based on a false premise.

If my information on MFH construction/supply is so off base where the true story is almost the exact opposite then that would make me pause the rest of my thinking on that investment.

 

[cyanide12345678]

You can rationale all you want but your initial premise that building was way down is wrong. Rents can go downdemand decrease without inflation plummeting. The Fed won’t pivot anytime soon. Just pointing out the flaw in your post. Hopefully your investment in MFH isn’t based on a false premise.

If my information on MFH construction/supply is so off base where the true story is almost the exact opposite then that would make me pause the rest of my thinking on that investment.

Eh…i usually only do cash flow positive assets that can be held through rough times. So it doesn’t really matter.

Also…. National numbers are usually not a true representative of local markets. Real estate is extremely local. Each zip code is its own market with supply demand economics.

 

[emergentmd]

;

Thoughts on multifamily development syndications? I've seen the ones on CS lately and they generally build in good states with growth (TX, FL, VA). Typically build at a 6-6.5% cap, sell in year 3-5 at a 5% cap and generate 15-17% IRRs.

I would never buy into a new build esp with the current interest rate environment. This debt feels to be too large a hill to climb. I have been told and believe that never buy/build the most expensive house in the neighborhood.

I only invest in Class B/C properties and put money into making them Class B/A raising rent. Cheaper entry, inexpensive renovation with a good operator, and you can raise rent close to a new build. Its a win win.

15-17% IRR seems low for the risk.

Same, a couple of syndicators have decreased distributions.

All of my operators including the ones I bought into 6 months ago still does 8% return. The only time they paused was due to covid and the unknowns that came with it.

 

[emergentmd]

You can rationale all you want but your initial premise that building was way down is wrong. Rents can go downdemand decrease without inflation plummeting.

You are correct that no one can predict the future but can look at the past. Apt syndications were one of the few assets that did not drop dramatically in 2008 when housing plummeted 20-60+%. If I remember correctly, it was flat in 2008.