Should You Diversify Into Multifamily, Part 3


The Importance of Value-Add Investing

By: Carl Pankratz

In Part 1 of this series, we outlined the overall benefits of investing in multifamily real estate.  Part 2 included reasons why property management is key to success (and how we emphasize in-house management for the benefit of our investors and residents).  In this, the final installment, we discuss why value-add can be a primary vehicle in achieving investment targets. 

Apartment properties come in many different classifications. Properties are often referred to by property class (A, B, C and D) based primarily on age but also somewhat on condition and location. There are also specialty classes like student housing for properties that rent by the bed near college campuses or low income housing where many units are restricted on how high the rents can be as well as how high the income can be of the residents that live there. There are some outstanding opportunities for value creation when investing in apartments that appeal to middle or working-class families that need renovations or upgrades; these are considered or value-add apartments. As we discuss this value creation, there are three areas we are going to highlight: ways to create value, prohibitive nature of building new product, and the demand for workforce housing.

First, value-add properties offer an investor significant avenues to increase the value of a property while improving the surroundings for the residents and often have a positive influence in the communities surrounding them. These assets, which are generally 10 to 50 years old, often have dated interior finish-outs and the exteriors and amenities may be in some level of disrepair or at least not up to the standards of newer properties in the area.  The changing styles and preferences over time make it possible to bring in modern designs and ideas to refresh the space, making it more appealing. This improved appeal generally leads to higher rents and better investor returns. Ideas to make spaces more attractive to current and prospective residents include: revitalized kitchen cabinets, backsplashes, new flooring, improved lighting fixtures, and new appliances.

All these, and other upgrades, can lead to rent premiums. However, as we discussed in the previous article concerning property management, it’s important to partner with an investment group that understands the highest and best use of rehab funds in a project. In some cases, smart home technology may be a good investment; however, in some markets it is an excess whose cost will never be recaptured. Utilities are also routinely higher at older apartment communities. Thus, bringing in water conservation measures or energy consumption improvements can also be a big benefit to the property’s bottom line. Whether it is improved finishes, energy efficiency, or better management, these properties can offer big investment upside.

A second factor in the benefit of investing in value-add multifamily is that building new affordable housing for residents close to jobs is challenging. Today, many factors weigh against the ability to build properties with rents middle and working-class families can afford. Finding labor is very challenging. In a market with a booming economy, trying to find a quality crew experienced in construction will come with a cost, as the demand for their services has outpaced the supply. Additionally, material costs are increasing, land prices are higher, there is limited multifamily zoning in desirable areas and building codes are more onerous than ever before. All of this has resulted in a cost of bringing new product to market that has increased dramatically throughout this economic expansion. Higher costs when building new properties results in rents at those communities that are significantly higher than many working-class families can afford. This insulates the market for properties that are a bit older, as even after renovation they can often be acquired for substantially less than current replacement cost. Value-add properties also have the advantage of already being occupied in most cases. When new properties are built, a substantial amount of the investment time is spent with negative cash flow as the units are not yet occupied and often large concessions have to be given during the lease up period.

            Last, a big driver for value-add multifamily is the huge demand from working families. Workers with jobs essential to schools, police and fire departments as well as the service sector cannot afford housing that is conveniently located to their jobs. Using numbers from the National Multifamily Housing Council, there is a 3.1 million unit shortfall for working class families in the United States. This has been made more difficult, by the lack of supply on the market. Per the Joint Center for Housing Studies of Harvard University, the national vacancy rate for both owner-occupied and rental units fell to 4.4%, the lowest point since 1994. This provides an incredible demand for a limited number of units. Many renters are pushed to areas outside of where they work in order to find apartments that are affordable. These apartments are typically the apartments that are older in age and in need of an upgrade. These residents may not be able to afford the rents of a new building, but they still desire a clean and nice place for themselves and their families to call home. Many times, the apartments that were built prior to 1990 were built in locations close to core urban locations, and by upgrading the units, residents now have a clean and safe place to live, close to their employment. Therefore, nicer appliances, well designed kitchens, and other updates have value, as it still allows a rent that they afford but with the quality they desire. This drives the huge demand for value-add apartments.

Throughout this series, we endeavored to provide information on the multifamily process, while empowering you to make better investment decisions. You have hopefully seen the benefit of multifamily, the important role that good property management plays, and the demand from renters for value-add apartment communities. As you move forward, it’s important that you invest with a partner that has experience in the space and ask the “right” questions. Multifamily investing can help you achieve your financial goals; please reach out and let us know how we can help you in your journey.

Over the last decade, Exponential Property Group has given hundreds of investors the opportunity to grow their net worth using multifamily real estate.  Go to exponentialpropertygroup.com/invest to learn how you can too.

