Mike’s Apartment Blog

Another opportunity local to my area has shown itself. It’s funny how these opportunities blossom, only to shrivel up and die more often then not.

No doubt, the game has changed. What makes opportunities tough to get done is the constant rule changes. When rules like loan qualifying, short sale approval, and seller expectations keep changing, even the most steadfast buyer cannot make it happen.

I hear a lot of folks stating “cash is king”. It’s a fun buzzword and people like to say it a lot about real estate investment. They believe great deals can be purchased for all cash. I have not found this to be true.

All investment decisions are based on ROI and, more importantly, IRR. The big draw to real estate is the availability of leverage which allows you to multiply your ROI. In absence of this, ROI suffers, often times leaving you with an average investment you could beat by investing in other markets.

Until leverage becomes readily available, real estate will continue to be ostracized by the investment community.

Does this mean time to get out? Heck no! Being the investor who can see when financing comes back will position you to make incredible returns when the pent up demand for commercial real estate returns.

This post is two parts: 1 part advice, 1 part politics.

If you don’t know what Section 8 is, Wikipedia gives a good little explanation and history here.

Advice

A lot of folks look at Section 8 as a gauranteed way to ensure rents.  Section 8 rents can often be higher than market and get paid directly by the government rather than the tenant.  This takes away the hassle of trying to chase down tenants for rent.  All this is nice, but there is a yin to every yang.

When people are not personally paying for something, there is a certain respect that is lacked.  This is just human nature.  Ever get a free t-shirt from a concert or a convention?  Do you take it home, hang it up, make sure it is drycleaned ony, and wear it carefully?  No.  You probably wad it up, throw it in your bag, wear it while painting or working on your car.  The point is, you didn’t “pay” for it and so you don’t respect it.

Translate this human nature into apartment leasing.  Though you have tenant paying on time at an above market rate, get ready to make repairs.  Expect the unit to get torn up.  And move outs… those will be even more costly as most everything will need to be replaced.

There are two things you can do to compensate for this and get the best of both worlds.  First, vet out the tenant like crazy: find out how long they have been on Sec 8, talk to them about their situation, ask them the same penetrating questions multiple times to see if they are apt to lying, and get previous landlord input.  Second, make the unit indestructible: tile or vinyl instead of carpet or hardwood, high gloss paint that can be easily wiped down, heavy front doors with strong frames, and caulk every nook and cranny in the entire place.  Some thing you should just expect to replace like appliances and countertops, so be sure to find a low cost supplier for these things.

“Politics”

Let me initiate this by explaining that I am an economic libertarian.  I believe in minimal government involvement in all things: religion, crime, health care, regulations, and most importantly – business.  As a general rule, I stay out of politics.  But when it impacts my investing strategies, it is important to comprehend.

Government continues to get involved in free enterprise, often knocking it off course.  The idea is to aid those who are considered low income, give them the chances that might not normally be afforded to them.  Like most ideas, the essence of it is great – helping people – but the execution is and will always be flawed.

Government assistance is based off taxes, the amount the government collects is in direct relation to how much they can give out.  The flaw occurs when they increase taxes to create a new program.  The intention is to take money from those with lots of it and give it to those with less.  However, most folks who make lot of money are smart enough to work within tax laws and structure their businesses to avoid having to pay those higher taxes and the burden falls to the next level of income class.  Furthermore, these programs that are designed to give assistance to low income are sought out by the high income folks who then build a way to get that money back (like building indestructible apartments) - in turn getting richer.

This is the case with Section 8.  This is the case with food stamps.  This is the case with welfare.

The only question is which side are you going to be on?

Well, one of the deals I had been negotiating for month fell apart… again.

Very frustrating. We finally had an agreement on our LOI (letter of intent, a non-binding agreement to lay out the basic terms of the deal) and when I submitted the contract, they bailed.

Makes me question their experience as investor. Many new sellers and agents will play games like this without realizing the impact it has on their credibility. This is a fatal flaw, when you are new the only thing you have is your word. Once that is compromised it is very difficult to get established.

My company works very hard to live up to our commitments and deliverables. That reputation is incredibly important in a local, even national, investment market.

Most people who read this blog and haven’t seen a post in a couple weeks, might think that is because nothing is going on.  Quite the contrary… it has been a madhouse.  Lots has been going on lately and unfortunately this blog suffers.  But, I want to keep ya’ll in the loop (where I can of course).

Cirese Court – Still waiting on the inspection from the city.  They are dragging their feet, which never really made sense to me.  That building was a drug den before we took it over, now it has come together quite nice.  The city seems determined to charge us and delay us wherever possible.  I think this is how difficult neighborhoods get started.  The good news is we are taking this delay to get licensed to run ATR (Alcoholism-To-Recovery) Programs there.  This will allow us to accept grants from the city government, effectively doubling our cash flows.

New Apartment Deal #1 – This is an apartment I have written about previously.  Talk about your on again, off again relationship.  This deal got away from me earlier, when another buyer offered a higher asking price.  They defaulted on the sale (chickened out).  Now it is back in my lap, which we have negotiated a decent deal on involving some seller financing.  I think this is a good opportunity since there is significant value-add.  We are still in the negotiation stage, so I need to keep details fairly secret at this stage.  When we close, I can afford to be more open.

New Apartment Deal #2 – This is a deal in my backyard.  An owner has found himself in trouble with the operations of his building.  We are attempting to partner with him, cut a deal with the bank, and bring some cash to the table.  The resulting upside will come through stablizing the building and holding until rents rebound.  Unfortunately, this may take some time as the Phoenix-metro area is not expected to rebound until 2014.  Again, another deal in which we need to respect the parties involved and maintain secrecy.

