Results from the second quarter of 2018 are in, and they continue to demonstrate Atlanta’s strong real estate market trends. Lease rates ended at a historic high of $26.77 per square foot, and absorption was flat as tenants moved in and out of housing. Construction projects have been active in the Midtown region, which has been expanding available inventory, and available vacancies are up from last year.
Strong consumer demand has pushed rents up lately. Class A rents in urban regions rose a healthy 12.7% since 2017, and suburban rents rose by 7.2% in that year. Investors have taken notice as the creative office segment experienced some strong momentum in rent increases and absorption, and commercial real estate has reached a healthy equilibrium.
Multifamily housing in Atlanta has experienced a lot of strong trends in the last quarter. While Class A apartments have slowed considerably, Class C apartments have begun to fuel the market. Many expensive, top-tier units were constructed over the past four years, and that’s had the result of increasing overall vacancy. In order to fill some of those openings, some high-end apartments have had to sacrifice profits in order to make concessions and attract new clientele. Still, though, the surplus of high-end apartments means that many potential buyers choose to remain in cheaper Class C apartments. Despite the disadvantage of these vacancies, this quarter still saw faster rent growth than most of the metro area. Overall, multifamily units saw a 4.6% increase in effective rents from last year.
Construction continued into the second quarter, but not at an overwhelming pace. The Buckhead, Midtown, and Sandy Springs communities will be receiving a total of 4800 apartments. From a wider vantage, 9300 units are set to be completed by the end of 2018. In total, 12,000 units were constructed year-over-year since the second quarter of 2017, 1600 more than were completed the year before.
Job growth has been consistent in Atlanta thanks to the city’s pro-business environment. This has resulted in conditions that fuel household formation and drive investor interest. Non-local investors have been increasingly competitive with local investors, and even international investors have been getting involved. Investors are especially active in the Buckhead and Midtown areas. In both Buckhead and Midland, cap rates between 4.5% and 5.3% can be found. Investors have already started looking toward the Cumberland/Galleria area and Sandy Springs due to how competitive the scene is, and because cap rates under 6% can still be found there.
In the southwestern suburbs of Atlanta, investors interested in the $1 million to $10 million price tranche have been active. The suburbs are home to largely blue-collar workers, and the area had significant reductions in vacancies.
The prospects for the market are likely to continue to improve since the employment outlook for Atlanta is promising. Over 44,000 jobs were created in the Atlanta metro area over the past year, cutting unemployment down to 4.3% in the city. The greatest employment increases were in the trade, transportation, and utility sector, with education and health services, close behind. To meet the growth in these trades, investment in non-luxury multifamily housing should be a safe investment in Atlanta.
Vacancy And Rent
So far, demand and supply additions have maintained at pace, holding vacancy at 5.9%. While vacancy has held steady across Atlanta, Class C multifamily units saw a 100-basis-point decrease in the rate over the last year to 5.5%, while the average rent for Class C units rose by 6.2%. It’s clear that apartments servicing a working-class population are growing to take up a bigger share of the total housing market. Atlanta is currently doubling the United States’ overall five-year household growth, so it is a lucrative area for investment.
Across the Atlanta metro area, there was a 5% increase in effective rents year-over-year. Building on last year’s similar increase, that brought the average rent up to $1,143. Faster rent growth occurred in many suburban locations. For instance, in the Far West Atlanta Suburbs submarket, rent growth climbed 8.7% to reach $975 per month. Since 2014, the average rent has climbed almost $250 a month.
Overall, these demographics have made Atlanta apartments an exciting prospect for investors. Transaction velocity rose about 9% during the last year, and the high household formation rate in Atlanta and steadily-climbing rent growth helped maintain that interest. The rise of Class C assets and affordable options has also lowered the barrier of entry for potential investors and makes crowdfunding investment options look even more attractive. Vacancy continues to decline and rent continues to rise for Class C assets.
The Federal Reserve lifted the lending rate to 1.5% by increasing the federal funds rate by 25 basis points. An upgraded economic forecast that accounted for the rollback in regulations and the recent tax cuts made growth projections much more optimistic over the next two years. The Fed decided to move toward two additional rate hikes in 2018 and set the stage for as many as four rate hikes in 2019.
As interest rates rise, lenders will see capital costs rising in tandem, which may also result in higher lending rates for investors as well. Some competitive lenders might choose to absorb some portion of that rising cost, of course, while higher borrowing costs may push buyers to seek cap rates on the higher end. Still, the optimistic economic outlook should push rent growth well over the rate of inflation over at least the next year. Thanks to that market optimism, sellers continue to have higher asking prices, widening the expectation gap as demand trends and performance remain encouraging.
