Several days ago, the Wall Street Journal published an article about real estate syndicator Applesway Investment Group (owned by real estate entrepreneur Jay Gajavelli), which lost more than 3,000 apartments across four rental complexes that went into foreclosure.
What led to one of the largest commercial real estate bursts since the financial crisis of 2008? In a nutshell, Gajavelli’s company held floating interest rate loans where payments ballooned. Inflation brought higher expenses, but rental revenues could not compensate for the difference. Thus, bills became overdue, ultimately leading to these properties’ foreclosures. Thousands of individual investors looking to generate passive incomes (without being a landlord) have now been left empty-handed.
Should Individual Investors Be Worried About a Potential Housing Bust?
Between 2020 to 2022, syndicators raised a staggering $115 billion. As well, there were over 300,000 investors who participated in syndications in 2021, according to Financial Samurai.
As much as I would like to believe that this is a one-off scenario, I’m leaning towards that this could have a ripple effect that could affect the industry.
Assuming that other major syndicators carry loans with variable rates (without an interest rate cap), they will feel the financial pressure of increased payments. This is due to the Federal Reserve aggressively hiking interest rates for the 10th consecutive time since March 2022. And syndicators most likely won’t be able to escape from renewing at higher rates in the near future.
Aside from that, there are a variety of factors where things can go downhill. For instance, having poor property management, underestimating operating expenses, and a shortfall in rental income to keep them afloat could cause the business model to weaken. It won’t be nearly as devastating as the housing market…