2020 – Page 30

Avoiding the Money Pit

by Tim Rath
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Assessing and maintaining investment properties in growing portfolios In the classic 1980s movie “The Money Pit,” Walter (Tom Hanks) and Anna (Shelley Long) are house-sitting a New York City apartment owned by Anna’s ex-husband. When he suddenly evicts them, they decide to purchase a home and think they are getting a great deal on an estate outside the city. It soon becomes apparent that the purchase was too good to be true as the house falls apart, drains their wallets and, ultimately, destroys their relationship. What Walter and Anna failed to perform was proper due diligence before agreeing to purchase the estate. They did not assess the property’s condition and paid in more ways than one. While Walter and Anna bought the property to make it their own home, real estate investors also need to do their homework when purchasing properties for their portfolios and then continue to manage them throughout the leasing cycle. Managing rental or investment properties takes a lot of work. From getting the property rented by qualified tenants to executing the lease and collecting rent, it can become very time-consuming. Often real estate investors hire property managers or management companies to coordinate these day-to-day tasks. Equally important is ensuring the property itself is a profitable asset and subsequently maintained so it remains in marketable condition. Whether you own a large portfolio of investment properties spread across the country or a few local ones, properly maintaining those real estate assets is key to maximizing their value and your potential bottom line. You may want to consider a third-party property services company that can accommodate all your inspections and maintenance needs throughout the purchasing and leasing processes. Property Service Firms When engaging a third-party property services firm, determine whether it has flexibility and can handle any size portfolio—from one property to a large portfolio. And if you own assets in different areas of the country, a national property services firm with a trusted reputation for quality and consistent results is your best bet. Many real estate investors seek opportunities to expand their portfolios to outside markets and often buy properties in bulk. Having a property services company in place can help put your mind at ease. You’ll know the proper services will be completed to ensure you have made the right investment. This includes inspecting properties before purchase and completing due diligence assessments. Due Diligence Assessments The biggest risk in attaining an investment or rental property is current damage as well as susceptibility to additional damages. Issues like vandalism, tenant neglect or natural occurrences can affect not only the property’s profitability, but also be expensive for you to remedy. Investing in real estate can be a big risk. Mitigating those risks can be very difficult for growing investment firms. Performing due diligence will help you determine the profitability of the property you plan on purchasing. A comprehensive property inspection or assessment from a trusted third-party service provider is necessary to determine if the purchase makes good business sense and fits within the parameters of your current needs and portfolio. Knowing if the property is a good investment from the beginning and completing reoccurring assessments, to managing tenants and turnovers, you have to ensure you are getting the proper services to protect your investment. To keep the properties in your expanding portfolio in compliance, some of the key routine assessments and maintenance services you should employ include required landlord inspections once a dwelling is occupied and turnover services between tenant occupancy. Routine Inspections Services It is important to continue to keep an eye on your properties while they are leased and occupied by tenants. This is something that often can be overlooked, but your property services company can ensure you stay on top of it through routine service options. These inspection services are helpful for tenant turnovers, move-outs, lease renewals or monthly check-ins when the tenant owns a pet or has any other custom parameters in their lease that require regular assessments. The property services company will send a qualified field inspector to your property, document exterior and interior conditions, inform you of any damages and, if necessary, provide bids to remediate any damages in order to restore the property to a livable condition. These results include a written report on the condition of the interior and exterior of the property and detailed photo documentation. It also includes reporting on issues such as occupant neglect, infestation risks, roof damages, water intrusion and the presence of mold. Your property services company also should perform a listing inspection to check on a property that is for lease or sale. Be sure to get documentation of your agent’s or property manager’s services, including placement of signage and marketing materials. A qualified field inspector will do an on-site assessment of a property to verify it is in marketable condition. For an interior inspection, the inspector can either schedule a showing or attend an open house to also document the interior condition and cleanliness of your property. Operational Efficiencies Employing a property services company with national reach will aid in your operational efficiencies overall. Results will be consistent, and properties will be maintained in a uniform manner by qualified, local professionals. For example, a property services firm can help create processes for streamlined turnovers and non-emergency maintenance services. They also can be effective for completing eviction services and junk removal at properties that need cleaned out. To ensure you do not get trapped in a “money pit” and bogged down with unexpected expenses like Walter and Anna, creating these operational efficiencies will maximize the value of your real estate assets and safeguard your bottom line. Due diligence inspections and regular assessments and maintenance will keep the property profitable and minimize losses within your portfolio.