Government agencies currently control slightly over 50% of the apartment lending market share. National or regional banks account for around 25% of the share. Portfolio lenders should tend to require loan-to-value ratios of around 70% and offer interest rates in the 3.75-4.5% range. Given the recent tax reform and fiscal stimulus, the US economy should continue its strong growth trends, and rental demand should continue at its current rate. Apartment vacancies should rate at around 5% at the end of 2017 if trends continue.
Atlanta is a promising market for investors, especially if they keep in mind that Class C multifamily options are booming. The current trends of growth show little sign of stopping, and Atlanta shows all the signs of being a dynamic and fruitful market for the next year.
Flipping houses is becoming a greater challenge as rising home prices and stiffer competition hamper profits. Home flippers can continue to succeed in this market if they practice their craft with discipline, and private real estate lenders have a great opportunity to tap this market as well – and when private lenders have opportunities, there’s plenty of opportunity for real estate investments.
Home flipping has had a recent boom in popularity. This is in part due to the fact that many people saw opportunities in the bargain home prices that appeared right after the housing crisis. More recent arrivals to the scene may have been enthralled by reality television shows that make the fix-and-flip process seem quick, simple and guaranteed to be profitable.
Fix-and-Flip Market Today
Regarding the heightened competition in the fix and flip market, ATTOM Data’s Daren Blomquist, who collates data on home flipping every quarter for the data firm, noted that the number of individuals or groups flipping single-family homes had hit a decade-long high of over 43,500 in the first half of 2017, the highest number since the second quarter of 2007.
With rising prices and growing competition, the total inventory of affordable homes available for purchase is shrinking. The United States was in the grips of a foreclosure crisis until September 2010, during which around 120,000 foreclosures occurred in a single month according to CoreLogic data. Since 2007, there have been around 7.8 million completed foreclosures in the United States. Serious delinquency and foreclosure rates hit the lowest levels in more than a decade just this last year, signaling that the housing recovery is finally on solid ground.
Distressed properties have always been a major target of acquisition for home flippers. About 39 percent of flipped homes are purchased in the foreclosure process or as REO—a percentage that sits far lower than it did in 2010 when it was as high as 70 percent according to ATTOM Data. Flippers seek out pockets of distressed housing like this because these regions tend to also boast strong rental markets, which provides flippers a regular source of demand from buy-and-hold real estate investors who seek out turnkey renters.
The nation’s rejuvenated housing market is an excellent sign for flippers: The trend of increasing home prices has steadily persisted, and that has provided a hedge that helps flippers after the fix when they are hoping to sell the house and move on. However, those rising prices also increase the entry fee for potential new flippers – it’s hard to get started if the buy-in for the practice is prohibitively expensive!
Those who just use cash for their home purchases will be severely limited by rising home prices, but flippers that use financing will have the chance to leverage and expand their flipping portfolio at a considerably faster rate.
Real Estate Lending for the Modern Era
About five years ago, new types of lenders entered the marketplace and provided a creative spin on the traditional real estate financing that has been expected for flippers. These finance products include refinances, bridge loans and crowdfunding. The greater competition among lenders seeking out real estate investors, along with the increase of advanced technology and algorithms utilized by online lending platforms has also decreased the cost of borrowing.
This is excellent news for the modern real estate investor, who has gained additional financing options at a lower cost. These innovative financial products have re-energized the home fix-and-flip market over the past half-decade while also widening access to real estate financing. The proliferation of online lending platforms has offered flippers access to a new source of financing that doesn’t care where they live or where their flipping work will actually take place.
More than a third of house flippers used financing options on their 2016 and 2017 projects. In the second quarter of last year, that number grew even higher, becoming the highest since the third quarter of 2008, according to ATTOM Data.
Flipping used to be financed very differently. Ten years ago, an average hard money loan would come with an interest rate of 15 percent or more, and financing options would be restricted to those lenders who were local. Modern investors have access to short-term rehab loans with interest rates in the single digits and have much wider options since most internet loan companies offer loans that take only a week or less to access the needed funds.
Getting Ready for Tomorrow’s Real Estate Market
There is some excellent news on the recent jobs and wage gain front. Hourly wages rose 2.9 percent in January, which is the largest increase since 2009. Unemployment didn’t move at all and remains at 4.1 percent. However, the number of workers that filed for unemployment claims decreased to the lowest point in 45 years in February. Together, these economic signs demonstrate the prospects of additional wage growth this year, which should work to enliven the real estate buyer market.
Home flippers and the private lenders they rely on will still need to employ innovative strategies to stay at the head of their game, even if the market is becoming more friendly. Some tertiary markets have outperformed large metro areas, and are ripe for flippers’ time and interest.
