Why we believe in Apartments

Real Estate - everyone’s doing it! Flipping is back with a vengeance and has been for quite some time. All the flipping shows on TV are rocking and everyone I meet is a real estate investor or their aunt or uncle is a real estate tycoon. So why did I stop flipping houses a few years ago after flipping over 100 houses? The answer: Apartment investing. Now, it’s not like I invented a new niche or chose to move into something that was not popular, because buying apartments is nearly as popular that flipping these days. The reason for apartments is because of the massive wealth and freedom it can bring for all that are involved. The reason for me is about efficiency, running a business properly and effecting thousands of people in a positive way.

Venture D believes through its market research that the fundamentals are favorable for multi-family properties well into the future. The current demand being caused by the baby boomer generation, millennial generation and the immigrant population along with the shift in home ownership percentage is causing high demand for apartment living. We think this trend in home ownership will continue into the foreseeable future, which will continue to put demand on Apartment buildings. So let’s dig deeper.

Steady

Multi-family is also very steady. When looking at the graph below you can see that during the recession around ½ of 1 percent of multi-family housing was 60 days+ delinquent. Only in the early 1990’s did we see delinquencies of Multi-family above 5%. As compared to single family housing and other assets in general, apartments are a safe bet. Paul Moore, author of The Perfect Investment, put the 2 graphs below into his book to demonstrate the stability of Multi-family. 

Low Risk and High reward

• Less risk: Commercial Real Estate has seen less volatility than most other asset classes. When you narrow it down to apartments in particular you will find that they are even less volatile. When looking at the chart below, you can see that Real Estate is only slightly more risky that Government bonds yet has higher yields than large cap stocks. This to us speaks volume of the asset class that is real estate, especially apartment real estate. Very low risk with a very high return.

Supply / Demand:

• Limited Construction:The housing starts graph below shows the story of US housing starts though out the years. Looking at the graph below, you can see the record low amounts of construction during the great recession and the fact that just now we are slightly above historical averages. 2018 is projected to produce less housing than 2016 and 2017. Currently on a national level we are in an inventory crunch in the single family and multi-family sectors. There are approximately 400,000 units needed to meet the housing demand and not nearly that being built. Couple that with the fact that we look for markets with current values below replacement cost, where it is cheaper to buy than build, resulting in low construction levels.

Source: https://tradingeconomics.com/united-states/housing-starts

• Millennials: The large population increase in the millennial generation– those between age 18-35 is currently flooding the multi-family market. This generation is the perfect age for renting and is expected to peak in 2020. Millennials are the largest generation since the baby boomers and have a desire to remain renter longer than the generations prior to them.

Baby Boomers: The Baby Boomer generation is nearing the age where they are considering downsizing, which in turn will flood the multi-housing market. This generation is still the largest generation on record and trends are starting to emerge showing the generations desire to downsize into apartments and townhomes.

http://www.pewresearch.org/fact-tank/2016/04/25/millennials-overtake-baby-boomers/

• Economic Recovery:

Currently nationwide the unemployment rate is near 4%, much lower than the Great recession peak of 10%. This has boosted the economy and renting power among all demographics. The Millennial generation has finally began to obtain jobs and are seeing some, albeit small, wage growth. Currently we are focusing on markets that did not recover as quickly as others, but are now recovered or nearing recovery. This is allowing us to be in markets that we feel have a longer runway to capitalize on.

Labor Force Statistics from the Current Population Survey (Bureau of Labor and Statistics)

Tax Advantages:

Real Estate allows us to depreciate at 27.5% or better, take long term capital gains at near 15% and 1031 exchange our gains into another asset. We can also receive green credits, historical credits, low income credits, and many other potential government incentives.

• Depreciation – Government allows us to show that our property is worth $0 in 27.5 years. We can also use tools like cost segregation to help us be even more aggressive.
• Long term capital gains – if we sell and cash out, we will only pay the long term capital gains level, which will be much less than ordinary income
• 1031 Exchange – We can sell our asset and buy a new one of equal or greater value and avoid paying any taxes on the gain. This is perhaps the best tax benefit that we have.

Leveraging power:

One of the best parts of Real Estate is the fact that you can obtain financing in order to buy the asset. Doing so with an income producing asset allows us to bolster returns. Our residents pay our mortgage every month and provide us with additional income. Fannie Mae, Freddie Mac, CMBS, Insurance companies, local banks, etc are on board giving competitive rates in the low 4% range with 25-30 year amortizations, 10 year fixed and a possibility to obtain interest only financing for 3+ years.

• Leveraging repairs
• Our properties are value add and often times require repairs. We can obtain financing to make those repairs or pay with them out of our monthly income.
• Refinancing
• After we add value to the property, it will appraise at a higher level allowing us to refinance within 1-3 years. This will allow us to pay ourselves and our investors back some of our original investment and maintain positive cash flow, further increasing our ROI.
• Principal pay down
• Each month we are paying down principal of the loan, which without increasing the value of the property increases our ROI

Scale - Power in numbers:

Buying any multi-family, especially 75+ unit multi-family allows us to be efficient and effective. The issue with single family and small multi-family is the ability to scale and the ability to be efficient. How do we know that? We own and operate over 50 of them and have learned of the lack of scale. With mid to large sized apartment buildings we are able to have a full time or several full time maintenance staff and leasing staff. We are able to have a website for the property itself and we are able to add more amenities for our residents. Try adding a nice playground, grills, a dog spa, etc to a duplex. The numbers just don’t work. With an apartment a few vacancies don’t ruin the cash flow for the entire year, in fact with most of our buildings we can be at 70-75% occupied and still break even. With a single family 1 month of vacancy can mean an entire year or more is negative.

Teamwork:

Being able to build a power team is valuable for the success of the asset. With an apartment community we need to run it like a business and that means we need to have property management, maintenance staff, leasing agents, accountants, administrative assistants, attorneys, appraisers, brokers, lenders, etc on our team. They are not all on payroll, but all of them are working toward the same goal of making the property a success. This creates each apartment as its own business and allows the machine to run as long as we keep it oiled and full of fuel.

Syndication:

We purchase our properties using a syndication model. This allows us and our investors to purchase larger properties and more properties. Why is that important? Well read the main points above and you will see. By creating a proper partnership with others that want to take advantage of a great asset, we are able to all create a powerful investment tool. Our investors are able to be as passive as they desire and still have the opportunity to enjoy strong yield with lower risk. We as a company are able to grow and strengthen and use our and our team’s strengths to continue to build a positive business that can create positive communities.