• Efficiency:  Due to their varied locations managing and maintaining 8 properties after work can begin to be a rat race.
• Financing:  Banking rules only permit each lender to have 10 residential loans at any one time.  Under certain market conditions banks sometimes lower the 10 residential property loan maximum to 4. This will limit Jerry’s efforts to acquire new properties unless he elects an “all cash” acquisition strategy.  If it takes a high (or even 100%) amount of cash to acquire an asset you had better be getting a much higher percentage return on your investment or your yield percentages will drop.
• Non-scalability:  Jerry is just about at the limits of what he can take care of after work in varied locations.  If he wants to grow his portfolio and potential returns he needs to adopt a different strategy.

 Its a great time to start or expand your multifamily investments.  Contact Rick Bean of Rose City Commercial Real Estate to learn more about Portland multifamily and other good investments at: 503.577.1034, or rick@rosecitycre.com.

Options

 You should have seen the “lights go on” for Jerry when I told him that his plan had great elements but he was placing his energies in the wrong  type of property.  There is no limit to the number of commercial loans you can have at one time.  Banks don’t say:  “Sorry, Sam Zell…no more apartments for you, you have more than 10 commercial loans.”  Residential investment multifamily is 2-4 units.  Commercial investment multifamily is 5 and up.

It would take time, but my counsel to Jerry is to sell off his single family properties, aggregate his equity and purchase a 20-30 unit apartment complex.  He can give one of his tenants a break on rent to be his on site “eyes and ears” and collect rents.  He can elect to do all the maintenance himself, which will increase his monthly cashflow.  If is tired of management and maintenance duties he can get help.  His total cash flow will be slightly lower intitally…and much higher in a couple of years.

An additional option would be for Jerry to by a property with need of some “lipstick” and use his crews to help turn it around.  After stabilizing higher rents it could be sold for a substantial profit, and by using a 1031 exchange the equity could be turned into a 40 to 60 unit property…complete with M+MBO.  (Maintenance and management by others).

Multifamily scalability

Costco is based on the principle that makes apartments a great investment: Do you want to pay $43.75+ deposit for 35 single bottles of water…or $4.99 + deposit for a case of 35?  Apartments are by nature a highly scalable investment.  I once worked as an intern for a man who was truly self made.  He started many years ago by buying a triplex.  Since then he has bought multiple complexes that have over 1,000 tenants each.  The best part of this story?  He still hasn’t paid the taxes for the gain on the 1976 triplex sale due to the advantages of 1031 exchanges…but that’s a discussion for another post.

We want, expect, maybe even demand good…but excellence deserves special attention, doesn’t it?  It is the policy of Rose City Commercial Real Estate to celebrate excellence.  I have worked with a number of fantastic property management firms in my career.   Today I want to salute one of them.

I like to see an organization do something just because its the right thing to do for their clients…not just trying to improve their operational metrics.  Princeton Property

No one associated with this blog is a stakeholder, nor have they received payment from anyone cited for excellence.  Previous posts have celebrated Holly Bray/Love Funding, David Moore/Equity Advantage, John Adams/Logo Products, Montage Restaurant, Chinook Construction, and more.  If you think what someone is delivering is excellent not just good…let us know and perhaps we’ll celebrate them here.  Contact Rick Bean at: 503.577.1034 or rick@rosecitycre.com.

Management’s aggressive approach to lowering property taxes for it’s client’s properties is an example.  They’ve done a superior job of supporting tax reduction advocacy.  And they have taken the extra effort to be certain that each asset they run is reviewed for possible reductions.  The irony is that most of  Princeton Property Management’s clients won’t even know about the extra effort that Princeton has expended…but that’s why I’m citing Princeton for multifamily management excellence.

Remember that the norm is for management companies to get paid on gross revenue.  While successful property tax reductions pay off handsomely for the owner, the property management firm is not compensated or even acknowledged.  Office Manager Amy Acala is heading up the effort, but she also  has enlisted and received the support of the entire organization in pursuit of lowering property taxes.  That’s how things ought to be done!

From what I’ve observed, the overused word “excellent” is appropriate when discussing Princeton Property Management!

How should “Jerry the plumber” invest?

Jerry is a 50 year old who owns a successful plumbing business.  In addition to his own home Jerry has 8 other single family residences that are rentals.  He currently manages and maintains all the properties himself.  They have significant equity in them.

