Investing in apartments

Investing in apartments....

Buying real estate is not a spectator sport. It takes emotions, and it takes brains. Most of the people I know who are successful were lucky, too, since you can't control the world around you.

Emotions: you have to like the property you buy, and the people who rent from you. Really. Otherwise, it's unpleasant to manage and make decisions.

Brains: you should use more judgment and care in buying an apartment property than you usually use in the rest of your life, because the numbers are bigger.

Investing can be made simple: you pay out money to buy something, you get money in cash flow from the operations, and at some point, you sell it, and get a lot of money (your initial investment) returned to you.  I taught real estate investing at the graduate level, and used the following diagram:

Every investment costs money in the beginning (Year 0), brings in some cash flow in the years you hold it, and returns the cash flow plus your equity in the last year. You can compare every investment if you break it down into these steps, and calculate the internal rate of return. From baseball cards to the stock market, you can end up with a figure.

This is why I love apartment buildings: if you buy it right, run it well, and sell it for a little more than you paid for it, your "internal rate of return" can be excellent.

The other aspect of investment involves your assessment of "risk". I would argue that the market dynamics of apartment ownership are better than other investments. The population of the U.S., or your particular area, is probably growing. Most of the growth comes from young people, or people moving around, and they're more likely to need an apartment than a single family house. In other words, people need apartments and you'll always have demand.

An interesting LinkedIn forum for investments:

http://crepig.ning.com/profile/BruceHaulley

"Crowd-funding" and real estate financing

A recent change in the regulations of the Security & Exchange Commission may mean changes in small-scale real estate development. Combined with the reach of the Internet, it may mean more investors for more developers and ownership.

Briefly, prior to the July 10 2013 change, the SEC required those seeking investors to surpass very high standards of reporting in order to advertise for investors. Investors had to be close associates. Now, however, a real estate developer or a syndicate can make a plain-English appeal for funds to the general public.

The Internet brings a second element: crowd-funding. A Web presence, for instance "Fundrise", can reach numerous candidates easily and cheaply. A person in New York can invest in an apartment complex in Palm Springs.

It might go like this: an apartment building is found, but the experienced purchaser lacks all the down payment. He/she advertises on a crowd-funding site, producing a prospectus, a management team, financing, and supporting oversight experts (accountant, attorney, inspector). Moneys collected go into escrow, the deal closes, and reporting is done at agreeable intervals. At some time in the future, the property is sold and moneys distributed to investors.

I've had a little experience with real estate development partnerships. Investors should be careful to know the people they invest with, and exercise good oversight over management of the developments. It will be interesting to watch how the changes affect real estate in the future.

Here is the SEC announcement:

SEC removes prohibition on advertising for investors

A discussion is here:

http://astudentoftherealestategame.com/

Apartment properties-- the best investment in commercial real estate

There's a lot of talk about "real estate" in the U.S. rebounding.

The discussion usually centers around owner-occupied single family homes. Commercial real estate is a mixed bag, with more complex dynamics.Commercial real estate includes shopping centers, raw land for development, industrial, medical, office, and many more specific, individual groups with their own business cycles.

However, one sector, multifamily, may be solidly positioned to grow for the foreseeable future.
Prices for multifamily properties are reasonable, judged by their yield to the investor, their potential appreciation, and demand.

Institutions see a sustained growth for apartment investment properties:

http://www.realestateeconomywatch.com/2013/04/apartment-markets-still-look-good/

In my area, the Coachella Valley area of California, there are hundreds of low-density, functionally-obsolescent properties built in the 1950's. My secret personal plan (don't tell anyone) is to buy older properties, rebuild them from the foundation up, going up two to three stories, improving their building standards and security, and making them relevant for today's demographics (more single parents, seniors, and women). Since they were built in the past when the urban areas were much smaller, their locations are often highly desirable.

As an investment, older multifamily properties offer cash flow as investments, and the potential of redevelopment at a timing of my own choosing in the future.  If you're interested in partnering, please contact me!

Vacant Restaurant for sale or lease

My broker-partner and I have a listing on a vacant restaurant in Yucca Valley, California.

It's a diamond in the rough. The current owner bought it from the bank, and is willing to fix it up to the standards of a first class restaurant chain. There are two kitchens, a bar, dining rooms, and two patios. On 1.2 acres, there is plenty of secure parking.

The Rib Co. sits on Highway 62, with 28,000 cars per day passing in front. The town of Yucca Valley, according to the U.S. Census Bureau, has an average household income of $55,000. The town reminds me of Santa Fe, New Mexico, with a beautiful topography and cooler weather than the rest of Coachella Valley (22 miles south).

Yucca Valley is redeveloping its core, and the Property sits right in the "Old Town Highway Commercial Specific Plan". With good planning, the area will be friendly, beautiful, and busy.

Call me or email me with your interest. Bruce Haulley 760 969 1033, bhaulley@gmail.com

For flyer:
https://docs.google.com/file/d/0B5UxaxpDt6d2SnlvVmdqS3Q1NUE/edit?usp=sharing

https://docs.google.com/file/d/0B5UxaxpDt6d2Z3pBbUtZZFBUTjg/edit?usp=sharing

Published in The Desert Sun

The Coming Crisis in Apartments in Coachella Valley

When people talk about housing, they usually mean single family houses, owned by their occupants. But one third of Americans live in apartments, paying monthly rent. Housing policy hasn’t properly considered their legitimate concerns, and a crisis is shaping up.

