What does value-add really mean? I learned a long time ago to find properties that needed renovations. Light renovations, heavy renovations, whatever you feel you can take on. Big renovations means big investment but also big rewards. You invest $10K to $15K in renovating a unit and you can completely transform it. Then you hopefully get higher rents: $200, $300, even $400 more than what the unit could rent for before. A $200 rent increase is $2400 a year, and at a 7% cap rate is added value of $34K. A good return for a $10-15K investment.
Lighter value adds, same result. Invest $3K in flooring, or appliances, or cabinets, countertops etc. but probably not all of it. Then you can increase rent by maybe $100. That’s $1200 a year and $17K of added value. Still awesome.
But what if the reno work has already been done? I am seeing a lot of that. Typically I have passed on these offerings. The broker brings it to me, I see that the current owners already did the renovations, and I tell the broker that I pass because that’s what I do! I do the renovations, that’s my business plan, and who am I to change this strategy that has worked well for me.
Not any more.
More deals are on the market today that have been fully renovated. But they didn’t push the rents when they released the units. They just got a decent tenant in there. They rented maybe one or two at the higher market rents so they could prove out their model but now they have a modernized property whose rents are below market. Maybe substantially below.
I’ve made offers on several like this. There is so much risk taken out of an investment that is not capital intensive. It is not difficult to see where a property’s rents are relative to comparable units in the area. These aren’t turn-key (“coupon clippers” is a term I like but nothing is ever just a coupon clipper). They require work and they especially require skilled due diligence before you buy it.
But you’re not as concerned with costs of construction, finding contractors, keeping them on budget and schedule, and the supply chain which over the last four Covid years has been highly unreliable.
Why wouldn’t those owners just hang on for awhile, get higher paying tenants in, and achieve those NOI targets they set for themselves? For a lot of reasons, but financial distress is a big one. They have a balloon payment coming up on their mortgage and no way to refinance in today’s market, or they have to buy a rate cap to keep their debt service interest rate from increasing.
Or possibly the property is only 80% renovated and they ran out of capital improvement funds.
Or their investors want some liquidity, today. They are concerned about the bottom falling out of the economy or they just want capital to invest in new deals.
I’ve seen all of these reasons, but their reasons are not that important. Fear causes investors to make moves not in their best interest. There’s a lot of fear today.
My fear is missing out. I’m absolutely convinced that those who acquire today will be far ahead in five years, because I’ve been through this cycle. You don’t know if you’ve hit bottom and there are plenty of experts saying the other shoe is going to drop. That can certainly happen – a global war, persistent inflation leading to increased unemployment, destructive legislation.
Much more likely, though, is rebound. Maybe not today or tomorrow, but sometime soon. You’re holding real estate for five to ten years so you can weather this storm.
Market update
Minneapolis, MN – Like nearly every other city we review, Minneapolis is a fascinating city to visit. Look out for the lakes because they’re everywhere, and bundle up if you go in the winter, but take the time to explore what the people of Minneapolis have done to make this area a warm, inviting, and engaging city.
It shows up in rental demand. Rentcafe dropped it onto the top of their list of Top Cities for Rental Activity, for the fourth month in a row. Rental activity is a measure of the demand for rental housing, as reflected in listings being viewed and saved searches. Even though you would love to see rent growth in your target market being at the top of the rankings, rental activity says you will find renters. That’s one of the top reasons to choose a market.
Rent.com reports rent increases averaging 7.9% over the last year, as of March, the sixth highest in the U.S. That’s a pretty massive gain. Most of that gain probably occurred in 2023 as recent month-over-month the gain was .3%, but nevertheless it still indicates strength.
What’s driving this demand? Possibly jobs growth as it is still positive. It averaged 2.6% in the Covid years of 2021 and 2022 but then every city had large negative numbers in 2020 followed by good jobs growth numbers after that.
Now back to reality, and jobs growth has been less than spectacular, 1.6% last year and .9% so far this year. These are BLS numbers measured each month and then compared to the same month a year prior.
