Off Market deals solve a lot of problems for Portland, OR multifamily investors. Many Rose City Commercial Real Estate (RCCRE) customers have confided that they would love to sell their current assets. Fear of not being able to find a second leg property for their 1031 Exchange keeps them from making a move.  RCCRE has a group that focuses resources solely on multifamily assets that are not publicly marketed.

JUNE OFF MARKET SUCCESS

Our June success story success was finding an off market 57 unit property in great condition. And plenty of upside. Our client was  an institutional investor in a tight spot. They had closed on the first leg of their 1031 Exchange and their 45-Day ID Period was dwindling down. They weren’t finding a good property invest their equity in. We found them an off market opportunity that had been well managed, but the Seller had directed the management company to focus on stability rather than aggressively pushing rents.  Normally you don’t see high levels of upside in a two-year-old property.  With our help the client closed on a winner with great potential…and didn’t have to settle for “whatever’s left”.

JULY OFF MARKET SUCCESS

We were asked to help a California-based institutional investor with the second leg of their 1031 Exchange.  Sure they had multiple options. But they made an offer on our off market property because the asset because of its profit potential.  They are currently under contract finishing up their Due Diligence activities on the 30+ unit property.  Its located in Vancouver, WA.

AUGUST OFF MARKET SUCCESS

In August we found another off market but available asset.  It’s a 75-unit apartment property in Washington with significant profit potential.  We’re still working on the contract, but it looks promising.  Again, we have an institutional Buyer with a 1031 exchange.  Fingers crossed but it looks good!

FUTURE OFF MARKET SUCCESSES?

1. We have located a 28 unit property and a 31 unit property that we are researching.   The owner has indicated that they are ready to sell, but we have not established a price.  They don’t fit in with the acquisition profile for our remaining 1031 Exchange Investors. They look like they have great profit potential for someone.
2. We located an off-market-but-available Portland area apartment complex with 45+ units. The price is $7,150,000.  It’s almost new…so it’s in great shape. I’m still looking for a Buyer!

DO YOU WANT OFF MARKET APARTMENTS?

Could having access to our multifamily deals before other investors become aware of them be an advantage for you?  Contact our team at PH: (503)577-1034, or EM: rick@rosecitycre.com.

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I am currently looking for 50 unit and up properties for a 1031 investor…but I’m also researching plexes and small apartments for a California investor that wants to move his equity to an environment that is more favorable.  There are huge REIT funds now that focus on single family residences and plexes…and they are doing quite well.  The fact that they are active in Portland says volumes.  With PDX being the #1 city in the US for year over year appreciation three months in a row we can expect that to continue.

Residential Multifamily (RM) Definition:  Typically Residential Multifamily is regarded as 2-4 units, or “doors”, with 5 units and up being considered Commercial Multifamily.  Lending requirements differ greatly…so the differences are important.  Many multifamily investors start by purchasing a duplex, triplex or quad; living in one unit and renting out the balance.  I know of one very successful investor that started out with a tri-plex and now has 5,000 multifamily units to his portfolio.  Perhaps even more amazing…he sold the triplex years ago…but has yet to pay taxes on the profit due to judicious use of the Section 1031 IRS Rules.

Residential Multifamily Pluses and Minuses: One advantage of a plex investment strategy is that lower down-payments are permitted by banks…sometimes as low as 3%.  RM loans close much more quickly with fewer requirements than CM loans.  RM loans focus exclusively on the lender’s evaluation of the owner’s credit worthiness…with CR weight is also given to the quality of the investment.  It’s easier to keep a watch on your renters when they’re next door, too.  Prices per door tend to be lower than single family homes.

Their pluses are also a source of their weakness:  living next to your renters means they always know when you’re home.  From the renter’s perspective you are always available to discuss their maintenance problems and “wish list” of improvements they would like you to make (without compensation.) You are more likely to become “friends” rather than business associates.  It’s harder for most to enforce rent timeliness on friends.  Paying a Property Manager 8-10% of your gross rental income makes it very hard to have positive cash flow on small investments.

Plexes tend to produce low Cash Flow, a reason they were previously eschewed by some investors.  Cash Flow is simply the monthly amount remaining from:  (All Income) – (All Expenses, including taxes, insurance and debt service).  With fewer units to amortize expenses over, plexes had a hard time competing with the functional efficiency of commercial complexes.  As a result, the plex investor focuses primarily on returns gained over time from appreciation.  Those gains are that are reaped at resale or refinancing of the property.  Contrast this with the investor of larger investments that expects to make a higher downpayment (20 to 40%) and receive monthly distributions from profitable operations.  (In addition to appreciation.)

