Marcus & Millichap Apartment Overview & Outlook

This is an excellent presentation by Marcus & Millichap describing some of the current challenges the apartment market is facing as well as an overview and forecast of where the market is expected to go in the coming years. The presentation will take about an hour. If this is too small for you to view, you can also find it at www.stevesteadele.com/ApartmentOverview





The firm has scheduled the next presentation April 21, 2009. For more information, go to www.marcusmillichap.com.

We are definitely entering one of the best times to begin investing in apartment buildings. If you've been sitting on the fence, unsure of where to start and how to begin, start by visiting www.stevesteadele.net/mp.html to learn more about my coaching program where I'll help you raise the money and we'll buy large multifamily properties together--I'll even refund your money when we buy our first building!


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The Apartment Building Cycle

One question I receive quite often is, "Where are we in the apartment building cycle, right now?"

Well, that depends on where you are. Below you'll find a graph provided by the great folks at Integra Realty Resources, Inc. This will give you an idea of where different regions throughout the country are in the apartment building cycle. Enjoy.




Although the multifamily market is a less stable than it was last year due to the numerous economic factors affecting unemployment, apartments still offer investors favorable returns with considerably reduced risk when compared to other assets. Vacancies have increased slightly because residents are doubling up or moving in with parents or friends.

The good news is educated apartment investors can pick up property for substantially less than they could a few years ago. Many uneducated sellers bought at the peak of the market and are now selling for much less than they paid--in some cases by as much as 50%. Cap rates have increased and fewer buyers are writing offers. 2009 and 2010 look to be incredible years to buy apartments.

Don't know what to do or need more information? Check out my how to courses at www.SteveSteadele.com.

If you'd rather a passive investment with no tenant hassles, mortgage, property management or maintenance headaches but want the ability to earn 12%-20% on your money secured by real estate, visit www.SteveSteadelePartners.com.

Do you have a question? Email me at steve@stevesteadele.com.


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How Much Due Diligence Should I Do Before Writing An Offer?

Hi Steve,

I have gone through your course and have a question. At what point do I need to complete a rent and sale comparable study if I am looking to invest in an apartment building? Your course makes a lot of sense and it breaks everything down but I am confused about how much time to spend working on that information before I write an offer. It seems like I would spend a ton of time doing that with no time to do anything else. Do I need to do it all before writing an offer?--Brian J******, Louisville, KY

Brian,

When I work with coaching students I have them complete a rent and sale comparable analysis using the Apartment Evaluator just to get use to doing it. Yes, you need to understand sale comparables somewhat before writing an offer and, by default, you’ll learn a little bit about the rental market. How do you do that? More than a half dozen agents in any given region will be more than happy to get some information to you in hope that you’ll eventually do business with them. You don’t need to do a full analysis initially. Begin by locating motivated sellers who own properties that are within your price range. When you find a property and qualify it as worthy of your time get it under contract and then get more specific during due diligence. That's when you'll make the most money. For more information, check out How to Turn Due Diligence Into BIG PROFITS!

Thanks for the question.

Do you have a question for Steve? Email him at steve@stevesteadele.com.

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Apartment Investing: Value Indicators

Question:

Steve,

I have Fast Track to Millions. In there you talk about the five different value indicators. Which one is more common to use when comparing properties? What do sellers usually go by? Do they understand what they mean? --Gary P****, Vancouver, WA


Answer:

Gary,

No, most sellers have no idea what the value indicators are or how to calculate them. Just about anyone can figure out the $/Ft and the $/Unit, but most sellers do not know or understand the meaning of a GRM/GIM or Cap rate. That’s where the challenge comes in. A lot of sellers will price their property based on a “gut feeling” of what the market is doing. Rarely is it ever realistically supported by comparable properties unless an agent managed to earn enough credibility to list it that way. (Or the property is large enough that sellers understand the income and expenses must make enough sense to attract potential investors.) Sometimes you’ll find a property that is worth much more but because the seller is motivated, they’ll sell for less. Those are great situations to be in, and in those cases the five value indicators will usually make some kind of sense even if it’s found in substantial upside. As far as which indicators are more important—it depends. All of them are important to some degree. Properties that are closer to the city core are heavily influenced by the price per foot. Properties in outlying premium markets tend to lean toward cap rates or price per unit. And properties in cash flow markets are heavily influenced by the current cash flow generated by the asset. Those are the basic, generic answers. All of them are important. It really depends on the market and the property. Thanks for the question.

Is it a good time to start apartment investing?

Question:

Steve,

The financial market is a mess. Lenders are hard to work with and sellers are still asking high prices. Is it really a good time to start apartment investing right now?--Lynn P******, Amarillo, Texas


Answer:

Lynn,

Thanks for the question Lynn. This is a huge topic. I’ll try to keep it short, but I could go on and on about this for hours.

