TWO RULES FOR BUYING AND SELLING APARTMENT BUILDINGS
How many times have you heard it said, “The three most important things to remember when investing in real estate is location, location, location”? Or, “If I'd bought that property 10 years ago, I would be a millionaire today.” Knowing what, when, and where to buy is not only the key to sound real estate investing, it is the key to all investing.
John Paul Getty said, “Buy when everyone is selling and sell when everyone is buying.” This simple statement represents the cornerstone of our investment philosophy. When buying, find out where everyone is selling, evaluate the area, and negotiate the best deal possible. Sell when everyone else is buying. At cal state companies it is our Standard Operational Procedure (SOP).
THE BENEFITS OF BOTTOM FISHING
Remember, there are always pockets of opportunity for real estate investments. Good markets exist all over the world at varying times. Concentrate on weak markets, not weak properties. A weak market is the most favorable condition in which to buy. Prices are depressed and profit potential is high. Sellers just want to get out. Buying in a depressed market is called “bottom fishing.”
The Key to Evaluating Locations
Eugene Vollucci says "focus on areas where the local economy is basically strong and the current downturn is caused primarily by overbuilding". The U.S. Bureau of the Census publishes building permit activity for buildings five units and up for Metropolitan Statistical Areas (MSAs). Identify markets with the largest gains in building permits from one year to the other. If you discover a “construction bubble,” it could mean you've located an ideal market. With a diversified local economy, the overbuilding should be absorbed. A weak market caused by conditions other than overbuilding should be scrutinized carefully.
Multi-Family Buildings often make money for the second owners in overbuilt markets, not the first. Builders get paid for building and they will keep on building as long as they get paid. More often than not, banks are the ones doing the paying.
The market becomes deluged with an excess of inventory. This is when you should step in.
Base employment is probably the single most important factor contributing to the economic health of an area. In evaluating employment trends, be careful of construction employment. During boom-and-bust building activity, the labor base can become distorted by construction related jobs. If possible, eliminate construction employment figures when plotting trends. Predicting growth industries and where they will be located can give you a further indication of where future employment growth will take place.
Talk with the local city planner to determine the direction of city growth. Plans for shopping malls, universities, and business parks create a potential demand for employment and desirable apartment locations.
Demographic Factors Affecting Apartments
Demographic factors are also important in evaluating demand. People tend to marry later and divorce is on the increase, both of which result in a larger single population. In addition, people are living longer, and we have the empty nest syndrome, as grown children move away from the family home usually into apartments. The parents no longer need a large private home and many choose an apartment as well. The number of households is increasing, and the size is decreasing. The affordability of single-family homes is also decreasing.
Demographically, look for an area in which there are a higher percentage of females to males, younger and/or older adults as opposed to middle aged, singles rather than married, smaller families over larger families and renters over non-renters in evaluating favorable rental areas.
APARTMENT BUILDING CYCLES
The “when” to buy and sell is just as important as the “where.” With bad timing you'll strike out every time. To improve your timing, you must become familiar with apartment cycles.
Cycles results from the influence Apartment Supply and Demand have on the marketplace. Economists spend countless hours trying to accurately predict them, and gurus for the current year are the ones who guessed correctly the previous year. As long as their crystal ball remains clear, they will continue to be called on for their advice. One false prediction and they are ousted from the Nostradamus Hall of Fame.
Apartment cycles are difficult to forecast. Yet, it’s essential to have projections when buying and selling. Understanding them will give you the insight to make intelligent decisions.