Where are the Multifamily Market Opportunities?
Find a market with jobs, low rental housing supply and rents that are affordable.
The Multifamily market has been cooking for several years as the demand for rental housing created by the crash and millennials who choose to live in cities.
As the cycle continues, investors begin to ask, “how long can this last?”
If you are a developer or investor, the ability to look at a specific market and identify the characteristics in play are critical to your success. Firms like firms like Axiometrics, acquired by RealPage, specialize in providing monthly multifamily market data.
Primary markets with the most demand and development, are showing signs of oversupply in the class A units. In these markets, free rent concessions have begun to show up and rent growth has slowed.
Say goodbye to rent growth of 12, 14 and 16% year over year is no more in most markets. The healthy markets for the near future suggest 2 - 3 % annual rent increases.
Are there still multifamily market opportunities?
While primary markets ability to absorb all of the new units has begun to cool, the secondary and tertiary markets still show signs of opportunity for investors and developers.
What’s the key? The fundamentals of opportunity remain the same. Where are the jobs? Where is supply tight, and rent is still affordable.
Tech jobs pay well and drive up the demand for high end housing.
Things to watch?
The cost of construction is rising based on the tight labor market. This has not slowed development, but it is driving the cost of developing new units and repositioning older units.
Millennials continue to want to live downtown, are not getting married and do not want to move to the suburbs. Until then, multifamily demand should remain strong.
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A local real estate investor can grow big, and gain efficiencies not available to investors who spread their portfolio over multiple markets.
Brian Murray, founder of Washington Street Properties shares how he moved from his position as a college professor to a full time real estate investor in Watertown, NY. His focus on local real estate has created multiple opportunities for growth and the ability to contain expenses.
Advantages to investing in local real estate
There is no substitute to seeing your portfolio daily. If you find something is not right, you can address it immediately. This nips the problem in the bud and can reduce the cost of the fix.
Local knowledge provides you the real time ability to know if your rents are too high or too low, and to make adjustments accordingly. This helps maximize income.
Opportunities for growth
When you are visible in the community, brokers, owners and potential tenants know who you are. Brokers and Property owners looking for a buyer will contact you first because they know what you have done and that you can close.
When you have more properties in a single market, you can accommodate tenants needs for more or less space
Contracts for service.
Many investors focus on just one asset class which supports the notion of specialization. However, if you specialize in one local market, you can gain pricing advantages from vendors not otherwise available. The same service provider for roofing, electrical, parking lots, plumbing, carpet cleaning, lawn care, etc. can service multiple properties for you. When vendors have the opportunity to do more work for you, they are willing to provide a discount.
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It is said that the First Multifamily Deal is the hardest. For Jason & Pili Yarusi, they realized that there are efficiencies in multifamily are greater than what you can get with smaller properties.
Once they decided to move forward with multifamily, the question turned to where?
Jason & Pili are residents of New Jersey, where real estate prices are prohibitive for investing due to compressed cap rates and tenant laws do not favor landlords.
The markets they found to support their criteria:
The first member of the team in was property management firm. The criteria for selecting a property management firm:
How did you find the property?
Their property manager led them to a property that had been on the market previously. They believed it had some value add potential. They analyzed the deal, and made an offer. The seller countered, but quickly they realized they were too far apart.
After six months of a continued search, they circled back, and made a second offer to the seller. This time, they provided numbers to back up their offer and explained the reasons for their offer. The seller came down $600,000 and requested that the buyers pay their brokers commission.
After analyzing hundreds of deals, making multiple offers, and always being disciplined, their efforts paid off.
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Retail Commercial Real Estate is NOT DEAD! Despite of what you’ve heard about how Amazon killed retail, it is fake news.
The Amazon effect has made it challenging for older stores and malls that attempt to continue operating as they did twenty years ago. However, this challenged subset of retail is not reflective of the whole asset class. The rest of the class is doing great!
My guest, Commercial Real Estate Broker, John Crossman with Crossman & Company, discusses the retail sector and provides an overview for what is working.
There are multiple types of retail real estate, including: strip mall, neighborhood shopping center, community center, power center, lifestyle center and enclosed malls.
Since the beginning, healthy retail has relied on the surrounding two miles of residents for support. This continues to be true today. If a community has jobs, and a minimum of 10,000 residents, you can have a healthy retail center.
