REI INK

Back to the Basics of Asset Management in a Challenging Market

Three Phases of the Multifamily Investment Life Cycle By Sean Thomson Asset managing multifamily projects is difficult enough in the best of times, but when things go wrong it can become challenging.  There are three major phases of a multifamily investment life cycle: acquisitions, operations, and dispositions. Each phase has its own processes, strategies, and challenges. Within each phase are also a variety of roles that make it all possible. Before diving too far into it, let’s set a foundation. WHAT IS ASSET MANAGEMENT? Asset management is a systematic approach to acquiring, maintaining, and trading real estate for optimum growth potential to maximize the value of the asset while maintaining an acceptable level of risk. It is the middle ground between property management and ownership and the bridge between the investment model and the physical asset. It is also the checks and balances between all the roles and is the pivot point between maximum success and failure.  How is asset management different from ownership or property management? In a typical multifamily syndication the ownership is responsible for deal sourcing, team building and management, and all capital related items. Property management is the daily oversight of the property through onsite operations, repairs, maintenance, security, and upkeep. Each of these roles has a clear focus: ownership is the long term outcomes, asset management is mid-term impact, and property management is short term damage. Phase 1 // ACQUISITIONS This phase is all about discovery and creation. Commonly, this phase is just seen as only the ownership role sourcing deals. While that is a large aspect to this phase, it is so much more. Underwriting This part of the process is solely focused on discovering a deal that meets investment criteria, discovering the opportunity in its acquisition, discovering the risks, and discovering the most effective strategy. In this phase, asset management is trying to find all the possible risks and all the possible opportunities. Where it can get tricky is deciphering which is which. It is far too common for owners to see the risk but not understand how to eliminate, reduce, or manage that risk to create opportunity or on the other hand, seeing the opportunity but not how it could be a problem. The assessment of these risks begins by asking questions:  »         Are these assumptions realistic to the demographics, location, and current operations of this asset?  »         Will the demographics and locations of the asset support the expectations of the investment model?  »         Are these expectations truly feasible?  »         Are the rental comparables accurate and effective?  »         Does this model allow for pivots, setbacks, or pitfalls? Due Diligence Due diligence still heavily relies on discovery, but this part of the process is also where creation begins. The discoveries now can no longer be put in the deal killer category of risks. It is all about planning and strategizing how to mitigate and manage the risks. This discovery includes:  »         Financial audits  »         Rent roll & lease audits  »         Building inspections  »         Market analysis  »         Legal audit  »         Marketing audit As the discovery process happens, creation will start to take form: creation of the mission, vision, and plan for the asset. Each asset needs to have its own mission, vision, and plan that guides the investment model and operations to ultimately reach the targeted goalor exit strategy. Phase 2 // OPERATIONS The money has been wired, the documents have been signed, and the key is in hand. This is where experience takes the lead. Operations is all about mitigation and optimization. In uncertain times and without the proper asset management foundation, this phase can be overwhelming and complex. When markets tighten up and competition for residents intensifies, it is important to focus on lead generating efforts and resident experience. Here are a couple of suggestions: Customer Service Standing out against the competition is a key strategy when times are tough. Why would a prospective resident rent this asset versus all the other options in the market? Customer service could be as simple as ensuring the on-site team is always available and answering the phones or ensuring the website is up to date. A well-thought-out customer service plan could be the difference between a cash-flowing asset and one that struggles to cover expenses. Marketing Analysis Rental revenue is the largest contributor of income in multifamily properties. It is crucial to understand the asset’s resident market and where those people are coming from. The answer to all this is in the marketing strategy. What marketing efforts are driving demand most and which ones are not? Key performance indicators for marketing are the conversion rate and monthly expense amount. Finding the right targets for each of these will keep the asset’s occupancy high and resources needed low. Everyone Needs to be on Board Even if one member of the team is not 100% invested in the project’s goals, big problems are more likely to occur. Everyone from the ownership, all the way down to the subcontractors and onsite property management team, needs to be working toward the same goal. It’s the asset manager’s role to set the tone and be a great leader. Set high expectations using the mission, vision, and plan created during due diligence and monitor progress every week, month, quarter and year. The asset manager is the lynchpin that holds everyone together. The more engaged everyone is, the more optimization potential the property could have and the more willing the team members will be to give input and feedback. Data Driven Numbers do not lie but knowing what to look for and how to read them is critical. Our top four KPI’s (key performance indicators) are:  »         Occupancy/vacancy — This number in combination with unit availability speed can be full of information and optimization possibilities.  »         Delinquencies/collections — The market and tenant circumstances will change so this is a critical metric to watch. Keeping good lease records on the asset’s residents and where they are employed will aid in predicting how

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Q&A with ILE Homes’ Mahesh Shetty and Dan Brady

