2020 and 2021 handed us the cheapest money most of us will see in our careers. The Fed held its rate near zero from March 2020 until March 2022, and the thirty-year fixed hit 2.65 percent in January 2021, the lowest in Freddie Mac’s survey going back to 1971. If you were going to buy, that was the time, and we did. So did our investors.

What’s interesting is what happened next. Plenty of people bought into that window and still got hurt. Plenty of others sat it out waiting for a better entry that never came. Same two years, three different outcomes.

So the year was never the thing. What separated those three groups is what we look for in every market, including this one.

What we were actually buying

In the fund world there’s a word for this. Vintage means the year the money first went to work, and allocators sort managers by it before almost anything else. There’s something to it. The year sets what assets cost and what debt costs, and you don’t negotiate either one. But it only decides your outcome if you bought at the market, and we weren’t. We were buying value-add and distressed, which means buying below what the asset is worth the day you close and then earning the rest.

That second part is the whole job. You take a building that’s been run badly, with soft collections, deferred maintenance, rents under where they should be and expenses over, and you fix it. Occupancy up, delinquency down, expenses controlled. The income goes up because you made it, and value follows income.

That’s forced appreciation, and it’s the difference between owning an asset and waiting on one. The return came out of the work, not a cap rate moving in our favor while we stood there.

Buying right means buying for the conditions

Buying right isn’t the same as buying cheap. It means the number works for the conditions in front of you, not the ones you’re hoping for.

The price has to work against the debt you can get today, not the refinance you’re counting on in year three. The rent has to exist in that submarket right now, not three renovations from now. And the exit assumption has to be at least as conservative as your entry, because assuming you’ll sell into a better market than you bought in is a hope with a spreadsheet around it.

A lot of what blew up later was bought on the opposite of all three, in the best rate environment we’ve had. Priced for cheap money that would stay cheap. Underwritten to rents nobody had hit. Exited at a cap tighter than entry.

Cheap debt didn’t cause that. Cheap debt let it hide longer.

If there’s only one way out, it isn’t a plan

Before we buy anything, we want more than one way this ends well. Can we refinance and hold it. Can we sell to another operator. Can we own it and let it cash flow while we wait. If it only works one way, it isn’t a business plan. It’s a bet on one outcome, and single outcomes are what a market change takes away.

The deals that got in trouble almost always had one exit. Sell in three years into a strong market, or refinance lower. Both are bets on somebody else’s behavior.

That discipline costs you at acquisition. You pass on deals that pencil one way and not the other two, and watching somebody else buy one is not fun. It pays off somewhere people don’t expect. When you buy right, a short hold becomes an option instead of a trap. We’ve had deals where an investor could turn around and sell inside a year at a profit, more than once. That isn’t timing or luck. It’s the spread you created at the closing table and the work you did after.

Spreading money around isn’t diversifying

Most investors I talk to are in six deals, four states and three sponsors, and believe they’re diversified. They aren’t. If all six are value-add multifamily on the same assumptions with the same debt, spreading them across a map did nothing. A rate move hits all six the same week.

Real diversification is asset class. Multifamily behaves differently than industrial, retail or self storage, because different things drive their income and different buyers want them at the end.

The second kind is the type of distress you’re buying, and most people never think about it. Physical distress is a construction and lease-up problem. Operational distress is a management problem. Financial distress, where the building runs fine but the capital stack doesn’t, is a negotiation problem. Those three don’t go wrong at the same time or for the same reasons.

The year gets credit and blame it never earned

I understand why people reach for the year. It’s the one variable nobody had a hand in, which makes it easiest to point at.

I’m not saying it never matters. There’s one case where it clearly does, an asset you only plan to hold a year or two. On a short hold you’re leaning on the market being there when you need it, because there’s no time to fix anything. Timing is a real risk there and should be underwritten as one.

Everywhere else it’s the excuse. The people who got hurt buying into the cheapest debt of our lifetime weren’t hurt by cheap debt. It was bad underwriting and bad management, which never win in any market and leave you no cushion when something moves. When the plan is tight and the operations are sloppy, the first thing that goes wrong is the last, because there’s nothing left to absorb it.

The other side of it costs just as much, and this is the part I can’t stand. People comparison shop. Somebody bought well in 2021, every deal since gets measured against that one, nothing measures up, and they stop buying. There’s no such thing as the same deal five years later. If the only deal you’ll take is one that hasn’t existed since 2021, you’ve decided to sit out permanently. Sitting out has a price. Nobody sends you a statement for it, which is why it never feels like a loss.

Three questions on anything you’re looking at now

Does this deal work at the debt available right now? Not at a refinance, not at a rate anybody expects next year. If it only works after a refinance, you’re being asked to underwrite the bond market.

Where does the return come from? Ask the operator to split it. How much is forced through operations, and how much is the asset just being worth more later? The first has a plan behind it. The second is a guess dressed up as an assumption.

And what are the other two ways out? Not the preferred exit. The second and the third. If nobody’s thought about it before you asked, you’ve learned the most useful thing about that deal.

If you want to walk through a deal with somebody who isn’t trying to sell you one, you can book some time with me here. No pressure if the timing isn’t right.

In my next Empire Brief, on October 29, I’ll get into 506(b) and 506(c), and why that difference decides who’s allowed to talk to you and what they have to prove about you first.