March 4, 2023

JF3103: The State of the Multifamily Market ft. Mike Roeder


Mike Roeder is the co-founder of Granite Towers Equity Group, which focuses on value-add properties in Dallas-Fort Worth and Nashville. In this episode, Mike discusses why he prefers the DFW and Nashville markets to the midwest, how low competition impacts negotiation strategy, and the state and trajectory of the multifamily market.

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Mike Roeder | Real Estate Background


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Slocomb Reed: Best Ever listeners, welcome to the best real estate investing advice ever show. I'm Slocomb Reed, and I'm joined by Mike Roeder. Mike is joining us from Minneapolis, Minnesota. He is the co-founder of Granite Towers Equity Group, which focuses on value-add properties in Dallas, Fort Worth and in Nashville. Their current portfolio is over 2,200 multifamily units, assets under management just over $320 million. Mike, can you tell us a little bit more about your background and what you're currently focused on?

Mike Roeder: Certainly, and thanks for having me on the show today. I really appreciate it; looking forward to our conversation. So let's start off with my background. I'm going to rewind about seven to eight years ago; I was commuting about an hour and a half each way to my corporate position, I was an insurance agent, and I just remember driving down the road thinking "There's got to be a better way; there's got to be a way to build up passive income, to build my wealth." And at the time, I kept hearing that real estate was one of the best ways to build up wealth. The issue was I was already in real estate; I had three single family rentals, I was self-managing them, was evicting tenants, was leasing to new tenants, was handling all the maintenance, and I was cash-flowing very little... And at the same time, I was really experiencing quite a bit of burnout, because I had added a second job to my plate, and I already had a lot on my plate with my corporate career, commuting, my family... So it just really wasn't working. And at that point in time, I decided I need to get educated, I need to partner up with someone that has more experience, and that's exactly what I did.

I started reading books, I found my business partner, he had been buying apartment complexes, which was working really, really well with him... And we decided to go into business and jump into the multifamily space, where we could employ third-party management, have someone overseeing the day to day operations, scale our actual business and get the economies of scale with more units, rather than just picking off a single family rental here and there, and really mitigate risk, because we had multiple units where if we had a vacant unit come up or if we needed to replace a roof, you can spread that out amongst many units instead of just one. So that's really where I got my start, and that's where my passive income started to grow and started to give me my freedom back.

Slocomb Reed: Mike, at Granite Towers do you focus on the value-add business model?

Mike Roeder: Strictly value-add. So we're buying B and C-class apartment buildings that are already built, in great markets... And there's a couple of reasons why we love that niche. First off, they tend to do really well in an economic downturn. So when you have a downturn, a lot of times the A-class tenants will move to a B-class property, the B-class will move to a C-class... So you have that trickledown effect; so your occupancy still stays really strong.

Another reason why we love that class is it typically cashflows right off the bat. Whereas if you're doing a development deal, you can do extremely well with those, but a lot of times it's a couple of years in before you start to get that cash flow. So we absolutely love multifamily, and we love the B and C-class arena.

Slocomb Reed: I want to dive deep into a couple of things here, but for our listeners, I want to make sure we're all coming from the same place. Other components of the value-add business model is that you're typically targeting a five year hold or three to seven year hold, depending on how you articulate it. There's a defined hold period of five-ish years; you are raising capital from passive investors, to whom you are delivering a preferred cash on cash return while you own the assets that you acquire. And then there is five-ish years down the road after the property is acquired and you've executed on your business plan, there will be a sale or other major liquidity event that delivers all of your investors capital back, plus some multiple on that capital, giving an internal rate of return of let's just say high teens for now. I'm not asking you about the specifics of your deals here, Mike... But understanding that that's the business model here, let me ask, when did you get into DFW and in Nashville?

Mike Roeder: We started in Minnesota and Western Wisconsin, which is close to where I'm located. And that was about six and a half, seven years ago, when we jumped into the multifamily space up here. DFW, it was about five and a half years ago when we entered that market. And there's a couple of reasons why we jumped down to DFW and stopped buying in the Midwest. Number one was deal flow. Dallas, Fort Worth is kind of the Mecca for apartment investing... But not only that, it's very landlord-friendly, it has a ton of business growth, it has a ton of population growth... So all the winds are at your sails and pointed you in the direction of success; whereas a lot of other markets, you can still do extremely well, but if the market isn't as landlord-friendly, or business-friendly, that can affect your occupancy, or that can affect your collections, because it takes longer to get tenants out.

