Investing in Secondary and Tertiary Markets: Best Practices

Investing in Secondary and Tertiary Markets: Best Practices

Applying the same rules of primary-market investing won’t work here. These assets require a down-in-the-weeds approach to obtain the best value.

Joel Sanders, managing director, Realstone Capital

There are robust opportunities to be had by investing in multifamily assets located in secondary and tertiary markets. Yet, in order to realize the attractive risk-adjusted yields many anticipate achieving in these markets, it’s imperative to vet these opportunities differently from primary markets.

If underwritten correctly, these alternative markets have the potential to offer investors significant benefits. Here are some tips for those looking to follow yield off the less-worn path:

Remember the supply side of “supply and demand”: Multifamilydemand drivers like job announcements and immigration receive more press than the local apartment supply pipeline. However, the lack of new apartment supply in secondary and tertiary markets is a crucial, often-overlooked, factor. These markets are consistently less attractive to new apartment developers than primary markets, even though fundamental demand drivers such as capital cities, regional medical centers, and long-standing higher-education institutions help create stable renter demand.

Additionally, the absence of new apartment supply coupled with the aging of the existing multifamily inventory generates a pent-up demand scenario, which is a good start toward making a great investment.

Some inhibitors to new supply in secondary and tertiary markets may not be apparent at first glance. Local governments may be averse to the development of new apartments, such as in the best submarkets of St. Louis; Memphis, Tenn.; or Jackson, Miss. Additionally, geographic features such as the steep terrain around Nashville, Tenn., can make it costly to build new multifamily product.

Conversely, in first-tier markets, pronounced demand growth fosters excessive new supply. In several Texas markets, for example, the job and household growth that fuel renter demand have been remarkably strong. Flat land is also abundant and affordable. The local governments aren’t extremists in their opposition to new apartment developments. This smells like ripe conditions for significant multifamily development activity.

Stay close: Proximity to an investment is key in these types of markets. Through the last recession, many of the secondary- and tertiary-market investments that experienced trouble suffered because out-of-town owners lacked a realistic understanding of the local markets in which they invested, rarely visiting them. Consequently, when times became tough, those owners didn’t know where to begin addressing challenges. Even their lenders picked up on their lack of understanding and were less amenable to using “extend and pretend” work-out scenarios.

One reason for this is that, often, driving—or even flying—to a distant market may not be an option, due to the time involved and commercial flight limitations. Unless one accesses these markets by investing alongside a local or regionally focused operator, the original investor is starting out with a disadvantage.

Don’t underestimate home-field advantage: Although many of an investor’s local or regional competitors may not appear to be very sophisticated, be careful not to underestimate the well-connected owners that live and breathe those markets every day.

Local owners elect the local politicians, pay their taxes to the local governments, and are country club members with the managers of the primary local employers. Where these same players may have shortcomings in apparent sophistication, they may overcome them through general business savvy and local insight that can’t be found on the Internet. This finger on the pulse may offset a competitor’s revenue management system.

Pay attention to less-conventional market information sources: Worthwhile market information packaged up nicely is more difficult to find regarding these opportunities. It is also the same “outside-in” information that other interested parties are reading. Visiting with the staff of a convenience store located at “Main and Main” within a submarket can be more useful than reading a few lines in a quarterly market summary.

Shop a property’s comparable set in person rather than calling them from five states away, since the operators of those comparable properties probably aren’t the same usual competitors you’ll find in the primary markets. Bartenders at local hot spots, too, can be a valuable source, as they’re usually pretty in tune with local lifestyle components important to the multifamily industry.

These sources in secondary and tertiary markets can be decently reliable, since everything is more tight-knit, which makes it easier to keep up with other people’s business.

Include two-bedroom units in your plans: An equal weight of one- and two-bedroom units is a safe bet. Although predominantly one-bedroom mixes may be preferable in primary markets, the renter demographics of alternative markets lend themselves to two-bedroom units, as well.

Because the gross monthly rents in secondary markets are lower than those in primary markets, higher-income one-bedroom households may opt to lease a two-bedroom unit for the utility of an additional room. Regardless, a minimum ratio of one parking space per bedroom is vital, even if it’s not required by the local municipality.

With three-bedroom units or larger, price point will be the primary competitive advantage over the shadow market of single-family home rentals, which always existed before the recent recession and will continue to exist in the future.

Consider the suburbs: The majority of the local jobs that drive renter demand and household growth are often located in the suburbs. Typically, there is less mass transit infrastructure in place in such locales, requiring that more residents, even lower-income ones, have vehicles. Walkability factors are appreciated, but be cautious about paying too stout a premium for that feature in these markets.