The markets that saw the largest increase in home flipping over a year ago were solely in tertiary markets. Baton Rouge, Louisiana, saw the largest annual percentage changes at almost 140 percent, but Winston-Salem in North Carolina followed at 58% and Salem in Oregon increased by over 50% as well. Buffalo, Tulsa, Greenville, and Chattanooga similarly saw a large increase in fix-and-flip activity, and are all tertiary markets as well.
If the momentum behind this tertiary market trend continues through 2018, then private lenders will grow more and more interested regardless of the site of the market. With advanced real estate financing technology, lenders and investors alike will be in a position to facilitate this phenomenon. Internet-based lending platforms will be especially useful for tapping disparate tertiary markets at once.
Flippers will always be able to use a local hard money lender, but lending options have proliferated in the last decade. National, sophisticated online lenders are ready to lend in smaller markets and don’t need a physical presence to start lending in a particular city where the fix-and-flip market starts booming.
A wide selection of financing options should only energize the flipping market as it shifts away from a distressed, cash-only marketplace to one that can capitalize on at-market houses purchased with financing that facilitates faster portfolio growth.
When calculating risk on a property investment, real estate investors have several tools they can use. One of the most useful resources is the “capital stack”. The term refers to the different financial sourcing layers that go into funding the purchase of a real estate project. In an ideal world, a real estate investment would hit its target, and everyone would receive payment according to plan. However, like any standard investment, real estate has its risks.
The capital stack provides investors with useful information about where they come in the pecking order of cash flow, and what the order means for their repayment. While there’s no specific limit on the number of layers capital stacks can contain, this article will look at the four most common: common equity, preferred equity, mezzanine debt, and senior debt.
Explaining Preferred Equity and Common Equity
Preferred equity is one of the toughest components of the capital stack to understand. It’s highly flexible, and it gets its name because holders of preferred equity will have a better chance of receiving payments than standard equity holders. Preferred equity can range from “hard” preferred equity to “soft” preferred equity which is more likely to contain extra advantages if a real estate project performs well.
While hard preferred equity holders can make some important decisions about the real-estate development, soft holders will only have limited rights. On the other hand, common equity is one of the most profitable, but riskiest options for real estate deals. The developer in this deal will be required to invest some of their own money to have skin in the game. Investor risk in common equity is significant because every other type of capital comes before the common equity holder.
In other words, those holding common equity get paid last. However, if the property is successful, investors may have no cap on their potential returns. This means that a successful common equity project can be very lucrative.
Senior Debt and Mezzanine Debt
Other forms of a deal in the capital stack include senior debt and mezzanine debt. Senior debt is secured by the deed of trust or mortgage on the property itself. This means that if the borrower fails to pay the amount owed, the lender can take ownership of the title to the property. This makes senior debt one of the least risky investments available in real estate. However, the low risk means that returns are limited too. Senior debt investors expect a lower yield on their investment compared to equity investors in exchange for a more secure position.
Mezzanine debt sits just below senior debt when it comes to defining the order of payment priorities. Once the developer has paid their operating expenses, and the senior debt, they can then push cash towards the mezzanine debt. If the developer can’t pay on this debt, the lender will be able to take over control of the property. Mezzanine debt can have a higher rate of return than senior debt, but the return is much lower than actual equity.
Understanding the different debt structures available for real estate investors, and how they work in the capital stack is crucial for investors who want to make the most out of their portfolio. Similar to investing in bonds or stocks, the risks and returns of different debt investment options will determine an individual’s diversification strategy according to their investment goals.
Our Suite of Companies
Sharestates is a real estate investment marketplace that allows individual and institutional investors to participate in rigorously vetted debt offerings. All of the offerings on the Sharestates platform have passed through a 34-point underwriting process. Sharestates has combined proprietary technology with a proven track record of business development expertise to become the fastest growing real estate crowdfunding marketplace, doubling every year since its 2015 launch.
Syndicate Profile offers investors direct access to real estate equity investments through our online marketplace–with typical net annualized returns between 12-40%. In addition to using a 34-point underwriting system, Syndicate is able to further minimize risk by partnering with the top performing borrowers from Sharestates who are seeking equity partners. Syndicate Profile’s goal is to make these lucrative investments available to a wider audience of investors.
According to the Securities Act of 1933, any company that sells securities must either register with the Securities and Exchange Commission (SEC) or file for an exemption. The JOBS Act 2012 provides a way for companies to use crowdfunding as a means of selling securities, but companies using this method must still comply with existing law. Regulation D of the Securities Act exempts certain companies from registering with the SEC, however, it does require them to file a Form D, which lists the officers and other details of the company selling the securities.
