My Dad taught me a valuable lesson when I was a youngster.  He asked me if I had mowed the lawn as asked.  I replied: “No…but I’m thinking about it.”  He said:  “Well now…thinking about something is a step, but not a very big one.  And now we’re talking about it…an even further step, but still not very big.  To sink a long putt you have to take your time, read the green and envision your success.  But at some point you have to actually strike the ball.  Planning improves success, but without action planning is useless.”  I went out and mowed the lawn right away.   I’d like to tell you that I learned the lesson my father offered me immediately, but like many 14 year old kids it took the message a few weeks to sink in.  Of course, now the message is clear: ” Words and thoughts take a back seat to action.”

“The best time to make an offer on a building is while the firemen are  still moping up.  After its rebuilt the price will go way up.  The multifamily market has taken some hits over the past few years…but I feel now is a good to start a portfiolio…or to expand one. Take action now…call Rick Bean at 503.577.1034 or email me at rick@rosecitycre.com.

Years ago a bright and energetic fellow as running around Eugene with a waffle iron in his trunk trying to get folks interested in a new type of shoe that was designed for running.  The waffle pattern was purported to offer superior traction and performance.  Someone I love and admire was made the same offer given to so many around town:  “Give me $20,000 and I’ll sell you 10% of my new shoe company.”  Today that slice of Nike is worth considerably more than the original offering price.  Many thought about it, few acted.

My question to those that are thinking, talking, and considering investing in apartments is this:  “Will your story 10 years from now be that you thought about investing in multifamily?”  To paraphrase my father’s wisdom: “You are in no danger of making a profit on the good investments you don’t make.”

Take action! Contact Rick M. Bean at Rose City Commercial Real Estate today: 503.577.1034 or rick@rosecitycre.com.

Next week I’ll be testifying as an expert witness in a property tax appeal case for an 120+ unit multifamily asset in Salem, OR.  Part of my research is to interview the on-site property manager.  I was very impressed with how well she knew her area, the asset she managed, historical vacancy rates, concession rates…she was a pro.  Some people have an innate talent for property management and she is clearly one of them.  Others may need some top notch training to fulfill their potential.  I am an unabashed fan of Grace Hill Training for multifamily pros.  They offer low and no cost programs that your management staff will benefit from.  Multifamily management is not easy.  One asset owner I talked to thought training was over rated.  I responded:  “You’ve got a highly motivated  person willing to put in long hours on your behalf to help you optimize the profits on a $10 million dollar asset.  Give them tools so they have them the greatest chance to create positive outcomes on your behalf.”

The next GracHill Offering has that FREE pricepoint that value conscious owners like:

GRACE HILL & MproTV PRESENT LET’S TALK TRAINING - In their second episode of Let’s Talk Training, you’ll discover new and innovative ways to keep your maintenance teams trained and motivated by using new methods of learning.  They will discuss challenges and benefits of several methods:

• Online training
• Hands on training
• On the job training
• Training facilities
• Videos/podcasts
• Outsourcing

If you are an owner, trainer or supervisor, join them on Wednesday, October 12, 2011 at 2:00 PM ET for Maintenance Team Training and Motivation.  Click here to reserve your spot now.  Let’s Talk Training is always free of charge, so it will fit nicely into your training budget!

When you think of top notch multifamily training, think of Grace Hill.  To optimize your multifamily portfolio contact Rick Bean of Rose City Commercial Real Estate at: 503.577.1034 or rick@rosecitycre.com

• 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.

The obvious metaphor for Recession is Winter.  In winter the days are shorter and there are few opportunities for growth.  As bad as this latest Recession was in Portland, for Phoenix and Las Vegas it was like a Nuclear Winter.

LENDERS

During a recession risk adverse banks shut down lines of credit, increase Debt Service Coverage Ratios, lower Loan To Value requirements, and in some cases cease to make new loans at all.  Getting a buyer and Seller to agree to terms is rarely easy and there are always the myriad of details to handle.  But during a Recession managing the lender is as big a deal as keeping the principals mollified. An Example: I had a small 1031 Exchange deal getting ready to close in the midst of the recent Great Recession.  The lender called me in my role of Buyer’s Broker to tell me that the bank had changed their lending parameters and that my client needed to increase the downpayment by 65% in the next couple of days so we could close.  I pointed out that was a discussion the lender should have with our mutual client, not me.  He said he felt bad “doing this” so close to closing but there was nothing he could do.  Bear in mind that my client and his wife were in their 80′s and only owed $225K on a $2M estate.  I told the lender that I knew my client’s finances well and that much ready cash was not available.  The lender said” I”m sorry, I guess that means we ‘re out of luck on this deal.  He’ll have to go elsewhere…but don’t forget about me in the future.”  I told him:  “This is bad form to do to anyone, much less an elderly investor with an exchange…and you can rest easily…I’ll never, never forget you.”

