Investment Strategies

The real estate investment market is changing so fast. Recovery is full speed ahead and buyers’ tastes are changing. Multifamily properties have never looked better. Real estate investors follow these five experts as they share their take on it all.

Adding a multifamily real estate investment to your portfolio is time to call in the experts. Rick Bean and the professional staff at Rose City Commercial Real Estate specialize in designing a personalized investment strategy for each client, carefully balancing risk and return. Call today to get started.

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The highest average multifamily profits are expected in Portland, OR; Raleigh, NC; East Bay, CA and Austin Texas?  So asserts Bendix Anderson in a  recent article in National Real Estate Investor’s NREI-Online.  Anderson says that Tier I markets such as New York City, Washington DC are expected to have the lowest average multifamily profits, while the aforementioned TIER II markets will shine brightest.  He adds: “Markets that people gave up on are now markets that people are going back to,” quoting Walter Page, director of research for Property and Portfolio Research, a division of the CoStar Group. “In most primary markets the average price per sq.ft. is twice what it is secondary markets.”

Basic math is the reason for Portland’s high multifamily profits:

• Cities like Portland, OR have higher Cap Rates than Tier I Markets.  A “no-brain-er”…when you are buying,  a higher Cap Rate means that you pay less per dollar of NOI.  NOI is the revenue generation engine…from which operational profits are derived . Paying less per unit of NOI is a very good thing. If that still doesn’t ring any bells, try:  “Buy low…sell high.”
  • NOI refresher:  Demystifying Multifamily Cap Rates, NOI, and Investment Basics
• Finance rates are roughly the same everywhere.  You can still get sub 4.00% debt.  (As of May 31, 2013, anyway.)
• Acquisition Cap Rates tend to be 100 to 200  basis points higher in Tier I Markets.  If you buy multifamily assets in NYC or W-DC at 4.75% and finance at 3.85% you have a +90 basis point spread. (Great!)  Buy in a Tier II Market such as Portland at a 6.50% Cap and finance at the same 3.85% and you have a whopping +265 basis point spread.  (Much better!) A larger point spread between acquisition rate and finance rate also means its safer to borrow money, that there is less downside exposure.
  • Greed sucks: Don’t over borrow!  Even if you could buy at 10% down, should you?  Reference:  No Money Down + No Brains?
  • If you would like a debt sensitivity analysis, please contact me, Rick Bean,  at: 503.577.1034 or rick@rosecitycre.com. (No charge to investors or competitive brokers.)

I spent the first few years in this blog writing about great restaurants, nice people, investment basics and good vendors…but I didn’t tout our market.  To do that would have been disingenuous to those I want to help. That’s because the commercial real estate investment fundamentals were horrible.  I still like to acknowledge those that outperform their competitors, those that perform good acts.  But things have definitely changed, and this is the time of action.

If you want to be a GENIUS in 5 years, make wise commercial real estate investments NOW.

NREI Online has great information…to see the article cited above in it’s entirety go to: Secondary Markets Win Multifamily Investors

Want to get started investing?  Add to your existing portfolio?  Contact Rick M. Bean at: 503.577.1034, or rick@rosecitycre.com

 

 

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I was asked recently if the surge in multifamily construction had reduced my excitement for multifamily investments specifically, and investment real estate generally.  In a word: “NO!”  In a phrase:  “HELL NO!” First of all, current projects in the pipeline are still below the amount of units to replace those not built during the Great Recession.  Secondly, there has been a fundamental change in the way many look at renting:  there has been a huge increase in “lifestyle renters”…those who can afford to buy a home but prefer the simplicity of leasing.  Third: I believe investing in Bonds right now is a guaranteed loss, and the stock market has expanded so fast and so long I don’t think that horse has the legs for much more.  Fourth and most important:  Investments have a cycle of highs and lows.  Most real estate asset types in most locations have hit bottom and are starting to go up.  Heck…don’t take just my word for it.

In an Associated Press article published today, Charles S. Rugaber cited some very telling statistics from the last period provided by Core Logic, a highly respected real estate data provider:

• US Home prices rose 10.5% (year over year)…the biggest gain since March 2006.
• Oregon’s price increase of 14.3% was the 4th highest of the 50 states.
• Oregon homes prices have recorded 14 months of increases in a row.
• Current for sale inventory is only at a 4.7 month supply. (Typically we consider 6 months to be supply neutral…any less than that means a Seller’s Market!)

Rising home prices make affordable apartments more attractive.  Steady job creation and record low mortgage rates have helped as well. Rising home prices will sustain the housing rebound and provide fuel to lift the economy.