How should “Barry the bond holder” invest?

Barry is a retired businessman who has well over a million in bonds that pay anywhere from 2-4% per year.  He’s conservative, (he’s into bonds after all!) but he’s also concerned about inflation.  Monthly cashflow is very important as that is a major source of income.

How should “Jacob, the mid-30′s dynamo” invest?

Jacob is young enough that he doesn’t even think about cashflow…his focus is on the big chunks of equity that come upon sale so he can exchange into a larger property.  His current goal is to own as many doors and expand his holdings as fast as possible, even if that means a shorter hold period.  He doesn’t see himself as a risktaker…he times markets and buys at the bottom, although he does use higher leverage than most apartment guys.

How should “Dylan the daytrader” invest?

Dylan is a highly successful daytrader who understands the stockmarket and has made a killing in it.  He’s concerned that the volatility index of the market is increasing and that the European (and local) debt problems may reduce values.  He wants to put $1 million into multifamily, but he doesn’t know the first thing about asset management of real estate.

While these names are obviously made up, the profiles are similar to actual savvy investors I’ve met.  Please check back to follow the series as we explore the challenges and possible solutions for each of these scenarios.  If you want to me to assist you in developing a custom solution crafted to your specific economic circumstances, contact me, Rick Bean, at: 503.577.1034 or rick@rosecitycre.com.

Two stock market related articles caught my eye this morning.  One entitled: Investor Uncertainty At 6-Year High: Survey has details of a survey taken by the American Association of Individual Investors.  The percentage of stock market pros surveyed expecting the market to remain flat for the next 6-months is the highest that it has been in 6 years.  Ouch! Short term solutions to our domestic malaise and the European dept problems just don’t seem to exist. And this has the market on edge.

Another article from Aaron Task of The Daily Ticker was even more dire than the first: “Very Scary”: The World Won’t End in 2012, But Might Feel Like It’s About To.  Follow the link to the article and a video if you’re feeling cheery and want to change your mood.  Perhaps even scarier than the short-term fundamentals of the stock market is the overall lack of stability.

Daily changes in the Dow are much greater than they used to be.  On May 6th of 2010 the DJIA lost a $1,000,000,000,000 in a few minutes. 1,000 points. Starting at 2:45 PM the bottom fell out and within a few minutes a trillion dollars in value was gone.  Shortly thereafter the market went back up again and people seemed to forget about it almost immediately.  For thrill seekers that like stock markets and roller coasters:  Good luck to you!  I am counseling potential clients that real estate offers a more stable placement for equity that has never gone down a trillion dollars in value in a single hour.

Contrast the doom and gloom with the apartment market.  Over the past few years apartment construction both locally and national has come to a near standstill.  Rents are beginning to rise, vacancy rates are falling…I expect to see raising Net Operating Incomes and falling Cap Rates for the foreseeable future.  Portland has become a great market for institutional investors, and other ownership segments are following their lead.  Please contact me to discuss equity expansion at: 503.577.1034 or rick@rosecitycre.com.

1. Unmanaged property tax liability. This is an item that needs an annual review by a professional. As an example, exception value in Oregon can only be appealed the first year it appears. No, they don’t identify it…so failure to appeal can cause a permanent increase in taxes.  There are a few exceptional professional property management companies that consider property tax minimization as part of their mandate to run the property.  Many do not!

2. Resident retention…and turnover costs when we fail to do so. Many multifamilistas don’t focus on this so much, after all the next renter is just around the corner. While the vacancy component of total turnover cost is lower than it used to be, the costs of turnover can be huge, particularly if retention rates drop. Below is another great article from Keat Foong of Multi-Housing News Online. Interesting reading that challenges commonly held beliefs about renter behavior.

Concerned about maximizing your apartment portfolio’s profitability?  Contact Rick M. Bean of Rose City Commercial Real Estate for an evaluation.  We’ll discuss low hanging fruit as well as more involved projects.  Phone: 503.577.1034, or e-mail me at: rick@rosecitycre.com.

According to Miller, being able to successfully keep your residents has to do with paying attention to basic “blocking and tackling” tactics on the operational side of apartment management. “What we have found is that when prospects are first enticed to a community, they are interested in how the community looks and all the bells and whistles. Once in there, their focus shifts, to the service level and the value they are getting. The question for them becomes how easy it is to be a resident in the community, to get calls returned and things fixed,” says Miller.