CONDITIONS

Recession vary in intensity, but the hallmarks are:

• Increasing vacancy rates
• Increasing concessions
• Low to negative absorption
• Low to negative employment growth
• Low to negative rent growth
• Decreasing prices
• Tightening lending requirements
• Raising cap rates

The one-two punch of Recession is that vacancies are on the rise so revenue drops, concessions raise…dropping revenues further and then Cap rates rise meaning that each dollar of the diminishing profit stream is worth less.  One way to optimize profitability…or in some cases…minimize loses…is to appeal property taxes.  Hotels, land, offices, industrial plants, apartments, assets acquired below market price are all excellent candidates.  FULL DISCLOSURE:  I co-founded Prime Property Tax Negotiation because paying more than your fair share in property taxes is wrong.  Last week our client got a check for $32,300…not enough to change their lives..but still quite welcome. Feel free to call 503.577.1034 for a free evaluation.

There are a few hardy animals that actually thrive during the coldest months when other animals hunker down…just as there are investors who do well during Recessions.  All cash offers swing a big club, particularly to distressed or marginal investors without sufficient resources.  During Recessions “buy well below market price due to distress” and “buy and hold” strategies are solid, but flips are much harder.  Some of the deals will require “all cash” to close, but even the few deals that are financed will be at low LTV’s.

One thing to remember about Winter (and Recessions):  Spring  (and Recovery) will come someday.  I was in Las Vegas working on multifamily projects at the start of the financial bloodbath…but now Institutional investors are paying low, low caps (high prices) again for Class A assets.  They are also doing terms like “Downpayment goes hard in 4 weeks” that is nuts. The problem I had with living and investing in Las Vegas is you can make or lose a ton of dough…and every morning when you wake up you’re in Las Vegas.  Personally, I’m a 5th generation Society Of Native Oregon Born (SNOB) and I love Portland.  Living and investing in Portland multifamily is great…it’s a great place to do well…and every morning when I wake up I’m in good old PDX!

More posts in our Timing Your Multifamily Investment Series:

• Multifamily Investment Basics-Part 1 of a series
• When To Make Multifamily Investments-Recovery-Part 2 of a series
• When To Make Multifamily Investments-Expansion-Part 3 of a series
• When To Make Multifamily Investments-Hypersupply-Part 4 of a series

The Hypersupply cycle in investing is like Fall.  In Fall trees slow their growth, flowers fade and the days turn cooler.  Some flowers open and close and follow the sun each day.  That’s a luxury that condo converters and large project builders don’t have in investment real estate.  Due to the barriers to entry and time it takes to permit and build apartments we can’t just shut them down.   At the beginning of Hypersupply it sometimes looks like the economy is just taking a breather before getting a second wind.  While absorption rates are a key the fundamentals of a Hypersupply cycle market include:

• Increasing vacancy rates
• Moderate to high new construction
• Low to negative absorption
• Moderate to low employment growth
• Medium to low rental growth
• Per unit prices tend to peak at the transition of Expansion into Hypersupply
• Increasing value attributed to all cash offers
• Tight lending standards

The strategies that worked great in Recovery and well in Expansion are not as plentiful in Hypersupply.  Buy and hold long term is viable…but it is important to use proper financing to avoid a Debt Service Coverage issue later on in the cycle.  Flipping is very perilous with large numbers of new units coming on line, absorption challenges, stagnant rent growth tend to lower values.  Condo conversions already under way may continue, but new projects are often delayed or cancelled.

There are some good deals to be made during Hypersupply, but cash becomes more important.  Lenders tend to raise DSCRs, lower their LTV’s, and Non Recourse Loans become rare or non-existent.  Lenders change their underwriting from focusing on the deal (is this going to work and produce the profits the investors had hoped for?) to focusing on the dealmaker. (How solvent is the borrower; does he/she have the resources to weather the storm?)

The other analogy I liken Hypersupply to is coming over the top of the roller coaster.  There is a slowing of upward motion then a brief period where things almost stop then….