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A Conversation About SFR, Multifamily, and Institutional Buyers Mahesh Shetty is the CEO of ILE Homes, a privately held single-family rental and asset management company. ILE generates current income and capital appreciation through investments in single-family rental homes and mitigates risk through diversification across the best residential rental markets so investors can build wealth with little active management. Dan Brady is the Vice President of Acquisitions for ILE Homes. Dan has been involved in over 1,750 scattered site single family acquisitions and professionally renovated over 450 homes since 2011. REI INK sat down with Mahesh and Dan to get their thoughts on the single-family rental market, multifamily investments and how, if at all, institutional buyers changed the real estate investment landscape. Mahesh, given your finance background, do you see the economics and operational aspects of SFR and Multifamily converging even more than has taken place over the past five years? MS // At a macro level, it appears that there is a lot in common. And there is significant overlap in multifamily and BTR single family segment. But the similarity stops there. The art of acquiring scattered sites, renovating, and managing them requires a skill set that is completely different from managing apartments. The advantages of design and density that is common in multifamily is absent in scattered site rentals — one size does not fit all in single-family rentals. There is a bespoke nature to single family rentals that requires seasoning and acculturation in the team to be truly successful. Mahesh, you have an extensive background in almost every facet of real estate, except Single Family Rentals. Most people gravitate toward, some would say graduate to, Multifamily from SFR, but you are doing just the opposite – why? MS // With my background in private equity and mergers and acquisitions, I was excited about the opportunities of creating value in a fragmented sector. Every other sector of commercial real estate is “institutionalized”— single family rentals are on the verge of massive consolidation in the next ten years. I wanted to play a small role in the process and be on the proverbial cutting edge of this industry consolidation. Dan, there has been a lot of recent press around institutional buyers — mostly bad. Has this press tarnished the SFR space? DB // In no way has the press tarnished single family rentals; however, they have tried to paintus as the “bad guys.” I would say that institutional buyers are IMPROVING the normal rental experience for our tenants.  Institutions renovate with two major thoughts in mind — safety and security — neither are ever compromised. Institutions typically have more available cash to renovate properly on the front side, and also spend when necessary for major repair and maintenance issues. The typical tenant experience in an institutional home, is normally superior to the average Mom and Pop owner that may be cash strapped when repairs are needed. Dan, to expand on that, as institutional buyers continue to grab market share, do you see them pushing the smaller operators out of the space, which would actually mirror what happened in the multifamily space? DB // We are a LONG way from institutional ownership dominating the SFR space unlike the ownership patterns in other sectors of commercial real estate. For example, in multifamily the institutional presence exceeds 55%. If institutional ownership in the SFR space reaches 15% in the next 15 years, I would be surprised.  There will always be a space for both smaller operators and institutions. Mahesh, what are your thoughts? Are institutional buyers really keeping first time homebuyers from entering the market? MS // First time home buyers are typically more competitive than institutional buyers because their time horizon on ownership is longer, they are looking to provide a shelter for their family, and there is a tremendous amount of pride and emotion wrapped into the purchase. As a result, they are willing to pay market or a premium for the home. On the other hand, the institutional investor is numerically focused on returns over a 5–10-year horizon and is less likely to pay a premium for the property. Typically, they buy homes that are in some form of distress and require a level of renovation that first time home buyers do not have the knowledge or the patience to attempt. The flipper market has always existed in the US — their exit was the mom & pop rental owner. The institutional investor has consolidated the flipping business without impinging on the first-time home buyer market. Mahesh, what steps did you take to prepare the company to both solicit institutional capital, and how large would I need to be before seeking institutional capital? MS // We started with the proverbial three-legged stool — an experienced team, developed and refined our processes, overlaid it with proprietary technology. Once we had those three elements in place, we bought properties to demonstrate our ability to synthesize the components and make the whole (our company) better than the sum of the parts (people, technology and processes). Institutions are keen on investing in management teams and platforms that can absorb capital and scale and providing institutional level reporting and transparency on the performance.  Dan, with the market downturn, do you foresee institutional capital staying on the sideline? DB // This is a great question! I would say that “some” institutional capital may run, but the majority will remain committed to the space. SFRs are the safest harbor in an inflationary environment. The ability to dollar cost average as one buys scattered site homes is core to portfolio valuation protection. While one asset may take a dip, another certainly will offset the decline, and often out pace. We are long-term players, as is our capital. Long-term, SFR is the absolute best hedge in real estate. Mahesh, what is your vision for ILE Homes and how long will it take you to get there? MS // We have always dreamed BIG. Our vision for the company

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The Five Features Renters Crave