Although apartment buildings have cycles similar to the economy, they don’t necessarily experience the same ups and downs at the same time. If you had asked this question a year ago, my answer would have been, “It’s always a good time to buy apartment buildings, somewhere.” Someday we’ll get back to that answer, but not today. Instead, the answer is more like, “It’s a good time to buy almost everywhere.” Here’s why.

If you know how to determine what phase any given market is in you can make a lot of money. We all know that. It doesn’t matter if you call it buyer’s phase 1 or emerging market or whatever you want to call it—if the market is near the bottom of the cycle (or beginning to go back up) you can make a fortune. But we’re facing something today that is unprecedented. We’ve never seen an apartment investing market like this before.

When the economy tanks (like it has) real estate has historically suffered with it. Years ago developers didn’t have the kind of information they have at their fingertips today. As a result, the number of new units to enter the market at the end of the expansion phase was enormous—meaning we were stuck with massive oversupply. Developers didn’t know it was time to stop building until it was too late. That’s when knowledgeable investors started buying. The rental market suffered until demand eventually caught up with the extra supply. Then they sold.

Today the surplus of information has resulted in shorter, more manageable apartment building cycles. (The single family market is another story. Today it suffers not because of oversupply, but because lender criteria has changed. More on that another day.) Apartment cycles are not nearly as turbulent as they were decades ago (which makes cycles harder to identify). Over the past 3-4 years the amount of new apartment development has been very, very low. That’s the main reason the apartment market is not experiencing the same issues as single family homes, retail, and office buildings. Values have suffered somewhat depending on the asset and MSA (Metropolitan Statistical Area). Condo conversions are no longer pressing prices and tighter lender criteria has made it more difficult to invest. This has caused prices to decline a little bit, but other economic factors are actually helping apartment owners. Many are experiencing more cash flow than they’ve seen in years because everyone was buying a home.

There are very few new units scheduled to come out of the ground over the next 2-3 years. Meanwhile, demand continues to accelerate. Foreclosures are at an all time high and over 4 million people turn 18 every year. Demand is shooting through the roof while supply remains nearly constant. To top it off, it’s a buyers market.

So the short answer is yes—it’s a great time to start investing in apartment buildings. For the most detailed information available, check out the Complete Course


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Do I Need Good Credit To Buy Apartment Buildings?

I received the following question via email recently and given the current financial environment, I thought I should try to shed some light on this very important topic.

Question:

I've heard a lot of people say I can buy apartments with no money down. If I can do that, how important is my credit? I don't have great credit and I'm not sure how that affects me. Can I buy apartment property with no money if my credit is less than perfect? Thanks Steve--I'm really enjoying the book. -Tom L***, Florida


Answer:

Tom,

This is a good question because the answer has changed somewhat. A few years ago you could buy apartments all over the country with little or no money and horrible credit, but times have changed. Lenders are licking their wounds. Underwriting criteria has tightened up a lot over the past 6 months to a year. A few years ago people with credit scores under 600 were still getting conventional loans. Today it's pretty tough.

The good news is banks are more forgiving with regard to your personal credit report when purchasing commercial property than they are when you buy a single family home. Lenders start by assessing the income and expenses of the property and then look at the borrower. If the property supports the loan (meaning the Debt Service Coverage Ratio using realistic numbers is favorable) and you have great credit your chances of securing financing are better than average.

For more information on how to find quality investments using various creative strategies, check out When, Where and How to Buy.

When, Where and How to Buy


Market Analysis

* 3 Basic Questions a Market Analysis Should Answer
* How Micro and Macro Economics Impact Real Estate
* How Understanding Market Cycles Will Make You Rich
* 4 Phases of the Business Cycle
* How the Real Estate System Works

Defining the Investor

* Investor Motivation
* 2 Fundamental Reasons Investors Buy Any Type of Investment
* 5 Major Constraints to Investing in Real Estate
* How Do I Know How Much to Pay?
* 3 Major Factors to Consider When Buying Investment Property
* 5 Different Types of Real Estate Markets

Simplified Economics

* Simple Steps to Discovering Top Markets to Invest
* Top 6 Variables the Impact the Rental Demand
* Easy Ways to Understand Supply and Demand Variables
* How to Determine Where the Market is in the Apartment Building Cycle

Profit Analysis

* 4 Major Categories of Seller Motivation
* 3 Ways to Maximize Profitability When You’re Buying at the Right Time
* 5 Types of Property to Avoid
* Questions to Ask Yourself to Maximize Performance of Your Investment
* Top Money Making Indicators and Why Other Investors Avoid Them

Finding Quality Investments

* Top Resources to Finding Money Making Opportunities
* How to Find the Best Real Estate Agent

Creative Ways to Buy Apartments

* Can You Buy Large Apartments With Little or No Money Down?
* The Pros and Cons of Leverage
* Seller First or Second Mortgage
* Partnership Opportunities
* Subject To Investing
* Master Lease Option
* Other Great Ways to Minimize Out of Pocket Expense