Tanner Bickelhaupt has been investing, developing, and looking at new deals for the full cycle. He owns and operates a management company and has been successful across several asset classes in different markets. He’s also made it through different economic cycles and come out on top. 

Just Because the Market is Good Doesn’t Mean You Don’t Need to be Cautious

(1:30) – Right now, the markets are at a high. It’s normal to talk about how to protect investor wealth during a downturn, but you can’t forget about precautions during the good times. 

Bickelhaupt says some syndicators are in the mindset that they have capital and want to spend it right now in a get-rich-quick scheme. The healthier viewpoint is just to invest and preserve capital. 

“Basically, how can I have enough runway? Because the things that never happen, happen all the time,” said Bickelhaupt. The pandemic was the perfect example of that, but it proved people always need to live somewhere. “We like what we can control, but we like the peace of mind knowing we’re owning real good real estate that’s being operated really well and we don’t have a lot of surprises.”

(4:20) – Growth for investors is very aggressive right now. Cap rates are the lowest they’ve ever been. People are buying up C and B class properties. There’s a huge demand along with a slowdown in ability to build, so right now it seems like things are only going to continue to grow. That’s especially true in the markets Bickelhaupt operates in, like Scottsdale, Arizona. 

“The brokers will tell you, I’ve cost myself. I started locking in debt 2 years ago, 10-year, with the anticipation that rates are going to go up, but I just liked the fix that it provided a large fluctuation of cash flow,” said Bickelhaupt. “I would never even talk about bridge debt 2 years ago, but the bridge debt terms in that market have changed so much that we do talk about it. We’re looking at a deal right now where that might be the play. We feel there’s some low-hanging fruit that we can change stuff very quickly, we do not want to lock in that long-term debt but I will lock it in as quickly as possible. So the business plan would not be take it, flip it; it would be ‘Let’s create the value then go put more debt on it, and we’ll keep it.’” 

Bridge financing can increase investor returns, so syndicators like it. You can hit 85% LTV, compared with a Fannie-Freddie set up where you’d get 65% or 75%. 

“I really have to believe in the up-story to do that. Those deals are still out there, they’re just harder to find.”

(8:44) – Coming out of the pandemic, Bickelhaupt set up in an office in one of the apartment units Tanbic Company owns in North Scottsdale. Tanbic focused on what it already has and focused on rent collections. 

“I think we had a lot of investors watching. We sent quarterly distributions, we didn’t miss a cash flow. Now, we were down 30-35% on what the expectations were, but I think a lot of groups said, ‘Hey, we’re pausing all distributions, we’re going to stockpile cash’ and that’s a great strategy. I’d be lying if I said we weren’t thinking about that. But, we were sitting on plenty of reserves.”

Tanbic Company cash flowed then spent that on capital improvements. 

They’d help residents with rent assistance if they needed. Of course, there were some people abusing the system, and that was a challenge. They countered that by paying residents to leave.

“It’s just counterintuitive of, ‘Hey, you owe $3000 on your rent, you’re behind, you have this new car and you’re telling me you can’t afford it, here’s $500 if you move out in two days.’ Because the problem was, you had new residents that wanted to come in that wanted to lease the one bedroom, but you didn’t have the one bedroom. So you’re basically losing twice. This resident is taking $1500 by not paying, this one wants to pay $1500, you’re losing $3000 and you’re stuck.”

(13:15) – Multifamily did really well in the pandemic if they had the right structure. Office buildings and senior living were tough pitches, but multifamily remained nimble. Institutional capital lowered their return parameters.

(14:12) – Reserves are crucial.

“We see a lot of deals syndicators will send like, ‘Hey, what do you think?’ And that’s probably one of my first go-to’s is if they’re not raising reserves on the front end. Now, I get it, because they’re buying deals at a high price, you’re trying to meet a certain return parameter for your investor, the more reserves you collect, that lowers that. But what I tell our investors is, ‘We’re going to over-reserve this property, we’ll probably hold it for two years, and then we’ll give it back.’ I’m willing to take the lower on the front end, but gosh, when this happened, it allowed us to double down.”

How Investing Has Changed

(16:02) – There’s a lot to pay attention to when things are going well. For instance, there are proposed policy changes on capital gains, which might cause multifamily owners to pull their properties off the market and old onto them. There’s also massive rent growth right now solely because of demand. It’s free money, happening just because of how things are right now, not because you’ve invested in value-add.

Right now, Class B cap rates are sometimes trading lower than Class A in Phoenix. 

“Which is a fundamental flaw,” said Bickelhaupt. “I’ve never seen it before, where a 1980s property is going to trade at a lower cap rate than a Class A.”