Exponential Property Group Included in Inc. 5000 List of Fastest Growing Companies

NEW YORK, August 14, 2019Inc. magazine today revealed that EXPONENTIAL PROPERTY GROUP appears on its annual Inc. 5000 list, the most prestigious ranking of the nation’s fastest-growing private companies. The list represents a unique look at the most successful companies within the American economy’s most dynamic segment—its independent small businesses. Microsoft, Dell, Domino’s Pizza, Pandora, Timberland, LinkedIn, Yelp, Zillow, and many other well-known names gained their first national exposure as honorees on the Inc. 5000.

“Inclusion in the Inc. 5000 is an honor and validation of the work we’ve done to serve our investors, team members and residents,” said Kim Radaker Bays, founder and principal of the Southlake, Texas based company, “We continue to pursue excellence in each aspect of the value-add process and are grateful to be recognized at a national level.”

Not only have the companies on the 2019 Inc. 5000 (which are listed online at Inc.com, with the top 500 companies featured in the September issue of Inc., available on newsstands August 20) been very competitive within their markets, but the list as a whole shows staggering growth compared with prior lists. The 2019 Inc. 5000 achieved an astounding three-year average growth of 454 percent, and a median rate of 157 percent. The Inc. 5000’s aggregate revenue was $237.7 billion in 2018, accounting for 1,216,308 jobs over the past three years.

“The companies on this year’s Inc. 5000 have followed so many different paths to success,” says Inc. editor in chief James Ledbetter. “There’s no single course you can follow or investment you can take that will guarantee this kind of spectacular growth. But what they have in common is persistence and seizing opportunities.”

Exponential Property Group’s path to success has relied on value creation for its investors, teams, communities and residents that call the company’s properties home. The company owns and operates multifamily communities and has a proven track record of success.  Utilizing first-in-class property management, strong capital relationships, and an established supply chain of domestic and international vendor contacts, Exponential Property Group is uniquely positioned to achieve success in a variety of financial climates and property locations.

CONTACT:

CARL PANKRATZ

817-809-6854

Carl.Pankratz@exppg.com

Should You Diversify Into Multifamily, Part 2

Property Management

Effective Property Management = Higher Likelihood of Success

You may have heard that you make your money in real estate when you buy a property, meaning your purchase price determines success. However, while there is some truth to that, if you don’t have effective property management, it will be very difficult to maximize the returns no matter the purchase price. 

Not all property management is created equal. Here are some of the many things property management does for an asset and some of the key issues to remember when evaluating multifamily investments through the lens of property management.

Inspections and licensing

City inspectors are people too and making their jobs more straightforward could be the difference between passing or failing an inspection.  This is one of the key ways that onsite management is a difference maker. Professional property management will know what issues to fix before an inspection and will be quick to make the correction if there is an issue.  They build relationships with cities and make sure issues are addressed quickly and efficiently.

One of Exponential’s points of difference is our in-house property management team. They understand the value of maintaining relationships with city officials built on trust. These relationships are backed by a track record of successful inspections and quick responses to issues. We take that reputation very seriously and do everything we can to protect it.

Crime prevention and response

By making early contact with community policing resources and building a rapport with the beat officers, professional property management begins making critical inroads with law enforcement.  Making them feel welcome often leads to a greater law enforcement presence and a safer community.  

At Exponential, we welcome our law enforcement partners. We open up our facilities to give officers a comfortable place to work. There have even been instances of law enforcement using club houses as a substation. We’ve even kept a favorite brand of coffee on hand.  It’s the least we can do.

Human Resource Management

Unless you’re a CPA, salesperson, referee, social worker, and babysitter with the construction know how of Chip Gaines… you’re going to need a team to run a property.  This is generally where apartment owners see the most immediate benefit from professional property management.  

At Exponential, we pride ourselves on well trained teams. Each team member at our properties understands the numerous issues that are involved in running a property and is trained in how to respond. Whether it is handling work orders, finding new residents, handling new leases, or keeping accurate accounting records, our teams are prepared.   Knowing this value, we keep our teams even after a transaction. That means we can place people where they want to be and in a position for which they have a passion. This allows us to continuously coach our people for the long-term benefit of our investors. 

Weather and Disaster Response

When weather strikes at 2 AM, someone is getting that phone call that the power is out or there is a problem with the roof.  Most investors would rather that call go to property management. In a third-party management situation, often the owner will hear about the event on the news before the office is open again.  

Exponential’s in-house management team is on call to coordinate response and communication during severe weather or unforeseen events. Whether it is calling the power company, tarping the roof to prevent leaks or removing fallen branches, our team can quickly respond.