Successful retail centers have a component of civic purpose. Centers that have been architecturally designed, without function continue to fail. People want and need connection with others. A successful retail experience provides this both a connection and a sense of community. A good example of a center is a grocery store.
Evolve and survive!
The rules have changed. You cannot limit your search to a big box retailer to fill an empty big box space. You have to get creative and look towards non traditional tenants such as; healthcare, education, office, church, and gyms.
The upside for these tenants is, less expensive rent than downtown, easy parking and access to retail shops & entertainment.
Tenant space requirements have changed. Space in the range of 800 - 1500 square feet is always in demand. Space that is larger than 1600 square feet is more difficult to lease.
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Private Money can be the solution to your real estate investing when the bank shuts you down.
That’s exactly what happened to my guest Jay Conner after years of successful borrowing and repayment from his bank line of credit he used to fund his real estate deals.
At first he did not know what to do. How was he going to continue without the $1 million line of credit from his bank?
In just ninety days, he found $2,150,000 of private funds at his disposal, and he thanked his bank for shutting him down.
What is Private Money?
For the uninitiated, private money is synonymous with “hard money”. Hard money is typically provided through a broker for periods from six months to one year. The average interest rate is greater than 15% and requires additional loan origination fees from two to ten percent of the loan.
Private money lending connects the borrower and the lender direct. The rates tend to be more than you will get from a bank, but less than Hard Money. The length of the loan can go from two to five years, and be interest only. This allows the borrower to season the property before obtaining long term traditional financing.
Who has private money to lend?
There are two sources of private money. The first is your warm market which includes friends and family. The second is those private money lenders who are already in the business of lending their private money.
What are the benefits of using Private Money?
There are many including:
CREPN Radio listeners, goto: www.jayconner.com/CREPN
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Every real estate deal starts with a pro-forma analysis. The buyer learns quickly if the seller and his broker’s numbers support the asking price.
If you do not confirm all the numbers, you will be the fool.
Beau Beery is a Commercial Real Estate Broker with Coldwell Banker in Gainesville, FL who specializes in Multifamily. I had the opportunity to review with Beau the numbers and learn what should be present when doing an analysis.
Grab the example used on the call click here.
Beau’s experience has shown there are some primary expenses that tend to be different for the seller and the buyer.
Pro-forma Analysis Expenses
Property Taxes: Property taxes are based off of a tax value, which rarely reflects current market conditions. If the seller has owned the property for a long time, it is likely that the taxes reflected in the pro-forma will be substantially low. It is important to evaluate what the taxes will be when you buy the property.
Reserves: Smaller properties that are managed by the seller will likely either show a low number, or nothing at all. This is where you account for things like new roofs, ac units, paint and parking lots. It’s a real expense, and an easy number to omit, or minimize which will affect the actual performance of the property.
Insurance: The seller’s insurance program is likely not what you will find. The seller could have multiple properties and have access discounts not available to you. Or if the seller does not have a loan, he may elect to self insure.
It is a must to learn, know and evaluate the numbers presented by the seller to make certain your deal will be profitable for you.
For your FREE Deal Workbook to analyze your next property, click here.
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Hey property investor, have you thought about what happens when disaster strikes your property, how do you keep from a loss of rent?
If your tenants are unable to occupy your building, your rent will stop unless you protect your rent. Where will you get the money you need to pay your mortgage, pay your employees, and ongoing expenses? What about your profit?
You would be shocked to know how many landlords do not buy Loss of Rent protection, especially on C & D class assets.
If income matters, you want to insure your rents from loss in the event of a “covered loss” to your building.
Insurance is complicated, so please understand this:
1 - The Property Coverage Form, has multiple lines of coverage. If there is not a number on your declaration page next to the coverage description, with rare exception, you do not have coverage!
2 - A property insurance policy with “special form” protects your Building from all perils EXCEPT those that are excluded, such as; “Earth Movement” & “Flood”.
What do you need to protect yourself from Loss of Rent?
A - The coverage you need to insure your rents can be called a couple of things:
What is covered?
B - The property policy provides protection from loss caused by a covered peril including:
How much do you need?
C - There are multiple coverage limitation options available. You need to consider the time needed as well as the amount. If your market is experiencing significant rent increase, or a local building boom, and the damage is extensive, you may need substantially more than you expected to get back up and running.