The Changing Landscape of Single-Family Rentals By Kori Covrigaru Zillow recently released its 2022 Housing Trends Report, and, boy, have renters evolved. Renters are going on fewer in-person tours, are more likely to have pets, care more about floor plans, and put a higher value on amenities than in previous years.  As the rental market continues to change, property managers and single-family rental investors need to know what renters are looking for in 2023. There are five key elements at play in today’s changing landscape of single-family rentals. Use these in your rental marketing strategy to ensure you’re ahead of the curve with your properties. Pet-Friendly Homes Renting to pet owners can be a great way to attract more renters and fill vacancies faster. When advertising your single-family rental, mention that pets are welcome along with any pet-friendly features in the house. This will increase your pool of potential tenants. Consider adding features such as pet doors or fenced yards, which will make it appealing for pet owners to rent your property. You should also have a policy regarding the pets allowed and any additional fees associated with renting to pet owners. Be sure to communicate this clearly, so there is no confusion when it comes time to sign the lease agreement. Finally, remember that your insurance provider may not cover some breeds, so do your research before accepting certain animals into your rental property. Pet-friendly homes are an excellent option for rental investors and offer an attractive amenity that can help increase occupancy and attract quality tenants. Smart Home Technology Smart home technology is increasing in popularity in single-family rental properties. It offers convenience and peace of mind for tenants and property managers. Tenants can use smart thermostats to adjust the temperature from their phones while also providing property managers with data on energy usage. The ability to control smart appliances remotely allows tenants to check if they left something running or shut off after use. Smart locks provide an extra layer of security for both parties and a way to grant access without having to meet up in person. Property managers can even monitor when someone enters or exits the premises through notifications sent directly to their phone. Smart home technology makes it easier for everyone involved in a rental property transaction. Tenants have more control over their environment and greater security; property managers have better insight into the unit’s usage and maintenance; and investors benefit from increased efficiency throughout the process. Safety Safety is always top of mind for families. Smart locks are an easy way to ensure that only the right people can access your property. You can program them with unique codes for each tenant and easily change them when tenants move out. Good lighting around the home’s exterior will also help deter unwanted visitors from entering your property after dark. Security systems provide peace of mind by monitoring activity 24/7 and alerting you if something suspicious occurs. Key Takeaway: Property managers and single-family rental investors should install smart locks, security systems, pet-friendly fencing, and smart home technology to keep their properties safe. Floor Plans Floor plans are an important tool for marketing single-family rental properties. They provide potential renters with a visual representation of the space they will live in and help them decide if it is right for them. Floor plans should include accurate measurements and any special features, such as fireplaces or balconies. Consider how tenants can make the most of the space when creating floor plans. For example, if they could easily convert an extra bedroom into a home office or playroom, highlight this feature on your floor plan to show its versatility. Don’t forget to include outdoor spaces like patios and decks so that tenants can get an idea of what their outdoor living experience would look like at your property. Floor plans also give tenants a better understanding of room size and layout before they commit to renting a property—which helps prevent misunderstandings down the line when move-in day arrives. Be sure to calculate each room’s size so that prospective tenants know exactly what they’re getting when signing up for your rental unit. Including detailed floor plans in your listing materials gives potential renters more confidence in their decision-making process by making it easier to envision themselves living in your property, ultimately helping you find great tenants faster. Floor plans are an essential part of rental marketing, providing a detailed overview of the property’s layout and features. With 3D virtual walkthroughs, you can now give potential tenants a better view of your single-family rental before they even step foot inside. Virtual 3D Walkthroughs Virtual 3D walkthroughs are an innovative way to showcase single-family rental properties. They allow potential renters to explore the property from the comfort of their own homes, without having to physically visit the property. This can be a great time-saver for renters and property managers. 3D virtual walkthroughs are becoming increasingly popular among single-family rentals because of their convenience and cost-effectiveness compared with traditional in-person viewings. Property managers now have access to powerful online tools that make showcasing their properties effortless. At the same time, tenants gain peace of mind knowing exactly what they’re getting into before signing on the dotted line. With the right combination of the features renters crave, you can create an attractive listing that will stand out from the competition and attract more qualified tenants. Are you a single-family rental property owner looking for an effective way to market your listings? PlanOmatic provides comprehensive photography, floor plans, and 3D walkthroughs that help showcase the beauty of your home. Our solutions will give potential tenants a detailed understanding of what they can expect from their future living space while making sure you maximize interest in your listing.  Contact us today to get started by visiting https://www.planomatic.com/.