Rule 506 of Regulation D (Reg D) paves a way for companies to raise unlimited amounts of money from the sell of securities. The two components of Rule 506 are 506(b) and 506(c). Here’s what each component of this rule allow companies to do.
Rule 506(b) Imposes the Following Standards on Companies Selling Securities
In order to comply with the exemption rules listed in Section 4(a)2 of the Securities Act of 1933, companies using 506(b), Reg D
- cannot advertise or use general solicitation methods to market securities;
- may sell to an unlimited number of accredited investors and up to 35 other investors;
- cannot violate anti-fraud prohibitions;
- must provide non-accredited and accredited investors with the same information;
- and a company representative must be available to answer questions to prospective buyers.
Standards Imposed by Rule 506(c)
There is a slight difference between Rule 506(c) of Reg D and Rule 506(b). Companies selling securities can advertise and use general solicitation methods to find prospective buyers, however, the company can sell securities only to accredited investors. The company must also take reasonable measures to verify that investors are indeed accredited investors.
Crowdfunding platforms that operate under Rule 506(c) typically ask investors to register as either an accredited investor or a non-accredited investor. Before allowing investors to make their first investment, platforms generally ask to review tax documents, W-2s, statements from financial institutions, credit reports, and other documents to prove that investors using the platforms are accredited investors. Penalties for not complying with Rule 506 can be stiff.
Where to Find a Copy of a Company’s Form D
Securities sold under both Rule(b) and Rule(c) are considered restricted securities. While these securities do not have to be registered with the SEC, the companies issuing them must file a Form D with the SEC. This form includes the following information on the company:
- Names and addresses of company promoters;
- Names and addresses of executive officers and directors;
- And details about the securities being offered.
When a company files a Form D with the SEC, it becomes public information. You should search for and find Form D for any crowdfunding platform you wish to use to make investments, whether you intend to invest in real estate or other securities. All Form D documents can be found in the EDGAR database, which is operated by the SEC.
What Else You Need to Know About Securities Crowdfunding
All companies that sell securities, whether through crowdfunding or otherwise, must conform with federal law regarding the selling, advertising, and solicitation of said securities. Not only that, but companies must comply with individual state laws in each state where they operate. Be sure to check with the securities regulator in your state and learn what they know about a company before you decide to purchase securities from them.
Crowdfunding is a newer asset class but is still subject to the same securities laws as other securities. Both equity-based and debt-based crowdfunding allow companies to raise capital for growth and expansion, or for particular projects. To protect yourself from bad actors, learn as much as you can about crowdfunding before you invest in or with any company.
In the hospitality industry, crowdfunding projects are quickly gaining a lot of momentum. Many of the biggest real estate crowdfunding websites and networks frequently have private placements and hotels mixed in with a variety of other offerings for real estate around the country – making them a perfect place for those looking for hospitality properties.
A few crowdfunding sites have even begun to focus specifically on the hospitality world, particularly as retail stores continue to close down, and hospitality sees a boom in popularity. The rise of RECF has meant that today’s hotel developers and hospitality entrepreneurs will now have a new way to purchase or invest in incredible new buildings around the US.
How Does RECF Differ to Traditional Real-Estate Lending?
The first thing that investors need to know when they’re looking at crowdfunding real estate, is what RECF is, and how it compares to typical lending processes. Essentially, Real Estate Crowdfunding, or RECF is one of the fastest-growing solutions in the real estate industry, forecast to continue growing as the digital disruption transforms the world.
RECF refers to a process that offers traditional restate ventures or assets through various forms of financial product that can be distributed to investors using technology. RECF ensures that a broader range of investors, or a “crowd” can make smaller investors in real estate ventures in a manner that’s more cost-efficient. The aggregation of smaller forms of capital from broad investors can lead to a pool of capital that ensures a crowd can collectively purchase properties, lend money to developers, and take states in equity developments.
Obtaining Crowdfunding Real Estate
While RECF might be a more advanced form of lending, it’s worth noting that the people responsible for offering capital to developers for hospitality properties in this area are still looking for largely the same things as other lenders in the real estate world. In other words, they want to make sure that they’re going to get a return on their investments.
Ultimately, hospitality developers who are considering going into crowdfunding real estate should be looking for properties that are low-cost and high reward. This might mean flipping a previously abandoned CRE property into something that’s capable of bringing in a high profit. On the other hand, it may simply mean developing new property in a location that has the proven ability to bring in new forms of revenue.
Interestingly, however, RECF platforms do allow borrowers looking for capital in riskier ventures to obtain a better chance of funding. Because the convenience of the online crowdfunding real estate platform makes it easier for smaller investors to offer the money they feel comfortable with, it’s much easier for investors to trust they’re not going to lose all their investment.
