Small Apartment ($1M~$1.5M), Seller's market?

Question

Hello BP Advanced Users,  I am new to this world. I have several single rental homes and I am trying to purchase a small apt in the range of $1m~1.5m.  Brokers tell me that it is currently a seller's market with the Apt price recovered to the previous highs.  Originally I thought it was a good idea to purchase Apt now as the interest rate is low, however with the current high price of Apt, does it make sense to buy now?  Your experienced comments are greatly appreciated for this newbie.  Looking at State of WA market.

Joe Fairless · Answer

@Casey Rolland sure, I mean that you'll want to find the right market that cash flows and isn't in a cycle of hyper-supply. A good report to look at is the IRR Mid-Year Viewpoint - http://www.irr.com/.

Additionally, if your strategy is a value-add play, then you'll want to purchase the property at the right price based on current value and there should be some value that you can do to increase the value of the property (i.e. improve units, decrease water bill, etc.). If your strategy is to buy a stabilized property then you will need to make sure the property is truly stabilized during due diligence and be ok with the cash flow.

Paul Timmins · Answer

@Casey Rolland

To find out about an area go to IREM.org search for ARM certified property managers. Call 5 ask them what sides of the city they like/dislike and why. Ask what they see them selling for and what expenses are by category. Ask for market occupancy and rents. Ask if they know anything coming up for sale.

Good luck

Paul

Patricia Hinojos · Answer

Thank you @Joe Fairless for the tip on irr.com for Local Market Reports!   For others looking for the direct link, here's the page where you can search by local and property type.  I've bookmarked this as another great info resource.    Thanks again Joe.

http://www.irr.com/Publication/MarketSnapshot.asp?...

Louis Leone · Answer

Two other great resources if you're looking at apartment buildings (commercial) are:

The urban land institute report:  http://uli.org/emerging-trends/emerging-trends-rea...

and

The Dividend Capital Research Cycle Report - you need to search that in google and you will see a pdf file you can download.  If you have a problem, PM me.

Giovanni Isaksen · Answer

Great info everyone. @Louis Leone I used to follow Dividend Capital's Cycle Monitor every quarter until I noticed that their placement of Seattle's apartment market had no relation to what was actually happening in that market (my main local market). See here for more:

Apartment Building Investment Cycle Analysis via Dividend Capital. Can this be right?

I'll be doing a post later this week on the Seattle apartment market's magical trip through Div Cap's market cycle in the last two years. Since they mostly invest in industrial properties hopefully they're more up to speed with that sector.

That said Glenn Mueller's work on how real estate market cycles operate which he explains in every Cycle Monitor is some of the best free real estate education you can get... Although I'm not 100% on board with his contention that markets can back up in the cycle, that goes against the very definition of a cycle.

Joel Owens · Answer

"I have several single rental homes and I am trying to purchase a small apt in the range of $1m~1.5m."

Hi Casey,

Reread your phrased statement. Your thought echo's a lot of other buyers. You have SFR but that market is overheated so now you understand tenants and paying rent so the natural progression is small balance apartment complexes.  So in that entry level size there is not much product but a ton of buyers.

Most complexes are not built that small and the ones constructed today tend to be hundreds of units in size.

So without knowing your market in depth I would say there is some validity to what they are saying. I transact all over the country for clients. Larger apartment complexes have been contracting for about the last 12 to 18 months nationally with caps.

Most of my clients are buying multi unit retail for caps in the 8's that throw off COC around 15% annually off of putting 25% down.

What options are available to you will depend on liquidity and net worth. You might be able to afford more or less than you think.

Joel Owens · Answer

"My husband and I have decent jobs and we don't need C/F from the Apt but we don't make so much that we can support vacancy of a retail b/d."

Multi-tenant retail can be safe if you buy right. If you have 10 units and 4 go dark you have enough generally to pay the mortgage still for breakeven occupancy putting 25% down.

Some people say retail is riskier but it's simply they do not understand enough about it to buy correctly.

Casey Rolland · Answer

Thanks @Steve Olafson

Yes that's what I hearing as well.

Steve Olafson · Answer

I am a net seller of apartments right now.  In my location the prices are ahead of fundamentals.  Buyers are paying proforma prices.  Even "fixers" are selling at high prices on a cost per unit basis.

I am currently trading into retail that still seems to have some upside.

Small Apartment ($1M~$1.5M), Seller's market?

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