The Impact of Unicorns on Commercial/Multifamily Real Estate
The Impact of Unicorns on Commercial Multifamily Real Estate
read moreThe Importance of a Well Designed Real Estate portfolio
A Properly Balanced Real Estate Portfolio True, returns from owning multi-family rental properties can be high, but the highest overall returns can be obtained only after a careful assessment of risk and with a well- designed portfolio of properties. The stability of the return from each property is key to the performance of the package. The best approach is to add properties only after considering how they balance others in the portfolio, in order to spread the long-term risk and increase returns. Avoiding Vacancies – and Turnover The biggest risks of all: vacancy and turnover. An unoccupied unit brings no return, whatever its assessed valuation. Potential causes of vacancies should always be kept in mind, and a mix of property types in one’s holdings can mitigate the consequences inherent in the instability of the real estate market. Class “A” Characteristics For residents of Class “A” luxury complexes, prime location, and amenities are essential. “A” Tenants tend to be unaffected by the ups and downs of the markets, and to be reliable in payment of rent. However, stable, high rents do not necessarily translate into high returns; actual returns can be low because of the substantial maintenance and renovation costs the investments requires. Other factors to consider: new or newly-renovated complexes nearby, or conversely, the potential decline of the neighborhood might lead high-paying tenants to flee, leading to a re-evaluation of the worth of one’s holding. All this means that even a somewhat lower return can be viable as long as the units are continuously occupied Class “B” Characteristics Class “B” developments constitute the bulk of rental housing. A “B” tenant may be credit- worthy and looking for a lower price unit in a desired neighborhood, or could be a less-credit-worthy tenant desiring a better complex. The property may be in an “A” location, but with much deferred maintenance and a dated design. Upgrading and refurbishment of the property implemented over time should be part of the business plan, in the end can yield excellent returns to the portfolio. However, current tenants are likely than not to generally changing neighborhoods; however turnover may be a challenge during up and down cycles. Credit-worthy tenants usually continue to rent or buy while the less credit-worthy may downgrade to low rental units. Class “C” Characteristics Class “C” complexes tend to be in less desirable locations, and lacking amenities such as trendy cafes and retail shops nearby, and with much deferred maintenance. Although tenants may face difficulties in keeping up with their rent, subsidized units – that is, those backed with government support – can offer quite stable income. Near universities, students make dependable tenants, to a large degree offsetting the relatively high maintenance required by temporary occupancy. The low purchase price of Class “C” properties can result in substantially high returns when occupied, compared to that of other property classes, balancing the innate volatility of lower-rent areas. However, overall employment and proposed changes in government or institutional support might alert one to review the investment potential of the location, so it is wise to keep abreast of any planning issues. Moreover, if there is an improvement in the surrounding area, the property might shift from the “C” to the “B” Class. A Balanced Portfolio Is an Active Portfolio It’s not just the properties themselves;...
read moreDevelopments near transit hubs have become attractive
As traffic is projected to increase in coming years, developments near transit hubs have become increasingly attractive to intrastate rail transit, including the largest high-speed system in the US. The variety of shops and the availability of transit favor multifamily projects. The L.A. County Metropolitan Transit Authority (LACMTA) operates bus, light rail and subway services and is the third largest transit agency in the country. The scale of development ranges from small neighborhood centers around the stops at the Expo line, to the mammoth convergence of transit at Union Station. Many Opportunities Exist The wide variety of stores appeal to the regular passerby. Theaters and other entertainment venues find customers at the hubs, too. Empty office complexes in the suburbs have lost many of their tenants to new facilities near transit stops. Apartments with access to shopping and transit are particularly desirable for Millennials and, in metropolitan Los Angeles, are located in the downtown areas of Long Beach, Hollywood and L.A. itself. The Pasadena area – stops like Fillmore, Del Mar and Memorial Park – is especially interesting because Amtrak’s Surfliner service to San Diego is due for expansion, and the promised high-speed link to San Francisco will be routed near there. But there are many transit stops in lower density areas as well, and these offer potential for upgrading, or even replacing, adjacent properties. What used to be a strip mall can be transformed into a mixed-use development, with offices, high-end stores, restaurants and theaters. Attracting the Millenials The preferred lifestyle for Millenials appears to be very different from that of the Boomers. Rather than an isolated house on an acre 30 miles from a central city, young adults today like closer-knit communities, with more opportunities for social interaction and amenities nearby. They purchase bicycles and short-range electric vehicles, and generally appreciate a more casual lifestyle. They tend to stay longer in apartments, waiting to start families and in preparation for buying a house, saving to reduce the mortgage. But even when they own, they like to have their friends around. Changes in the office environment have led to more flexible working hours and more mobility. Many younger workers perform a substantial part of their jobs in Wi-Fi-equipped cafés. Really, the transit stop provides an immediate connection to anywhere you might go, with a lot less time spent sitting in an...