For a recent national survey conducted in June and July, “Getting Inside the Head of Today’s Online Renter—Behaviors, Preferences and Implications,” SatisFacts surveyed about 85,000 residents in communities of all classes managed by 20 companies. Topping the list of what is most important to residents when shopping for their next apartment is the perception of quality customer service, the ability to pay rent or submit service requests online, and the ability to provide resident feedback. At the bottom of the list is having a community Facebook page, or the ability to rent Zipcars.

Biggest reasons for turnover

The Towbes Group boasts a relatively high resident retention rate, and its turnover rate does not exceed 45 percent, even with the recent implementation of a rent increase program. That number is 10 to almost 20 points below the average industry resident move-out rate of 58 percent to 63 percent. Jim Carrillo, vice president, residential properties, for The Towbes Group, says “communication with the residents is always transparent and two-way. Nothing of importance is kept from the residents, positive or negative.” The company also surveys other communities in the markets it serves to observe the level of service provided at its competitors’ properties. Then the company establishes a standard above that.

As a way to preempt potential move-outs, in October of 2008 The Towbes Group informed all its market-rate residents that rents would be frozen through 2009. Rents were again frozen in 2010. And the company did not participate in lease renewals, but rather, allowed all leases to convert to month-to-month after the initial 12-month lease. This led to a low annual turnover rate averaging 39 percent—in the midst of the economic recession following the financial crash. Since then, the company has implemented a renewal program that is seeing some of the first increases in nearly three years, says Carrillo.

Lowering the rent or refraining from raising it, although necessary in downturns, may be a costly way to keeping residents in communities, however. Instead, Jen Piccotti, SatisFacts senior vice president of education and consulting services, recommends that property managers pay attention to providing great service at all stages of the lifecycle of the apartment renter. SatisFacts’ research shows that residents tend to feel neglected towards the end stage of the lease cycle. “You have to show the love 365 days a year,” not just at the beginning of the lease term, says Piccotti.

“Every property has its chronic complainers. You get to know your high maintenance residents, and the human tendency is to start hiding and looking busy when you see them coming, but you have to make sure every resident feels welcome. They are, after all, paying your salary,” says Piccotti. “Keep that smile, welcome everyone, and bend over backwards every time someone walks in the door. We need to assume that as soon as they leave the office, they go to their mailbox and find a lease renewal/rent increase letter awaiting them.”

Creating an appealing environment

The visual appeal of an apartment community can also play a role in retaining residents, according to designer Rebecca Jones, ASID, principal of RD Jones & Associates Inc. “Overall, the client base is hesitant to invest in design the way it should, but clients that do are reaping the rewards,” she adds. For example, The Bozzuto Group hired Jones to design the interior spaces of The Fitzgerald in Baltimore, which garnered a 2011 MHN Excellence Award and is, according to Bozzuto, the fastest-leasing apartment community (25 units per month) in the history of Baltimore.

The Fitzgerald was designed with a boutique hotel aesthetic, reminiscent of a hot spot you’d find in New York City, such as The Gramercy, says Jones. “If you design something really cool, that sets you apart from the competition,” she adds. The fashionable design makes the residents “feel good about the space, about themselves and about their living environment.”

Self esteem is important to the sociable Generation Y, and they like to bring their friends to their trendy buildings—they see the common areas and the entertainment spaces as extensions of themselves, she says. “They want to be able to say, ‘this is my personal space that I can enjoy and use with my friends,’” Jones notes.

Don’t underestimate the role that functionality in the design plays in holding onto residents, says Jones. Flow, access and convenience are important. You do not want the garages to be in a location that is too much of a trek. And make sure there are enough elevators interspersed through the property. “We see a lot of buildings in which you have to hike a football field to get to your space,” she notes. People may express dissatisfaction with such daily inconveniences by moving.

I prefer to buy at the bottom of the market…how about you?

The time to buy multifamily assets is now…its a refrain that I’ve been offering for several months.  But there is a difference…now it makes sense for stock holders to move their equity into multifamily.  Rose City Commercial Real Estate can show you how to invest your IRA…and not create a taxable event!  Let me show you how by calling 503.577.1034 or contacting Rick Bean at: rick@rosecitycre.com.