And then we eventually went up to Nashville about three years ago; we absolutely love that market. A ton of growth. It's very landlord friendly. You've got a lot of people coming in, a lot of high-income jobs... So we love Nashville as well.

Slocomb Reed: In your description of Dallas you touched on my next question, Mike... You called it a hub for apartment investing; you said the deal flow is really good there. We are recording in the middle of February 2023. What I really want to ask is, how are DFW and Nashville doing with regards to deal flow right now? This episode will air in a couple of weeks and then it will be listened to for the remainder of 2023, at least for Q1 and a little bit of Q2. I know a lot of people - and we've interviewed a lot of people on the Best Ever podcast who are involved in B to C-class value-add apartment syndication who are looking into those markets... What is the market of the moment right now? What are you seeing specifically in the heart of Q1 2023 in Dallas Fort Worth and Nashville?

Mike Roeder: That's a great question. So first off, quarter one in any year, it's typically a little bit slower; you get past the holidays... And then sellers are talking to the brokers, it takes time to put together the offering memorandums and all the financials, and bring a property to market... So I think typically Q1 is fairly slow. This year, it's slower than I've ever seen it, and a lot of brokers that I've talked to, it's one of the slowest times that they've seen as well.

You have a couple things happening. I think you have a disconnect between what sellers think their property is worth and what buyers are willing to pay, because of what interest rates have done over the last 6 to 12 months... And you've got a lot of people that are just holding out; they're gonna wait until things stabilize as far as interest rates and the debt markets, and then they're gonna bring their properties to the market.

So back to the two markets that we're investing in - Dallas, Fort Worth, there's still a decent amount of deal flow, but a lower amount than we've seen in previous years. Nashville - very stagnant; we haven't seen much deal flow up there at all, and there's not as much optimism about how much is going to be brought online this year.

Now back to Dallas, the brokers that we're talking to, they are saying that things are starting to pick up and they're going to pick up substantially over the next month or two.

One other thing to consider too is you have a lot of bridge loans that were placed on multifamily properties over the last few years, and you have a lot of those bridge loans that are either coming due, and people can't extend, because they're not hitting the debt-service coverage ratio requirements, or their rate cap is up and they have to pay 400k or 500k, or maybe a million or 2 million to buy a new rate cap, and they might not have the funds to do that. So I think you're going to have a lot of forced sales happening where people are needing to bring their deals to the market because they're in a sticky situation.

Slocomb Reed: Mike, I know a lot of very sharp, experienced people in commercial real estate investing who are saying very similar things to what you're saying. Another piece of the puzzle, from what I've heard and read, is that the delta between what buyers are willing to offer and what sellers are expecting to sell for has just been too broad recently, and that's the key reason why markets like Nashville have stagnated. The deals you are currently seeing in Dallas though - are they penciling out as well as the deals you were seeing a year ago?

Mike Roeder: We're starting to see more deals pencil out, however it's still few and far between. So we have to sift through a lot of deals to have one makes sense. It depends on what brokerage is listing it, and where the sellers expectations are... But we are seeing some deals that are penciling out.

Slocomb Reed: If your deals in Dallas are penciling, I imagine that you are still currently writing offers in that market. What has your experience been with those offers?

Mike Roeder: Correct. So we still have been writing offers. Last year we able to close on six properties. This year we have one in the hopper. And what we've seen is there's been a price decrease, what we believe to be about 10% to 20%, depending upon the asset, at least for the deals that we're taking down, and that we're seeing that actually make sense with our underwriting metrics.

So again, about a 10% to 20% discount. And I think moving forward, I don't think that that will increase substantially from here. I think it'll kind of level off, and then once we start to see interest rates decrease, which hopefully at the end of this year, that'll happen, I think you're going to see the cap rates start to compress, you're going to see pricing go back up, and as more capital floods into the market, and the debt market's stabilized as well, that's going to help compress the cap rates as well. So I think we're pretty close to the peak on where cap rates are gonna go.