read more4 Benefits of Real Estate Syndication
When most people think of real estate investing, they think of buying a property on their own and making money off leasing or renting it to other people. However, there is an alternative way of looking at real estate that is much bigger than traditional real estate investing- this bigger picture in real estate is called real estate syndication or passive investor real estate, and it’s an excellent option for people looking to make a big real estate investment with a limited amount of responsibility.* So, how does real estate syndication actually work? In real estate syndication, many owners get together and pool their resources in order to purchase real estate. This property is usually much larger or bigger than any one investor would purchase on his or her own. There are many benefits of real estate syndication, and its rewards are clear as more and more investors opt for this crowdfunding method of real estate investing 1. Lower Financial Risk Most Syndication are set up with a general partner and passive partners. The management risk in the investment, thus, is with the general, however the general partner gets to use collective sum other people’s money for the investment. The passive investor only invested a limited amount, and their greatest risk is losing their original investment. 2. Greater Knowledge Like the saying goes – two heads are better than one. And, in the case of real estate syndication, real estate investors get to take advantage of the fact that they can rely on the knowledge of a group of investors, and not just the knowledge of one. Owners in real estate syndicates are often able to take advantage of the expertise of people who come from a wide-range of backgrounds, which means they can make smarter decisions with financing and managing the property. 3. More capital Upfront With more investors, there is more capital or money available upfront, since there are many accredited investors involved. This means that a bigger payment can be put down on properties from the beginning, yielding lower monthly payments, as well as more available money for rehab, upgrades, and maintenance. 4. Less Involvement Because a real estate syndication consists of a real estate limited partnership, it’s a great choice for passive investors who are interested in putting money into real estate and making money out of real estate, who would also like to avoid daily real estate management issues. First, it’s important to understand what a limited partnership is: a business entity in which the limited partners plays a limited role in the organization’s operations, and have limited liability when confronted with losses. A real estate limited partnership (RELP) is normally comprised of a general partner, usually a seasoned property manager or real estate development firm, and outside investors whose role, of course, is to provide financing, and as limited partners, to receive a share of ownership as limited partners. Real estate syndicates allow passive investors to reap the financial rewards of owning a property without having to deal with the day-to-day hassles of owning a property, like tenants, maintenance issues, or upkeep. * Please note: it is always prudent to consult your CPA about issues of tax liability and your legal advisor for any real estate...
read moreReal Estate Implications of Population Shifts in California Through 2050
Urban Areas in California Are Evolving In real estate, first movers define the market. By the time you read reports on what’s trending, it is often already too late. Reports involving US census data along with demographic projections issued by the state of California provide a a data-driven picture of how urban areas in California are evolving, particularly in the greater Los Angeles metro area. Understanding the real estate implications of those changes can provide significant value in terms of determining which income generating properties are best positioned to perform in the new environment. Taking a proactive approach to real estate investing offers many benefits beyond the financial, such as having better leverage in future deals and earning a reputation for being right. No one can see the future, but investors who have the better models of how the market is changing will have a distinct advantage. Trend 1: The End of Booms Right now, 15 percent of the population is 65 or older. By 2030, it will be more than 20 percent. Investors have already cornered a majority of the best deals for real estate syndication and investment around properties concerned with healthcare and services for the aging. What people may not realize is that the replacement birth rate in the US is low but remains steady. There has even been an increase in birth rates in recent years. This will put an end to generational bubbles like the Baby Boomers for the foreseeable future. The coming trend in real estate investment through 2050 will be greater marketing to the swelling buying power of younger professionals who are flocking to inner cities. Trend 2: The New Work Force Hispanics became the majority in California in 2014, but what matters most is their ages. The California Department of Finance projects that by 2030, whites in California who are aged 65 or older will number 4.1 million, while only 3.8 million will be under 25. In comparison, Hispanics aged 65 or over will number 2.2 million and those aged 25 or under will equal 7.2 million. By 2050, adults of working age in California will be predominately Hispanic. To be successful in reaching these working professionals, multifamily commercial real estate in the inner urban areas will need to concentrate on serving this demographic. Trend 3: Real Time Delivery Cash-flow investing in multifamily housing will remain very promising over the next few decades, but commercial real estate investors should look on retail construction very critically. The mobile workforce increasingly operates online and on demand, with the rapid rise of real time service delivery providers like Uber. Southern California will lead the state population growth through 2050, with Riverside growing faster than any other county. It will take second place after Los Angeles in population, with a projected 4.2 million compared to L.A.’s 11.6 million over the next few decades. Mobile delivery services are growing in importance to this new generation as central urban centers attract the greatest number of affluent working professionals. California’s population is expected to top 52 million over the next few decades and skew younger than the rest of the country. A young, urban, predominantly Hispanic working population will require specific types of housing and commercial real estate. The only question is which investors will provide it for...
