What We Can Learn from Applesway Investment Group

Applesway Investment Group has been one of the biggest stories in multifamily investing recently. Here’s what happened, the lessons that can be learned, and how Investream has been working to mitigate risks on real estate investments. 

What happened with Applesway Investment Group?

In March, Applesway Investment Group stopped payments on approximately $229 million worth of loans on four complexes in Houston. The properties were sold in a “courthouse sale” to Fundamental Partners (based in New York) on April 4, where they were purchased for $32.5 million under the loan value. Applesway is also facing a lawsuit for some unpaid work at properties, as well as claims that one of the four properties was not livable. The lender, Arbor Realty Trust, has stayed on and is lending to Fundamental Partners via a restructured sale. Unfortunately, this has led to private investors losing their equity investments in these deals. 

August 2023 update: On August 8, it was reported that Applesway had a 5th foreclosure sale, pushing losses up to $294 million. Recent conversations around the properties have discussed the “hydrogen-bomb scenario” that can befall investments due to the way multifamily properties are financed, combined with the CMBS loans coming due. 

What went wrong with Applesway? 

From what we understand coming out of many reports and industry insights, there were a few fundamental issues that likely led to Applesway’s collapse: 

• Understaffed team: Applesway grew too fast and was operated essentially by very few asset managers instead of hiring (or partnering with) a professional team to support. These properties were purchased within 9 months, the smallest one being around 700 units. There was a general lack of urgency, oversight, and total grip on the business plan. 
• Not local: Applesway’s leadership wasn’t local to the Houston area. Being local to the area where you’re buying and operating properties gives you a more in-depth perspective on the local market factors, challenges, and most importantly the day-to-day operations and progress. 
• Limited partnerships: It seems that Applesway acquired recent deals without partnering with other strong operators. These large apartment complexes are multi-million dollar businesses and require strong and dedicated asset and property management teams to run.
• Overleveraged: Overleveraging happens when a business experiences too much debt burden from borrowing too much, often too fast. These properties were purchased at the height of the market, taking on additional risk of inflated value. Coupled with the fact that many of these properties were highly leveraged at or over 90% in some cases. When the market shifted, with the recent interest rate run-up and increasing expenses, the already un-optimized operations and weak cash positions were exposed and all led to the failure of covering the basic expenses and debt service in a very short span of time. 

How is Investream working to mitigate risk? 

When you look at the individual factors that led to problems at Applesway, you can also see where similar risks should be mitigated.

At Investream, we’re focused on building and strengthening our team/partners of capable and experienced asset managers, property managers, and support staff to ensure each deal is led by vetted and seasoned experts. We invest in Houston and are local to the Houston market. We work with strategic partners with a long-performing track record on all of our deals. Finally, we constantly watch the markets and adjust our strategy accordingly to mitigate stacking additional investment risks. 

With our leadership team’s experience in successfully running multiple start-ups, acquiring multiple businesses, and transforming operations of large enterprises, we believe we are suited to weather this transitionary period in the industry and emerge stronger on the other end. 

What should you know before investing in multifamily?

Every industry and investment has inherent risks. Investors can see through the Applesway situation what can happen when operators get caught in the market shift without proper protections, staff, cash reserves, and solid business plans. Working with careful and methodical operators can lower your financial risk when investing in multifamily properties. We expect to see more of these weak deals in the second half of the year or so- capital calls, loans due, and auction sales that come about from properties that were purchased from 2019 to 2021 at the height of the market. However, these deals also represent a big opportunity to acquire and turn around or lend a hand to rescue and protect the investors’ interest. 

Want to learn more about our process and what we do to limit risk in our deals? Schedule a call and connect with us!