New Business – Yes, I decided to help a friend take on a new endeavor.  He is starting a company and needs help in understanding the business side of things.  He is excellent on the core functions, but knows that if he wants to grow this thing, he will need to build it properly.  For this, he has asked my help.  I don’t want to scoop him and give away the premise, but sufficed to say, it is a great opportunity for him and I am helping in return for a small piece of the company.  Goal is to build this business around him, so when it becomes successful I can sidestep the craziness and be bought out (for a premium, of course).  Apartments are my thing, but I can’t resist helping good people get things started!

Guys, opportunity abounds.  If you are in the real estate investment business, now is the absolute best time to take advantage of depressed asset prices.  I am scrambling to grab everything I (and my investors) can.  We may not see another opportunity like this for a long time, if ever!

There it is.  With all the things that are going on, I am lucky my wife still wants to stay married to me – I am going to have to put in some serious family time this upcoming week.

Nitro Real Estate Services sent me a note earlier this week.  We have been thinking about making some minor improvements to a C-class building we have in downtown Kansas City.  We took this building over about 2 years ago and since then have been making slow but continuous improvements for the residents.  Every time something needs to be repaired or replaced, we redo it better to add curb appeal and value to the building.

<photos on their way>

This weekend, we added a retaining wall and a new front door.  What a difference it made!  It improved the building, added curb appeal, and created a sense of pride with the current residents.  Good people tend to want to be part of a positive movement.  The goal is to keep everyone moving forward

I don’t know.  My guess is that all the decent programmers out there have their sights set on much more lofty projects than property management.  Maybe it’s that most PMs are fairly basic.  Who knows?  All I know is there is a drought of good solutions out there.

Now add the fact that everything is going mobile… now what?

One company I came across is trying to do something about it.  Softwareadvice.com has a bunch of software reviews, and has one brief article that sums up the solid mobile apps available to the tech savvy property manager.  My favorite is the wireless maintenance management.  It allows the absolute fastest turn around time possible, reducing damage from latent repairs and keeping residents happy.  You can find it here.

Glad to see someone finally pulling this stuff together.

In this case, I mean opportunities.

Right now, my company is vetting two opportunities we had previously bid on in the past.  Both opportunities slipped past because we could not get to an agreeable compromise.  Now the opportunities are back, for whatever reason, and we are bidding on them again.

Negotiations can be tense, especially when there are large dollar descrepancies between offer prices and asking prices.  I have found that most investors are reasonable people and a good, sound and logical explanation behind and offer goes a long way to maintaining a relationship.  If a deal cannot be made now, perhaps it can be made again in the future.

And that is exactly the case now.  Unfortunately, for both opporunities, both the seller and buyer situations have changed.  Sellers are coming back asking for same offer as made before, but buyer has modified offers because the investment landscape has changed.

An important thing to keep in mind is to maintain the relationship with both parties.  In both cases, the folks are reasonable and looking to maximize their returns.  At this point it is a matter of matching expectations if possible.  And if not, part with mutual respect. 

Hey, you might have to work with these folks again in the future.

by Scott Ableman on Flickr

Ain’t nothing like coming inches to the finish line only to be clotheslined out of nowhere by some unassuming fan.  Rough.

Found out today that not only are the legal addresses to our buildings transposed, but the building has been incorrectly zoned.  Luckily, we are grandfathered in, but that means if we do any major work, we may be forced to original zoning.  So no additional units…

We may also be forced to pull permits for the work that was done prior to us moving in on the building.  Ouch… that could prove expensive and time costly.  If nothing else, it pushes back our CO and ability to get tenants moved in.

All part of the allure of investing in real estate.  If things were easy, everyone would do it…

We have nearly completed the top half of the units in Cirese Court.  There was a delay as we ran into plumbing issues we hadn’t anticipated.  This put us about 1 month behind schedule, however we are well on our way to leasing the building up.

Expectation is to fill the rent-ready units by beginning of the next month.  Construction costs appear to have increased due to these mechanical issues, but we are still far under fair market value for what we have into it.  This little building should turn out to be a very good move.

Check out the management team, www.reboundllc.com.

It’s no secret the housing market has been hammered.  Prices are down and inventory are up – the worst its been in decades.  Add to it the lending standard and apprehension banks have in giving anyone a loan, sales have come to a grinding halt.  Foreclosures and bank owned properties dot neighborhoods all over the USA, and few areas have been unaffected.

But what about commercial real estate.  Apartment buildings in particular?  Depends on the area, but most areas are starting to feel the pinch.  Check out this articlefrom Bloomberg.

Basically, the worst is yet to come – at least for banks.  A rash of unprepared buyers, lofty proformas, and lax underwriting led to many building being over leveraged.  These over-leveraged buildings now present a huge issue for banks, for as the asset value comes down, owners walk away.  Defaults to the tune of 5.5% of all mortgages are anticipated in 2010.

So what does this mean for investors? 

Well, if you own buildings you are probably already feeling the pressure.  Increased vacancy and decreased collections are apparent due to job loss, while increased energy costs can pinch cash flow.  Many loans are expecting to go variable or hit their balloon payment terms within the next couple years and those owners will be unable to sell their property or refinance their loans.  Banks will be staring at an inordinate amount of REOs.  They will have to change their standards just like they are doing with home loans.

If you are a buyer, this in an incredible opportunity.  There will be many properties stuck at the banks looking for owners.  Whether it is discounted price, killer terms, or extra leverage opportunities, it will be time to capitalize.

I am in the unique situation that I will be in both camps.  I intend on negotiating with any of our current buildings to take advantage of any leniency the banks offer while attempting to pick up additional assets in the downturn.  No doubt, it will be a interesting time to be an apartment investor!