Next up: The fourth and final phase of the investment cycle: Recession…or “the race to the bottom.”

More posts in our Timing Your Multifamily Investment Series:

• Multifamily Investment Basics-Part 1 of a series
• When To Make Multifamily Investments-Recovery-Part 2 of a series
• When To Make Multifamily Investments-Expansion-Part 3 of a series
• When To Make Multifamily Investments-Recession-Part 5 of a series

The Expansion cycle sees a sharp increase in the number of units sold and a dramatic increase in the prices per units accompanied by a consolidation of Cap Rates.  The REIT I worked for in Las Vegas bought a nice institutional size property during the last Expansion cycle .  It was a B asset in a B location.  We bought well…we always did.  Our acquisition strategy was “Buy and hold” with a “mild lipstick refurb”.  By the time we got it painted we received a “Brando”.  A firm offered us a $13,000,000 premium over what we had paid for it less than a year before.  That worked out to a million bucks a month net profit to the investors.  Before I move on its important I acknowledge that while I was damn proud to be a valued member of that team I was not the Principal Broker.

Just as Nature transitions from warm June days at the start of Summer to blistering hot days in August…so does the Recovery cycle.  Eventually even people who don’t have a background in development jump in.  After all, “What could possibly go wrong?!”

The fundamentals present that characterize an Expansion cycle market include:

• Decreasing vacancy rates
• Moderate to high new construction
• Moderate to high employment growth
• Medium to high rental rate growth

Acquistion strategies that work effecively in an Expansion market are similar to Recovery markets, but with additional caveats on timing. Towards the transitional phase from Expansion to Hypersupply (Summer to Fall) it is much more important when making a flip play that you can complete the full deal before the end of the season.  Investors who “Buy and hold for the long term ” will be fine.  Where I have no problems with an agressive leverage strategy during Recession or Recovery,  you can’t afford to buy with minimum down towards the end of the Expansion season.  Where I might be fine with a 75 to 80% LTV (Loan to value) play during Recovery I want to position the asset to have adequate DSCR (Debt Service Coverage Ratios) should the property suffer from some lower revenues during a downturn. 65 to 70% LTV loans make sense during Expansion.  Ironically, this is when the bank is likely to offer even better terms than you should accept.  Over leveraging at the wrong time is how you can inadvertently turn your lovely Cash Cow into an profit hungry Alligator.

Leverage note:  The LTV levels I have discussed are my opinions based on the economic cycle that work for me.  Lowering the LTV has the effect of increasing the equity stake required and lowering risk, along with a commensurate lowering of profit potential.  Like risk, each investor must set their own level in accordance with their personal comfort.

In our next post: When to Make Multifamily Investments-Hypersupply-Part 4 of a series.

More posts in our Timing Your Multifamily Investment Series:

• Multifamily Investment Basics-Part 1 of a series
• When To Make Multifamily Investments-Recovery-Part 2 of a series
• When To Make Multifamily Investments-Hypersupply-Part 4 of a series
• When To Make Multifamily Investments-Recession-Part 5 of a series

Just as in nature where Fall is followed by Winter which is in turn followed by Spring, multifamily investing follows a cycle.  And cities have an investing climate, too.  Las Vegas tends to be real hot or real cold.  The same with Phoenix. A great deal of institutional money is being pumped into those two cities.  The amount of money to be made and risked is much greater than in more moderate investment climates like Portland and Seattle.

RECOVERY

Recovery is to Investing what Spring is to Nature.  They are both about great potential being born.  There’s no guarantee that your garden will grow…but it has the best chance if planted at the proper time.  It’s a great time to invest too.  Many investors sit on the sidelines during the Recovery phase to make sure that things have really hit bottom.  As a result they buy during the Expansion phase and don’t reap all of the rewards that are available for “trigger pullers.”  The Recovery Cycle is characterized by:

• Decreasing Vacancy Rates
• Low build rates
• Moderate absorption
• Low to moderate employment growth
• Low to negative rental rate growth
• LOW prices relative to potential upside

A broad spectrum of investment strategies are viable during Recovery. “Buy and Hold”, Refurbish, Flip, Repurpose, Build and “Convert” all have their place at this time.  Unlike Nature, the Recovery Cycle is not set in the time it will take to move into the next phase, Expansion.  But just as we know the rains of Spring will yield eventually to the sunshine of Summer, so shall Recovery turn into expansion.

NEXT POST: We’ll cover the attributes of the Expansion Phase of the investment cycle.