While plenty of renters by choice still live in secondary and tertiary markets, keep in mind that many Class A apartment rent levels are close to the cost of owning a comparable single-family home. Consider that point especially as Echo Boomers age and while they’re at the stage where they’re still delaying starting families.

Joel Sanders is managing director of Realstone Capital, based in Little Rock, Ark.

Price Gains to Diminish as REO Inventories Dissipate

Author: Krista Franks-Brock January 30, 2014 0

Price Gains to Diminish as REO Inventories Dissipate

On the heels of two other home price reports this week, CoreLogic released the CoreLogic Case-Shiller Indexes for the third quarter of 2013, reporting an 11.2 percent annual price gain at the national level.

The S&P Case-Shiller Home Price Indices and the Black Knight Financial Services Home Price Index both reported monthly price gains in November.

The CoreLogic Case-Shiller tracks home price movement on a quarterly basis in more than 380 metro markets across the country.

CoreLogic anticipates a substantial deceleration in home price gains this year. In fact, the firm predicts home price gains will fall just below the long-term historical norm of 4.5 percent appreciation annually, which has been maintained since 1975.

Home prices are expected to rise 4.2 percent from the third quarter of 2013 through the third quarter of 2014, according to CoreLogic.

“Double-digit price gains are unlikely to persist, but since housing is far more affordable now than it was in 2006, there is less concern that a new housing bubble will occur,” said David Stiff, principal economist for CoreLogic Case-Shiller.

Despite home price gains and rising interest rates, Stiff said as of the third quarter, the national median mortgage payment as a percentage of median family income was at a 40-year low. The ratio was 35 percent lower than it was at the height of the housing bubble, according to Stiff.

The large metro areas—those with 950,000 or more residents—with the greatest annual price gains in the third quarter were Las Vegas, Nevada (30 percent); Sacramento, California (27 percent); and Riverside, California (26 percent).

California markets made up six of the top 10 markets with the highest price gains year-over-year in the third quarter.

For example, Sacramento’s 27 percent gain reported in the third quarter will fall to a 3.8 percent gain over the following 12 months, according to CoreLogic.

The smallest price appreciation year-over-year in the third quarter took place in Philadelphia, Pennsylvania (3 percent); Hartford, Connecticut (3 percent); and New Orleans, Louisiana (3 percent).

While California and Arizona markets continued to post high price gains in the third quarter, Stiff anticipates a shift in these markets as their REO inventories dissipate and investor demand dissolves along with it.

“Investor demand and sales of foreclosed properties are dropping quickly,” Stiff said.

“Non-investor demand, although increasing, will not replace demand from investors,” he said.

Looking ahead, CoreLogic anticipates the greatest price appreciation occurring through the third quarter of this year in Oakland, California (9 percent); New Orleans, Louisiana (9 percent); and Fort Worth, Texas (9 percent).

The smallest gains are expected in the Southern markets of Nashville, Tennessee (2 percent); Orlando, Florida (3 percent); and Jacksonville, Florida (3 percent).

 

2014-01-30

 

Tagged with:

Recovery Hits Eighth Consecutive Month

 

topStories Monday, January 27, 2014
Recovery Hits Eighth Consecutive Month
Ongoing improvements show economic stabilization, with 87 markets reaching full recovery and housing market price gains nearing 2005 records

Homes.com, a leading online real estate destination and a division of Dominion Enterprises, has released its November Local Market Index, a price performance summary of repeat sales

 

 

Read More >

December Existing-Home Sales Rise, 2013 Strongest in Seven Years

 

topStories Friday, January 24, 2014
December Existing-Home Sales Rise, 2013 Strongest in Seven Years
Existing-home sales edged up in December, sales for all of 2013 were the highest since 2006, and median prices maintained strong growth, according to the National Association of Realtors®. Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops …Read More >

It’s a landlords’s world now

 

Investments

It’s a landlord’s world now

Another report suggests multifamily is gaining traction

January 20, 2014  3:46PM

Another report – this time the Securitization Weekly Overview from Bank of America-Merrill Lynch (BAC) – is forecasting a shift away from single-family home purchases to a rental market.

Granted, this is not the first time a report predicting multifamily growth has hit in the past few months, but it does reiterate a common theme – investors are betting on multifamily more often.

Just last week, HousingWire reported that more younger Americans are expected to pile into the multifamily market after spending years in their parents houses or sharing apartments with roommates.

But this younger crowd, while keen on homeownership, apparently lacks the momentum, due to job constraints and a general inability to obtain a mortgage.

It’s something Chris Flanagan, MBS/ABS Strategist with Bank of America-Merrill Lynch and MBS Strategist Justin Borst also recognized in their newly published research.

