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Cliff Hockley, CPM
President, Bluestone & Hockley Real Estate Services
The purchasing craze of the baby boomers is on. They are buying every stick of real estate in sight. As corporate pensions vanish, social security evaporates/extends to age 70, and the stock market delivers inconsistent returns, baby boomers have increasingly turned to real estate as their retirement vehicle. Real estate investment brokers cannot currently get their hands on sufficient inventory to satisfy them, and competition has reduced returns for investors.
In view of the present lack of inventory, it is important to review your real estate operations annually from marketplace, financial and physical standpoints.
The Marketplace
The latest economic downturn has created a high vacancy rate in many areas of the country and in every class of property (with the exception of retail), making many properties difficult to sell because they do not generate a positive cash flow.
Echo boomers (kids of the baby boomers) are being faced with significant challenges in the job market. Just take into consideration all of those workers, including older baby boomers, still in the job market because they lost thousands in the stock market. Add to the list illegal aliens coming over the border, the number of jobs moving offshore, jobs trimmed by corporate America in the last recession and the high tech implosion and you begin to see why we are faced with higher than usual unemployment in many markets across America. Oregon’s current unemployment rate is hovering at 6.9%, while the federal rate is closer to 5.6%, according to the Oregon Employment Department.
So what do these statistics mean to the average real estate investor? In those areas of the country with higher unemployment rates and higher vacancy rates, returns on real estate have not been very strong. This has created challenges for those that own real estate as well as those that may want to purchase real estate, because banks are nervous about lending on properties that have higher vacancy rates or may be empty.
As an owner of real estate, you need to continually monitor the progress of your investments. There are many ways to analyze investment profitability. Most investors look for cash flow or property appreciation as their main indicators, but you also need to consider your tax bracket, if you are receiving tax shelter and the debt reduction on your investment.
In some markets across the Unite States it is difficult to achieve a positive cash flow on your investments due to the pressures of immigration, population and job growth. In those markets the cost of property is being driven by demand for location with no correlation to the cost of construction or rental rates. In those markets you need to be prepared to place a higher down payment, or have an application for the tax shelter the negative cash flow might give you.
Financial
In any case, an annual review of some key statistics is prudent. Some of the following apply for apartments, some for commercial properties.
- What was my cash on cash return over the last 12 months?
- What was my cash on cash return the pervious 12 months?
- What was the vacancy rate for last 12-month period and previous 12-month period? Compare to market vacancy rate for the same time period.
- How many times have the units turned?
Key expenses:
- Maintenance
- Rental Preparation
- Advertising
- Capital expenses (renovations, tenant improvements)
- Renewal expenses (real estate commissions)
- Mortgage (interest rate, balance due)
- Property taxes
- Insurance
- Water and sewer
Recently we reviewed three years history for a residential client (with about 18 tenants in 9 buildings) and found that three years ago we had two tenant turns that lasted about two weeks each. This last year we had 6 turns that lasted on average 2 months each. In addition, this owner invested significantly in his infrastructure. The result was that over the past 12 months, this client’s net income has declined significantly. On the other hand, he has invested in his property to make it more competitive with new product entering the marketplace. His number one asset is the location of these investments. By deciding to upgrade the units, he will help keep the units competitive in the long run and weather the vacancy storm.
Physical
In another case a client recently installed a new roof at his property. As he went up to inspect the installation, he found dry rot in barge rafters and places that had not been inspected in 3 years. Annual property inspections allow you to plan for future repairs such as new carpeting, new roofs, exterior or interior painting, fence replacements, asphalt overlays or re landscaping. The newer a property looks, the easier it will be to rent and the higher a rent you can usually get.
Real estate is like any other investment. It can make money for you, but you need to pay attention to it. This includes an understanding of the current marketplace, physical inspections of the property as well as an annual financial review of the investment. By consistently following up and make adjustments to your operations, you can help ensure a profitable investment.
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