Sure. They are overpriced.

You used to be able to buy these at 10 caps (10% per year return), and then increase their profitability to 20%+ or even 50%+ if it was in bad shape. Along the way, debt prices went lower and the asset values grew so refinancing or selling for a huge gain was pretty common. These are typically the stories you hear. Gurus get clients by convincing people this is still possible.

Today, everybody is aware of this asset class, so the entry price might be a 2 or 3 cap, and you’ll do a lot of work to get it up to a 6 or 7 cap in a great scenario. Don’t believe me? Ask a broker for some pricing and this is what you’ll see. Those aren’t the exciting returns of years past. Most people buying today at these super high prices are institutionalized. They capture value by putting 100 units into a bucket of 10,000 units that they can sell off to PE shops at a premium (these typically have a $10M min). They can buy for a 1 cap and still make a ton with this model, although if they don’t know how to operate they have their own troubles.

Btw, this same concept has played out in multifamily, mobile home parks, self storage, HVAC companies (not totally yet with these), car washes, etc…. There are a variety of factors that go into it, but if you had to boil it down to a single affect, it’s essentially just price discovery.

I personally believe that this is the most important piece in analyzing businesses. Just because a business is extremely stable, doesn’t mean that it can’t be extremely risky if you overpay. Stability + spread over costs are what makes businesses stable.