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Apartment Investing – Resetting Investor Expectations but Delivering

Investment in Apartments

I recently had a chat with an operator partner for multifamily properties who I’ve had the pleasure of working on a variety of syndication agreements and who owns a large number of multifamily homes. The problem is to locate deals with similar return characteristics to our previous deals, without altering the standards. Of course, the cap rates continue to shrink because the demand for these assets is not waning.

There are more players than ever involved in this market due to the stability and long-term performance of value-add homes. Which includes foreign buying organizations. In the U.S. still is seen as a secure around the globe, and has one of the most robust economies. I was reading an article in which it was stated that families offices (High Net-worth families that have professionals as money manager), apartments are in the top Real Estate Investment Strategy.

There isn’t many commercial real estate markets where the winds remain favorable and the current cash flow. Upside potential can be achieved realistically. And not be overlooked and risk is low when you have the right mix of ingredients. Let’s take a look at the numbers.

Apartment Assets

The performance of apartment assets has outperformed the stock market by two times over the last 25 years. Most people don’t know this. Between 1993 and 2007 apartments earned 13.32 percent, while stocks gained 7.54 percent. The most important thing for investors, particularly in the market which has been strong for a while in the past. Is that apartment properties perform exceptionally even in downturns. Between 2007 and 2009, during the time frame when markets were in a downward spiral in the 2007-2009 period, there was a drop in the S&P 500 stock index lost 22% while apartment values dropped 6percent. One could assume that this information includes all properties. If you had selectively eliminated certain kinds of properties, regions as well as operators that are below it, the chance of being a victim would have been virtually zero.

New Apartments

Newly constructed apartments are the most impacted in downturns (we concentrate on value-add that is safer, since new buildings are more likely to need to offer concessions to rent).

Markets that are risky areas that are bad for towns where jobs are scarce and people aren’t moving away from, but rather fleeing.

Unprofessional operators (those without experience) no business plans, small cash reserves poorly maintained or managed properties. Excessively optimistic forecasts and loan structures that are not correct, and so on), who may be required to sell their property at bargain prices or even lost to banks due to their inability to pay back their debts.

Smaller apartments with less scale in comparison to larger ones (200 units or more). In which the cost per unit for the manager or maintenance worker, for instance, is considerably smaller.

The information on the Housing Finance Policy Center report include the bad, good and ugly.

In 2009, which was the worst year during the period of economic collapse. The 200 homeowners were in delinquency in the payment of their mortgage (0.5 percent across the country).

In contrast to the majority of those who have a single-family house, The mortgage default rate was (4.5 percent across the country). A 10x higher risk of default is to own a single-family home versus having an apartment.

Return on Investment and Cash On Cash

As a result, returning to my discussion, the operator partner I work with has models to have a preferred 8% return as well as a Cash-on-Cash (COC) of 8to 8 and average annual returns over a 5-year goal hold of 18-22 percent. The same characteristics have been consistently observed for the last three years I’ve worked together on their GP side. They reached 8% in the first year, on a COC basis. They pay out on a monthly basis, and investors become enthralled by the frequency and consistency of payments. By this way They have been able to exit successfully and outperformed expectations in a variety of deals.

The reason for this was that if they’re having difficulty finding deals in this price range If we reduce our expectations for return. In turn, adjust expectations of those we invest with, that could provide more opportunities to investors. I urged them, as I’m close to investors who are interested in their deals, and often allocations are restricted to our investors who are exempt from deals. They can still invest in high-quality markets, assets that require renovation and better operation (value increase strategy) However, our investors are willing to prefer slightly lower returns.

Investors Education

When we educated our investors and offered good deals (still offering a 8.8% preferred return that is cumulative). In which case CoC returns are 5-5% per year, 7% in year 2 and perhaps 8-9 percent in the 3rd through 5th year with 15 or 17% annually yields that have a history and track record of consistency. Investors are still willing to jump onto the bandwagon. Going further, say 7 years as opposed to five years of hold time could be acceptable.

They have agreed, so a small adjustment of expectations is on the ready in a market such as this. But it doesn’t mean there aren’t any good quality deals that investors could do very well. The only thing is that we have to make sure investors are educated. Investors recognize that these types of returns can be awe-inspiring and offer more opportunities for them to take part. Resetting expectations can be beneficial.

When the bank is offering 2.2% on one-year CDs which secure you money up, and 1 percent on savings accounts. And the stock market Vanguard (largest mutual funds firm globally) states will yield only 5 percent returns over the next 10 years. It’s not even an issue that investing in value-add apartments with slightly lower returns is still a potent reliable motor. That can get your financial boat to the most secure and safest shores with less rocking on the route.

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