People were offering incredible deals, like a 40% rise in price from just a few years ago, which they’re handing down sight-unseen. 

“There’s so many guys walking around with so much capital who have 1031 problems because they sold, they pulled the trigger, the clock’s ticking. And so you’re seeing these offers get super aggressive. Great to sell in, horrible to buy in. Then meanwhile what was happening was, we sold at what we thought was a really good cap rate, we started to see major rent increases. Fast forward to the last 2 months, we’ve had over 50 leases up over $155. I couldn’t do it. So I went back and said ‘Hey, I can’t sign the PSA. The brokers, it’s horrible, because the brokers did their job. Everybody did their job, they worked their tails off. I got cold feet,” said Bickelhaupt. 

(22:00) – Patrick Antrim, CEO of Multifamily Leadership, points out that it takes courage to say no. 

Bickelhaupt says things are simple if you put the investor first. He likes to invest in a story and in true value.

“While the number was great and the number we’d receive in our One Year exceeded our Six Year pro forma, there’s more there. And there’s more that we can control. That’s why we’re looking around saying, ‘We’re getting these rent increases, we’re still sitting on a million dollars of cap x dollars and stuff we can do to make this better. If we get stuck with this, my debt’s fixed. We’re now on a value standpoint, based on what the market’s telling us – we’re now less than 50% leverage,” said Bickelhaupt. “As long as that thing’s cash-flowing, it lets us come at it from a position of strength. If we find the right asset, we can make the move.”

(25:26) – Bickelhaupt doesn’t think good off-market deals really exist. He says that even pointing out that he’s sold off-market before. He says off-market will depend a lot on the broker. But he’s learned that when people are bidding, they stop looking at the property and they’re just looking to win. The market has changed extremely rapidly.

“I will tell you, in the last 60 days, we have made probably 25 offers off-market. Numbers that I would never, ever see. There was one deal in particular – you know, that you’re not supposed to like – but we really wanted this one. Super aggressive. It would’ve broken the record, it would’ve been the highest price at the time… but at the time, we thought it was a great offer. It was an $80 million offer and the seller scoffed at us. At the time, we thought he was crazy, but he was right, he probably just found another $10 million by just waiting another month and a half!”

(29:19) – There are a few questions to ask ahead of a deal. 

“I do find it interesting sometimes, where the investor is fitting in the capital stack,” said Bickelhaupt. “You’re seeing mezzanine capital, lots of guys, if they’re having trouble raising equity, they’ll maybe have debt, they’ll have mezzanine or preferred equity, then basically you’re fourth in line. So if the thing goes sideways, the lender’s going to get paid first, the mezzanine’s getting paid next, or the pref, and the investor’s getting paid last. So your price per pound of where you’re entering the deal, that’s where you need to get somewhat comfortable.”

(32:15) – Right now, Antrim points out that there aren’t many market challenges to face. However, cap rate compression is moving the market.

Bickelhaupt says he’s focused more on the cash flow than on the value and the cap rate. 

“When I underwrite the deal, the cap rate goes up. Depending on the market, it’ll be anywhere from a half to a 1% wrong-way direction.”

He feels the investors should look at NOI growth. The market can change value, but people should prove what they have done individually. 

“All this stuff moves and it moves very, very fast. But I don’t need the cap rate for the exit because if I’m leveraged correctly and I’m cash flowing correctly, then I don’t have to be a seller,” said Bickelhaupt. Then, if the market isn’t favorable to sell, he can still issue a quarterly check. 

(36:25) – Once in a while, you’ll be able to build for cheaper than you can buy. However, that involves different risks. 

“Costs have always gone up,” said Bickelhaupt. “I’m more concerned about, can the vendors get the supplies? Can we get the refrigerators, can we get the widgets to put the piece together? Because if I’m buying the land right and I have the right contractors and all that stuff can work out, but I don’t want to be caught with all of the sudden having some of the stuff that I bought for X that’s now worth significantly less.”

(37:49) – Rent growth is projected to be very strong in the Phoenix area moving forward. That would solve a lot of price-per-pound and price-per-door issues.

(39:25) – There are a lot of players in the industry right now. There’s a lot of capital involved. For groups that have specific parameters, you should always ask questions about how and why that’ll be achievable. People might be overly optimistic. 

“It’s really just understanding these assumptions as these investors or these people have these parameters. I’ll have investors tell me, ‘I’m looking for X.’ Well, you don’t understand the market. That was two years ago, that deal doesn’t exist. And if I put that in front of you, you should be skeptical,” said Bickelhaupt. 

Institutional quality assets require institutional-quality prices.