It’s painful, it’s ugly, it’s what a real estate bottom feels like.
Filed under: Multifamily Investments, The Economy and Current Affairs
Does the market feel like you are in the opening sequence from Terminator II? Are you fighting amidst the wreckage of the previous boom? Surrounded by foreclosures, scarce money, economic gloom and doom? Real estate going into nuclear winter? That’s what market bottoms feel like and as investors we need to get comfortable with that feeling because this is our time to make solid, reasoned investments that produce good results on improving fundamentals. Conditions like this create the opportunities for savvy investors who were patient through the bubble and have waited for the speculative, greater fool market to come to its inevitable end.
Many great real estate investors got their start in rough times like Sam Zell of Equity Residential for instance. He started out buying properties from distressed owners in the late sixties. Tom Barrack of Colony Capital waded through the carnage of the S&L meltdown to buy properties at a discount. Barry Sternlicht of Starwood Capital also started in the wake of the S&L crisis buying multifamily properties. What will your story be? It’s time get to work and seize the opportunities. Put on your hardhat though because it’s about to start raining real estate, and while not every distressed property is worth pursuing if you stick to your niche and learn your market good deals will surface.
At Ashworth Partners Ltd we are focused on multifamily properties in selected markets that we’ve identified as being positioned for growth through the 2020s. We believe that demographics and market forces favor this sector and are actively pursuing deals that fit our model now. We operate under Warren Buffett’s advice to never count on making a good sale; have the purchase price be so attractive that even a mediocre sale gives good results.
That feeling in the pit of your stomach that there’s nothing good in the world? Get comfortable with it, make it your friend. To put it succinctly, buy when you are depressed and sell when you are happy.
For up to date news and info on real estate, finance and the economy follow @GiovanniIsaksen on Twitter.
More Positive Indications for Multifamily
Filed under: Multifamily Investments, The Economy and Current Affairs
At the end of last year (See my Dec. 28 post Why buy Multifamily in ‘09) I laid out a number of factors pointing to the opportunity to secure good returns on income producing apartments this year. As time marches on we are receiving more corroborating evidence of a market bottom for multifamily at the same time as the credit market for these properties still has money available for acquisitions.
From a diverse range of reports starting with the ULI/PricewaterhouseCooper’s Emerging Trends in Real Estate 2009, Real Capital’s report published mid-Feb to Marcus & Millichap’s conference call last week (Feb. 24th) we are seeing a real buyers market develop in multifamily.
First of all multifamily starts are projected to be down at least 30% this year on top of being down 50% in ‘08, meaning starts are down 85% from two years ago. Balanced against this lack of supply is the fact that Census Bureau projections show the growth in the prime renter segment of the population (20-34 year olds)will accelerate significantly over the next five years forcing rents higher over that period. There will also be a steady if not growing stream of immigrants who tend to long term renters.
Even in the markets that dodged the worst of the mortgage meltdown (remember that the vast majority of the damage was done in only four states: CA, AZ, NV, FL) home prices and mortgage availability are keeping many from buying a home, or from considering home ownership to be a good investment. Net-net, supply down and demand about to rise. Markets that are poised to benefit from stimulus spending, especially in infrastructure and energy will experience the economic recovery sooner than other locations in the country and multifamily properties in those markets will turn around sooner as well.
Financing while requiring more equity, is still available. The GSEs are full of cash, are actively lending on multifamily and are authorized to continue doing so through the end of 2009. Regional and local banks are also lending on multifamily, albeit at slightly higher rates than the GSEs. There is also foreign capital finding good multifamily values here in the continental US.
With all these positives, why isn’t everyone out there acquiring? There are both challenges in the short term and a large group of buyers waiting for ‘the bottom’ of the market before they wade in. The primary challenge is that vacancies in most markets are rising and rental rates are projected to be flat to down through ‘09 and maybe into the first part of 2010. This has many buyers afraid of ‘overpaying’ for properties which puts them in the waiting for the bottom group.
Our strategy is to buy based on higher vacancy and lower rental rates so that the property will operate positively while we wait for demand (and inflation) to pick up. During the latter part of the anticipated seven or eight year holding period the property will benefit from increased demand, inflationary pressure on rents as well as the return of growth in the economy and amortization of debt. We will also utilize technology to insure operating costs are kept to a minimum.
Those waiting for ‘the bottom’ will naturally be paying more for their properties because the confirmation of the bottom is rising prices of course. There is an old saying that the smart money is typically thought to be ‘early’ and we believe now is the time to be part of that group.
For the statistics and charts we are seeing or to learn more about apartment investments and the multifamily deals we are uncovering please contact us:
Giovanni Isaksen
Ashworth Partners Ltd.
Why buy Multifamily in ‘09?
