September 2020

Six months ago we thought the pandemic would be mostly gone. Summer weather would mean we’re outside and not spreading the virus, medical research would produce a remedy, and we would all have changed our behaviors to prevent the spread. State and local governments restricted evictions but Fannie and Freddie offered borrowers forbearance. Once we looked that new word up, we decided maybe it wasn’t such a great offer.

Today the picture continues to be muddy. The short term mortgage relief offered in forbearance will come due shortly, the CDC stepped up restrictions on evictions at a national level, and the pandemic is a major political issue.

One of my favorite people on TV was Louis Rukeyser back in the 80s and 90s. He hosted a financial show on PBS, Wall Street Week, with terrific guests but shared an extraordinary wit. I watched him with my nerdy friends who couldn’t get dates on Friday night. Lou was as relentlessly positive about our future prospects as he was disdainful of politicians. This was a refreshing perspective whenever disaster struck
and our investments were in the toilet.

Let’s look a little bit into the future.

A famous Warren Buffet quote was “it’s only when the tide goes out that you learn who’s been swimming naked”. The tide is out. Our properties are doing better than surviving, they are making good money but decisions we could have made earlier to prevent issues have become clear. Other properties and owners may not be as fortunate. If your properties are struggling, by now you know what you should have
done differently, earlier. Learn from that.

We will start seeing owners who cut margins too thin, took unreasonable risks, didn’t capitalize sufficiently, can’t hold on until they can replace non-paying tenants with paying tenants, bring their properties to market. None of us want to see real estate investors take a bath but there are buyers with money who will take the problem off their hands.

Election – who will be better for real estate investors? Who knows, but what we do know is that the difference in how the economy performs after the election of the candidate from one party is not much different than how it performs after the election of a candidate from the other party. Again, back to Louis Rukeyser, “no politician anywhere on the planet has ever actually created a rupee’s worth of prosperity.” So get out and do your thing based on what you think is right, not what you think the politicians are going to do.

Covid – death rate is down, vaccines are close to final testing, more proven treatments are available, and masks, distancing are now the norm. Still too many crazy college kids parties, political events, and biker rallies but they too will subside. The light at the end of the tunnel will be bright by the end of the year. If you’re buying, now might be the time. If you’re selling, buyers won’t want to be left out of the good times coming.

Dover, Delaware – For so many years, actually generations, this small town was little more than an annoying speed bump on the way to the beach. I lived in northern Delaware until I moved away after college and never thought much of Dover, the state’s capital. But a few decades of growth just a few miles up the road has extended down state, and today it has one of the 50 highest job growth rates in the nation at 2.28% (Department of Numbers). Not to mention access to the prime coastal resort towns of Rehobeth Beach and Ocean City, Maryland.

Watching Wilmington, Delaware grow from a one-company town, Dupont, into a financial center with banks and credit card companies relocating their headquarters there, it was easy to see that they were on to a good situation. These major companies saw a good opportunity with very favorable laws and regulations on the books. And they intended to keep it that way.

Hence, growth in the capital city of Dover. Today’s industries that came to Delaware over the last several decades include much more than banks, though. Pharmaceuticals and agriculture are prominent. Dover Air Force Base continues to grow, and, yes, no sales tax in the state so retailers thrive.

What is the market rent for this area
This is one of the most important questions you have to answer before buying a rental property. You see a decent C class property that has laminate countertops, 15 year old appliances (but they run!), chipped ceramic tile flooring, pedestal sinks in the bathrooms, and you think – this would be a great opportunity to renovate, then raise the rent! But the market tells you that they’re already getting market or better rents. So forget it, I’m not investing $5,000 renovating a unit when I can’t get any more rent. That may or may not be the right call, because do you really know what you can get after you renovate it?

Look at the rent roll. What are the average rents, then what are they getting after a turn, what have they gotten for their most recent turns? Those might be closer to market than their average rents.

Check out the free websites like Rentometer. This could be a great resource for quick checks. But check the comps they use (buy the Pro-level service to see comps) and you might see their rent comps are from a year ago. Why can’t they get more recent rent comps? Their data samples are just limited so don’t put a lot of value in them.

Look for apartments available on Apartments.com. Drill into your area, click on a lot of the local apartments available, look at their offers. Usually for advertised properties there’s a rent range. That’s not too exact but it gives you a better idea of what’s out there today. Also look at availability. Sure, they are advertising for renters but their next availability isn’t for two months. Or they show you a list of 20 units available today. Both of these situations tell you about the market.

Talk to local property managers. Find the bigger ones, not one-person shops. They want to help you because you might do business with them. Ask for a Costar Underwriting Report. That will show you rent comps. Keep in mind that Costar owns Apartments.com. Costar’s rent comps should be pretty reliable.

The property managers themselves will share their opinion of local rents. Even better, they can tell you what you can expect from a renovation. $50 premium or $150 premium. They’ll know.

Top multifamily buyers, those who share their knowledge with us through podcasts, often have sophisticated market analysis for rents. They are paying for current, reliable data and might have an edge on the rest of us, but keep in mind, they can’t buy everything. And they won’t have the insight that you have by thoroughly immersing yourself in that market.

Who We Are

Cardinal Oak Investments acquires, improves, and manages under-valued commercial apartments. We buy B and C class properties of around 100 units in the Southeast and Midwest. We look for properties whose amenities, aesthetics, and appeal have fallen into obsolescence, whose care reflects tired management, and whose location is where a stable workforce wants to live.

And we partner with like-minded investors looking for stable assets that produce good cash flow and strong appreciation.

Founded and managed by John Todderud, Cardinal Oak Investments has acquired properties on both coasts and in between creating annual double-digit returns.

For more information, schedule time with me or contact us.

Please note: Past performance is no indication of future performance.