read moreTitle Insurance in the Due Diligence Process
The Role of Title Insurance in the Due Diligence Process – Part 3 in a Series Protecting Ownership Rights What kind of protection is available to the buyer or lender at the end of a real estate transaction, complex or simple? The answer: commercial title insurance, designed to shield the insured against losses resulting from title issues and defects. Important: the Right Title Insurance Company You’ve got be on the lookout for any special exceptions to title, as they can interfere with your real estate investment goals. A good title insurance company can help you with this (BTW, such a company, usually for a fee, will perform due diligence services of its own). Such a company offers what is called an owner’s policy, the purpose of which is to ensure that the property purchased by the buyer isn’t saddled with defects, liens and encumbrances. What Title Insurance Offers the Lender Lenders, for their part, desire a policy that protects and facilitates the sale of mortgages to the secondary market – Fannie Mae and the Federal Home Loan Mortgage Corporation, as well as to private institutions. Available to them for that purpose are the forms provided by The American Land Title Association (ALTA), in which the basic elements of insurance designed to address problems involving title to a property to be mortgaged can be found. Among these problems When the property to be mortgaged is subject to defects, liens or encumbrances; or is simply unmarketable When the lien created by the mortgage is invalid or unenforceable; is not prior to any other lien existing on the property on the date the policy was written; or, under certain circumstances, is subject to mechanic’s liens When the insured faces legal challenges Title Insurance Policies Covering Construction Loans There are also title insurance policies covering construction loans. These usually require a Date Down endorsement affirming that the insured amount for the property has, due to construction funds that have been vested in the property, gone...
read moreCommercial Real Estate Due Diligence: Leases
The Commercial Real Estate Due Diligence Process – Part 2 in a Series Leases are Supremely Important In the course of conducting due diligence, a buyer of a new commercial property must be sure that the lease(s) in place have key elements intended to protect his/her real estate investment. Elements an Existing Lease Must Include These are, first, escalations of rent, designed to serve as ballast against inflation and to increase revenue. Market value of property will be dependent on market rents, and a lease with locked-in rates from 10 years ago, without any provision for escalation for the next 15 to 20 years, is detrimental to a property’s marketable value. The second element, established guidelines for the use of the property, should fit your projected concept of use (both retail and office) and restriction of subleases. And the third: a comprehensive review of your tenant demographic. Read Every Word of Every Lease (Followed by Another Set of Professional Eyes)! Either a ‘stand-alone’ tenant lease, or the sum of the tenants’ leases, represents the future value of your investment. Take notes on things you don’t understand and then ask a seasoned mentor, or hire a real estate attorney, to carefully read over the leases. This part of the process is so important that I refuse to completely delegate it, but work on it with a team. If you wish to draft a new commercial lease, I highly recommend turning over the task to your legal counsel, or use as a model the professional lease agreement readily available at web sites like kossresource.com To be discussed in following blog posts: the importance of insurance and title policies in conducting due...
