I am retired and take educated guesses on all things financial.

May 21, 2009

May 22, 2009: Alternative Investment $$ - Multi-Family Housing

As mentioned in my writings on numerous occasions, a holistic investment portfolio is best. This portfolio should include the ownership and active management of real estate.

For the first quarter of 2009, multi-family sales were so slow as to be almost nonexistent in most areas of the country. Roughly $135b worth of commercial
property changed hands in 2008 - 68% less than 2007 in dollar value. The decrease, which was even more pronounced in the first quarter of 2009 reflects far fewer deals and lower selling prices.

Generally, sellers are waiting and hoping they can weather the storm. Buyers are waiting for rents to drop, sellers to throw in the towel and prices to fall even further. This is the perfect storm for the investor to grab a modest multi-unit property, quite possibly through a bank that does not want to publicly foreclose but needs to dispense with a non-performing asset.

Large apartment complexes are generally the domain of institutional investors of large real estate companies such as Avalon Bay and are not really the focus of this post. The sweet spot is the $500g-$5m properties generally owned by a local developer/entrepreneur or consortium's of doctors/lawyers, etc. that may have not been effective property managers, milking the property for rents and not maintaining the premises to continue success. These properties may be in a negative cash flow position with deferred maintenance, having insufficient writeoffs or poor financing which are each, and collectively, reasons to sell.

It is my view, and the view of other professionals in the field that are comfortable in this sector of the real estate market, that deals in the above price range are occurring because properties of this scope and price are viable for individual investors or small investment groups that can pay cash or obtain a loan from a local bank that owns the financing and/or has a good feel for the market. Get to know your local or regional bank's loan officer and real estate portfolio department intimately.

With financing tight, the investor may look for transactions that qualify for specialized loans. Buyers of certain multifamily properties could qualify for funds through the HUD 221(d) program. Business owners may be eligible for a Small Business Administration Loan, which can require as little as 10% down (not suitable for residential rentals, but certainly appropriate for retail, warehouses and office properties).

The individual investor should be aware that banks are a great source for properties close to default (foreclosure) status. Banks do not want bad loans on their books. With short sale regulations and procedures being both standardized and simplified by recent legislation, purchasing these properties is easier and less stressful for both buyer and seller.

Make no mistake, there are many thousands of distressed multi-family properties out there. Sometime, perhaps this summer when the next wave of foreclosures hit home (literally), owners who have overleveraged are going to say, "Let's just get rid of this property", and the market is going to reflect in later months, after the downdraft, equilibrium. Myself and others have found tremendous bargains in real estate for years (There is always a bull market somewhere? I digress.). The time for shedding the notion that stocks and bonds are all you need for investment purposes is at hand through the purchase of income producing real estate at the right price and on the right terms.

Another way to sweeten a deal's bottom line is to proceed to obtain tax credits for providing low-income housing to a percentage of tenants. Although federal funding may be hard to come by, state and private tax credits can be solicited. Added to rents, depreciation and other tax benefits, multi-family real estate speaks in no uncertain terms towards the old adage, "it's not what you earn - it's what you keep."

If you are a novice investor, please seek competent advice from a seasoned investor. My experience is that successful investors in modest multi-family properties are usually more than willing to share their successes and failures with you. I am always learning something about real estate investment (often times from my rent-subsidized tenants - they have their world fine tuned). If you are a good observer, good listener and willing to take your investment portfolio, in part, into your own hands, I bet you will achieve not only excellent profits, but a lifelong interest in not only the brick and mortar part of real restate, but in human nature as well.

Real estate can, and should be, be an investment well lived.

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