Market Trends for Rents and Amenities

One of the clearest advantages of professional property management is first hand knowledge of resident expectations for amenities and the amenities’ value in monthly rent.  With more data points across more properties, there is an understanding of what rents and amenities may command in a submarket. For example, their knowledge of neighboring properties would let you know that a dog park might be standard for one area and a differentiator or simply unnecessary in others.  

At Exponential we understand there is a difference between knowing how much to charge and actually leasing for that rate.  We not only have the market knowledge, but the ability to implement updated rents. There have been occasions when our management team has taken over properties from third party management groups that have not raised rent to keep up with the market and immediately increased rent $200. This was before even beginning to renovate the property.  

Monitor construction workflow

If your property is undergoing renovation, property management can be the difference between efficient rehab and budget busting cost overruns.  Having a property manager that will work with the contractor to keep the job on time and on budget is invaluable.  

At Exponential, our property management sets the scope of work and timelines with the general contractor and ensures that materials are ready for the subcontractors, saving time and material markups.

Coordinate unit turn prioritization

When going through a value-add on a property, knowing which units to renovate and when to do the work is critical to maximizing value.  Often, the choice of which unit and when to renovate it is left to the maintenance team rather than using predetermined business logic to inform that choice.  Professional property management will know which unit types are most in demand. Exponential’s property management weighs every notice to vacate against dozens of factors including current rent, potential increase, and renovation team availability to determine which units to make-ready and which to renovate.

Lease enforcement

Whether a resident is late with the rent, brought home a new puppy or violates his lease in another way, someone has to communicate the issues and, potentially, assess fees or initiate eviction.  A professional property manager can help ensure that the lease terms are enforced legally and according to local statutes. Remember, lease enforcement goes both ways and the property owner must comply with the lease terms as well.  Property management takes on much of this responsibility. 

Expense Controls

It’s easy to be focused on the income side of a P&L statement, but it’s often the expenses that make or break an investment. On many work-force housing properties, implementing a water conservation program can lead to big cost savings. Further, making sure there are spending controls on office supplies, maintenance items, and other purchases can hold on-site teams accountable.

At Exponential, we look for every opportunity to reduce expenses. Each employee has oversight to prevent unauthorized or wasteful spending. We have had occasions where prior owners did not have tight controls on spending, and we were quickly able to improve the property’s profit via our training and spending policies.  

Ultimately, the role of a property management company is to protect your investment and earn you money, so be sure to remember that when you’re out there interviewing. Will the management company closely watch the accounting? Will they make sure units are quickly ready to rent when someone moves out? Will they treat it like it’s their asset? Will they look for ways to achieve cost savings? It’s your hard-earned money, make sure you have the right team protecting your investment!

Over the last decade, Exponential Property Group has given hundreds of investors the opportunity to grow their net worth using multifamily real estate.  Go to exponentialpropertygroup.com/invest to learn how you can too.

In Part 3 you’ll learn about the benefits of investing in the value-add category of multifamily.

Should You Diversify Into Multifamily?

Multifamily Real Estate Investment – Part 1

Any investor looking to seriously build their wealth and add more diversity to their portfolio should consider investing in multifamily real estate.

If your goal is to accumulate net worth, take a moment to read why multifamily real estate is a high impact investment strategy you can use. 

So why Multifamily Real Estate Investment?

Home is a Necessary Expense

People will always need a place to live. Unlike other types of real estate that can be severely impacted by changes in technology, customer preference, or relevancy, people will always need a place to call home. For you as an investor, this means there will always be demand.

Fewer People Buying Homes

Did you know that homeownership fell to a record-low of 64% in 2018? More people are getting divorced. The affordability gap continues to widen. Millennials are staying at home longer, delaying the purchase of their first home. Whether it is the growing student debt, credit card debt, or increase in cost of living expenses, many people can’t afford the down payment needed to purchase a home. Thus, more people are becoming long term renters.

Efficiency of Investing Capital

In a single transaction, you can accumulate significantly more density and income, more efficiently than would be possible in single family properties. This allows you to deploy your investment dollars more quickly and avoid the hassle of multiple transactions.

Multiple Income Streams

Multifamily gives you the opportunity to have multiple income streams that stem from the same investment property. Unlike relying on a few residents, multifamily properties can have hundreds. Simply stated: more people renting means less risk.  Combine this with revenue from premium services like reserved or covered parking, laundry or high-speed internet and the values increase beyond rent growth.

Finance Opportunities

No other type of commercial real estate have the number of loan options that are available to multifamily properties. Between Banks, Life Insurance Companies, Debt Funds, Fannie Mae and Freddie Mac many vehicles exist to finance multifamily property investments with strong leverage, reasonable rates and term flexibility.

