A Market We Knew Well
Our target markets included Louisville and Lexington, Kentucky. Both are strong markets, at least in many of the areas around those two cities. We'd seen a good number of properties we liked there and had built relationships with several brokers.
One broker found an opportunity in 2024 in Bowling Green, Kentucky. Not far from our other target markets, and there were plenty of attractive qualities. It was growing, new employers were showing up, and it was affordable. And it's where Corvettes are made. What could be cooler than that.
2024 was a transitional year. Optimism for recovery from high interest rates and inflation was running high. We'd had a few years of strong rent growth after Covid, and we were close to certain that once rates leveled off and started coming down again, markets would strengthen again.
So there were very few concerns about a growing city like Bowling Green continuing to be a winning bet.
The Property and the First Questions
The property was 50 units. It had an interesting story. The owner's wife did the property management. Have you ever managed a 50-unit apartment complex? Neither have we, and if someone said we needed to, we'd figure it out. We've managed smaller properties ourselves, and we've managed the property managers who run much bigger ones.
But would we be good at it long term? Probably not, because that's not our strength. We looked at this property and figured the owner's wife was probably making a few mistakes, mainly because the job fell to her out of convenience, and to save money. We could have been wrong. That was our working assumption.
The broker told us they never had any trouble renting these units. That's one of those lines every broker says. How would the broker really know? They don't. They just say it. We set that claim aside.
About 25% of the units had been renovated, so there was real room for improvement. Good.
More Questions, More Problems
As we asked more questions, more came out.
Some numbers were inflated. Delinquent units recorded as vacant when they weren't. That's an owner kicking the can down the road. It gets discovered eventually, just not until much later in the process.
The owner was getting offers, but they were too low for his liking. His pricing expectations were rosy.
We had concerns about rents, too. Nearby comparable apartments with nicer units weren't renting for much more.
That raised the real question: would rents keep growing the way they had been? That has a direct effect on cap rates and ultimately on what a buyer is willing to pay.
Is the market about to take off? If so, we'd better move, because if it looked a little pricey today, it would be out of range soon. But we'd seen this movie before. We needed more information, and we weren't going to buy into the excitement without it.
What We Saw on the Ground
We traveled to the property. Seeing and touching a place adds a lot to understanding it.
The neighborhood was wall to wall apartment complexes. The yard was full of shopping carts, at least 20 of them. Shopping carts don't give us the same warm feeling that toys and bicycles do. This wasn't a community. Tenants were there because it had the cheapest rent around, and they couldn't have cared less about taking care of it.
The first order of business would be replacing a lot of those tenants. That can work as a business plan, but the owner wasn't seeing it that way. He saw a nearly full property and figured any buyer would want it as is. Maybe that math worked a few years earlier. Not in 2024.
It was an easy pass.
What We Look For Instead
This is the same discipline we apply everywhere. We underwrite with worst-case rent growth and stress-tested exit cap rates, and we want to see that income claims can be trusted. If we can't trust a seller's numbers, it doesn't matter how clean the spreadsheet looks. Garbage in, garbage out, as they say.
We've also learned the opposite lesson. We once passed on a property because the offering materials said it was fully renovated, and it sat unsold for a year. A different broker later listed it, honest about its real condition, needing work on nearly every unit. We bought it at a price that reflected the actual work needed, renovated it, leased it up, and it's a strong asset today. The lesson both ways is the same: trust the condition you can verify, not the condition someone describes.
What Happened to the Market
Bowling Green, like many markets that looked promising in 2024, has struggled since. Not enough growing companies have moved in, not enough new jobs.
Today Bowling Green's average occupancy sits around 90%, which is low, and year-over-year rent growth is negative 0.5%.
Prices were resetting in 2024, but not fast enough. Today's multifamily prices there are considerably lower, on average, than they were in 2024. Pricing follows net income and the growth expectations baked into cap rates. When income shows steady increases, cap rates tend to pull back. That's healthy for owners, sellers, and buyers alike, when it happens.
We'd rather pass on ten deals that look exciting than own one that doesn't hold up when the excitement fades.
If you want to talk through how we evaluate a deal like this one, or ask what questions to put to any sponsor about their pass rate, schedule a call with John.