The opportunities I see today are with large apartment complexes, over $10M in valuation, newer builds, 90’s or newer, class B and A, and in growing markets, and that includes places that would not have been on my list just a year ago. Most people think this is what everyone wanted a few short years ago to just park their money. I understood it. Low cap rate, no one’s going to move out, let’s just collect a tiny distribution check each month, sell it in three years, and move our capital on to the next one.
That worked, nothing wrong with it. You’re making more than money markets, CDs, bond funds, and you get a tax shelter.
And on top of that, if there’s a value-add opportunity, every dollar you increase the NOI on a 4 cap property adds twice as much value to the asset as a dollar increase to NOI on an 8 cap property. Who doesn’t want that.
Then the floor fell out of the market. This market, the market we’re in today. New construction caused rent pressure so rents actually declined in some of the best markets. Nice properties were bought with short term low interest loans, because that’s the only way they could cash flow, but when they went to refinance, they couldn’t pay the mortgage. Pressures built up from all directions on some of the nicest apartment complexes, across the country. Some markets were worse than others, but here we are.
That brings us to today. There is still demand to rent apartments, and now they’re not building as many new ones. People have jobs and want nice places to live. Many choose rentals because they can’t afford to buy a house, but more and more are choosing apartments because they like the lifestyle. What’s not to like – fitness rooms, pools, covered barbecue grills, dog parks, and tenants like you who can afford this lifestyle. It’s a very desirable community.
So that’s where my focus has been. You’ll see properties I’m buying if you’re in my investor group. These properties will have an opportunity story. A market with a record of growth, owners who ran into trouble, and not a need for heavy renovation.
I’ll be partnering with strong operators. An operator is the team of general partners who run the property on behalf of the investors. They aren’t necessarily the property managers but they give the property managers direction. Usually weekly but sometimes more often than that. They decide what renovations to invest in, whether to push rents at the expense of occupancy, or push occupancy. Their priority is safeguarding investor capital.
Of all the things an investor like myself learns over many years of operating multifamily properties, it is how to qualify an operator. The choice of operator is more important than the choice of property. If the property is questionable but you think the operator is good, look more deeply at the operator because good operators don’t buy questionable properties.
Want to talk about properties or operators? You know how to reach me.
Market update
Madison, WI – to learn that the Madison MSA’s population grew by 41% to 708,000 in the last 25 years is extraordinary, especially because the big population drivers are that it’s the capital of Wisconsin, the home of University of Wisconsin (go Badgers!), 51,000 students strong in Madison although twice that in branch campuses, and just a couple hours north of Chicago. But that doesn’t tell the whole story.
With total state government employment estimated at 30,000, total University of Wisconsin employees of 27,000, and total employment at the largest private employer, Epic Systems, estimated at 13,000, we realize that there are many diverse employers maintaining and growing this vibrant economy. What attracts them is the unique cultural virtues that college towns offer, that make college towns such vibrant places to live. They bring the arts, restaurants, and an education community that drives innovation and rewarding jobs.
The biggest employers in Madison include government, healthcare, and education, as you’d expect. They are huge employers and they’re not as subject to economic cycles as private sector employers are. In Madison’s case, they have continued to grow through the financial constraints of recent years.
They also include insurance, telecommunications, financial services and medical services firms. These industries need an educated workforce.
Multifamily vacancy has remained very low over the last several years, at 4% currently. Median household income of $76,000 and average rents of $1,784 means renters are paying 28% of their income on average for renting. That’s a reasonably affordable rent, particularly since university towns typically have a higher percentage of renters – students and younger families.
Jobs growth remained strong for three years following Covid, averaging close to 3%, but has dropped off over the last year, now under 1%. This is something to be aware of but may not foretell future declines. There has been hiring caution nationally, but not the kinds of declines in GDP that precipitate recession. Pauses in government and education hiring are usually temporary, but we’re seeing potential changes in healthcare coming, the kinds of changes intended to drive costs down. That may be causing reduced spending in those sectors.
Crime statistics, according to city-data.com, tell us that it shouldn’t be a cause not to invest. The numbers for virtually all categories of crime are good, better than the U.S. average, and they’re trending down. They could be better but mainly we’re looking for communities where crime is not deterring people from moving in, and Madison fits this criteria very comfortably.
Rent growth has not been as strong as we would want, averaging 1.8% year over year according to Rentcafe. Again, this is the story across the U.S., and is not a good leading indicator. In fact, we should be cautious of chasing the high rent growth markets because those growth rates change dramatically year to year. A city’s 10% rent growth in one year can easily be followed by near-zero growth the next. It’s not a metric to be ignored but further study is always needed. It is not uncommon for one sub-market in a major MSA to produce dramatically different levels of rent growth than another in the same MSA. Talk to the property managers – they’ll tell you.
If you can endure a chilly climate, Madison has whole lot to offer.
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Your Business Plan – Live It, Follow It
When you buy investment real estate, do you make a business plan? Do you write down what you plan to achieve and how you’re going to achieve it? If you don’t, you’re in good company. Too many investors don’t.
Let’s say you do that. You have all the concepts in your head before you take the first steps to buy the property. The kind of property you want, how big, where it’s located, how much work you want to do with it. Then you start hunting for that kind of property.
You need investors so you write a document. All words, your ideas, what you’ll do on day 1, month 1, year 1, etc. Then you make it into a PowerPoint with pictures and graphs, something you could present to investors. That’s how you help them decide to invest.
Your investors send you their hard-earned money 1) because of you, 2) because of the team, 3) because they liked the property and the returns you’re projecting, and 4) because of what you say you’re going to do with the property to make them money. That last part is the plan, the business plan that you committed to executing. It’s not an afterthought, and it’s not a list of ideas and possibilities. It is your commitment.
How often do you deviate from the plan?
If this sounds like you, you are reactionary, pretending to be flexible. Mostly likely you’re being influenced by events you didn’t anticipate, and probably should have anticipated. You’re agreeing to directions that are different than what you committed to in your plan.
Did you decide to save money and keep it in reserve rather than invest it in improvements? Is it because the market shifted since you put the property under contract? Markets don’t usually shift that quickly. Think about any mental blocks you might have about spending that money, and think about your investors. If they wanted their money saved, they would have held onto it.
Did you decide to perform the property management services yourself, going out and hiring an on-site manager and having them work for you, rather than contract with a third party property manager like you wrote in the plan? Does that really make sense? If so, why didn’t it make sense when you were raising capital? Maybe the investors wouldn’t have bought into it?
Are you investing in interior unit renovations before the exterior work, when your plan had it the other way around? Maybe closing took longer than you expected and now it’s winter and you can’t get the exterior work completed for a few more months. That makes sense but if you don’t have a solid reason for not following your plan, you have some explaining to do.
Your investors may be forgiving. They send you the money expecting you to do the right thing. If you’re making it up as you go along and in five years they get a good return, no problem. But if you deviate from the plan and the investors are aware of it, and it doesn’t go well, those investors will not keep trusting you with their money.
Even if you are an exceptionally good operator, if you plan to make key decisions about strategies and tactics after you have held the property for awhile, write it down in your plan. Investors will understand that, and the ones who aren’t comfortable with it will choose not to invest. That’s what you want.
But if you commit to a plan, it is in your best interest to execute the plan and if you have to change it, communicate it to your investors.
“Commitment is what transforms a promise into reality.“
― Abraham Lincoln
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 send an email to john@cardinaloak.com.
Please note: Past performance is no indication of future performance.