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The Cult of Stocks is dying, and at 0% rates bonds have nowhere to go but down Says Bill Gross. Time for apartment building investments?

Bill ‘The Bond King’ Gross, founder of PIMCO says that the long run of stocks outperforming the overall economy is done and that the only policy option left for the ‘advanced’ economies in the world is inflating their way out of debt. Since Inflation = Higher Interest Rates and rising rates reduces the value of existing bonds issued at lower (currently near zero) rates, they don’t look to good as a long term investment either. See his letter here PIMCO Investment Outlook

So what’s a saver or investor to do, especially those nearing or at retirement? Chase yields in emerging market bonds? Who would you trust for information about those issues? Have those economies really decoupled from the US and Europe? Where could you find a decent stream of income with inflation protection build in and appreciation potential on top of that?

Apartment building investments. As we’ve laid out previously apartment owners can benefit from even small increases in rents, have demographics and social trends on their side and new supply has been quite limited over the last decade (see here, here and here for the details). Does the prospect of high single digit current income with inflation protection and even appreciation potential warm your retirement spreadsheet?

In this example, raising rents $25 or about 3% increases the value and owner’s equity $190,000 or almost 12% plus the income goes up more than 9%. That is the power of apartment building investment. Notice that in this example that the building is nearly full, if we were to buy a building that had more vacancies we could have paid a lower price based on the lower Net Operating Income and we would have the opportunity to create even more value by improving the management to bring in more renters. That is why we like apartments.

When I talk about investing in apartments I am not talking about being in the landlord business, I am talking about being in the property owning business and one of the expenses we gladly pay is for professional property management. We’re not in the tenants, toilets and trash business; we hire the pros to handle that and our job is to manage the managers…. And reap the rewards. Find out how we invest in apartments and how you can too by contacting me at giovanni@ashworthpartners.com.

Top 10 best and worst places to rent an apartment/ Top 10 worst and best places to own #multifamily?

Forbes put out a piece with a slide show of the best and worst places to rent an apartment; my question is wouldn’t you want to own an apartment building investment in one of the top 10 cities? How about in any of the other cities listed?

Are the top 10 worst cities to rent in the best cities to own an apartment building investment?

One of the factors they used was the cost of renting vs. owning but the ownership cost is lowballed because it only includes the house payment (mortgage, taxes, insurance), ignoring the true cost which also includes maintenance, repairs and reserves for capital improvements… not to mention coming up with 20% down payment and qualifying for a loan. Even still renting comes out looking pretty good in those places.

Then in a WSJ piece in their Smart Money section there’s this: “On the national level, it is cheaper to buy than rent, according to a March 2012 report by Deutsche Bank – even after taking into account the down payment and property taxes. But in some areas, including California and the Northeast, renting remains more affordable than buying. The report identified 13 cities where renting costs less than the after-tax mortgage payment (that’s the mortgage expenses the owner incurs, along with the mortgage interest deduction they get come tax season).”

Once again ignoring the true cost of owning which includes keeping the place up, yardwork, painting plus fixing things that break like appliances, furnaces, hot water tanks, and setting aside something for things that wear out like the roof and the driveway. They list five markets where even lowballing the cost of owning it is still cheaper to rent:

Northern NJ
Long Island, NY
California
Honolulu
Seattle

Cheaper to rent than own in Seattle, good for apartment building investments

In my hometown of Seattle they picked some interesting neighborhoods for examples but found on average that even without factoring in repairs, maintenance and capital improvements renting averaged $377 per month less than owning.

Net, net renting is a better deal in many places even if you could afford the downpayment and qualify for a loan.

How to Structure Apartment Building Investment Partnerships by Brian Ward of TCG Capital.

MHN Online has a nice piece out this morning talking about what institutional and private equity equity providers are looking for in their apartment building investment deals. According to Brian Ward, CIO of TCG Capital Markets, the requirements are much tighter than just a few years ago. Here are the high points:

Align the style and needs of the capital source with the operator. A long term operator shouldn’t be matched up with private equity that needs short term holds to clear their return hurdles.
Equity capital today generally comes in two two types: preferred equity or joint venture (See the table linked in the article for a good breakout of when to use each).
Blind pools are very difficult to get funded today —even the best and most sophisticated operators have had trouble executing this type of equity raise.
There must be local knowledge on the management team, both lenders and investors want their operators close by.
Operators must have Continue reading How to Structure Apartment Building Investment Partnerships by Brian Ward of TCG Capital.

The split between Apartment Investors Creates Opportunity for Good Returns in Value-Add

Good article in Asset Management Quarterly Value Add Has Its Day talking about how investors have split since the Financial Meltdown in 2007 into a risk adverse group favoring mostly Class A apartment building investments in core markets and a more risk tolerant group seeking high returns by purchasing distressed debt.

This has created an opportunity to generate good returns with investments in properties that need help of some kind. A few bullet points:

“It’s [The polarization] left this big open hole in the middle of the playing field for middle-risk, middle-return strategies, and it’s made the pricing on value add very attractive,”
“It should be an extremely desirable place to invest but you haven’t seen a lot of investors go there yet, which is why it’s such an interesting opportunity.”
buyers needn’t take on excessively risky scenarios in order to reap a handsome return of Continue reading The split between Apartment Investors Creates Opportunity for Good Returns in Value-Add

The secret about home ‘affordability’ they don’t want you to know- Good for Apartment Building Investment

Home prices have crashed. Interest rates are at all-time lows. If you’re in the market to buy, homes are more affordable than they’ve been in years. Or are they?

