Categories Business

What happened? What Happened?

This market crash was inevitable. We didn’t really know how bad it would be or when. We now know the answers to the first two questions.

  • When? Currently underway.
  • How? Below you will find out.
  • No one knows how bad it is.

This article will explore the events that led to what we are experiencing now. Investors can then draw conclusions based on what I have considered below.

In a recent article, The Wall Street Journal revealed that thousands of investors had lost millions in multifamily deals. It highlighted a Dallas IT worker with a mid-level who had built a multifamily portfolio of 7,000 units in only four years. He lost 3,200 apartments to his lender, defaulting on $229 millions in debt. This resulted in a loss of a lot of syndicated investors’ capital.

I will comment briefly on what happened, what is happening in many syndications at the moment, and why it’s certain that this failure won’t be the last. You need to take one important step before investing again.

The Newru Effect

I have often warned about the dangers associated with investing in newrus. Newru is my sarcastic label for promoters that were not in the real estate business until recently, but now are promoting themselves as expert who syndicate deals and collect millions of dollars from investors.

Newru = Newbie Gurus

It’s not a term that’s been widely used yet. I need your help. It’s fine to be new at investing or joining a syndicate. It is wrong when these people tell others that “it’s different this year.” They take huge risks and encourage others to follow their example.

In the last decade, Newrus has become more popular due to a number of factors that have come together. These include:

  1. The 2012 JOBS Act (Jumpstart Our Business Startups Act) has increased the opportunities for syndicators to raise capital.
  2. HGTV, and other popular network shows, have helped to make real estate investing more mainstream.
  3. Social media and online advertising platforms offer many opportunities for self-promotion.
  4. Alternative assets are replacing the casinos of Wall Street.
  5. The commercial real estate market is experiencing a record bull market (in terms of time and growth), while the memory of 2008’s disaster is fading.
  6. Millions of Americans have seen a significant increase in their wealth and investment capital.
  7. Investors from all three of the I’s will be investing: Institutional, International, and (self directed) IRA investors.
  8. Coaches who promise to free you from the daily grind, as well as great riches, by becoming a syndicator (no prior experience required, and yes, it is possible to do this at home).
  9. The late 2017 change in tax laws has provided a huge boost to investors in commercial real estate.
  10. HGTV viewers (see #2), who love real estate, often realize that they don’t enjoy dealing with tenants, toilets and trash. The next logical step is to invest in a syndication.

Don’t get me wrong. I don’t generally criticize most of the factors which led to this problem. Wellings Capital, and many others, have benefited from this environment.

I criticize the way these factors have converged into a new breed inexperienced operators who are unqualified and can be unscrupulous. Syndicators collected hundreds of millions in investor capital and gambled on multifamily assets which, if acquired and managed correctly, would have provided reliable returns to investors.

Most of the problems were predicable. In my many articles and videos, I warned of the consequences we are experiencing right now. But one thing was missed. In a minute, I’ll talk about that.

You may have heard radio advertisements in Texas, particularly over the past few years, enticing people to sign up for one of many multifamily training programs. In Texas and across the country, thousands paid the fee to take the plunge.

The gurus offered to pay acquisition fees, asset-management fees, and any other fees regardless of whether the deal was successful or not. It was an easy way to get rich.

The WSJ has an article on Jay Gajavelli. He was a Texas IT man who became a student and then a syndicator. He lost 3200 multifamily homes, as well as tens of million of dollars in investor money. Citing from the article:

He said that after a long workweek he had a realization which changed his life. “I am sick and tired of having to work for money.” That’s when he became a landlord. He told investors in a webinar last year that he was able to replace his IT income over time. I live my life on my terms.

On an investor webinar, he was quoted as saying: “I don’t worry about the economy anymore.” “Even when [the] economic situation is bad, I still make money.”

The emphasis of these programs is usually on raising capital, finding deals and asset management. One of the teachers told me that the hardest part is getting money and finding deals. A good property manager can make managing the deal a breeze.


