Our growth trajectory at Morongell Capital, from a units’ perspective, plummeted in 2019. As an owner who would have liked to match or exceed the 650+ units from 2018, this was not part of the master plan. However, in the grand scheme of things, I know we will look back and see how important this year was for us. It rooted us in our core values, which are to have investors that trust in us, and brokers who respect and choose to do business with us. So, the question you are probably wondering is…How did this happen? Did something go wrong? Grab a coffee and have a read.

#1 We Entered New Markets

I picked up as the principal of Morongell Capital and moved to Charlotte, NC in hopes of gaining a market presence not only here, but throughout the rest of North and South Carolina. Living in the market, or just a short drive away, is helpful as you learn where certain pockets of growth and poverty are, and ultimately, where opportunity lies. Secondly, it also gives you the ability to show face with the brokers on a regular basis and build a friendship and rapport at a much faster rate than an out-of-state investor can. It also gives you a competitive advantage to be able to drive out and see deals that are shown to you on the very same day. All in all our relationship building with new brokers, property management companies, and local investors was a success this year, regardless of buying 0 units.

#2 Strict Buying Criteria

One of the biggest things Morongell Capital prides itself in is never being forced to do a deal. This is incredibly powerful as it consistently gives us a clear lens to look through when underwriting deals. We are not in the business of doing lots of deals just to collect acquisition and management fees. We are in the business of doing strong, quality, value-add multifamily deals where our investors can sleep at night knowing they’ve invested into a strong asset. We stress test every deal we underwrite in many different ways. If it fails on any of them, it hits the trash. Of course we would have like to buy a few apartment complexes last year. We were close on several opportunities, but were not willing to stretch and go up on our purchase price just to do a deal.

#3 Adjusting Investor Expectations

The days of doubling your money in 3-5 years for a tradition B/C value-add apartment complex is over. Yes, you might able to find a one off deal here and there that ends up hitting a 2X on a five-year-hold but it’s probably in a market you’ve never heard of or know anything about. The deal probably carries additional risks that a traditional passive investor wouldn’t pick up on unless told about.

We have gone back throughout the second half of 2019 and have adjusted our investor’s expectations. It has cost us investors leaving and finding other sponsors, but has also helped us add many that are not looking for high-risk multifamily assets to invest in. Morongell Capital buys in mid-large MSA’s and therefore will always have a willing buyer on the exit of an asset. This translates to a lower exit cap both on the buy and sell side. Lower cap rates equates to lower-moderate risk and that’s the sweet spot we continue to build upon in our portfolio.

#4 Continuous Cap Rate Compression

Capitalization rates have tremendously dropped over the last 12-24 months. The spread between an A deal and C deal has also slimmed down. Mid-large MSA’s from A-C deals are currently somewhere around 4.5%,5%, and 5.5% respectively. This is much different compared to 3-5 years ago when the spread was 4.75%,5.5%, and 6.5% respectively. Investors are paying a premium for a B-C asset today and it’s a pure reflection of where were at in the market cycle, and how much money is out there chasing yield. We are also willing to pay a lower cap rate for a B-C deal however it must have a compelling value-add play(s) we can execute to get our stabilized cap rate back up to 8-9%. If there is no value-add play for a 1980’s vintage product we would be better off buying a newer asset at a lower cap rate since it will be worth more on the back end coupled by lower operating expenses.

Conclusion

In short, entering new markets takes time when you do it the right way. We were in 7 best and finals, but came up short. For those wondering what the wrong way is, it’s to overpay for a few deals (to show brokers you can close) and then you have a market presence. I don’t recommend the latter.

After reflecting on this past year our same goals still apply for 2020. They are to buy a few deals as they make sense and to give investors a strong return that we can truly fulfill. We will never be your highest return option when it comes to looking at a proforma and projections but we will be one of your safest options. You have to decide what fits your investment goals now and for years to come.

If you have been following us from a distance, or maybe just hearing about us for the first time today, feel free to reach out. We would love to hop on a discovery call with you and see if investing alongside us is a good fit. We can also help you navigate through other investments you may be looking at, as it is our goal to bring transparency to the world in real estate investing.

-Scott Morongell, Principal