Valuing Residential Multifamily Assets: The local submarket  for single family residences (SFR) is the strongest fundamental in determining values of plexes.  Without adding in other factors, most potential renters will not pay more for the inconvenience of living close to neighbors than they would pay for of a SFR which would likely have more privacy. RM purchasers use the Gross Rent Multiplier (GRM) to compare properties.    GRM = Purchase Price ÷ Annualized Gross Rent. GIM, or Gross Income Multiplier is also used interchangeably.  It’s intended to reflect that rent is not the sole source of income; late payment fees, NSF charges, garage rent and other revenue sources need to be considered.  A triplex that rents for $600 per door and produces $400/year in other income that is for sale for $279,000 is available at a 12.7 GRM.  Proof:  $279,000 ÷ $22,000 = 12.7.

GRM Limitations: As it is based solely on the Gross Income, there is no accounting for vacancies, concessions or expenses.  What if their property has occupancy problems due to poor maintenance?  What if the landlord is giving a lease concession of two months free rent, thereby reducing revenues by 10/12’s or 16.7%?  What if expenses are managed poorly?  In each of these examples the value of the asset is lessened, yet the GRM would remain the same.  Use GRM only as a rule of thumb when investing in plexes to see if a more thorough investigation is warranted.  All competent investment advisors will offer a proforma including expected profits based on actual income and expense.

1% Rule: This archaic valuation factor was derived from the notion a property’s value would  equal 100 times a month’s rent.  Rent rates have not increased at the same rate as home values.  A $250,000 house would rent for $2,500/month under this scenario.  If someone cites the 1% rule they are telling you: “I don’t know what in the heck I’m talking about.”

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Real estate investors know that I have been touting Portland’s meteoric recovery from The Great Recession for some time.  But it may be even better than you thought in regarding investment real estate…particularly in the Multifamily Segment.  Industrial, Office, and even Retail properties are doing very well in Portland, but Multifamily is still the “Belle of the Ball”. Not only is PDX a hot multifamily market…but the fundamentals seem to support long term success as well.

#1 Spot as a Top Moving Destination

United Van Lines issued their 2015 Movers Study last week.  It showed Oregon as the Number 1 Destination State with 70% Inbound vs. 30% Outbound moves.  This was Oregon’s third straight year being Number 1…and Oregon actually increased it’s percentage lead over other states in 2015.  Bear in mind that while Oregon is cited…its the Greater Portland Area that is the primary cause.

I call it “youngification”.  Millennials are moving to Oregon in droves.  They may be the leading segment, but their not the only ones.  Oregon’s livability is a key…but there has also been significant job growth too.  Nike and Intel seem to be racing to see who can expand the fastest.  Its just about impossible to find office space of 25,000 plus in the Sunset Corridor, and downtown is even tighter.  Start-ups see Oregon as a great place to start operations…we’re one of the 3 fastest growing tech centers in the nation.  All those folks need somewhere to live.

Portland #1 for Home Price Increases

Portland has been booming.  The most recent S&P/Case-Shiller Home Price Indices show Portland, Dallas, and San Francisco with a 10.9% year-over-year increase in October, 2015 …the highest in the nation.  Portland has been near the top for awhile.  To give Portland’s numbers some contrast, our 10.9% increase is more than double the rest of the nations 5.2% increase. With so many moving to Portland there is upward pressure on housing prices that show no signs of abating.  One of the impacts of rapidly rising home prices is that the affordability level for purchasing moves up…meaning that many would be owners are forced to be renters.  This in turn pushes up rents.

New Figures Show Oregon’s Vacancy Rate Lowest in U.S.

The Associated Press reported two weeks ago that data from The U.S. Census Bureau shows that Oregon’s rental vacancy rate was the lowest in the country in at 3.6%…down from 4.4% the previous year.  Second was California at 3.9%; Massachusetts, Vermont, and Washington State were also low.

While those vacancy rates seem low…Portland’s extremely low vacancy rate, even lower than most of the state, is skewing the numbers downward.

What it Means to Investors

As recently as 3 weeks ago I was quoted 3.125% on multifamily debt.  That means even buying at a 5.0 Cap Rate you have a 175 points of favorable leverage when comparing Acquisition Cap Rate vs. Debt Cost.  While you can make pretty good returns on that basis in a flat market…a market like PDX that holds long-term promise for continued upward results explains why so many institutional players lover Portland.

I spent much of The Great Recession telling potential Buyers that unless they were buying for all cash from a highly distressed Seller they should stay out of the market.  I could have used those commissions, to tell you the truth.  For the last couple of years I have been a big proponent of multifamily, particularly in Portland.

Outlook

While it won’t go on like this forever…growth will slow down before it stops.  I continue to see signs of of the local market in Expansion Phase.  I see the influx of population and jobs continuing for some time.  Higher single family home prices will create a condo friendly environment as well as higher rent rates.  My advice: continue buying if you already have a portfolio…and start buying if you don’t.

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