The experience gained from years of trench warfare is not something that can be taught in a program.

Here is another quote from the WSJ Article highlighting Gajavelli’s lack of financial management skills:

The video was made for potential Applesway investors in December 2021 and featured the 704 unit Houston apartment complex Timber Ridge. Applesway, Gajavelli’s company, purchased the complex for $56.7M in December 2021 with plans to increase investor returns through raising rents, adding tenant fees, and adding covered carports.

The investor video featured a neat complex of apartments, arranged around an iridescent swimming pool. By the summer of 2022, pool water was a sickly-green color. The parking lot was littered with high piles of garbage. Tenants complained about mold, rats, and illegal evictions. They also said that the management failed to maintain the building properly.

These programs produced thousands of untrained students who were then thrown into a market that was ripe for disaster (see the list above). These students then began to compete, bidding against each other in a race for the bottom.

The CRE boom and the general economic boom have been a constant rising tide that has lifted almost all boats. Even newru boats.

Millions of dollars were made. Students enrolled. The market grew even more frothy. Successful investors and their friends were tripping over themselves to invest in the next deal that was soon to be sold out.

The most glitzy capital raisers rose to the top. The best asset managers are not always the best promoters. Few people cared as they received quarterly payments and went further into debt.

When hundreds of syndicators competed for each deal, it was inevitable that something would give. Syndicators were forced to:

  1. Overpaying for assets
  2. Reduce costs by borrowing at a short-term floating-rate.
  3. Use more aggressive growth assumptions in order to convince underwriters who are willing and investors who may not be aware of the merits of your deal.

Here’s the truth:

  1. The rate of interest rose unexpectedly, and in some cases the debt service cost doubled.
  2. Rent growth slowed down and in some cases even reversed.
  3. The inflation rate continued to increase, as did operating expenses. Insurance and property tax increased for many by 50-75% in the last year. Insurance costs for some Texas and Florida properties have doubled or tripled.
  4. The math is no longer valid for short-term debt.
  5. Banks are tightening their terms and lending less as refinancing is imminent.

Many of us were not surprised by this. Here’s something I didn’t expect.

Many syndicators who have floating rate debts paid for a rate cap. Well done! These are temporary caps that must be renewed often many months before the loan is due. Lenders are contractually entitled to require that syndicators set aside cash for future rate cap renewals. They’re already doing it.

Many syndicators are being crushed by these interest rate cap reserve reserves.

I have heard from first-hand accounts of syndicators who set aside a few thousands dollars per month into a reserve for their next cap on interest rates. The lenders raised the required monthly reserve from a few thousand dollars to tens or even hundreds of thousands. Some lenders increase required reserves up to 50x (yes, you read it right).

Last week, I heard of a syndicator who had made $60 million in his career. This convergence of financial issues, topped by the interest rate cap issue, has brought him to ruin.

Newrus, who had expected to continue raising capital and sail through “easy” acquisitions-to-sale cycle, has hit a terrifying roadblock. We’re now hearing about capital calls, suspended distributions and a few foreclosures. Today’s CRE Daily is stating the following as I type this:

“Multifamily asset prices are still higher than pre-pandemic levels. But some owners are finding that they are unable to sell their properties quickly, even though they had expected a trickle. In the past, lenders were eager to issue high-leverage bridge loans in order to meet demand. But now, many investors are struggling to pay off these debts and headline defaults could fall in short time.

What to Expect From This

But I know many of you are. But I know that many of you do.

Although getting from 9% inflation to under 5% was easier than most expected, I think that the journey to the Fed’s 2% target inflation rate will be painful for America.

We expect that many apartment projects will be returned to the lenders. This will only cause more pain to thousands of investors. However, it will also present opportunities for funds and syndicators with enough cash and conviction. We are monitoring the market to find opportunities, even though we’re sorry for the pain that this situation is causing.

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