read moreThe Commercial Real Estate Due Diligence Process – Part 1
If you do not know how to ask the right question, you discover nothing. – W. Edwards Deming The Function of Due Diligence is to Discover and Verify! The purpose of a thorough due diligence process is that when the time comes to present your deal to investors and lenders, you will be armed with the level of information and knowledge regarding the property required to determine the foundation of a good investment. Due diligence has many aspects, encompassing both the relatively tangible and the completely intangible. Let’s begin with the following. Environmental Due Diligence As applied to commercial real estate transactions, this typically includes Phase I and Phase II environmental site assessments. In the US, these are often undertaken to avoid liability under the Comprehensive Environmental Response, Compensation, and Liability Act, commonly referred to as the “Superfund law.” The purpose of an Environmental Phase One Assessment: to determine the environmental status of a property or facility as it relates to a real estate property transaction. This kind project follows standards which include those published by ASTM. Regarding Environmental Phase Two Assessments/Subsurface Investigations: these projects include, but are not limited to, sampling and subsurface drilling , asbestos and lead sampling., ground penetrating radar, and monitoring well installation and sampling. Technical Due Diligence Caveat emptor is in important legal principle underlying all property transactions: the party acquiring the property is legally obliged to discover and verify as much about it as possible. This means is that the most comprehensive and painstaking technical due diligence is indispensable. Similar in terms of process to a building survey, the term technical ‘due diligence’ has become increasingly common in describing the process of gathering information regarding the physical characteristic of a property risk assessment tool. The process involves research, analysis and discovery. An engineering or property condition assessment (PCA) typically includes a review of building systems in order to evaluate deferred maintenance items that can materially affect the operation and value of a property. In the course of such an assessment, micro-cameras, scopes or other devices may be required to scrutinize (behind the walls or underground) the condition of HVAC ducts, plumbing, vertical transportation, electricity, windows and walls. The information these assessments provide can be critical in identifying major defects and opportunities for improvement, in verifying and confirming the quality of the building and the land it stands on (thus ensuring the suitability of the property for its intended use), and for negotiating the price of a property. Finally, in order to provide a level of protection for institutional investors, these assessments are required as part of securitized lending commercial mortgage-backed securities. Due diligence is an incredibly complex matter, so we are far from having exhausted the subject. We will continue our discussion in subsequent blog...
read moreWhy Go Green? As Apartment Owner
For one thing, because it’s something that you as a good citizen should do. And because Going Green is smart business for you, as apartment owner or property manager. Next time that you, in your capacity as landlord or property manager, have to arrange for the replacement of a light bulb, it might be a good idea to opt for the slightly more expensive, but higher quality and enhanced performance, LED bulb. Why pay such a high price for green tech? Please read on. Property Value = NOI / Cap Rate The facts are these: LED lighting products enjoy vastly greater longevity and save up to 75% on energy. The resulting lower utility bills will raise your net operating income, while improving the quality of the building, and thus increasing its market value. The Best Part is the Free Lunch Be sure to take a look at the local, city and state incentives, which often offer huge rebates to owners opting to install sustainable green technology. Other Benefits The good news doesn’t stop there. In addition to the other goodies: Less use of water and utilities by your tenants means that that they will pay less –and so will you. Less worry for you about vacancies. Tenants will save on utilities and will thus have a strong incentive to stay put. You will save on labor costs. Longer light bulb life (not to mention that of other green products) = less labor needed to...
read moreWhat to look for as a multifamily investor?
Why Multifamily? People often ask us, “What are the advantages of being a multifamily investor?” The answer is simple: by bringing rents up to market value and making some small improvements, you can build up a significant amount of equity in multifamily buildings. What to look for as a multifamily investor? Here at Abel Real Estate Investments we always consider the following. Location, Location, Location (Of Course)! The cost of homeownership is very steep now, so many people prefer to rent. The multifamily investor should consider locations where economic factors (e.g. land constraint) are pushing up rents. At the same time, the investor should always consider areas where there is substantially high job growth, so that the occupants will be in a position to afford high rents. Finally, the location must provide an attractive atmosphere to live, work and play. A Key Social Demographic One social demographic that we believe especially deserving of your attention: Gen Y, With a population, all still under 30, estimated at roughly 72 million strong, they are the most educated, diverse, tech-proficient, and soon-to-be largest American generation, and, because of the state of the economy and their distinctive culture, are most attracted to the idea of multifamily living. Gen Y and Life in the City For one thing, many members of Gen Y are experiencing weak job security and the likelihood of having to change jobs, so they are reluctant to be burdened with a 30-year mortgage. Furthermore, people of the Gen Y generation tend to think less about buying the “American Dream” and more about experiencing it. For them, this means the advantages of urban life: proximity to friends, to trendy restaurants and cafes, to all the amenities of city life. Utilizing apps and social media enable Gen Y to maximize their living experience in the city. The startup mindset is yet another factor luring them to the city. And about the high rents: “there is an app for that.” Gen Y is dedicated to getting more with less – they can do without cars, relying on ride-sharing apps like Uber and Lyft, and are savvy consumers, relying on word-of-mouth or “buzz” advertising. If you own or represent a multifamily property you would like to bring to our attention— why not contact us...
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