Zoning Isn’t Your Problem

by Nick Labadie
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Looking at the potential issues a project may face and taking the steps to minimize them early will help keep you on budget and on schedule. When developers, investors or builders look at a new project, everyone knows to consider the zoning and the entitlements necessary for the project to happen. What often gets pushed down the priority list, or not thought of at all, are the corollary issues that may have a bigger impact on the project than the zoning itself. It is not enough to simply confirm that an appropriate zoning district is available and apply standard estimates for timing and costs for processing the applications for those entitlements. There is almost always a zoning district that will accommodate the desired use. But the zoning district itself is not what poses the greatest threat to the ultimate approval. Instead, it is often politics; neighborhood opposition; the property’s history; general, comprehensive or specific plans (where applicable); or even traffic concerns. Any one of these can derail your schedule, budget or both—and in a big way. You don’t haveto leave them up to chance though. Each one can be researched and planned for well before any money goes hard. Politics One of the first steps in considering the viability of any project is having a meeting or discussion with the local elected official of the district where the project is located. This may be either a councilperson or county supervisor—or the most influential—if the local elected officials serve at-large. This meeting isn’t about just giving a polite heads-up. Local elected officials must balance a complex and interwoven pile of issues, agendas, goals, stakeholders and problems, many of which were inherited, all while trying to responsibly reflect the desires of their constituents. Many factors that won’t turn up in any research but are within the elected official’s realm of responsibility can impact your project. For example, there may have been significant community discussion about the property you are looking at, and plans laid for it despite it not being owned or even tied up by the jurisdiction or community. That is something you need to know before making an application for a project that may be completely different. Elected officials themselves may have plans for municipal projects that are not yet on paper but will impact your project. These kinds of projects may range from large open space plans to significant infrastructure upgrades or studies in progress for specific area plans. They may also have strong personal preferences on certain aspects of development that can be easily incorporated into a project early on. You must also consider the interrelation of the elected officials’ interests, concerns and agendas. The balancing act elected officials must perform and the fact they may be elected by different demographic groups can put them at odds on various issues. Analyzing how this will impact your project is a critical component of the research you should be conducting before committing to a project that will require city, town or county approvals. Neighborhood Opposition You’ve likely seen a project get absolutely destroyed by opposition from neighbors, neighborhood organizations, or other interested and organized parties in the community that may or may not be geographically close to the project. Of course, you believe your project will benefit the community. It very well might, but it is difficult to foresee how everyone in the community will view it when you cannot know what is tinting the lenses they are viewing it through. What may seem like an obvious and eminently appropriate change of zoning from a technical, professional and societal perspective may seem like the end of the world to neighbors or community groups. Often, such opposition is due to misconceptions, miscommunications or fears associated with past experiences. As the applicant for an entitlement, you are often unfairly greeted with distrust and skepticism rather than the benefit of the doubt when it comes to the quality of the project, true intent and willingness to communicate with the community. Likewise, the community often forgets that projects like yours are the only way cities and counties improve infrastructure, build roads, extend utilities, construct and maintain parks, and generally create progress and growth that is a critical component of a healthy city. With a good project, neighborhood opposition can almost always be overcome through communication and open dialogue. Most often, community outreach involves treating the community as one large group and hosting multiple public meetings, conducting focus groups, sending surveys and attempting to identify and solve problems. That may be appropriate in some cases, but there are rarely issues in a community that apply across the board. Embracing a multifaceted approach that includes research, required notification, meetings with key players and individuals and continuing communication is much more effective. At the earliest stage of your project research, you should investigate the history of neighborhood opposition to projects in the area. Your zoning consultant should have some idea of the larger issues in the area, but specific research should be done to identify projects in the immediate vicinity that have had significant neighborhood participation—both positive and negative—to identify key issues and players. City or countywide research can also be helpful if the project is more unique and there are comparable projects elsewhere in the city or county. This research does not need to take forever or blow out a budget. You can often find and identify issues quickly. The jurisdiction will typically have requirements for public notification and outreach that you must conduct. Follow up with all responses from this step. Either identify the issues and work to resolve them or thank the respondents for their support and request they voice that support in an email or letter to the jurisdiction, or better yet, attend a hearing. When someone supports a project they likely will not participate in the process unless they are asked. However, you can be sure that folks who aren’t happy will engage. It is important for everyone’s voice to be

