20 units

I drove a listing that I think is a pretty good investment. It's 20 units in the "Cove" area of Cathedral City, near Palm Springs.

The Cove is the area on the south side of Highway 111, which is nice because it has a neighborhood feel, a gently rising topography, and some consider it to be the "downtown" of Cathedral City. The City Hall is just across the Highway, with a cinema, a water feature, and dining. It's nice.

First of all, we consider the numbers put out by the listing broker. He claims 6.72% cap rate,  and a 7.9% "cash on cash". 

Just to refresh your memory, the cap rate is the "net operating income" divided by the asking price (before the mortgage payment). 

The "cash on cash" is the net cash after the mortgage payment, divided by your down payment.

In my experience, the broker's numbers are usually a little optimistic (that's his job, by the way).  

If you agree with me about demographics going up faster than construction, multifamily properties will appreciate a little faster than single family homes over the next few years. So, if you add the market appreciation to the cash-on-cash return, your "internal rate of return" would be very good, better than any other investment I'm aware of.

If you're thinking about an investment, you might start off with an offer at about $90 per square foot, which is ten percent less than the asking price. Call me for more information, or to present an offer!

When to buy, when to sell...

As an economist, I'm comfortable with numbers, facts, and clear questions. So here's one: when should you sell your investment property?

When you have a better investment.

How do you know? Here's where the work and the judgment come in.

It's my personal opinion that most investment property owners hold too long. It's understandable; it's a lot of work to market your property, sell it, and find another one. However, the market is always changing, and your excellent decision of 2010 is probably not the best decision in 2013.  Interest rates change, business changes, and population moves. Hanging on to a property may not be a bad plan, but it's rarely the best strategy to make the most in real estate.

This strategy implies a constant monitoring of other investments. Right now, I personally believe that commercial real estate, particularly multi-family, is the best sector for investment and appreciation. However, real estate related stocks might be good, too. The smart investors are always looking at things they turned down in the past; maybe they changed and are better now.

As a commercial real estate professional, I notice that I deal with a lot of mature people with assets. That kind of person probably has learned to be careful with risk, and fairly opinionated (since they're successful, they have every right to trust their own opinions).

However, it's easy to make judgements too quickly. It takes some effort to keep your mind open when you think you already know the answers (I'm really talking about myself here, not you), but I've been surprised in the past when I found the facts were very different from my beliefs.

The U.S. real estate market has changed much more than anyone would have guessed, before the Global Financial Crisis. The rate of change is not slowing down--it's actually speeding up. Stay open minded, and see the opportunities before the crowd.

Chorus of positive articles about investing in apartments

The act of investing includes two approaches: first, to independently look at the facts, and second, to watch what other people are doing. 

We are definitely a "crowd", and crowd behavior is a powerful influence on investment results. A 'buzz" of good news, or bad news, drives a lot of individuals to make decisions, and that affects the market. 

Commercial real estate has been a mixed bag for the last seven years. Industrial, office, development, and specialized uses were knocked down by the Global Financial Crisis, and slow to get back up.

But now, I see a lot of articles about multi-family. Ride the wave early.

Article "six-facts-why-apartment-investors-should-be-optimistic"

Getting the right advice

Choose the right people to ask for advice in your apartment investment. In my experience, talking to an attorney or an accountant is likely to get inexperienced, personal opinions, not good business advice.

First of all, operating a commercial real estate investment is a specific skill. Judging tenants, calculating risk, and negotiation are really important-- and most people don't have the necessary experience.

Accountants are good for judging your personal financial situation, and tax obligations. But the macro-economic judgment that leads to good returns and high rates of internal rates of return, would not be their area. They're excellent at arranging the books and records, but don't know how to manage property (my apologies to anyone that does).

Attorneys are temperamentally risk-averse. They look for problems and threats. Believe me, owning commercial real estate will have problems and threats. LLC's and entities are worth looking into to shield your personal net worth from the risks of ownership. But most lawyers don't know how to manage property investments (my apologies again to anyone that does).

Being an entrepreneur is very different from being an accountant or an attorney. Use experts where you should, but don't invite opinions from those who aren't used to taking on risk.

Reasons to buy an apartment building as an investment

Recent stories suggest that the bond market is over as an investment, as interest rates rise. Stocks have appreciated, but few analysts suggest that there's a lot of future growth in prices.

Real estate, in California, is still a great deal. Multi-family, in particular, has not gone up much in price, and there are many good deals on the market. A good broker can find you deals that aren't on the market, which is where the opportunities are.

8-reasons-to-invest-in-multifamily-apartments

Buying an apartment building in Palm Springs

Palm Springs doesn't have the most apartment units in Coachella Valley (Palm Desert has more), but it's got prestige and name recognition. If you're considering buying an apartment property, you could do worse.

The cap rates for Palm Springs range from 5% up. I recently walked through a 1955 property, well-located, and in good condition, for sale for a seven cap. As an investor, I'd look at buying an older property in a good area as a two-step strategy: first, run it as is, and look into rebuilding on its foundation in the future.

Here's the issue with Palm Springs for investing: it's a little unfocussed in its long-term future view. There are two large shopping centers which are vacant. One's being remodeled for a hotel now, and met some local resistance (for good reason). The other's just vacant. 

Since I live here, I think it's a great place. For apartment investing, it's got a good location on a major interstate highway, it's near Los Angeles, and has a reasonably healthy local economy. Detroit, it's not.

Los Angeles Times article

Rehabilitating American cities

I had the great opportunity to live in Asia for the last six years, and my opinions about America will never be the same, again.

I love being an American, so this isn't a political change. However, I don't love American cities, and I do love Asian cities. American cities could learn to become better places.

Density is not a bad thing. Traffic jams, crime, and noise are bad, but the benefits of living and working closely are great.

I can't help but notice that shopping centers are under-utilized. Too much parking, too much vacancy, too little going on to attract me to go. In Coachella Valley, there are many vacant ghost towns of old retail.

Cities might take the lead and redevelop the sites into mixed use with public transportation access. 

Pudong area of Shanghai, China. This project, at the time in 2007, was the most expensive housing in China.

Buying an apartment building in Indio

The Coachella Valley has a number of sub-markets.

One is the City of Indio. This is located at the eastern end of Coachella Valley, with a largely agricultural, lower economic population.

Indio is engaged in a long-term plan of redevelopment. The long-empty shopping center in the middle of town will be redeveloped as

For an investor, Indio is a good area to investigate. The cap rates are far better than the Western region of Coachella Valley. Many properties are newer, and the streets are clean and safe.

 "the Next Big Thing" report about Indio

Americans are driving less...

According to a study, the year 2004 marked the high point in automobile usage in the U.S. Since then, people are driving less, owning fewer cars, and spending less on them.

This has a lot to do with real estate, particularly apartment real estate. Location represents a premium, or a discount, for any apartment property you're considering. 

http://www.uspirg.org/reports/usp/new-direction

The Current Market for Real Estate in Coachella Valley

Some recent data shows real estate in Coachella Valley as having recovered from the Crisis, and getting some legs under its pricing and velocity.

Prices for homes have been flat for the last few months after growing in the 12 months before. Speculators are becoming a smaller segment, and owner-occupants are becoming a bigger proportion.

In the Coachella Valley, people associate the summer with a slow down in activity. However, the statistics show that the inventory declines, demand continues, and transactions increase. A couple of years ago, there were years of supply on the market, using the current rates. Now, it's less than three months.