Commercial real estate investors have been suffering under the weight of rising interest rates, but the pain is acute for some small-time multifamily players.
Small investors are losing mounds of cash after bets on the rental market were soured by the Federal Reserve’s fiscal policy, the Wall Street Journal reported. Some are losing their life savings after trying to grab a piece of the multifamily pie.
Investors dabbling in real estate have been pooling their money together under the guise of one or two leaders in deals known as syndication. While syndicators have ways of profiting regardless of an investment’s performance, investors have little recourse when an investment goes bad.
Syndicators, who make money by collecting acquisition and management fees, can be emboldened to take risks with money put up by investors.
From 2020 to 2022, syndicators raised at least $115 billion from investors, according to Securities and Exchange Commission filings. Defaults aren’t common yet, but foreclosures could be coming soon.
One example is playing out in Houston, where Jay Gajavelli syndicated real estate deals for Applesway Investment Group. At one point, the firm was one of the city’s largest landlords and had $500 million worth of multifamily holdings across 7,000 units in the region.
Arbor Realty Trust in April foreclosed on four of those rental complexes, a portfolio valued at $229 million. In the blink of an eye, 3,200 apartments were lost. A major reason was the rise of floating interest rates, which sent monthly payments upward, outpacing rents.
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Rising rents across the country — particularly in the Sun Belt — drew many investors into the fold during the pandemic, interested in passive income and reeled in by effusive pitches from syndicators. Gajavelli was a disciple of real estate investing coach Brad Sumrok, who was mentored by arguably the most famous syndicator, sales coach and investor Grant Cardone.
At Timber Ridge in Houston, Gajavelli promised to double investor returns through rent rises and additional tenant fees. But Gajavelli allegedly left the complex in disrepair, leading to tenant complaints and threats from the city. Tenants fell behind on rent payments, too.
Gajavelli solicited investments in February, but turned around in March and said more money wasn’t needed. The following month, the complex was foreclosed on.
— Holden Walter-Warner