The Economic Bubble is Hiding in Plain Sight

by Tom Olson
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Investors, beware and be aware—constriction is coming. We are so far into the longest economic expansion in the history of the U.S. that just about everyone—no matter how bullish on their particular market—is stuck in a waiting pattern. Currently, our economy, our country and, arguably, our housing market are all subject to an array of uncertainties, including: COVID-19 (the novel coronavirus that first appeared in Wuhan, China) and its impact on global health and the Chinese economy. The 2020 U.S. presidential election. Cybersecurity threats, including the recent Equifax breach that compromised the data of an estimated 145 million Americans. A volatile stock market. A looming housing affordability crisis. Inflation. Student loan debt. Overall consumer debt. The list goes on and on. Despite the uncertainty, the economy and investors are not behaving as most would expect. They are behaving as though we are in the middle of an economic expansion rather than riding high on what can only be called a bubble, to put it bluntly. Investors who fail to acknowledge and react strategically to the presence of this bubble will fall hard in the next 12-24 months. Do not be among those who simply shut their eyes and refuse to acknowledge that sooner or later, the end of this upswing is coming. I tend to be a pretty unpopular guy when I say we are in a bubble or that the economic expansion is barreling toward the end of its life. I understand. No one likes to hear that the “good times” are almost over. Our industry does, however, gradually seem to be accepting that an eventual economic downturn—or at least a leveling off—is realistically inevitable. 3 Things to Know About the Bubble When it comes to the next several years and our economy, there are three things every investor and small business owner must realize: 1) Real estate market cycles have historically been twice what “conventional wisdom” says they are. Looking back over 200 years instead of just 20, you will see that the biggest market cycles for real estate are not seven or 10 years, as most people think they are. Rather, they are about 18 years. Counting from the crash (2007 or 2008), you can see we are sitting right on the 18-year threshold as we enter 2020. Keep in mind that not every recession is exactly like the one we just went through—most recessions are not 18 months long! In fact, the average length is 11 months, and the two prior to the Great Recession lasted nine months (the savings and loan crisis of 1990-1991) and eight months (the dot-com bust). Although some economists are warning that the present extended boom will be followed by an equally extended bust, the odds are against this happening. Why? Because the Great Recession was a result of a combination of negative behaviors in two of the pillars of our country’s economic stability: the housing market and the financial markets. While some may argue that not everyone “learned their lesson” after the housing crash and financial meltdown, most of the problematic, institutional behaviors that led to that crash have since been remediated. Takeaway // Not only is it unlikely the next downturn will last as long as the last one, but it is also unlikely it will stem from the same weaknesses in the system. 2) The next downturn is unlikely to hinge on housing. Supply and demand remain (and likely always will) the most influential factors in the life span and nature of real estate cycles. For this reason, the next downturn and economic cycle will be different from any other correction when it comes to real estate. More than ever before, regional real estate performances will diverge from one another. Some areas will rise significantly in value while others fall. This happened to a limited degree during the 2008 housing crash, particularly in areas of the country like Dallas, Texas, which had not experienced the astronomical appreciation rates the rest of the country had leading up to the crash. When the market fell, the Dallas market softened slightly and then proceeded to go on the tear it is still experiencing today. By comparison, Boston went through a major upswing prior to 2008. But by 2009, houses were selling for half their former value. Likely, the next downturn will certainly affect the housing market and real estate sector, but it is unlikely to be caused by the housing market. This means that different facets and tiers of real estate will react differently. It is far more likely that a recession will disproportionately affect higher tiers of the housing market, driving owners in those brackets downward to lower-cost residences, than send the entire housing supply plummeting in value. Looking into my “crystal ball,” my best prediction is that if you invest in areas with price ranges between $300,000 and $600,000, these will be the properties most likely to go “on sale” during the next downturn. By comparison, highly populated areas with homes under $200,000 will continue to rise in value because it is nearly impossible to build properties at that price point in today’s market. Upper-tier properties have been overbuilt, and lower-tier properties are undersupplied and in high demand. Takeaway // If you can buy homes under $200,000 in areas where there is any type of job stabilization, you will be in prime position to build your portfolio during the downturn and benefit over the long term from your foresight. 3) Inflation will be part of the equation. Although the Federal Reserve seems determined to keep interest rates low for as long as possible—probably until after the presidential election—it will eventually be impossible to continue to postpone inflation and an economic correction. When interest rates do normalize and we see 6% or 7% interest rates once again (which are still quite low by historic standards), the affordability of the midrange properties I mention in #2 will diminish greatly. Takeaway // Lower-tier, affordable housing will be the hottest “ticket” in

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CBRE Group has been named the top global brand in commercial real estate by The Lipsey Company. This is the 19th year in a row CBRE has achieved this recognition. CBRE’s development services subsidiary, Trammell Crow Company, was the top-ranked development company for the third consecutive year. Lipsey is a training and professional development firm specializing in commercial real estate. It has surveyed commercial real estate professionals on their perceptions of the industry’s leading brands since 2002. CBRE has been ranked No. 1 every year Lipsey has conducted its survey. The survey is open to U.S. and international professionals, including property owners, investors, lenders, occupiers, brokers and property managers. Earlier this year CBRE was the top real estate company on Fortune’s World’s Most Admired Companies list and was ranked #13 on Barron’s list of the 100 Most Sustainable Companies in the U.S.

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First American Financial Coporation announced in mid-February that it has reached an agreement to purchase Docutech—a provider of document, eClose and fulfillment technology for the mortgage industry—for $350 million. Docutech’s management team, including President and CEO Amy Brandt, will continue to lead the company’s operations. The acquisition is expected to close by the end of March.

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Maryland-based real estate firm Blue Ocean has expanded its footprint into Howard County, Maryland, with its acquisition of The River Front Apartments in Savage, Maryland. The 144-unit, water-front and gated, residential community is located in Howard County, a few milesfrom downtown Columbia. The purchase of The River Front Apartments aligns with Blue Ocean’s long-term strategyto acquire real estate in Class A locations that provide tangible opportunities to create or add value for its Investors. The seller was represented by Transwestern Mid-Atlantic Multifamily Group of Dean Sigmon, Robin Williams, Justin Shay and Michael D’Amelio.