Break: [00:10:52.20]

Slocomb Reed: Are you sensing that there is as much competition for those deals right now as there was a year ago?

Mike Roeder: There is not. Not the deals that we're offering on. So a year to two years ago, the competitive properties that were located in good areas, that might be 200 units, '80s deal, you might have anywhere in between 10 to 20 offers in DFW and Nashville. We're seeing that the amount of interest in those deals has decreased, because I think there's a lot of people waiting on the sidelines. Whether it be individual syndication groups or institutional investors, I think that's the case across the board. So right now, we go into a best and final round or a call for offers, a lot of times we're seeing somewhere in between that five to eight range for people that are actually offering on the properties. So the competition has dropped a bit.

Slocomb Reed: Competition having dropped, how has that changed the negotiation experience, the guidance that you're being given by brokers and the way that negotiations are actually panning out after those offers are submitted?

Mike Roeder: A couple of things - when you get to best and final, if the brokerage actually puts together a best and final round, which is essentially the round after the first round of offers, a lot of times you won't go into that second, or that third round of best and final. Whereas a year ago, there was 2, 3, 4 rounds, because they were trying to push prices up so substantially... And they were doing that because they could get the higher prices. Now, in my opinion, the brokers are happy if they can receive five, six offers and get one really solid offer.

Now, the other thing to consider too is what we've seen is the selling brokerages are really really honed in and focused on who can close the deal. That is actually more important to them, and also to myself when I'm selling a property than the actual price. So sure, we want to get a great price, and we want to select someone that can give us as many dollars as possible, but the more important piece is can they actually close the deal? Can they secure the equity to close on this transaction? And are they going to make the transaction as smooth event? Are they going to retrade you? if they've done that before, they're pretty much out.

And the reason for that is with interest rates fluctuating, and with investors being a little bit more skittish, you have more risk on the interest rate side, plus it's harder to raise capital. So you're seeing a lot of deals out in the marketplace fall through. And when that happens, it's not good for anyone; it's not good for the buyer, it's not good for the seller, it's not good for the selling brokerage... Everyone gets hurt in some way or another in that situation. So again, your ability to close is one of the most important aspects right now in this market.

Slocomb Reed: With as stagnant as you said the Nashville market has been, and with the portfolios you already have in Nashville, as well as DFW, are you content to wait on the national market to pick up, or are you already pursuing other markets to be expanding the portfolio in currently?

Mike Roeder: Great questions. We're happy waiting it out. We do think that DFW and Nashville can keep us busy enough, and they're great markets; we don't feel like we need to expand to another market. Now, there's some great other markets out there that we've explored. We've explored Phoenix, we've explored Kansas City, Charlotte, Tampa area - all those are great markets. But we really love building out our buckets in these two markets, to get some economies of scale; it limits your exposure to a different market where you're having to travel there all the time. Plus, we'd like to try to have a full-time asset manager in the market that we're in, or at least have it convenient for the general partners to visit the properties often. So that's very important to us as well. So we're just sticking to those two markets.

Slocomb Reed: Last question, or at least I think this is the last question before we transition the show, Mike... Within the 2,200+ units that you all have in your portfolio currently in those two markets, have you seen any changes in the operation of those properties in the last couple of quarters? And I don't mean your property manager was blue sneakers instead of red sneakers. I mean the performance and the direction that the leases are headed, are vacancies being filled faster or slower? Are the amenities of highest value, or highest return changing? Have you seen any change in that regard in the operation of your current portfolio?

Mike Roeder: Yeah, great questions. So I think there's been a couple of changes over the last six months. Number one is rent growth has started to cool down a bit. And it depends on the market that you're in; we've still seen some really good rent growth, but not like we've seen over the last two years. You know, over the last few years I think a lot of people got used to between 10% and 20% rent growth, which is astronomically high compared to historical numbers. And we're starting to see that cool off. So maybe 2%, 3%, 4% or 5%, depending upon the sub-market and the market that you're located in.

