Beautiful, Affordable Portland

One of the metrics to look at when picking an area for a long term investment is the affordability index.  And by that I don’t mean looking soley at how much the median income is in an area…I mean:

Average Rent/Median Household Income = Affordability Index.  (What portion of your pay goes to rent?)

It’s great that some investment counselors track Median Household Income (MHI), but without the context of average rent for that area we really don’t have a way to evaluate areas that have long-term rent expansion capability.  An obvious example is New York City.  Clearly the MHI is higher there, but so are average rents.  New York has an affordabilty Index of 57.2%.  That means that between half and two thirds of the household income goes for rent.  I suggest that while NYC has posted impressive rent gains for all property types, that the pace of those increase is likely to wane…how much more than 57% of your income could you afford to pay for rent?   Years ago I had an employee that considered himself to be a real tout, a master horse race handicapper.  Mark would always tell me:  “Rick, there are horses that run fast, and horses that run long…but aint no horse that runs fast and long.”

Highly Ranked Portland

With Average Rents at $825 and Median Household Incomes at $57,757, Portland’s Affordability Index is 16.8%.  That’s fifth in the nation.  Portland-Beaverton-Vancouver “Asking Rents” jumped an average of of 3.1% in the fourth quarter of last year compared to a year earlier.   Full disclosure:  Oklahoma City had the nations best ratio at 12.3%…but the catch is that if you move there …every morning you wake up in Oklahoma.

With room for long term rents to expand and a great area to live in, isn’t this a great time to invest in Portland area multifamily properties?

Portland, OR

Look at current and future job growth as key factors when evaluating a market for multifamily purchases.  To research opportunities I have traveled to  Reno, Albuquerque, Phoenix, Seattle,  and Los Vegas.  Without exception job creation/population growth seemed to be the common fundamentals that told the tale.  It seems that folks would move to hell if they could get a job.

That’s why I’m so strong on Portland.  We’ve seen good job growth on a consistent basis here for years and the promise of the future is for the pattern to continue or accelerate. 

For those that are dour about the current multifamily market…remember that while Cap Rates are decompressing currently, there are many properties that were purchased at the average 8.3 Cap in 2002. They would now  trade at a 6.50 Cap.  Do the math: 8.3 divided by 6.5 equals a 28% increase in value even if NOI only stayed constant.  The truth is that this market enjoyed significant increases over that period and many Portland multifamily investors have huge sums of redeployable equity, and this is the time to act.

Contact me for equity redeployment information now at: rick@rosecitycre.com

Before a lynch mob is dispatched…let me clarify: I’m still a huge proponent of real estate investing!  It’s just that residential investments rarely cash flow…you have to wait to make your money at sale from appreciation.  And you can’t afford to have someone else manage the units for you in most cases.  Banks limit you on how many residential investment loans you can have…but they don’t care how many commercial loans you have active.

Take Off Your Training Wheels-

Rumor on the street is that banks are again permitting a prospective borrower to have up to 10 residential loans. Legally you

Heather Joy, An 8-unit Investment

can have as many as you want of course…its just that lenders won’t underwrite loans past 10 residences. (This is a reversal from a year ago when Freddie Mac tightened up standards to permit only 4 loans.  Fannie Mae adopted the stricter rules shortly thereafter.)

Will the banks  change course again and tighten up standards anew? Rather than shout: “Hurray!” and buy more residential investment properties, I advocate a different strategy.

Convert your multiple residential property equities into a single commercial investment.

Here’s an example:  I have a friend that has 10 single family homes, nine of which are investments. He holds many of them “free and clear” while others have small balances.  He can sell off some of the homes and use a 1031 Exchange to defer taxes, converting the proceeds into equity for a commercial property downpayment.  He can also put new loans on the remaining house to add still more.  Banks are currently writing loans of up to 70 to 80% LTV on investment properties where cash is being taken out at refi.  When this is done my friend will easily be able to acquire sufficient funds ($250-350,000) to buy a commercial property like Heather Joy, currently listed at $779,000.  The advantage of Heather Joy is that he will be able to manage 8 units by going to a single address…a significant improvement in efficiency.

South Towne, An 18 Unit Investment

The next step up would be to take an even greater portion of his existing portfolio equity and purchase a larger asset like the 18-Unit South Towne. That $1,150,00 property would require approximately $350-450,000 in equity to purchase.  It has enough units that we could now afford MBO…Management By Others.  That means that my friend would transition from running all over town to manage 9 single family homes to reviewing the results created by the management company.

Los Verdes, A 53-Unit Investment

To take this further…if my friend’s holdings were enough that he could combine equities to add up to $1,200,000…he could purchase Los Verdes, available for $3,200,000.  That property is large enough to not only have management by others…but an on-site manager.  Contrast owning 53 units in one spot that are managed by someone else vs. running all over town to manage and maintain 9 single family homes.

Summary:  You will make more money, receive it earlier, and have fewer headaches…when you transition to Commercial Real Estate Investments.

Call Rick Bean at Rose City Commercial Real Estate for a no cost, no obligation assessment of your investment options.