Crowdfunding Real Estate Continues to Grow
As a simple, but effective model for funding larger real estate developments, the crowdfunding model is bound to keep growing in the years ahead, particularly as technology developments make the concept easier to manage. What’s more, when it comes to larger hospitality properties, crowdfunding could ensure that developers can access the support they need.
Acquiring financing for development and growing your investment portfolio requires careful planning to cope with the array of internal and external factors present in the real estate marketplace. SWOT is a valuable tool you can add to your planning to address your internal strengths, weaknesses, and identify strategies to take advantage of opportunities and handle threats. In this article, we’ll discuss each part of the SWOT analysis and how they can be specifically applied to real estate development, investment, and marketplace lending.
Strengths – ‘S’ in SWOT Analysis
What do you do best as an investor? What key skills do you possess that give you or your firm an advantage?
These questions will help you identify your core competencies. These are the traits, resources, and skills sets that will help offset weaknesses and overcome environmental threats. Knowing your strengths provides the basis for building a competitive advantage in the marketplace. Allocate extra attention and resources to those areas where you excel to build the greatest differentiation from competitors.
Consider the various functional areas of business. How well equipped is your investment operation in terms of project management, marketing, maintenance, accounting, legal, acquisitions, and capital?
Where you find strengths, you’ll find excellent benefits and motivators to offer to other parties. If you’re particularly well capitalized, you can use this to your advantage in persuading a counter-party to accept your offer over another offeror.
Excellent project management skills? This could open up opportunities to expand into development or property management. Completing the SWOT analysis will give you a better awareness of the operating environment, including less obvious, but profitable opportunities strategically aligned with core competencies.
What could you be doing better? Where does your team lack experience and education? What pieces of the strategic puzzle are you missing?
Addressing weaknesses is a key step in the success of any venture. Investors and partners will want to understand your strengths and weaknesses to confidently assess the risk profile of your project or proposal. Objectively consider what weaknesses personally and professionally you may have that could interfere with the execution of your plan. Be bold in identifying your weaknesses, as well as strengths.
Where you find weaknesses, hire the appropriate professionals to bridge gaps. We should never limit ourselves based on weaknesses. There is always a way to improve ourselves and team by planning, learning, and seeking the help of others. Wealth generation in any field requires a team. Practical weaknesses to address in your SWOT analysis as an investor include capitalization, liquidity, experience, risk tolerance, team size, accounting, and rental management.
What room is there for market share expansion? What technologies are available to improve efficiency and offer more value? How can you diversify your portfolio and differentiate your brand?
One of the key benefits of conducting your own SWOT analysis is that it allows you to identify the multitude of opportunities that are available to you. You can find opportunities in terms of new product ideas, unmet consumer needs and demand, enterprise technologies, and more. After you’ve completed the strength and weakness analyses, you can begin to seek and be open to opportunities that will enable you to achieve additional growth and revenue. For investors and developers this can mean new tax legislation, favorable interest rates, low property taxes, expense reduction, and improvements in vacancy rates.
Other valuable opportunities that can be identified through SWOT analysis are benefits, services, and brand positioning potential that will allow your firm to further improve brand strength and demand in the marketplace. A competitor analysis, an essential aspect of strategic planning, can further help evaluate the core competencies of competitors and help you stand out amongst the plethora of other investors and developers seeking acquisition opportunities and capital.
How do your competitors lead? How do you want to lead? What do you want to be known for?
Depending on your market and the nature of the competition, you can strive to differentiate on access to capital, reliability in closing, and meeting project deadlines, as well as other factors that would be a value to your prospects or partners in the investment industry. Your reputation and brand position is critical in real estate investment. It helps other parties understand what you offer and why they should trust you.
What internal and external factors could damage your portfolio over the next 12 months, 5 years, and 10 years? How will the economy and shifting consumer tastes affect the multi-family and commercial real estate market?
Unless you know what you’re up against, there’s no way to prepare and ensure success. Fool’s luck may get you by for a period, but in the long-term of wealth generation objectives, strategic planning is invaluable. The SWOT analysis identification of threats is perhaps the most important to developing a set of effective contingencies to deal with the potential for depreciation, lease rate declines, economic obsolescence, inflation, regulation, and a number of other factors. In general, threats can be categorized as internal, external, regulatory, environmental, social, and operational.
Internal threats are typically those that are the result of issues involving employee conduct, financial solvency, and credit issues, as well as other weaknesses identified in the foregoing analysis. Regulatory issues are vital to monitor over the span of years by staying closely involved in legislative matters affecting the industry. A notable example is the Dodd-Frank Act, that while beneficial in improving transparency in the finance and securities industries, also drastically limited a subset of investors engaged in direct lending.