The latest data shows Portland at a 3.5% average vacancy rate…yet multifamily building permits for the period  fell.  Why? The costs and risks of development are still high

If you want to be a genius in 5 years…make smart multifamily investments today.

relative to the returns available at the current revenue structure.   (Particularly when the costs and risks of building are compared to buying existing multifamily assets.) For those that have only been in the multifamily arena for a few years that may not mean much.  What it says to the others is that:

A.)  We are poised for significant increases in rents even without macroeconomic improvement.  Our population continues to grow, yet the market has not responded by starting more apartments.  If the economy does turnaround rents will really head up.

B.) There will be downward pressure on Cap Rates. This will raise asset prices. 

HOW I SAY IT:  “The next few years will be a golden age for Portland apartment owners.”

Below I have attached a great article from Investor’s Business Daily:

By JOE GOSE, FOR INVESTOR’S BUSINESS DAILY Posted 08/25/2011 03:51 PM ET

 Rising renter demand is filling apartment buildings around the U.S., in defiance of the economic malaise.

Vacancy rates are shrinking all over, in tight markets such as Minneapolis and loose ones like Phoenix.

It’s an unusual situation. Job creation typically drives apartment demand. But this time the tenant top-up is largely about a lack of new supply — in the face of paltry employment growth. Meanwhile, demographic trends and the single-family housing slump are creating tenants, says Hessam Nadji, a managing director at Marcus & Millichap Real Estate Investment Services.

 

“The demand for apartments is at levels that we haven’t seen since economic boom years like those in 1999 and 2000,” he said. “It is clearly decoupled from the economy.”

The property brokerage projects that asking rents will grow an average of 3.5% this year in the U.S.

After the Big Apple at just a 2.8% vacancy rate, the tightest areas are now Minneapolis, San Jose, Calif., and Portland, Ore., all under 4%.

Widespread Improvement

Some 3 million young adults age 24-34 that moved back in with family or roommates in the last five years are now moving into their own places as their employment prospects improve, Nadji says. Hiring has sputtered over recent quarters, but this age group captured 65% of the new jobs created in 2010.

Other factors are creating tenants too, Nadji notes: A double-dip in single-family home values has made house hunters wary of buying. Tougher mortgage qualification requirements deter purchases. And homeowners who lost houses to foreclosure have become renters.

Together, those trends helped to lower the U.S. average apartment vacancy rate to 5.9% at the end of the second quarter. That was a 1.9 percentage point improvement from a year earlier, as noted by Marcus & Millichap.

While bellwethers like New York and Boston are among markets with vacancies below average, Minneapolis, Milwaukee and other markets also beat the average, largely due to decent job creation and scant new construction. Minneapolis employers added 7,000 workers in the first half of 2011. They had let go 6,200 a year earlier.

Among very tight markets, Minneapolis and Portland vacancy rates fell 2.2 percentage points from a year ago in the second quarter.

Even markets that were battered by rampant speculative home and apartment construction in the last decade have seen rapid improvement. Vacancy in Las Vegas, for example, plunged to 8.1% at the end of June from 11.1% a year earlier.

Continuing weakness in the Las Vegas housing market contributed: One in every 99 homes in the metro received a foreclosure notice in July. But now the jobs picture is improving slightly. Employers are expected to hire 16,200 workers this year, which would mark the first year of job growth since 2007.

A glut of empty single-family homes reverting to rental houses in Sin City and other overbuilt markets could slow further occupancy gains, Nadji says. But he and other observers point out that single-family homes don’t appeal to most renters ages 24 to 35. Instead they want places that provide maintenance, amenities and services.

Terry Considine, CEO of Denver-based Apartment Investment and Management Co. (AIV), told analysts during the second-quarter earnings call in July that foreclosed homes and rental houses were “not really competitive with professionally managed apartments.”

A sign beckons renters near Tampa, Fla., where vacancy has fallen to 6.9%. AP View Enlarged Image

“They serve different market segments where customers have different interests and preferences,” said Considine, whose company owns or manages more than 600 multifamily properties in 38 states, Washington, D.C., and Puerto Rico.

Buying Splurge

Encouraged by improving fundamentals, investors are flocking to apartments. Some $21.6 billion in multifamily properties changed hands in the first half of 2011, more than double a year earlier, says Real Capital Analytics, which tracks sales of more than $5 million.

