Multi family is a counter-cyclical industry that does well, even in a bad economy.
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WE FIND PROPERTIES IN GROWTH MARKETS
Multi family is a counter-cyclical industry that does well, even in a bad economy. Unlike single-family homes, the demand for apartment units has reached record-levels. Buyers, who three years ago could secure a mortgage to buy their own house, are now challenged to qualify for home ownership loans.
Because the cost of new construction is high, only “A” class apartment construction that commands high rents is economically feasible. Kademe Investment Group LLC (KIG) is dedicated to identifying opportunities in strong growing markets to meet the ever-present demand for multifamily B and C class properties.
- The apartment market, as an investment vehicle, offers investors greater returns with less risk than other investments.
- The apartment market is less reliant on business cycles for occupancy and will continue to benefit from demographic trends and population growth.
- Multi family ownership is more management intensive than some other asset types. This distinction ensures “value added” opportunities.
- Apartment demand is driven by an expanding and transitional population, and, at present, by record numbers of foreclosures.
APARTMENTS ARE THE BACK-UP HOUSING CHOICE AS?
- Young people move out of their parents’ homes
- Students graduate from college
- Immigrants come to the U.S.
- Workers staffing new factories move into nearby neighborhoods
- Financial challenges create the need for temporary and affordable housing
WHY INVEST IN APARTMENTS?
Multifamily properties historically maintain a structurally lower vacancy rate than other product types and generally exhibit greater resiliency in holding their values during market downturns. Demand can still increase for apartments in economic downturns when homeowners turn to renting to preserve capital and renters cannot afford to buy. Lenders offer superior terms due to investor familiarity with this asset type, and there is a wider availability of financing options.
The relatively high turn-over of apartment units (vs. office buildings, commercial space and single family homes) allows us to continually improve the assets as tenants move, increasing rents and therefore increasing value.
DO I NEED TO QUALIFY FOR A LOAN?
KIG qualifies for all loans so no guarantees are required of our investors. Because we use limited liability companies to structure our deals, investor liability is limited to the amount of their investment and their outside assets are protected.
INVESTING IN MULTIFAMILY PROPERTIES
We have observed that Wealth Management firms are currently moving many of their investors towards multifamily investment opportunities like those offered by KIG. The earning potential in the commercial real estate market is climbing in key states like Texas, North and South Carolinas, Phoenix, Chicago and California, so there is an increased amount of interest in multifamily projects, according to Nreionline.com.
Private Equity firms and individuals are seeing high returns in the multi-family sector due to the simple need and demand for housing in larger markets and highly populated areas. The investment opportunities to build, develop, acquire and / or renovate multifamily complexes are producing attractive investment gains.
The following criteria are used to identify undervalued multifamily properties for acquisition, value optimization, management and disposition.
- Age: The 18 to 34-year-old market segment comprises 22% of the U.S. population
- Income: Renters who earn $35,000 and less annually
- The retiring Baby Boomers are scaling down and are enjoying carefree multifamily community living.
- Multifamily residential apartments
- Roofs with pitched construction
- Minimum Occupancy 80% with the exception of properties that require renovation, providing properties are well located and present value enhancement opportunities
- Size and Price: 100+ units in the $5MM – $15MM range
- Returns: 15-20% Cash on Cash, minimum Debt Service Coverage ratio of 1.5
- Type: C- to B+ properties located in C- to A areas
- Location: Emerging market areas with indicators for strong near and long-term economic growth
Choosing the “right” multi-family apartment complex to acquire is a critical aspect of Kademe Investment Group LLC (KIG’s) investment strategy. That is why we are diligent in our exploration and focus on opportunities in Emerging Markets, where jobs and local economies are expanding. We follow jobs!
EMERGING MARKETS ARE CHARACTERIZED BY
- People migrating in, rather than leaving a geographic area
- Jobs being created rather than lost
- Rents and property values quickly rising
- Strong, local government leadership dedicated to attracting jobs
- Markets beginning to absorb oversupply
There are many indicators and a lot of research that goes into identifying an emerging market in the US. We start out by performing thorough market research that includes the following areas:
- Job Growth Report (local & regional)
- Population Growth
- Path of Progress Reports
- Local Economic Reports & Trends
- Chamber of Commerce Reports
Property owners who have suffered through years of a contracting buyers’ market frequently don’t recognize early signs of recovery. As investors, they are still feeling the pain of the previous cycle, characterized by decreasing rental rates, oversupply, and rising vacancies and unemployment. It can take local investors as much as a year or more to realize that their market has begun to turnaround. That is the prime buying window. KIG monitors indicators of emergence.
Kademe Investment Group LLC (KIG) takes pride in building relationships with local listing brokers to get their “pocket listings” and access to other Bank Owned Properties (REO). Our searches include soliciting owners directly instead of waiting for properties to come to market.