Like so many big metros across the U.S., Minneapolis is the sum of many smaller submarkets. If you see a metric like jobs growth that looks only mediocre, don’t read a lot into that. Look at the submarkets. You might not get jobs growth numbers more granular than the MSA level but you will find interesting things such as new companies, new retail, rent growth, and basic building-block metrics like household incomes, housing values, and affordability. When those metrics combine to create ideal conditions for growth, growth usually follows.
Two trends not working in Minneapolis’ favor, though, are the weather and the politics. Both are notorious for limiting growth. Political leaders in many cities in the U.S. enact legislation intended to prevent tenants experiencing hardship from getting kicked to the curb. It places a significant burden on landlords, though. Who wants to invest where someone can take over part of your property without paying.
That’s only part of the story. How do you explain rent growth that is one of the highest in the country? Who wouldn’t want to invest in that market?
One explanation is that the same political leaders who protect tenants also limit new development. Maybe intentionally or maybe inadvertently. When there is nominal growth in an urban area and not enough new development, supply constraints, rents are likely to go up.
Minneapolis has lots of room to expand and not all of the submarkets around it are ideologically the same. These are the growth opportunities for investors to take advantage of one of the top lifestyle cities in the U.S.
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Finer Points of Multifamily PropertiesRelationship Gold – Some Short Stories
We can all look back on our childhood and recall adults who helped us, did something for us, or said something to us that we still remember. Things that changed the course of our lives.
There have been people in my life who have done just that since I’ve been an adult, and most of them don’t realize it.
The most profound change was when I was 19. I had aspirations to get myself in good physical shape but never did. A boy I grew up with was considerably worse off, though. A great guy, a friend, but not in good shape and never athletic. Then I finished high school, went away to college, and saw him at a party over the holiday break. In a casual what-have-you-been-up-to conversation he said he started running after high school graduation, ran all summer, and in the fall joined the local university’s cross-country team. I was blown away, so impressed.
I’m sure I told him that but honestly all I recall was thinking how did this happen. How did he do it. More importantly, how did he decide he wanted to do it and recognize that he could do it. I realized I knew so little about my friend of so many years.
I made the decision that I could do it too, and I did. I started running and have never stopped since. It opened a world of outdoor experiences I never would have had and it is central to my life still today. Because of this one guy, this one conversation.
Fast forward to my real estate life. The first property I bought was a triplex. I was on-site doing a turn, walking in and out of the unit. A guy walks across the driveway to introduce himself. He’s working on his duplex across the street. (You know who you are because you’re in my network and might be reading this.)
We talk, he talks about his other investments, how he got started, and I’m completely hooked. He charted a path that I want to take, and at a much younger age achieved many of the goals I had. He invited me to a local real estate meetup, and there I met other like-minded people and developed an interest in syndicating.
I would not have found this opportunity if he hadn’t wanted to say hello and meet me. Extremely good fortune.
Another example, again someone in my network. (Hope you don’t mind me telling the story.) I met him in a local real estate meetup and owned a small apartment building nearby. He owned some properties, took care of them himself, and also ran a carpet installation company. He was also a firefighter and his fire district included my apartment. I needed carpet so I hired his company to install it. They did a great job and that was that.
When you read about the value of relationships, this is what it means. Someone has taken an interest in you. I hope I am embracing that fully and am returning the grace that others have shown to me. Real estate has given us so much, it’s the least we can do to pay it forward.
Until about six months later. He calls me and says “John your apartment is on fire!”. He knew that because he heard the callout on his radio and knew the address of my apartment, and he had my phone number. I raced down to the apartment and fortunately it was a charred cutting board and lots of smoke but no other fire damage. I saved the cutting board as a souvenir and reminder.
When you read about the value of relationships, this is what it means. Someone has taken an interest in you. I hope I am embracing that fully and am returning the grace that others have shown to me. Real estate has given us so much, it’s the least we can do to pay it forward.
“Good judgment comes from experience, and experience comes from bad judgment. “
– Rita Mae Brown, Author