Over the last decade, Exponential Property Group has given hundreds of investors the opportunity to grow their net worth using multifamily real estate.  Go to exponentialpropertygroup.com/invest to learn how you can too.

In Part 2 you’ll learn how property management is key to success in your multifamily investment.

Invest With Those You Trust

You’re an investor, and you’ve tried traditional investments, but you’re ready for more. You want something that gives you better, more consistent returns with less headache to achieve your investing goals more quickly. You know that most of the millionaires and billionaires in the US have improved their financial situation through investing in real estate and you want to invest with someone you can trust, while avoiding the hassle and learning curve that goes along with doing it yourself. A great way to invest in real estate is through passive investment in multifamily properties. Multifamily is a particularly good asset class because people need a place to live, so it is more insulated to economic conditions than some other commercial sectors. Many organizations offer the opportunity to passively invest in multifamily properties, but it is important to understand that as an investor, who you do business with is just as important as the business itself. We’re here to help you ask the right questions to make sure your multifamily investment is profitable and managed by people you can trust.

Take the time to get to know the manager or group managing your money on an intimate level. Treat your investment like a job interview. Make sure you hire someone that is going to be a good steward of your money and a loyal partner along the way. Dig into their track record, get to know their team, and learn about their approach when it comes to investing.

Do their investing goals align with your goals?

Real estate can be a great investment for a variety of reasons including value creation, cash flow and tax advantages. It is important that you be honest with yourself on your goals for investing in real estate so that you can invest with a group that undertakes projects consistent with your objectives. Is current cash flow your primary objective or are you using this vehicle primarily to accumulate net worth and provide a better future for yourself and your family? Real estate is a much less liquid investment than stocks, so it is important to think through your time horizon. While everyone would love to make as much money as possible as quickly as possible, being clear about when you are likely to need the funds you are investing back in your hands will help you make a better choice on what project to invest in. You should ask if they are focused on current cash flow or capital gain, when distributions are likely to start and how long the property is expected to be held.

What level of information and transparency will be provided to you?

Are they providing information on their track record and where they are in any currently owned projects? How often do they provide updates on the property performance and what information is provided in those updates? Are you able to schedule visits to the properties you are invested in to see them with your own eyes? Do they offer an online portal to allow you to review the financials of an investment 24 hours a day?

Learn about the team that will be handling your money.

Ask about their story. Learn about who they are, what they believe in, and how they do

business. How much experience do they have in multifamily investments? Does the team contain people with strong financial, property management and/or asset management backgrounds? Do they understand the fiduciary role that they are taking on when investing your money, do they feel personally accountable for the results you experience? Are the residents and team members that work on their sites a means to an end or is benefitting the residents and team members part of the overall goal? Do they give back to their communities?

If possible, meet the team and get to know who’s on the other side of that phone call or email

you just sent. Is someone available to answer any questions you may have along the way? Know who you’re dealing with, and who will play what part in your investment. You should understand the heartbeat of the company and feel confident in doing business with them. Look for the manager that will step into your shoes, someone that will take ownership of the destiny of your money.

How are they paid for their work on the project?

Do they take acquisition fees when the property is purchased? While this is not uncommon, if the acquisition fee exceeds what they invest in the project they are getting paid for closing the investment even if the investment doesn’t perform. Does any of your original investment get reallocated up front or are allocations to sponsors only from the profits on the project? Reallocation is a less common scenario, but one that should be clearly understood. There is really no harm as long as all goes well; however, if at the end of the day the property sells at a break even, that reallocation could mean that the sponsor made money when you did not get a full return of your investment. You should ask how the sponsor will be paid. What fees does the sponsor take throughout the project? Ask the sponsor how their fee structures are aligned with the performance of your investment. The more aligned the sponsor is with the investors, the better chance that the sponsor is continually making decisions that are in your best interest.

How do they add value as compared to their competitors?

Are they able to provide more detailed oversight through in-house management? What systems and processes have they developed that make them more efficient or effective than their peers? Are they cost effective in their upgrade programs by handling things in house, strong vendor relationships and bulk sourcing of their materials either domestically or internationally?

What do their investors say about them?

This tells a lot about the character of the manager. Most people will paint themselves positively but be sure and measure their honesty in this question. It’s a test of self-awareness and an honest appraisal of how other investors see them, not just how they see themselves. Ask for references and speak with investors who are invested currently and particularly ones who have seen a project go full circle and have received a return upon sale.

Again, who you do business with is just as important as the business itself. Don’t leave these questions unanswered. Click here to interview us today. We’d love the opportunity to earn your trust and investment.