Why Are Investors So Hesitant Right Now?

Due to the unstable nature of our current real estate market, it is extremely hard to get investors to commit to deals.

Even deals that were a slam dunk 6 months ago are getting a definite NO from investors today.

Investors are skittish for 2 very basic reasons:

1) Downside fears, recession looming etc.: can I really trust that rents will continue to go up? What if cap rates go significantly higher? Is my 6% stabilized yield on cost enough to make me money? This is fundamentally a fear of getting into a bad deal at the wrong time and losing money.

2) Opportunity cost: in the words of one investor I spoke to: “why should I invest now when I’ll be able to buy 8% caps in 6 months?”

Though a deal may be good, investors are saving their cash for the real opportunities to arrive. In this case, it’s not fear of losing money, but fear of missing out on the potential to make money.

We cannot convince investors to get off the sidelines. We have no crystal ball telling us whether we should hold on to our cash and we have no way of knowing where real estate prices are headed. At Livi Kapital, we don’t have an opinion on whether a person should be investing now.

But we can try and solve for the downside fears. (Reason #1) And this could be done through savvy structuring of the capital stack.

In this environment, our solution has been to pitch our investors on deals with long term fixed rate financing.

(We were already doing this even while interest rates were low, and successfully closed on a large transaction earlier in the year with this approach. Call us prescient.)

With enough cashflow to cover debt service day 1, having long-term fixed rate debt removes much of the interest rate risk, and kicks the can down the road on the fickle movements of cap rates. Your debt payments should be fixed for 7-10 years, which is a long while to allow the fed to do their damage to rates. And you have no need to sell, so cap rates could fluctuate as they wish, and you could just watch passively. (With a HUD loan assumption, you don’t even have to worry about a maturity.)

At Livi Kapital, we have plenty of investor interest for this strategy. We would love to see long term fixed rate deals in Multifamily, Retail, Industrial and Medical Office, all of which are assets class we invest or advise on.

Whether it’s a recapitalization of an existing asset, or a new acquisition, we’re happy to take a look.



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