If a current dominant revenue generation strategy is suddenly rendered enviable by newly enacted lending, it can severely limit an operation. Being observant and planning ahead allows the formulation of contingencies and appropriate exit strategies according to each threat.
Risk and Management
Conducting your own SWOT analysis is a valuable exercise for the investor that dreams of a stable, cash-flowing portfolio. Building a reliable, low-risk, and properly managed investment business necessitates diligent strategic planning and forethought. If you’re seeking strong returns without the management troubles, oversight responsibilities, and risk, consider partnering with a proven marketplace lending platform.
When you’re considering any act with respect to your real estate investments, it’s important to carefully evaluate every aspect of the decision or transaction. Due diligence is a common term borrowed from the legal profession. It describes the process involved in fully researching any issue or decision. Due diligence is vital in real estate due to the personal and financial ramifications of the choices we make. Poor decisions lead to damaged credit, investment losses, poor cash flow, bad tenants, breaching buyers, defaulting borrowers, and a plethora of other problems.
Due Diligence Risk Factors in Evaluating Investments
There are numerous factors to consider in the process of conducting your due diligence when investigating a potential investment. Depending on the type of investments you’re pursuing, you need to consider factors related to the profitability of the project. Also examine the solvency of the project sponsors and the condition of the market. Using common financial metrics including cap rate, IRR, debt to equity ratio, and more, you can objectively measure the suitability of the investment and develop a basis for comparing competing properties. Insist that the project sponsors provide accurate and comprehensive financial statements including:
- Balance Sheet
- Statement of Cash Flows
- Income Statement, Profit and Loss
- Statement of Retained Earnings
Carefully examine these documents, employing professional finance assistance where necessary. Identify the data needed to perform the various financial metric calculations. Ensure that the data is reliable by questioning the method and thoroughness of its preparation. The results of your calculation will indicate if the project has sufficient growth and profit potential to merit its selection over other projects. They will also indicate the solvency of the sponsors by considering the balance of debt leverage, equity financing, and liquid capital.
The other things to consider are the credit scores, liquid assets, and degree of experience that the sponsors represent. Even if the project itself is promising, weak project leaders can lead to missed milestones and eventual default. Also, thoroughly research market factors including labor supply, unemployment, housing starts, industry growth, regulatory influences, and population expansion.
Reviewing Property Manager, Tenant, and Buyer Credibility
If you’re managing your existing portfolio, you’ll also need to continuously monitor the financial performance of your investments. Ensure that your property managers are professional, experienced, and maintain complete and accurate records for every aspect of the operation of your property. Before you hire a property manager, interview a variety firms. Be sure to call references and visit other properties they manage. Whether you do it yourself, or delegate to a professional property manager, devote extra due diligence to screening tenants and selecting only the most reliable and qualified.
Poor tenants can cause excessive maintenance costs, eviction proceedings, higher vacancy rates, and diminish demand for your property. It’s preferable to allow your unit to remain vacant until a qualified tenant is found, rather than enter into a contractual obligation with one that will likely cause issues. If you’re pursuing an exit strategy, it’s equally important to evaluate the qualifications of your prospective buyers. Much as you would with a seller, request complete financials for the entity making the offer.
Consider the credit scores, debt to asset ratio, and their prior experience in closing transactions of comparable class and magnitude. Protracted and failed escrows increase your holding costs, hinder your investment strategy, and lead to lost opportunity costs.
Ethical Finance Partners
Don’t forget to devote the same level of due diligence in evaluating the lenders and other financial partners you’re considering. Ask questions about their experience and success in funding projects such as yours. Do they have experience with your asset class? How long do their closings typically take? What rates do they offer, and what are their underwriting criteria? Forthright answers to these questions will help establish their credibility and level of interest in following through on funding your project. Don’t assume that a fancy website or extensive marketing equates to reliability. Demand proof and trust your best judgement.
Fortunately, recent legislation has helped regulate the finance industry. Congressional Acts such as Dodd-Frank and the close oversight of the SEC has helped improve transparency and accountability in the industry. While regulation has improved, it’s still important to conduct personal due diligence, read professional reviews, and get all your questions and concerns answered. Additionally, don’t accept the first financing approval you get, if the rate and terms don’t fit your investment objectives. Financing is a key component of your overall wealth building strategy. Accordingly, only utilize the most appropriate and favorable funding products and sources.
Managing the Task
Due diligence is a critical aspect of real estate investment, and while time consuming, can yield much greater results for the growth of your portfolio. It can also decrease your investment and borrowing risk and build your confidence in directing the future of your investments. If you’re looking for the benefits of a sound due diligence strategy, without the personal investment of time and energy, consider working with a financing and investment platform that can help you achieve your objects with minimal risk and enable you to achieve the greatest results.