More posts in our Timing Your Multifamily Investment Series:

• Multifamily Investment Basics-Part 1 of a series
• When To Make Multifamily Investments-Expansion-Part 3 of a series
• When To Make Multifamily Investments-Hypersupply-Part 4 of a series
• When To Make Multifamily Investments-Recession-Part 5 of a series

Rose City Commercial Real Estate works with first timers and seasoned institutional investors.  Two reminders.   First, if you want to be a genius in 5 years make smart multifamily investments now.  Second, you’re in no danger of profiting until you take action.  Call 503.577.1034 to develop a customized investment plan that meets your needs.

multifamily was enticing as well.  I often tell people that real estate never went down by a trillion dollars in twenty minutes like it did May 6th of 2010…but I digress.  Another investor who was heavily invested in bonds asked me for some guidance on what he could expect from multifamily investments.  He was concerned that his current yield of 2.95% (annually, not monthly)  would more than be eaten up between taxes and inflation.

I realize that these are just two datapoints…but I think they are emblematic of a trend I have been expecting for some time.  There’s something like $6 trillion in IRAs and 401Ks…and much of it can be used for real estate investing without creating a taxable event. Yes, its important to have the proper professional advice to prevent constructive reciept of the funds.  These new multifamily investors are savvy businessmen and women, but they have not been thoroughly exposed to multifamily investment fundamentals.  In order to give them the service they deserve I plan on reviewing real estate investing fundamentals over the next few posts, with a focus on apartments.

NEXT: When to buy from a historical perspective.

More posts in our Timing Your Multifamily Investment Series:

• When To Make Multifamily Investments-Recovery-Part 2 of a series
• When To Make Multifamily Investments-Expansion-Part 3 of a series
• When To Make Multifamily Investments-Hypersupply-Part 4 of a series
• When To Make Multifamily Investments-Recession-Part 5 of a series

Just under 4,000 multifamily sales transactions were recorded in the quarter at a total volume of $9.4 billion, according to preliminary CoStar sales data, compared with $6.7 billion in first-quarter 2010 and just $3.76 billion in first-quarter 2009. Despite the heightened activity, sales were just 22% of their mid-2007

Please note that his article has a national scope in mind…Portland Multifamily properties are experiencing a vacancy rate half of the national average as we have a market that is surging.  To learn more about investing in Portland multifamily properties contact Rick Bean at Rose City Commercial Real Estate: rick@rosecitycre.com, or 503.577.1034.  This market promises to be hot for some time…but why not get in early?

market peak of $43 billion in the most recent quarter. Sales volumes declined about $6 billion from fourth-quarter 2010.

While leasing fundamentals are no longer improving at last year’s torrid pace, investor interest by all accounts remained sharp for quality apartment product. Renter demand for apartment units remained solid in the first quarter, as the supply of new units continued to dwindle and the national apartment vacancy rate fell to 7.4%, a decline of 100 basis points since late 2009.

Despite an uneven economic expansion, “fundamentally, the outlook for the economy remains one of recovery and growth, and CoStar remains optimistic about its prospects. That is good news for commercial real estate and good news for apartment demand,” said CoStar Real Estate Strategist Kevin White during the Washington, D.C.-based company’s recent First Quarter 2011 Multifamily Review & Outlook.

Investor appetite for newer institutional-grade product in high-barrier coastal markets is driving sales volume in recent quarters, unlike 2008 and 2009, when larger transactions were difficult to finance and the limited pool of mostly local investors opted for smaller properties in suburban locations, explained CoStar Senior Real Estate Strategist Michael Cohen, who co-presented the outlook with White.

REITs and private equity firms were the dominant net buyers of multifamily property in the first quarter. REITs purchased a total of $515 million in the quarter, with $130 million in net purchases after subtracting dispositions. Private equity player netted $117 million in sales, an amount expected rise into 2012. Institutions were the largest apartment sellers, disposing of a net $354 million in assets.

Washington, D.C. and Los Angeles logged the highest year-to-date sales volume at $900 million, followed by the San Francisco Bay Area ($600 million), Phoenix ($500 million) and Long Island ($400 million). The top five multifamily markets accounted for $3.3 billion, about 35% of the $9.4 billion in total sales volume. Collectively, those top markets saw a 15% year-over-year increase in the first quarter.

“Core investors are still very interested in paying up for stability and low volatility,” Cohen said. “Pricing has been strong in D.C., but it still took the top spot for multifamily investment dollars.”

