Rick M. Bean

Before a Lynch mob is dispatched...let me clarify: I'm still a huge proponent of real estate investing!  It's just that residential investments rarely cash flow...you have to wait to make your money at sale from appreciation.  And you can't afford to have someone else manage the units for you in most cases.  Banks limit you on how many residential investment loans you can have...but they don't care how many commercial loans you have active.

Take Off Your Training Wheels-

Rumor on the street is that banks are again permitting a prospective borrower to have up to 10 residential loans. Legally you

can have as many as you want of course...its just that lenders won't underwrite loans past 10 residences.  (This is a reversal from a year ago when Freddie Mac tightened up standards to permit only 4 loans.  Fannie Mae adopted the stricter rules shortly thereafter.) 

Will the banks change course again and tighten up standards anew? Rather than shout: "Hurray!" and buy more residential investment properties, I advocate a different strategy. 

Convert your multiple residential property equities into a single commercial investment. 

Here's an example:  I have a friend that has 10 single family homes, nine of which are investments. He holds many of them "free and clear" while others have small balances.  He can sell off some of the homes and use a 1031 Exchange to defer taxes, converting the proceeds into equity for a commercial property down-payment.  He can also put new loans on the remaining house to add still more.  Banks are currently writing loans of up to 70 to 80% LTV on investment properties where cash is being taken out at refi.  When this is done my friend will easily be able to acquire sufficient funds ($250-350,000) to buy a commercial property like Heather Joy, currently listed at $779,000.  The advantage of Heather Joy is that he will be able to manage 8 units by going to a single address...a significant improvement in efficiency.

The next step up would be to take an even greater portion of his existing portfolio equity and purchase a larger asset like the 18-Unit South Towne. That $1,150,00 property would require approximately $350-450,000 in equity to purchase.  It has enough units that we could now afford MBO...Management By Others.  That means that my friend would transition from running all over town to manage 9 single family homes to reviewing the results created by the management company. 

To take this further...if my friend's holdings were enough that he could combine equities to add up to $1,200,000...he could purchase Los Verdes, available for $3,200,000.  That property is large enough to not only have management by others...but an on-site manager.  Contrast owning 53 units in one spot that are managed by someone else vs. running all over town to manage and maintain 9 single family homes. 

Summary:  You will make more money, receive it earlier, and have fewer headaches...when you transition to Commercial Real Estate Investments. 

Call Rick Bean at Rose City Commercial Real Estate for a no cost, no obligation assessment of your investment options.

Doug Foley, is more than my friend and mentor. He's a CCIM designee, a commercial broker with several decades of experience buying/selling investment properties for himself and others. He's a founding member of the Northwest Real Estate Inverstors Association, and a Past President and current Board Member of The Rental Housing Association of Greater Portland. I am grateful he has given me permission to re-issue the article below. I recommend subscribing to Doug's blog at www.realestateinvestmentspdx.com/

SELLERS, BUYERS & LENDERS - OPPOSING VIEWPOINTS IN TODAY'S APARTMENT MARKET
By Doug Foley, CCIM

Three Points of View:

We have an interesting situation in today's multifamily marketplace. We have three opposing viewpoints in the value of a commercial/apartment property. First, we have the seller's view, which is one looking backward to the past value of their property, or what it might have been worth a year or 2 years ago. They still want to sell for that value now. Unfortunately, just as in the stock market, your property/stock had a paper value - unless you sold at that time, your property only had that value on paper. If you sold when it was valued higher (when you still had a 401k instead of the current half valued "201k"), you could have realized that value, but today, it is not worth that much - the market now sets the price at what a willing buyer will pay a willing seller for the property today.

It has been my experience that it will take the sellers from 6 months to 2 years to adjust their thinking - to be realistic about the true market value of their apartment property. The seller is saying "I'm still keeping my rents up, my occupancy is still high, I've put a lot of money into the property while I've owned it; It is still worth more than the market says it is".

The second opposing value viewpoint is that of the buyer. the buyer looks forward in determining their value opinion. They look forward to the next year or two when the property might even be worth less than the value that is determined today. Forward to possible declining rents, high occupancy rates, and fix-up costs that it will need over the next few years; the market value could be much lower than it is now. Buyers want to deduct the cost of all repairs and rehab the property might need to keep it in top shape, even though the property might be priced lower than other properties to allow for additional fix-up needed. They want to buy it low enough that most of their risk is removed.

The third opposing viewpoint is that of the lender. The lender is looking even farther forward than the buyer. The lender is even more unrealistic than the seller or the buyer. They want to eliminate all risk so they are sure they will not have any foreclosures, short sales. or other problems banks are having today. But wait, it is not commercial/multifamily/investment property that caused the current lender problems - it is the residential market that was given 100% loans with no down payment to buyers who could not afford to make the payments from the start. Commercial loans have always been based on the ability of the property itself to make enough cash-flow to cover the expenses and the payments and to have enough left over that the owner actually has a net profit! So now we have an unrealistic lending attitude that they want more down payment, more cash-flow, more money in reserve so that the owner can pay for any possible change, so that the lenders are risk free.

We have had unrealistic sellers and buyers all along - now we have the lenders to worry about even after we get the seller and buyer to agree... How long are we going to have to wait for them to get realistic and make reasonable loans again?

SERVICE! SERVICE SERVICE!

 Outback is a perfect example of a business that is a huge success because of its focus on value and customers.  From top to bottom Outback does a better job of listening to their customers and providing a great meal at competitive prices.

They were one of the first to offer a usable curbside service that had specially designed containers to ensure your meal gets home steaming hot.  Their to go system is particularly efficient, and they offer all the condiments and extras that their competitors scrimp on.  They open the door and smile broadly when you enter, and again when you leave.