Properly valuing your current property, or those that you are considering for acquisition, will provide essential market data to help you make the most profitable decisions for your portfolio. The valuation process can create anxiety for all parties involved in the investment business. The results of an appraisal can make or break a transaction and drastically shape investment strategies. Here are answers to key questions that come up when selecting an appraiser, ordering a report, and interpreting the results of commercial appraisals.
How do appraisers measure the value comparables?
Appraisers employ detailed scientific methods to create accurate estimates of value. The methodologies they use include the substitution/comparison, income, and cost approaches. The substitution method is typically used for single family residences, condos, and 1-4 unit multifamily properties, as well as land. The substitution method considers the sold price of similar properties in the community. Adjustments are then made to comparables based on the estimated value of differences in the properties. The income and cost approaches can also be used to valuate rental properties of any size, but are more common in application to commercial properties.
What is highest & best use in commercial appraisals?
Highest and best use is a principal that appraisers use to determine what usage of the property will derive the greatest economic benefit. This is a common consideration when the prevailing usage of surrounding properties is starting to shift. If land or a structure is used in a way that is inconsistent with surrounding usages, it limits the potential revenue the lot could generate. This can also have a negative impact on the value of neighboring properties due to the principal of regression. If the current usage doesn’t yield the greatest return, then it may not be the best potential investment. An exception is if the property can be acquired well below market with the potential to change the use and improve the value.
How do commercial appraisals figure depreciation?
Depreciation is used in the cost approach to estimate the loss of value. This includes loss due to physical deterioration, functional obsolescence, and external obsolescence. Within these categories there is curable and incurable deprecation. As the names imply, curable depreciation sources can be remedied at a cost lower than the increase in value from improvements. Incurable depreciation describes to opposite circumstance where renovation costs exceed the potential appreciation. The straight-line or linear depreciation method is also commonly applied to adjust value in fixed annual increments that vary for commercial and residential structures.
How do I find the best commercial appraisals?
The ideal approach is to ask others in the investment community for recommendations to the most qualified appraisers. Look for local commercial appraisers that have experience in your property class and that have earned designations from the Appraisal Institute, including SRA, SRPA, and the highest level of recognition: MAI. MAIs have the highest level of verified commercial appraisal experience and are most qualified to advise on investment decisions. Avoid working with appraisers managed by appraisal management companies that are often less experienced and based outside your market. Hiring a commercial MAI as a valuations consultant will strengthen your professional support team. It will also help to ensure that you’re aware of all market factors, and prevent you from over paying.
Where do commercial real estate appraisers get their data?
Commercial real estate appraisers utilize a variety of data sources including tax records, public records, and market data. They study the data to draw conclusions about the direction of the market, value of adjustments, and customary cap rates. Additionally, most modern appraisers utilize data services that aggregate data and allow them to run statistics and extrapolate data. Larger commercial and industrial markets are complex and require extensive analysis to generate reliable and well-supported valuations.
Which type of report is best for commercial appraisals?
The best report to request will depend on your objectives and budget. The most common form types include the short or summary form, the uniform appraisal report, and the full narrative appraisal report. The summary report is typically available with a lower cost and turn-around time, and may not include an inspection. These forms also more suitable for smaller residential properties. Whereas for higher value commercial properties that require more diligence, the uniform and narrative reports are more common. They always include an interior and exterior inspection and include more detailed value justifications and comparable adjustments. The narrative report is the most comprehensive and is the best choice for commercial real estate investments.
What is the difference between the income and cost approaches?
The income approach to valuation involves estimating the value of the property in terms of the net income it generates relative to the purchase price. Appraisers analyze other income properties of similar class and market to determine the appropriate capitalization rate (cap rate). The cap rate is a multiplier that represents the level of returns that investors demand to contribute capital to an investment project. The rate is calculated by diving the annual net operating income by the price of the property. The cost approach is a method that estimates value based on reproduction or replacement cost. This approach is commonly used as a supplement to temper the value rendered by the income method. It is also suitable for non-income producing properties with specialized uses.
Figuring it Out
We work with a lot of appraisers and have had tremendous success in successfully closing transactions for our clients, despite appraisal challenges. We’d love to share our experience with you and answer any questions you have about the valuations process.
With the right opportunities, a property investor can establish their financial freedom, creating a powerful source of income in an area that’s never likely to lose interest – real estate. While financial freedom means different things to different people, it’s important for any borrower or investor to have a reliable exit strategy in place for when they want to slow down and stop selling.
While there are plenty of exit strategy options available depending on what kind of real estate financing an individual has, the following are the three most common solutions for property professionals.