Distressed transactions, including REO sales, deeds in lieu of foreclosure and properties with high vacancy and/or deferred maintenance costs, accounted for about 21% of all multifamily sales volume in the first quarter. While still quite high, the percentage of distressed deals declined 5% from the previous quarter, however, and CoStar expects distress levels to slowly drift down as fundamentals continue to improve.

In housing-exposed markets like Tucson, AZ, Fresno, CA, Jacksonville, Las Vegas and Atlanta, distressed trades exceeded 60% of all transactions. Supply constrained markets like Boston, Marin/Sonoma counties, CA; San Diego, Northern New Jersey, Portland, Washington, D.C. and San Jose, CA showed distressed levels of 20% or less.

OCCUPANCY, RENTS RISE EVEN AS ABSORPTION SLOWS

While the drop in the homeownership rate has led to higher absorption of apartments over the last five quarters, the pace has slowed from last year’s 167,000 units absorbed, which was the strongest level of demand since 2005. The last two quarters have seen demand of 19,000 and 23,000 units, respectively.

CoStar forecasts total supply additions of just 27,000 units in the 54 largest markets in 2011, just one-third of the pre-recession average between 2003 and 2008. However, CoStar expects to see occupancy gains in 49 out of the 54 metros over the next three quarters, led by San Antonio, Houston, Raleigh, Salt Lake City, Orlando and Portland. Markets such as Richmond, VA, Norfolk, VA, Seattle, Cincinnati and St. Louis will see modest increases in vacancy.

The limited supply of Class A and B properties continues to generate the most demand, resulting in fewer rent concessions a strong effective rent growth in 2011.

Three of the five top markets for rent growth in 2011 are in the supply constrained San Francisco Bay Area, led San Francisco (7.3%) and San Jose (7%). The East Bay, Honolulu and Boston round out the top five, followed closely by Phoenix, Raleigh, Washington, Baltimore and Denver.

By Erika Schnitzer, Managing Editor

Portland, Ore.—Portland-Vancouver-Beaverton has the lowest apartment vacancy rate, 4 percent, among the top 75 U.S. MSAs, according to the U.S. Census Bureau’s latest report.

While the unemployment rate has declined, it’s still relatively high at 9.6 percent, according to the U.S. Bureau of Labor Statistics. But, as Greg Frick, partner at HFO Investment Real Estate, points out, “even when we had high unemployment, our vacancy was about 10 percent, so we didn’t fall that far. We’re not typically a boom-or-bust market; we’re really slow and steady.”

Some good news includes Intel’s commitment to invest in an existing plant in Hillsboro,

A perfect storm for profits: Last week we learned that Portland multifamily was the nation’s 3rd leading market for rent escalations; This week our fair city is celebrated for having the lowest vacancy rate in the nation.   Contact Rose City Commercial Real Estate immediately: rick@rosecitycre.com or 503.577.1034.

says Frick. And the market’s continued in-migration and urban growth are expected to help the market’s recovery.

In the multifamily arena, construction remains extremely limited. The market typically averages between 4,000 and 5,000 units per year, Frick tells MHN; in the last two years, about 750 units were permitted each year.

Meanwhile, concessions are burning off, and the market is experiencing between 5 percent and 10 percent rental growth. But, Frick adds, “we’re typically the lowest on the West Coast for rent numbers, so 5 percent in our market does not equate to the same dollar amount as some of the other markets.”

On the investment side of the market, Frick reports, “there’s been a lot of money chasing deals … [for the] Class A institutional stuff.” In-core Class A assets are trading at sub-5 cap rates, while suburban Class A deals have traded between 5 percent and 5.75 percent. Meanwhile, B and C asset values have held steady.

“We are seeing some B/C stuff trade, but it’s not at the fevered pitch you’re seeing in the Class A,” Frick tells MHN. “There’s institutional money chasing deals now, trying to get into this market because of the demographics and low vacancy.”

As far as the recovery, Frick points to the bond measures that are trying to get passed, and the resulting increase in taxes and utility charges, that could have a negative impact on the apartment market. “Those are a couple of expense items you don’t really have control over,” he notes. “Will we get enough rent growth to keep pace? How much will that be eroded from these added operational costs?”

While Portland’s livability factor poises it for a strong recovery, Frick notes, “we just need …[to] get some jobs in here and wage inflation so apartment owners can really capitalize on that increased demand.”