“The December housing starts report provided some confirmation of the theme we discussed last week, which was that it appears as if a structural shift away from getting a mortgage and buying a single-family home to just being a renter is underway,” the pair said.

Such a transition is expected to subdue the possibility of dramatic changes in the single-family mortgage-backed securities market.

Flanagan and Borst note that “this shift should work to keep supply of single-family MBS at what may be surprisingly low levels well into the future. We also noted that we think this shift gives the Fed ample cover to taper its MBS purchases without much impact to mortgage rates, since gross supply of MBS may be shrinking more quickly than the Fed plans to taper.”

When comparing multifamily production today to the pre-housing crisis era, it is clear a major shift is taking place. BofA-Merrill Lynch notes that pre-crisis, the multifamily share of housing production hovered at roughly 20%, or one in five home starts.

Jump years ahead to today, and the latest multifamily share of production is up 33% and accounts for one in three homes.

The same analysts concede that with this higher multifamily share trend remaining for years now, a new “equilibrium” has apparently been reached.
The trend prompted Resource Real Estate, a firm led by CEO Alan Feldman, to announce last year that it will continue to try and serve the income-bracket stretching from $30,000 to $70,000 a year by refurbishing older apartment complexes for this growing segment.

“We touch real estate two main ways, we put equity capital towards investing, and we lend across a number of asset classes,” Feldman told HousingWire last summer.

By December, his firm was still employing this strategy, noting the forgotten middle-class is trending even more towards renting.

It’s a common theme that the numbers from BofA-Merrill Lynch seem to confirm for now.

Do Internet Customers Buy the Property They Called on?

topStories Thursday, January 23, 2014
Do Internet Customers Buy the Property They Called on?
We are aware some consumers find a home on the Internet and bring the property to the attention of an agent or broker they are already working with. And historically consumers would get interested in a property, call an agent who is associated with the listing, but then move on to a different home while working with that agent. Not every Internet search results in a double-ended sale for the listing agent. But here is one changing dynamic. The unprecedented increase in consumers finding the actual home they buy, …Read More >

Don’t Get Trapped By The Real Estate Guru Hype

A few times every year the Real Estate Guru Circus comes to town.  The radio ads start blasting how their strategy is perfect for your town and they will teach you how you too can make big money flipping foreclosures.

Seats are limited so call Now!

Truth is they are Marketing Gurus. They travel all over the country selling the same ideal. Sure they made some money flipping houses when they started out in THEIR HOME TOWN.   But do you think they know more about the city then the people who live their or the local investors and realtors that do this every day. The answer is NO.

They never mention in their ads that you will have to sign up for their Coaching Academy for $25,000-$40,000 before you are qualified to learn their strategy.

They usually get your phone number when you reserve your seat, so someone can contact you before the event to find out how much cash and or credit you have . This is how they know who too devote more time with when they ask you to stop at the tables in the back of the room.

Every time these Gurus leave town we get calls from the  disillusioned attendees, asking for help with finding a deal or helping them fix the dumps they bought because they are now alone and  NO GURUS in site.

Last year one person told us that they were told  they would get more out of the Coaching Program  if they pay 40K instead of just the 25K .

That would get them two calls a week from the coaching staff instead of the one phone call to ask them if they are looking at properties  and have they been making at least 25 offers a week.

If you are even thinking about investing in Real Estate find someone who lives where you do to work with. There are good honest people in this business in every city find them and start out smart.  The best way is to earn while you learn, with the right help they will show you how to invest that 25K-40K instead of wasting it on some out of state Coaching BS.

Real Estate Investing  has been around since we moved out of the caves don’t fall for all the New Strategy Hype.  Find someone local that has been doing it and ask them if they would like to partner up with you. Good Luck and invest smart.

Come to one of our events and meet the right people here in your home town.

EVENT

 

 

 

 

Taking the Temperature of the Market

 

topStories Wednesday, January 22, 2014
Taking the Temperature of the Market
Recently, Freddie Mac released its U.S. Economic and Housing Market Outlook for January showing that four of the key housing indicators are all moving in the right direction, which bodes well for an ongoing recovery. “As we start 2014, the housing recovery continues its steady pace,” says Frank Nothaft, Freddie Mac vice president and chief economist. “House-price gains will likely moderate …Read More >

December Housing Production Tallies Third Highest Month for 2013

 

topStories Tuesday, January 21, 2014
December Housing Production Tallies Third Highest Month for 2013
Following an unusual surge in housing starts in November, nationwide housing production fell 9.8 percent to a seasonally adjusted annual rate of 999,000 units in December, according to newly released figures from the U.S. Department of Housing and Urban Development and the …Read More >