Sell the Portfolio to Pay Down Debts
If an investor chooses carefully-selected properties in great locations, they should be able to put their buildings on the market quickly to get rid of their investments. They might even choose to sell several properties in their portfolio and use a real estate bridge loan to buy one final “nest egg” property that they’ll keep for the foreseeable future.
How an investor chooses to use the money obtained from selling their portfolio will depend on their personal goals. Some may choose to pay off the family home or fund retirement, while others will want to diversify their investment strategy. The biggest issue with selling the portfolio is that investors will be subject to capital gains tax on the homes sold.
The Buy and Hold Strategy
If selling the portfolio and paying off the debts accrued from real estate financing isn’t an option, some investors may choose to review their portfolio and see if they can transform the way they use the houses in their repertoire. Some real-estate tycoons simply buy property to fix them up and sell them on at a higher rate. However, it’s also possible to make long-term money on property by renting it out to people looking for an affordable new home.
The buy and hold strategy is often suitable for mature couples who want an ongoing solution for income. However, it’s important for investors who want to rent out their properties to make sure that they charge renters enough so that they can pay off both the interest and principle of the mortgage, while earning an income.
The idea is to purchase property that is either neutral or cash flow positive, with the aim of increasing yields over time. This exit strategy allows investors to add more property to their portfolio, while rent income covers the interest on the mortgage and provides additional equity for future investments. Over the years, the rent prices should rise to keep pace with inflation – providing a source of consistent cash.
Restructuring the Investment Portfolio
The best exit strategy for any property investor will always depend on their risk tolerance, income retirement and other personal factors. Some people will prefer to sell a couple of properties so that they can put some cash into bonds and stocks for diversification. Others will want to sell properties to reduce their loan-to-value ratio.
Those reliant on income from their property portfolio to support their retirement will often need to look at their assets and think about restructuring over time. When an exit strategy becomes necessary, it’s important to stop focusing entirely on capital growth and start looking for sources of rock-solid income. Investors holding properties that don’t yield particularly well may need to do some refurbishment and recycle their funds or offload leasehold properties in favor of freehold to reduce service charges.
While 2017 was full of excitement and change for the real estate market, it’s safe to say that 2018 will be even more interesting. Now that the US is set to be impacted by the largest rewriting of the tax code in years, luxury real estate is sure to see some transformation, particularly as Congress minimizes tax deductions for interest on mortgages and property taxes.
The lack of tax deductions for local and state income tax could lead to a small period of uncertainty as wealthy individuals look for opportunities to move from some higher-tax states like Connecticut and New York, into lower-cost spaces like Florida. Here are just some of the trends you’re likely to see in luxury real estate as we move ahead into 2018.
Popularity for Certain Real Estate Markets
During 2017, cities like New York saw a significant increase in sales, as sellers minimized they’re asking prices in an attempt to attract new buyers. This trend is something that might continue during 2018, as these locations are hit more heavily by the tax reforms.
The discounts of 2017 saw sales in the luxury real estate market to increase by 7%, though the average sales price declined by the end of the year. Greater sales, along with bigger discounts may be a trend that we continue to carry into 2018, depending on how significant the tax reforms are when it comes to flipping luxury houses.
Real Estate Inventory and High-Rise Renovations
Another trend that may appear in 2018, is a desire to get as much value as possible for the land purchased. Many developers this year are pushing forward with renovation for luxury towers and high-rise buildings, despite the change in prices and the risk of supply exceeding demand. There are already a host of prime towers ready to be built around Central Park for the billionaire buyer market.
All the while, real estate experts believe that inventory in the luxury real estate market will continue to increase. This will be the first time that we’ve seen a significant rise in inventory since 2015. Although there’s some chance that inventory will decline throughout the first portion of the year, the peak home-buying months around the fall could bring a host of new buyers into the market, ready to explore the options in cities with the lowest tax points. It may be that we see more luxury houses in the coming year, while the inventory for “first-time-buyer” homes remains somewhat static.
Luxury Real Estate
Finally, with the tax reform of 2018 poised to make a significant change to the world of luxury real estate, it’s likely that we’ll continue to see a change in the way people invest in property and renovation. As home prices continue to appreciate, mainstream homebuyers and investors alike will need to find more creative ways of sourcing the money they need.
While creative tools for financing like crowdfunding and peer-to-peer marketplace lending have begun to see more popularity in recent years, they could become even more noteworthy during 2018. Investors searching for passive income opportunities and diversification will increasingly be looking for ways to engage in group investments, as the tax changes leave the market in flux.
Individuals who are searching for alternative sources of funding may also found that crowdfunding and marketplace lender partnerships help them to make the most of the new luxury real estate market.