Did I mention that they listen to their customers?  Outback is coming out with a new menu next week that offers a whole new range of tasty, value priced dishes.  This is in response to feedback they received from their clientele wanting additional lower priced options.  Their signature steaks will still be around, and their patented "Bloomin Onion" will still be satisfying hearty appetites...but because they listened, they will also offer some lower priced items.

SE 82nd St. OUTBACK RESTAURANT

While I salute the customer centric focus of Outback in general, their 9500 SE 82^nd Portland, OR restaurant takes customer care and service from science to art.  I don't mean good service, I mean great service.  The kind of legendary service that John Sheridan (The Sultan)of Jakes Famous Crawfish gave.  I used to have clients call me from Dallas, TX to tell me they were coming to town and wanted me to check when John was working so they could see him again.  He's that good...and so is the team that Outback proprietor Adam Mayer has assembled at his SE 82^nd restaurant.  Food just tastes better when it's delivered by someone who serves up a smile as well as a great cup of chowder.  (By the way...their chowder is better than Jakes and on a par with Salty's.)  The last time my wife and I went there we had eaten a late lunch...so we split a sandwich.  Our waiter Mike brought it out on two separate plates...he even split our meal in the kitchen and put a garnish on each one.  At most restaurants they would snarl when you made the split request, then we would have had to wait for the server to come back to ask for an extra plate.  But that's not the way it works at the SE 82^nd Outback...where its:  "No rules...just right!"

If you would like to get a good value and client centric service from your broker, contact Rick Bean:  rick@rosecitycre.com  503.577.1034

A truly client centric broker delivers greater value and earns loyalty...and that's how I run my business:

Offering more than just "services for commissions." Assisting clients with developing their risk profile, and investing accordingly. Evaluating their portfolio, seeing if they have adequate equity build-up to warrant re-investment. Helping them assess their property manager, property tax rates and insurance costs. Performing Cost Segregation Feasibility Studies on both held and newly acquired assets. Actively seeking to lower costs to boost NOI...directly increasing asset values. Assisting with Due Diligence. Providing a knowledge base of lenders with the best rates and terms for the specific needs of the client.

I have included links to properties we have available on this site...but most of our space is devoted to assisting visitors in staying current with market conditions...not selling. That's why we've added a word of the day, a spot to review real estate and investment books and more.

Feel Free to finish your Holiday shopping from home by using my direct link to Amazon.com.

We hope you enjoy our blog and invite you to return to review our daily updates.

Sincerely,

Rick M Bean

Residential Multifamily (RM) definition: Typically regarded as 2 to 4 units, or "doors", with 5 units and up being considered Commercial Multifamily (CM). Many multifamily investors start by purchasing a duplex, triplex or quad; living in one unit and renting out the balance.

Residential Multifamily Pluses and Minuses: One advantage of a plex investment strategy is that lower downpayments are permitted by banks...sometimes as low as 5-10%. RM loans close much more quickly with fewer requirements than CM loans. It's easier to keep a watch on your renters when they're next door, too. Prices per door are lower than single family homes...an area where starter homes are $225,000 is likely to have duplexes and even triplexes for not much more.

The inherent nature of plexes is that their pluses are also a source of their weakness: living next to your renters means they always know when you're home. From the renter's perspective you are always available to discuss their maintenance problems and "wish list" of improvements they would like you to make (without compensation.) You are more likely to become "friends" rather than business associates. It's harder for most to enforce rent timeliness on friends.

Plexes tend to produce low Cash Flow, a reason they are eschewed by some investors. Cash Flow is simply the monthly amount remaining from: (All Income) - (All Expenses, including taxes, insurance and debt service). With fewer units to amortize expenses over, plexes can't compete with the functional efficiency of commercial complexes. As a result, the plex investor focuses primarily on returns gained over time from appreciation. Those gains are that are reaped at resale or refinancing of the property. Contrast this with the investor of larger investments that expects to make a higher downpayment (20 to 40%) and recieve monthly distributions from profitable operations. (In addition to appreciation.)

Valuing Residential Multifamily Assets: The local submarket for single family residences (SFR) is the strongest fundamental in determining values of plexes. Without adding in other factors, most potential renters will not pay more for the inconvenience of living close to neighbors than they would pay for of a SFR which would likely have more privacy. RM purchasers use the Gross Rent Multiplier (GRM) to compare properties. GRM = Purchase Price ÷ Annualized Gross Rent. GIM, or Gross Income Multiplier is also used interchangeably. It's intended to reflect that rent is not the sole source of income; late payment fees, NSF charges, garage rent and other revenue sources need to be considered. A triplex that rents for $600 per door and produces $400/year in other income that is for sale for $279,000 is available at a 12.7 GRM. Proof: $279,000 ÷ $22,000 = 12.7.

GRM Limitations: As it is based solely on the Gross Income, there is no accounting for vacancies, concessions or expenses. What if ther property has occupancy problems due to poor maintenance? What if the landlord is giving a lease concession of two months free rent, thereby reducing revenues by 10/12's or 16.7%? What if expenses are managed poorly? In each of these examples the value of the asset is lessened, yet the GRM would remain the same. Use GRM only as a rule of thumb when investing in plexes to see if a more thorough investigation is warranted. All competent investment advisors will offer a proforma including expected profits based on actual income and expense.

1% Rule: This archaic valuation factor was derrived from the notion a property's value would equal 100 times a month's rent. Rent rates have not increased at the same rate as home values. A $250,000 house would rent for $2,500/month under this scenario. If someone cites the 1% rule they are telling you: "I don't know what in the heck I'm talking about."