Slocomb Reed: Are you still filling vacancies as fast? I want to go one layer deeper there, just saying that rent growth has cooled off... Is your average vacancy lasting as long? Are you filling it sooner, or is it taking longer? The entire operation of leasing the property - is it just the rents aren't going up as high, but everything else is the same?

Mike Roeder: That is a good question. And it's really dependent on the sub-market and the asset that you're talking about. But I would say across the board, if you're looking at the whole portfolio - and this isn't just our portfolio; we've talked to our management companies that own tens of thousands of units... They are seeing vacancy creep up a little bit. I believe Dallas might be up 1% to 2% as far as the vacancy over the last year, that what we were at before. Still very strong, you're still sitting at 95%, 96% occupancy, but it has gone up by about 1% to 2%. Nashville, same thing, up a couple hundred basis points as far as the vacancy goes.

And I think you have some people budding up; because of the possible recession that we're dipping into, and the cost of living coming up substantially, you're seeing the effect of that. Now, I think, again, it depends on the asset. So if you're located in really good markets, and you're able to price yourself a little bit below the competitive properties, or provide a better product, or better people, you can really alleviate suffering any higher vacancy rate.

Slocomb Reed: That's helpful to know. Mike, are you ready for the Best Ever lightning round?

Mike Roeder: I'm ready.

Slocomb Reed: What is the best ever book you recently read?

Mike Roeder: So I actually just got done reading Shoe Dog to my daughter. It's a book on Phil Knight, the founder of Nike.

Slocomb Reed: How old is your daughter?

Mike Roeder: She's 10 years old. And she absolutely adored the book; whether you're an adult or a child or someone in between, it's just a great story on how being creative and having persistence can really take you so far in life. I just love that book. It's a phenomenon.

Slocomb Reed: I just finished it as well, and I very strongly resonated with what Phil was going through in the early years, being effectively a small business owner-operator myself. Mike, what is your best ever way to give back?

Mike Roeder: The best way to give back - we actually give a percentage of our profits to two organizations. One that's called Every Meal; so they filled a food gap for school-aged children. So when a kid goes home in the evening or goes home on the weekend, and they might be on that poverty level, they might not get to eat the proper amount of food. So we basically provide food to the schools, or this organization does and they stuff these kids' backpacks full of food on the weekends and the evenings, so that way they're able to fill that hunger gap. So we feel very strongly about that. And then Operation Underground Railroad, which helps with child sex trafficking; very, very in tune with that. I think it's something that more people need to pay attention to. It's happening out there and it needs to be stopped, so we donate to that as well.

Slocomb Reed: Thus far in your real estate investing career, what is the biggest mistake you've made and the best ever lesson that was resulted from it?

Mike Roeder: I would say the biggest mistake I've made is not firing a property management company soon enough. On a few of our assets a while back we had a property management team in place, and we saw red flags. And we tried our best to fix those issues. We had discussions with regional, we had discussions with the people that own the company. And at times, it seemed like it was getting better, and then it would dip back down, and I just wish we would have fired those management companies sooner.

Slocomb Reed: With that, Mike, what is your best ever advice?

Mike Roeder: Best Ever advice - I would say two pieces to this. Number one, educate yourself and get a mentor if you're going to step in to the multifamily arena as a general partner. And if you're going to be a passive investor, just make sure that you know the group that you're jumping in with; make sure that you trust them, make sure that you have vetted them very, very well. And then my other piece of advice is to skip the small stuff; skip the small properties. I went through single families, I bought a 20-unit, bought an eight-unit, bought a 12-unit. I did fairly well with the majority of those, but I can tell you right now that our large multifamily projects have done substantially better than the smaller projects we've invested in.

Slocomb Reed: Last question, where can people get in touch with you?

Mike Roeder: If you type in, you can fill out our Contact Us form on our webpage, or you can download our free eBook, which gives you a guide to passively investing as well.

Slocomb Reed: That link is also in the show notes. Mike, thank you. Best Ever listeners, thank you as well for tuning in. If you've gained value from this conversation, please do subscribe to our show. Leave us a five-star review and share this episode with a friend you know we can add value to through this conversation today. Thank you, and have a best ever day.

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