Capitalization rates slid to an average 6.4% in the second quarter from 6.6% in the first. They tell a property’s initial yield, falling as prices rise.

Sellers in major coastal markets are fetching prices that reflect cap rates of 5% or less, says Jeffrey Baker, executive managing director in the New York office of global brokerage Savills. That’s sending some institutional investors to secondary markets, where yields are higher.

It also is sparking new construction, which can ultimately generate higher yields of 6.5% to 7.5% for investors. Savills recently arranged equity financing for The Victor, a $140 million luxury apartment project in Boston that just broke ground. It’s the first big multifamily development in the city since the financial markets collapsed in 2008.

“There certainly will be some measured development that’s going to happen over the next couple of years,” Baker said.

Opportunities also exist for mom-and-pop investors in most markets among smaller properties, yet to appreciate at the same rate as top-tier assets, Nadji and Baker say.

While buyers typically need to do minor upgrades to justify rent increases in such properties, the reasons to pursue acquisitions have become more compelling, particularly with interest rates around 4.5% on a 10-year loan, Nadji adds.

“The turmoil in the stock market has made people think harder and more aggressively about buying apartments,” he said.

__________________________

If you would like to talk about transitioning your equity from a volatile stock market into the relative stability of multifamily investing please contact Rick Bean today at 503.577.1034 or rick@rosecitycre.com

In order to put our local apartment market in perspective I performed my own analysis of the data.  The headlines about big REIT players and  Class A assets?  Absolutely true.  But under reported is the way that all segments of the multifamily market have picked up.  The average age of multifamily investment closed in the last 12 months?  36+ years!  That suggests that repositioning opportunities and value add plays are as important as the flagship pride of ownership assets.

Apartment investments continue to be the preferred commercial real estate niche both locally and nationally.  CoStar reports  multi family volume jumped 80% in the second quarter over

For additional information on my study, contact me at 503.577.1034 or email me: rick@rosecitycre.com.

the same period last year.  Nationally almost $15 billion in  sales closed in the second quarter this year along with $9.5 billion in the first quarter for a $24.5 billion start to the year.  While that is less than the peak market, (mid 2007) it is still quite robust.  REITs are a major factor in this story…but acquisistions are also being made by individual portfolio owners large and small.  Nationally the average cost per unit is up to $88,500.  There’s been lots of press about all the deals in Phoenix ($1.3 B first half  2011) but during that same time period San Francisco ($2.1 B); Los Angeles ($2.3 B) and Washington DC ($2.6B) have actually had higher sales. It should be noted that the price per door in Phoenix is much lower.

So how is Portland doing?  Well…sales have been robust here…REITs have actually been net sellers…although all that I have talked to are still in buy mode.  I ran a list of all activity of $1 million and up  multifamily sales in a 25 mile diameter area roughly equal to the Greater Portland Metropolitan for the last calendar year.  Here are some of the highs and lows:

• Total number of multifamily sales in excess of $1 million: 94. Greater than $5 million: 20;  Greater than $10 million: 12; Greater than $20 million: 7; Greater than $30 million: 3.
• Highest sale price:  $36,875,000 for Kearney Plaza in NW Portland.
• Busiest area: East side of town.  Only two of the 7 largest assets sold were on the West side of town (Kearney Plaza and Park 19). The remaining 5 were on the East side (Russellville Commons, Orchard Pointe, 2121 Belmont, and Kemton Downs).
• Lowest Cap Rate (Actual): 2121 Belmont at 4.4% (Kearney Plaza was second lowest at 4.75%
• Highest Cap Rate (Actual):  Heather Glenn 10% .  Honorable mentions: Burnside Station 9.32% and Pioneer Plaza Manor: 9.99%
• Average Cap Rate:  6.91
• Average per unit: $82,650
• Newest 1 year old
• Oldest: 108 yrs old
• Average age of property sold: 36 years

Investors continue to prefer U.S. apartment buildings over most commercial properties, even commercial office space, as total multifamily sales volume jumped nearly 80% in the second quarter over the same perioud last year.

Although still just a fraction of its mid-2007 peak, the nearly $15 billion in sales in the quarter brought total investment for the first half of 2011 to $24.5 billion, according to CoStar Group data.