Investment Real Estate Profits Are The Key

So why am I so bullish on investment real estate?  Investment real estate is entering the part of the cycle where buying now maximizes profits.  Contrast that with bond yields at historic lows, virtually guaranteeing a loss of buying power.  The Stock Market breached 15,000 points for the first time in it’s history today, and the S&P hit 1,617 points yesterday…it’s all time high.  Don’t buy at the peak…buy at the bottom…that’s where the profits are made.  Hell yes I’m bullish on investment real estate.  You should be too! Contact me, Rick Bean, at 503.577.1034 or rick@rosecitycre.com, today!

 PROLOGUE: I originally wrote this over a year ago…and its still true today.  The fundamentals for real estate in general continue to be strong, and Portland, OR multifamily is one of the strongest markets.

 

 

 

 

 

 

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The week’s best in commercial real estate investing news includes more numbers showing just how hot the market is, great advice on how to acquire and manage commercial property, and a how a local Portland real estate investor should be looking at a multifamily investment.

Commercial real estate investing isn’t a simple business. Trust the expertise of Rick Bean and the staff at Rose City Commercial Real Estate to create a plan that meets your personal investment goals. Call 503.577.1034 today to get started.

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Great news for you Bond Fans, or “Bondies“!  (While I am a fan of spy movies…by “Bondies” I mean folks that prefer to invest in Bonds.)  The current yield for 10-year T-Bills is 1.8%.  Expert economists are forecasting bond rates to skyrocket by 60% to 2.85%/year by the end of Q4-2014. (Keep your champagne corked.)

Remember that T-bills are tax exempt…so a year later you will have 2.85% more after taxes.  $1,000,000 invested in bonds at the higher rate would yield a profit of $28,500 after 1 year.  Based on current inflation rates hovering around 3%/year, that means that Bond holders actual buying power will go from “lose every year” to “break even”.  The rate on 10-year Treasuries is the benchmark for all investments.  Betting on the US Government is widely regarded is the safest, most conservative move you can make.  Where “Bondies” make their mistake is that they assume that risk levels for all other investments must be much, much higher. 

If taking a conservative approach is what is preferred, real estate investments can be tailored with that in mind. In this article and my next I will discuss how balancing differing debt amounts with downpayment amounts produces different results.  In essence the two extremes are “fast” and “strong”.

FAST: (Little or no equity down)

I have one client that is always looking for the very minimum amount he can put down.  He would buy an investment property with 5% down if he could.  Financing 95% means that if the economy goes well and there are no bumps you can make a huge profit on sale.  Having a huge loan to pay off means you will not have any monthly cash flow, and that all of your profits will come at the end. Of course the slightest bump in the economy and any event such as rents falling, expenses rising, vacancy rising will cause a catastrophe.  Huge leverage can turn what you hoped would be a cash cow into an alligator.  Note: Banks have eased their lending requirements some; sub 19% equity multifamily loans are being made (81% LTV.) We are also seeing some commercial investment loans at 25% equity (75% LTV.) In the extreme, the “fast” approach is a bit like “letting it ride” in roulette when you win.  Or buying penny-stocks based on 15 minutes of research on an up and comming enterprise.  Fast is high risk…but it will build equity at a much faster pace than other methods.  If it works.  “Fast” works best at the beginning of a cycle, when prices are depressed.  My prediction is that in 2 years there will be very low requirement loans available for multifamily acquisitions.  I also predict that in 2 years there will be newbies that will take out those low downpayment loans…and some of them will even say:  “The apartment market is going so well…what could possibly go wrong?!”   A lot of FAST investors do fine and prosper.  But when we’re talking about 5, 6,  7, and even 8 figure equity investments that’s simply not good enough.  At first blush you would think that as an Oregon Licensed Principle Real Estate Broker that I would prefer clients that want to invest as little as possible…that way they buy larger properties and I get paid more.  Not so.  I get paid enough for what I do that being able to sleep well at night is much more valuable than an additional commission check.

Don’t get me wrong.  I’m a huge fan of using debt to expand equity.  I’m also fan of garlic…but too much is a problem there, too.  What I recommend typically is a minimum of a 30% down payment…using a 70% LTV loan to cover the rest of the acquisition costs.  A 70% LTV loan will typically satisfy the lender’s DSCR (Debt Service Coverage Ratio).  On a well bought property financed at this ratio you should have some insulation from the vagaries of the economy.  While a 30% down acquisition strategy is less risk intense than buying with only pennies on the dollar down, it is far from highly conservative.