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Home Prices In Opportunity Zone Redevelopment Areas Fall During Q4

Drop-off Matches Broader Nationwide Downturn By ATTOM Staff ATTOM, a leading curator of land, property, and real estate data, released its fourth-quarter 2022 report analyzing qualified low-income Opportunity Zones targeted by Congress for economic redevelopment in the Tax Cuts and Jobs Act of 2017 (see full methodology below). In this report, ATTOM looked at 4,119 zones around the United States with sufficient data to analyze, meaning they had at least five home sales in the fourth quarter of 2022. The report found that median single-family home and condo prices decreased from the third quarter of 2022 to the fourth quarter of 2022 in 56% of Opportunity Zones around the country and went down at least 5% in almost half. Those declines closely paralleled drops in neighborhoods outside the zones as prices fell across the broader U.S. housing market during the second half of 2022 following a decade of almost continuous growth. However, some signs emerged during the fourth quarter revealing that Opportunity Zone markets were withstanding the national market retreat better than other neighborhoods, just as they outperformed nationwide increases by some measures during the boom period. For example, larger portions of Opportunity Zones saw typical values rise by at least 10% both quarterly and annually compared to the rest of the nation during the last few months of 2022. In yet another ongoing sign of strength, median values were still up year over year in almost the same portion of Opportunity Zones as elsewhere around the country. “Home values inside Opportunity Zones are falling. But, on balance, they aren’t dropping any faster than in more well-off neighborhoods around the country,” said Rob Barber, CEO for ATTOM. “By a couple of metrics, they are even doing a little better. That speaks to the continued strength of Opportunity Zone housing markets and their potential allure for investors who still want to take advantage of the program’s tax breaks even in the current uncertain economic environment.” Opportunity Zones are defined in the Tax Act legislation as census tracts in or alongside low-income neighborhoods that meet various criteria for redevelopment in all 50 states, the District of Columbia and U.S. territories. Census tracts, as defined by the U.S. Census Bureau, cover areas that have 1,200 to 8,000 residents, with an average of about 4,000 people. Without a doubt, typical home values in Opportunity Zones remained well below those in most other neighborhoods around the nation in the fourth quarter of 2022. Median fourth-quarter prices fell beneath the nationwide median of $321,500 in 79% of Opportunity Zones. That was about the same portion as in earlier periods over the past year. In addition, median prices were less than $200,000 in 53% of the zones during the fourth quarter of 2022, also about the same as in earlier periods. Considerable price volatility also continued in Opportunity Zones, as median values either dropped or increased from the third to the fourth quarter of 2022 by at least 5% in more than three-quarters of zones. That likely reflected the small number of sales in many zones. Still, the fourth-quarter price trends, while down, continued a pattern of Opportunity Zoneslargely keeping pace with the national market despite their location in some of the country’s most distressed communities. Over the past few years, price trends inside the zones matched or even bested nationwide patterns. That happened as a combination of rock-bottom home-mortgage interest rates and a historically small supply of homes for sale pushed up demand and prices throughout the U.S. As buyers with more-limited resources were priced out of many areas, they likely turned to lower-priced locations, including Opportunity Zones. Home prices have dipped in most of the country since the middle of 2022 as higher mortgage rates and consumer price inflation, combined with a faltering stock market and other forces, have cut into what buyers can afford. But the ongoing tight supply for homes for sale could help Opportunity Zones withstand steeper drop-offs. “These areas targeted for redevelopment tax breaks may be less vulnerable to taking a big hit if the market keeps dropping because they are still some of the most affordable markets,” Barber added. “The Spring buying season should say a lot about whether they can maintain their strength.” High-level findings from the report Median prices of single-family houses and condominiums declined from the third quarter of 2022 to the fourth quarter of 2022 in 2,116 (56%) of the Opportunity Zones around the U.S. with sufficient data to analyze, while increasing or staying the same in 44%. Medians were still up from the fourth quarter of 2021 to the same period last year in 2,414 (63%) of those zones. Both of those trends roughly followed national patterns. By comparison, median prices decreased from the third to the fourth quarter of 2022 in 58% of census tracts outside of Opportunity Zones, while remaining up annually in 65%. (Among the 4,119 Opportunity Zones included in the report, 3,801 had enough data to generate usable median-price comparisons from the third quarter to the fourth quarter of 2022; 3,862 had enough data to make comparisons between the fourth quarter of 2021 and the fourth quarter of 2022). In addition, measured year over year, median home prices remained up at least 10% in the fourth quarter of 2022 in 1,738 (45%) of Opportunity Zones with sufficient data. Prices rose that much during that time period in 41% of other census tracts throughout the country. Of the 4,119 zones in the report, 1,481 (36%) had median prices in the fourth quarter of 2022 that were less than $150,000. That was down from 39% of those zones a year earlier. Another 697 zones (17%) had medians in the fourth quarter of last year ranging from $150,000 to $199,999. Median values in the fourth quarter of 2022 ranged from $200,000 to $299,999 in 934 Opportunity Zones (23%) while they topped the nationwide fourth-quarter median of $321,500 in 856 (21%). The Midwest continued in the fourth quarter of 2022 to have the largest portion

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