The average per-unit price of apartment properties reached $88,500 in the quarter — the highest since the third quarter of 2008, said CoStar Global Strategist Michael Cohen during CoStar’s Mid-Year 2011 Multifamily Review & Forecast.

FREE:  Rose City Commercial Real Estate will give you a no cost opportunity to develop a long term investment plan customized to your goals.  Portland multi-family investments are poised for solid gains.  Contact Rick Bean now at: 503.577.1034 or rick@rosecitycre.com

Meanwhile, strong renter demand continues to push down apartment vacancy rates and nudge up rents. With capitalization rates for existing properties seeing strong compression in some high-flying markets, larger multifamily developers have responded by starting to ramp up their development pipelines with new projects.

Top coastal markets continued to dominate sales volume in the first half of 2011, including Washington, D.C with $2.6 billion; Los Angeles, $2.3 billion and the San Francisco Bay Area, $2.1 billion. In Atlanta, where investors have sought a large number of distressed properties, sales totaled $1.3 billion in the first six months. In Phoenix, a housing bust market where fundamentals have picked up markedly, also logged $1.3 billion in sales.

For the second quarter, the top five transaction markets were New York City, with $1.35 billion; D.C., $1.3 billion, Los Angeles, $1.21 billion; Atlanta, $764 million and San Francisco, $689 million. Those markets accounted for about 36% of all sales volume nationwide during the quarter, with CBDs and well-located submarkets seeing the lion’s share of deals.

Institutional investors were by far the most active net apartment buyers, with net purchases of $1.6 billion on total acquisitions of $3.9 billion. REITs, private equity and owner/users were also net buyers, while REITs were also net sellers in a few markets such as Portland, Phoenix, the San Francisco Bay Area and Atlanta.

Average apartment capitalization rates continued to fall in the second quarter to slightly below 7%, while weighed average cap rates, driven by the large high-priced transactions in prime markets, declined to 5.7%. However, cap rates for mid-size value-add and opportunity deals are also declining. Cap rates on smaller transactions remain in a holding pattern.

Top deals in the second quarter included the acquisition of a 25% interest in a 20-property foreclosed portfolio by The Related Cos. from Fannie Mae for about $300 million; TIAA-CREF’s acquisition of The Corner at 200 West 72nd St. in New York from Gotham Organization and Phillip International for $209 million, or 1.07 million per unit; and Canada Pension Plan Investment Board’s $84 million acquisition of a 44% interest in a 654-unit property in Seattle from New Tower Trust Co.

Supply Tight Now, But Construction Starts Are Rising

Job growth has been the traditional source of apartment demand in the past. But in this cycle much of the demand is coming from many former homeowners who have become renters since the beginning of the housing crisis. That trend, combined with a growing number of young people forming households, is driving competition for a diminishing supply of apartments, powering the improvement in apartment fundamental since 2009.

CoStar forecasts total supply additions of just 30,000 units in the 54 largest markets in 2011, just one-third of the pre-recession average of apartment delivered between 2003 and 2008. However, multifamily construction starts are starting to tick up, with more than 70,000 starts in the first two quarters of 2011, suggesting a rise in completions in coming years, particularly in the 2013-2015 time period, Cohen said.

“It’s worth paying attention to the supply front,” Cohen said. “This is where I think the apartment market could be a victim of its own success. While we are forecasting below-average annual supply growth, we need to monitor the permitting data and the starts data.”

Vacancies, Rent Concessions Continue to Decline

Renter demand, while not at the outsized levels of 2010, remains very strong across the board, led by the fast-growing southern metros and the rebound in Detroit. Demand growth equaled about 66,000 units in the first half compared to the extraordinary increase of 105,000 units in the first six months of 2010, which was the strongest since 2005. However, the 45,000 units absorbed in the most recent quarter was more than the absorption of the two previous quarters combined, Cohen noted.

• Buying a multifamily investment with no debt, or very low Loan to Value debt.
• If any debt is part of the deal make sure it is positive leverage! (Finance rate percentage is lower that Cap Rate.)
• Buy in a city who’s in “Recovery Mode”.

Use Portland as an example of a Recovery Mode city:

• Apartment prices per unit will be low
• Absorption is high…no worries that rapid building will drop revenues
• High barriers to entry (That’s PDX alright!)
• Rents starting to rise (PDX!)
• High occupancy rates (Portland is above 95%.)