Candidate assets undergo a thorough due diligence process to confirm the physical and legal status of the property and to confirm valuations to ensure achievable investment strategies.
Early in the asset evaluation phase, the debt and equity financing strategy is developed based on a number of factors such as property type, magnitude of renovations, expected hold period and investor objectives.
Well-located assets purchased below replacement cost assist in attaining appreciated asset goals.
Product selection involves a systematic, routine evaluation to identify favorable demand characteristics, i.e., job and population growth, demographic shifts, supply absorption rates and positive local legislation.
Markets with supply constraints receive most favorable underwriting. Markets with signs of oversupply such as surplus land, changes in zoning and increases in building permits are avoided.
When national attention is focused on a particular market, smart investors are already selling their properties. A common investing mistake is to jump into ‘hot’ areas reported on by the press. At any given time – regardless of what the national economy is doing – certain cities are in a local expanding cycle, not a ‘hot’ cycle.
JOBS BRING MARKETS BACK TO LIFE
For a city to move to the next phase of the market cycle, it must take action to grow jobs. When jobs are finally created, people begin to migrate back into a community, population grows, vacant properties start being filled and rents start to increase over supply stalls markets and triggers the decline of emerging markets. KIG tracks job growth and shrinking supply.
Path of Progress
A Path of Progress is where the greatest amount of building and development is currently occurring, or soon will be. What is now Orange County was a Path of Progress between Los Angeles and San Diego?
A Path of Progress is where:
- Growth engulfs properties and drives high and quick appreciation
- The majority of new construction is occurring
- National tenants are moving into the neighborhood
Investing in Paths of Progress yields the greatest returns in the shortest period of time.
One of the critical things to understand when it comes to investing in commercial apartments is the formula that is used to determine the value of each complex. Unlike single family houses, where the value is determined based on the structure of a comparable property, the value of an apartment complex is based on the amount of income it generates on a yearly basis.
Think of it as a business rather than a building. The more income it generates, the more it is worth. When we purchase an apartment complex, we are looking for specific opportunities to increase the cashflow in different areas. These are called “Value Plays” or “Value Adding Components”.
VALUE PLAYS SOLVE PROBLEMS CAUSED BY
- Poor supervision of management companies
- Mismanagement caused by owner self-management
- Deferred maintenance
- High vacancies
- Below market rents
A single Value Play opportunity can help generate target returns. Here are some examples of Value Plays:
- Increasingrents to current market pricing. Sometimes we purchase properties that are 10% or more under current market pricing. This gives us the opportunity to increase rents and immediately increase the value of the property.
- Improve curb appeal by improving landscaping, adding carports, etc. Tenants will pay more when a property is in better condition or has carports or security gates.
- Implement a water and sewage bill-back system to charge to the tenant for actual usage. In a lot of cases, the apartment owner pays for all of the water. If we bill back the tenant it helps to offset those expenses and increase the cash flow, and tenants get more frugal with their usage, decreasing overall operation expenses.
- Add a coin laundry facility to the complex (may seem minor, but the income adds up quickly).
- Annual rent growth increases by 3-4% per year.
In an emerging market where a lot of new jobs are being generated, the annual market rent increases by 3-4% to support the new demand for housing. One of the next steps will be to show you the impact that each of these value-add components can have on the value on an apartment complex (remember the more income we generate, the more the complex goes up in value).
In the graph above, you will see the purchase price and the Net Operating Income (NOI). NOI is the gross revenue minus all reasonably necessary operating expenses. The value of a property is determined by theNOI and the capitalization rate (Cap Rate) for a particular geographicarea.The Cap Rates are provided by local Realtors who keep a pulse on the local market.
Here is an example property that has anNOI of $156,600. The geographic area has a 9.5% Cap Rate (provided by local Realtors). The formula for determining value is NOI/Cap Rate= Value. Thus, an NOI of $156,600 and a Cap Rate of 9.5 yields a value of $1,648,421. Thus the “strike price” for the proposed purchase is ~1.648 Million dollars
The above graph shows an example ofspecific components/amenities that will be used to add value during a3-5 year hold period. Notice the increase of NOI at the end of 5 years. Increasing the NOI by $71,901 has significantly increased the value of the deal. Here’s the way the new value is calculated:
NOI of $228,501 / 9.5% Cap Rate = $2,405,274 (value). Keep in mind the mortgage will havealso been paid down during the 5 year hold period, thus adding additional equity that can be shared with investors on resale.
Real estate markets and Cap Rates fluctuate. A 9.5% Cap Rate today, may sell for a higher Cap Rate later if market conditions have changed and financing is less readily available. New properties coming to the marketplace can depress rents and increase vacancies, causing a reduction in NOI. Thus, it is important to invest with seasoned sponsors who specialize in multi-family investments to ensure that all such factors are taken into account during acquisition, operations, and timing the optimum resale period for a specific property.