In my next post I’ll discuss the STRONG acquisition strategy favored by investors ranging from conservative to very conservative.  Hint: this approach is also favored by those that want to maximize cash flow.

 

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T-Bills: Guaranteed Returns?

I met with a potential client recently that wanted a guaranteed return 100% sheltered from State and Federal Taxes. I told him that in commercial real estate we create proformas reflecting current operations, and projections with potential results, but there are no guarantees. He was disappointed that I couldn’t duplicate the guaranteed return he was getting on his 10-year US Treasury Bonds.

I told him I refused to do that poor of job and he asked what I meant.

The simple truth is that if you invest $1,000,000 in 10-year US T-Bills paying 1.6% for one year you will earn $16,000 in interest. The good news is that interest is exempt from State and Federal Taxes. The bad news is that due to inflation af 2.5% a year you will have a net loss in buying power of $9,000 after tax. In short you have a guaranteed return that is a loss.  (Inflation data supplied by The US Dept. of Labor-Bureau of Statistics, Western Information Office.)

There are no investor of the year awards for minimizing losses…we want gains…so if the only guaranteed return is a loss…where should you go?

The Stock Market?

Investors loathe losing money…particularly if they are guaranteed a loss.  Certainly there  are no guarantees on securities and no sheltering from Fed and State Taxes, but returns over the past 3-1/2 years have been stellar.   The recent bottom of the market occurred the week of March 2, 2009 when the DJIA hit 6626.94.   The market is now hovering at 13,000, almost doubling  in just 40 months.  I used to have an employee named Mark Dean who fancied himself quite the horse-racing tout.  Mark used to say:  “Rick…there are fast running horses and there are long running horses, but God didn’t make any fast + long running  horses”.  If Mark’s metaphor is applied to investing it would suggest that markets that double in a few years may be overdue for a correction at worst, or a dramatic slow down in their growth at best.

I’m not only concerned about a possible correction, but how safe should you feel if your equity is invested in a market that can lose a trillion dollars in less than an hour?  At about 2:45 PM on May 6, 2010 the bottom dropped out of the DJIA and 1 Trillion Dollars in value was lost in about 18 minutes.  Some folks refer to it as “The Flash Crash”…I think of it as more than a little scary.  I shared my concerns with a “stocks only” investor and he said:  “It was a mistake.  It corrected itself shortly…these things happen.”  A mistake is when you forget to hold the bell peppers on a pizza.  A mistake is when you err and use “there” instead of “their” in a letter.  Mistakes shouldn’t, involve a billion dollars…much less a trillion bucks.

Investing in mutual funds or indexed funds may mitigate risk to a degree…that insulates some from the impact of a single company or even market segment performing poorly, but it doesn’t ameliorate risk from a market turndown/correction.

Investment Real Estate

I’ve worked on a series of deals with investors recently with varied returns matched to their risk strategy:

• I represented one cash poor developer that relied on owner financing to acquire an 18,000 sf commercial property in an up and coming area.  Their intent is to re-purpose the property.  Comparing their cash contribution to their profit potential produced an incredible Internal Rate of Return of over 50% per year.  They feel that investing in an up-trending neighborhood increases their chances of success…but they are aware that their risks and rewards are both quite high.
• I represented a cash rich institutional investor in acquiring a 26,000 sf medical office building.  This was an “all cash” transaction.  The closing price negotiated was a 9.72 Cap on existing income and expenses.  There was a 20% vacancy factor…so any new tenants are part of the upside strategy.  At the end of the day this has very low risk and a nice Internal Rate of Return.

I use these two examples to demonstrate how acquisition strategy impacts risk and returns.  Some of the projects I’m working on favor stability of monthly cashflow and low risk over long term appreciation.  Projected Internal Rates of Return vary from 8% to over 50%. While I can’t guarantee total sheltering of profits from State and Federal Taxes, the use of Cost Seg, and 1031 Exchanges significanlty reduces overal tax liabilities.  Managing your property tax liability helps too! There is some degree of risk in investing in commercial real estate…but my clients prefer that to the guaranteed loss from T-Bills!

To learn more about moving from a guaranteed loss to a possible gain, contact Rose City Commercial Real Estate at: rick@rosecitycre.com or: 503.577.1034.

Other articles you may like:

 

When To Take Multifamily Investment Opportunities: Recovery, part 2 | Rose City Commercial Real Estate

Multifamily real estate investment basics – part 1 of a series | Rose City Commercial Real Estate

CoStar: Multifamily Investment, Leasing Off to Solid Start in 2011 | Rose City Commercial Real Estate

Boost your NOI with training

 

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