When a conservative investor buys in the Recovery cycle they are buying in at the bottom of the market.  Buying in with little or no debt assures them that they can make much higher

I have chosen a boutique approach because I believe each investor deserves to have a strategy custom tailored for their needs.  If you would prefer individual attention rather than “shoehorning”…contact me at Rose City Commercial Real Estate: rick@rosecitycre.com or 503.577.1034.

returns than the bond market…and have their profits paid monthly from cash flow.  Because they have taken a very conservative acquisition strategy and used good timing, they are substantially sheltered from the pain of a further downturn. Even the combination of a reduction in occupancy and reduction revenues is not likely to impact them because of their superior Debt Service Coverage Ratio. Since they are buying in a Recovery market the inertia is for increased revenues and profits.

At the end of the year they will shelter their taxes with depreciation.  When they go to sell…their gains can be rolled over using a 1031 Exchange.  I know of an investor with several thousand multifamily units  that started out with a triplex in Eugene.  He made a nice return on the plex…but 36 years later the taxes still are deferred.  Now that’s a good deal…but I digress.

The Ultraconservative Approach: How to Invest

A truly conservative approach to multifamily investing would be an all cash purchase.  Let’s say you bought a 15 unit property that the listing agent said was a steal at a 7.5 Cap and $1,000,000.  For the right seller we might be able to offer $850,00 cash, conditioned only on books and records and physical inspection contingencies.  A 30 day close  has great value…particularly if the Seller is motivated.

Remember…this isn’t a sexy deal…as a conservative investor you’re more focused on:

• Avoidance of equity loss.
• Stability
• Cash flow.
• Preferential tax treatment on profits.

To achieve these you’re willing to give up some long term appreciation. (After all: you had your money in a bond that guaranteed a loss of buying power.)

The Cap rate is the ratio of the first year operational revenues- operational expenses compared to the sale price.  This allows us to see what kind of revenue generating machine we’re looking at without clouding the picture with capital expenses and financing costs.  In our example, after paying all of the operational expenses $75,000 (7.50% of the offering price, or 8.82% of the price paid) is left for profit, capital expenses and loan payments. We call this NOI or Net Operating Income.

Since we paid cash there is no loan to deal with.  The listing agent didn’t mention a capital reserve in his proforma…or he might have put in $150/unit per year in.  We don’t believe him.  As conservative investors we will set aside $350 per unit for a replacement reserve.  We will also pre-fund at closing an operating reserve to the tune of $10,000 and a replacement reserve at $15,000.  This will increase the original equity requirement to almost $900,000 due to closing costs, etc.

YIELD:   Our increased reserve fund payments took care of our capital expenses, but reduced NOI by to $5,025.  That left us a $69,750 year 1 return on a $900,000 investment or 7.75%. Please note that we can take depreciation based on a 27.5 year basis…so we have tax sheltered a significant portion of our profits.   Because we bought in at the lower end of the market we can expect an increase in cash flow over the next few years.    

Are you a conservative investor? Call Rose City Commercial Real Estate today at: 503.577.1034 oe e-mail me at: rick@rosecitycre.com.

Yesterday, August 8, 2011 it took much longer (all day) for the Dow Jones Industrial Average to drop 635 points, losing 5.6% of it’s value. Again that’s roughly $1,000,000,000,000…a trillion bucks.  Today investors bought back in and the market rebounded, regaining all but a few hundred billion dollars of the past day’s losses. Ouch!

It’s almost like we have our 401K’s and our stock portfolios being tended by a blindfolded drunk careening around.  Hang on, we might make or lose a ton of money.  Now on the more conservative side we have our bond holders.  Yesterday’s close at 2.182% for 10-year Treasuries is scarier in a way than the NYSE: At least with stocks you could make some money. Take a million dollars worth of bonds, pay taxes on the 2% profit and lose 2.7% due to inflation and you’re guaranteed a loss.  Nobody won the Warren Buffet Excellence in Investing Award by only losing .8% a year.

I am not trivializing the large losses of the one group, nor the guaranteed loses of the other.  It’s just that I believe investing in commercial real estate has an answer for each of them.  Over the next few posts I will detail varied multifamily acquisition strategies.  The next in the series is: Multifamily Acquisition Strategies for the Conservative Investor.