Filed under: Multifamily Investments, The Economy and Current Affairs
As I sit here looking out at the snow while I’m taking time out to review and update my goals for the year there are stars aligning to make the new year a positive one. Especially if you are looking for alternatives for your investment and retirement money. The stock market hasn’t been good to us (I look at my account statement from between my fingers!) and the prognosis for the next year or two isn’t much better.
In contrast there are a number of reasons to consider owning multifamily properties, specifically apartment complexes with more than 100 units. Before I go into the reasons why now is a good time let me first be clear about what I’m NOT recommending, the landlording business. The reason to focus on properties with more than 100 units is that they are large enough to support both professional management and professional maintenance; most likely having both onsite full time if not living there. As an owner of this type of property your job is to review the management reports and manage the managers, not unclog toilets or take phone calls from tenants.
Reason #1- Show me the money! The properties we’re talking about produce cash flow in the low to middle double digits and total annualized returns in the high teens to mid twenties on five to ten year holding periods. Before you say 10% cash and 19% total a year doesn’t sound like much let me be clear that we’re talking about existing buildings with existing tenants and provable revenue, not dream stage tech start ups or land speculation in Vegas. Besides what are treasuries, money markets or even dividend stocks paying lately?
Reason #2- There are 100 or more people paying the bills for you. One of the things that make multifamily a good investment in tough times is the diversification of income streams for the property. As opposed to a rental house, or even a commercial building, strip mall, etc., no one tenant moving out will destroy your cash flow. A certain amount of turnover is expected and your professional managers will have a marketing plan in place to provide the necessary replacement tenants.
Reason #3- Good supply/demand characteristics. No one is lending on property development now, developers are shuttering any project not already out of the ground on construction and the number of new completions are dropping every month. There is some new supply on the upper end as condo projects are switched to rental (or being UN-condo-converted) but the multifamily properties we’re interested in are the mid-level complexes that have good characteristics not top of the line luxury properties.
On the demand side there are three sources of tenants: Those who are renters by necessity because they can’t afford to buy; Renters by choice who don’t see the value in purchasing a home; Former homeowners who have been driven out of their homes because of the mortgage meltdown. For the ‘B’ properties, as they are called, there is an additional source of new tenants, ‘A’ renters moving down to reduce monthly expenses. B properties have most of the amenities of A properties but typically are a little older. Most were A properties when new and are in good neighborhoods which is also a factor that keeps B renters from moving down to C properties.
Reason #4- Competition for properties is low. While there a good deals to be had, especially from over-leveraged owners and bank REOs, most of the institutional money and foreign money is sitting on the sidelines waiting for the next upturn. Of course waiting for the upturn means that they’ll be paying up for properties, maybe even for one that you acquire now.
Reason #5- Buy low, sell high. Prices in most markets have come off their highs and sellers are starting to become reasonable in their understanding of market fundamentals; they’ve been watching the same news reports as everyone else.
Multifamily pricing is often described in terms of ‘Cap Rate’ which is similar to the dividend yield on a stock. Buyers are demanding a higher return on their investment which means that Cap rates have been rising, in many places by as much as one to one-and-a-half percent. A one percent move in cap rate can mean a significant change in price. For example a 100 unit property selling for 3.5 million at a 7% cap rate would sell for just over 3 million and an 8% cap rate. We typically want to buy at cap rates of 8.5-10% or higher and are uncovering properties now in that price range.
Reason #6- There is money for apartments! Fannie Mae and Freddie Mac are being pumped full of liquidity by the government and while it’s not publicized, they would MUCH rather lend that money on multifamily properties with steady revenue than on single family houses whose value may fall to the point where borrowers just walk away. Lending standards have tightened, which means that financially strong buyers have more opportunities and fewer competitors for the good deals. Commenting on the announcement that the Fed would aggressively buy Fannie and Freddie paper, even stock guy Jim Cramer announced on his show that now is the time to buy real estate.
Reason #7- Interest rates are low and inflation is coming. Interest rates are being held as low as possible to stimulate the economy and multifamily borrowers can lock in 30 year fixed rates as low as 6%. At the same time the government and the Fed are printing and pumping out money as fast as they can and when that money starts moving through the economy interest rates and prices will rise. If you’ve already locked in a low interest rate you will be perfectly positioned to benefit from rising rents. Just think about it, fixed expense with rising income, just the opposite of having a job and paying bills!
Remember the multiplier effect of cap rates, every dollar per month that rents go up in a 100 unit property is $15,000 of additional value added to a property at an 8% cap rate, with fixed expenses. Raise rents 10 dollars a month and you’ve created $150,000 in value instantly.
Now is the time to get in at low prices with good returns on conservative deals before the big money and inflation start driving up prices on properties, that you own. Market selection, property selection and manager selection are all critical of course but in a tough market and in any economy short of dig a hole and crawl in with freeze dried food and crossbow, owning multifamily will provide both current income and positive growth.
Here’s to a happy, healthy and profitable New Year everyone!
Giovanni Isaksen
Ashworth Partners Ltd.
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