America, and Coachella Valley, aren’t building enough apartments for our growing population. Even at the height of the boom in 2006, we built less housing than the growth in families as children became adults, started careers, got married and had children.

After the Crash in 2007, new building collapsed, but kids kept growing up. Goldman Sachs estimates that there are 2.7 million shadow households, adult kids living with their parents and room-mate situations. These people need apartments.

Coachella Valley is even more in need of apartments for its population than the rest of the U.S. in general. The Valley is an island, at great distance from other urban areas. Jobs in general here pay less than the rest of Riverside County. It doesn’t pay to commute to work here. Cities in Coachella Valley aren’t building apartments; building permits were declining even before 2007.

The living situation for the working class in Coachella Valley will become desperate in the coming years. New families, the working poor, and single parents will not be able to find decent, affordable housing within a reasonable distance of their jobs. Local cities must take a pro-active approach to finding creative solutions for this important segment of our society.

http://www.mydesert.com/ 

The Next Economic Earthquake

(Printed in The Desert Sun)

Why China Might Become Greece, and Why That Might be Good for California

The Chinese economic miracle has been growing for decades, since the government made private enterprise legal. No other economy has grown as much, and China is now the second largest economy in the world.

The banking system is a major component of the government’s ability to manage the economy. However, its lack of openness, and inflexibility, are major weaknesses. No one knows for sure how many loans in China are non-performing, and they could suddenly fail, one after another. Their banking system is living on borrowed time.

China may become another Greece, in that its loans, its currency, and its trade may suddenly shift unexpectedly. However, that may be good for the U.S., and good for California.

First of all, jobs would grow here, instead of China. Real estate here will be a better investment than property in China, much of which is sitting empty and too expensive for the average citizen. Finally, it might be “tough love” for the U.S. to get its own financial house and federal budget in order, without depending on the readiness of China to buy our debt.

This is a recent article from CNN regarding Chinese buyers of California homes:

http://money.cnn.com/2013/07/08/real_estate/chinese-homebuyers/index.html

This is a recent article about a change in policy to encourage foreign buyers of American real estate

http://www.realestateeconomywatch.com/2013/03/foreign-investors-could-be-freed-to-invest-in-us-real-estate/

This is a recent article regarding commercial real estate and Chinese buyers

http://www.nytimes.com/2013/06/26/business/global/chinese-investors-pursue-us-real-estate-deals.html?pagewanted=all&_r=0 

Are real estate agents worth the money?

Not always.

The best agents bring their "A-game" to each deal. No one outside the business has the day-to-day exposure to transactions, negotiations, and strategy, to match someone with experience and judgment, and a few screw-ups (yeah, I learned from those, too).

In the book Freakonomics, the author reported on a study of real estate agents selling their own homes, and selling the homes of clients. They consistently got more money for their own property, and the reason is simple. When they're working for someone else, they want the most reliable income, at any price, and when they're working for themselves, they want the most money.  They're likely to urge their client to take the first, solid offer, but wait for more offers for themselves. It's human nature.

My father never liked using brokers, and he was a successful investor and businessman. Some people like having the control.

I can see both sides, but I have found that the best investors use brokers. Success looks for experts.

http://www.freakonomics.com/2005/06/17/professors-dubner-and-levitt-made-erroneous-statements-on-today-show/ 

The Economist Magazine discusses U.S. real estate sales commissions:

http://www.economist.com/node/21554204

18 units in Desert Hot Springs

I wish I could have bought this property myself.

My fellow broker-extraordinaire, Dick DeCarlo, listed this vacant motel/spa in Desert Hot Springs for $530,000. It's in surprisingly good shape, on the bus line in a good neighborhood, and built with individual electric meters.

This property appears to be a great deal to me.

• On a "per-unit" basis, it's less than $30,000 a unit. (You couldn't build the building for that). 
• On a "per square foot" basis, same outcome. 
• On a gross rent multiplier measure, the projected rents would make this a great value. 
• On a "cap rate" basis, using reasonable estimates for income and expense, it would be a terrific purchase.

Here's the up-side. Buy it either with cash or get the seller to carry, fill it up with paying tenants, get a loan, fix it up, and sell it again in twenty four months at a seven cap.

Dick's got a couple of offers on the property already, so it's probably gone. But the California market has a lot of opportunity for people to make money with some work, some smart risk, and access to capital.

Foreclosures didn't necessarily hurt middle class families...

According to a recent study published in the American Real Estate Economics journal, the wave of foreclosures of single family homes in the U.S. did not reduce the living circumstances of those affected.

First of all, many foreclosures took place at the speed of a glacier. Fully half of the foreclosures were still in process two years after starting, meaning the families continued to live in the homes.

Second, when the families moved to a new location, few moved "down" into apartments or more modest accommodations. Most found a new, similar residence, at a lower price than their previous one.

Finally, the major damage of foreclosures was personal, not financial. The study mentioned divorces as a significant by-product of the stress on families making tough decisions.

http://www.areuea.org/publications/ree/

If you're thinking about buying commercial real estate....