From a WSJ report posted by Motley Fool:

The median down payment in nine major U.S. cities rose to 22% last year on properties purchased through conventional mortgages. … That percentage doubled in three years and represents the highest median down payment since the data were first tracked in 1997.

The average down payment for a US home is now 20%

Up 22%! yowza! More from MF:

The average home in America now sells for $272,000, so a 20% down payment totals about $55,000. The median household net worth, meanwhile, was $67,000 in 2010, suggesting the average homeowner needs to tie up a tremendous amount of their net worth in a down payment. Can you really Continue reading The secret about home ‘affordability’ they don’t want you to know- Good for Apartment Building Investment

Apartment rents rising at inflation rate- Freddie Mac video report

In their June 2012 Economic Update, Freddie Mac says: “Over the year ending March 2012, an additional 1.5 million households moved into rental housing. That’s a 4 percent increase in renter-occupied dwellings in a single year.”

The increase in apartment demand has helped to enhance property values, on average up about 25 percent during the past two years from their trough during the first quarter of 2010…

See the whole report here: Rental Markets: A Sign of Strength

2,000 unit Apartment Management Co. goes smoke free, gets 2 complaints, 1 move out.

As reported by MHN Online. The Towbes Group, a Santa Barbara multifamily company has imposed a no-smoking policy in the 13 multifamily properties it manages in the Santa Barbara area. Common areas and individual units will be smoke free in 6 months.

Why?

We had received an increasing number of concerns from our residents regarding second-hand smoke
The percentage of Californians who smoke is down to around 15 percent
Recent California legislation allows landlords and property owners to offer “smoke free” living environments at their apartment communities.
We are committed to giving our residents the best living experience possible in their homes.
The cost to turn an apartment that has been smoke free is significantly less than that of an apartment that has been smoked in.
The most important reason is the ability to give our residents a ‘healthy’ option in multifamily housing.

And the results: “Out of those numbers [2,000 units in 13 communities], I received two complaints from residents who were not in agreement with our new policy. In addition, we did have one resident let us know they would be moving out of one of our communities. If anything, that very small number validated our decision to go smoke free. We really believe that we will attract a greater number of prospective residents by offering a ‘smoke free’ living experience.”

Not bad eh? Create a more healthy living environment for your residents while reducing turnover costs. Have you done this with your apartment buildings? If you have please share your experiences with us.

Local banks, S&Ls and Credit Unions lining up for small apartment building investment loans.

Local and regional banks are working hard to fund ‘small’ apartment building investments in their local markets. Small loans in the $1-3 million dollar range are the ‘sweet spot’ for these lenders and investors looking for loans in the $3-5 million range are finding even more choices. For loans under $1 million the market is still pretty fragmented with lenders there averaging only five loans of that size.

“Banks are trying to create more aggressive lending programs in the small-balance multifamily financing space.”

In the West, banks like Sterling, KeyBank and Bank of The West are Continue reading Local banks, S&Ls and Credit Unions lining up for small apartment building investment loans.

Apartment building investments good for the ‘Age of Deleveraging’ Says author Gary Shilling.

Apartment building investments are a top choice according to Gary Shilling, one of the world’s foremost economic forecasters, a long-time Forbes columnist, publisher of Insight Newsletter with his editor Fred Rossi, and author of “The Age of Deleveraging,” (http://amzn.to/L9hm7W on Amazon) the perfect playbook for America’s new Age of Austerity.

Quoted in the Market Watch post:

Rental apartments. A huge inventory still overhangs the housing market as prices continue falling. The American dream of homeownership may be history. Renting is the affordable option. And with REIT prices running high, “direct ownership of rental apartments may still be attractive.”

See the whole post for more ideas for investing in these turbulent times.

Phoenix, Seattle and Washington, DC apartment markets at risk of overbuilding says NMHC panel

Report on the state of apartment building investment markets from the good folks at Joseph Bernard Investment Real Estate in Portland:

Continued positive multifamily demand fundamentals and ready access to capital at attractive rates is fueling a surge in new apartment development, according to industry executives.

Several hundred senior-level apartment executives gathered in Scottsdale, AZ, last week for National Multi Housing Council’s (NMHC) Apartment Strategies/Finance Conference and Spring Board of Directors Meeting. The following is the NMHC’s summary of what was discussed.

Continued low levels of new supply have led to a big bounce-back in rents as demand outpaces new construction. According to one panel of apartment executives, the new supply shortfall may be larger than once thought — as many as 700,000 to 1 million units — because many of the apartments built in recent years have been in the affordable, rather than market-rate, section of the market. Moreover, much of the current apartment stock dates back to the 1970s and is becoming obsolete, creating additional demand for new supply.

Select areas have seen such large upticks in the number of planned and under construction units that could turn into hot spots for potential overbuilding. In particular, certain submarkets of Phoenix, Seattle and Washington, D.C., appear somewhat at risk.

But, overall, new completions are still a very low percentage of total inventory.

Money Flowing for Multifamily

There is a wall of private capital that wants into the multifamily space. More than 250 private equity funds currently are Continue reading Phoenix, Seattle and Washington, DC apartment markets at risk of overbuilding says NMHC panel