Actual Loss Sustained is the most preferred option if your insurance company provides it. The simple reason this is preferred is because there is no dollar limit.
However, the standard length of time for Actual Loss Sustained is twelve months. This is great in a partial loss and normal building market. If you need more time, you could be screwed. Unless you are able to extend the time limit.
There are insurance companies that provide coverage time limitations of 18, 24 and even 36 months of coverage. You will need to check with your company or agent to determine the maximum amount of time available.
Other versions of coverage require that you preset a specific dollar limit. These options include additional terms you need to understand:
For your FREE worksheet to determine the amount of rent you need, CLICK HERE
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Investing in Real Estate works because of leverage. Other People’s Money is the leverage of real estate.
Whether you use a bank, investors, relatives or seller financing, you are using other people’s money. It is the leverage that allows people with little or no cash of their own to buy a property and benefit from real estate.
This is unique to real estate.
In the stock market, you buy shares of a company. Your upside and downside are limited to the gain or loss of the shares you own.
In real estate, you are able to benefit from the value of the whole property. In residential real estate, your success is determined by the surrounding properties. In commercial properties, you can force appreciation through reducing expenses and increasing rent.
The power of leverage is undeniable when compared.
Let’s say you have $10,000 to invest.
If you invest $10,000 in the stock market, and the stock goes up 17%, which is really good. Your $10,000 is now worth $11,700 and your gain is $1,170.00. That’s great!
Compare this to $10,000 invested in Real Estate.
Suppose you purchase a property for $100,000 and are able to get in for just $10,000. It happens a lot. You have $10,000 of equity and $90,000 of leverage using other people's money. According to the Case-Schiller Index, home prices rose from 1987 to 2009 an average for 3.4% per year. In this case, your $1000,000 property would now be worth $103,400.00. Your gain is $3,400.
Which would you prefer:
17 % on $10,000 = $1,170.00
3.4% on $100,000 = $3,400.00?
That's the power of leverage!
This is one of many reasons to consider investing in real estate. Currently there are tax benefits available to real estate investors. There is the real possibility that the Trump Administration may reduce some tax advantages of real estate in an effort to simplify the tax code.
Regardless of what happens with the tax code, the power of leverage remains.
Click here to get your FREE Real Estate Deal Workbook.
A Real Estate Investor must chose an investor classification from three allowable classes. Each class provides certain benefits and requirements that should be considered when determining the best tax strategy.
One of the often cited benefits for investing in real estate is the tax treatment. Investors are able to expense, interest payments, operating expenses, capital improvements and depreciation.
Depreciation is an accounting expense that is realized when filing and paying income taxes. Expenses lower the taxable income, benefiting the real estate investor taxpayer with a lower tax obligation.
Passive: This is the least beneficial. Allows the investor to take real estate losses and depreciation to the extent of the income generated from real estate.
Active: An investor who materially participates in the investments and owns at least 10% of the investment, can count upto an additional $25,000 of losses against ordinary income. Additional losses for real estate investors phase out when the adjusted gross income breaches $150,000 for a married couple filing jointly.
Professional: This is the most advantageous for tax purposes. To qualify, the real estate investor must spend the majority of their time in real estate, and a minimum of 750 hours per year. The professional classification allows the investor to expense all of their real estate expenses for the year.
The ability to count expenses against income should not be the sole reason for choosing a classification. In all three cases, unrecognized losses can be carried forward and used against future gains realized when the property is sold.
Additional considerations include whether or not to create an LLC or S Corp. The difference will determine if income is subject to self employment tax or a distribution.
In all cases, real estate investors should seek counsel of a tax professional to determine the best option to meet their goals.
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Patrick Camuso, CPA
Camuso CPA PLLC
Real Estate is segmented into asset classes; single family, multifamily, office, retail, warehouse, etc. One overlooked asset class with big returns is Mobile Home Parks.
Kevin Bupp is an experienced real estate investor who survived the crash, and has since devoted all of his efforts into buying and operating mobile home parks with great cash flow.
Consider the following reasons and you will see why mobile home parks make sense:
Mobile home parks are more plentiful in the rural parts of the United States. In these tertiary and rural market, people are accustomed to regularly drive thirty minutes for their work commute and shopping.
Pride of ownership can be provided to people who otherwise are unable to purchase their home.
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