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February 2022

The multifamily real estate market could be about to experience a profound transformational change through adoption of blockchain technology. If you’re not up on it, start reading up.

First imagine being able to buy a small share in a multifamily investment, say $1,000 or less. The number of buyers is many times the number who are syndicating and investing today. Demand for those shares will go up and property prices will go up.

Blockchain keeps track of it all – owners, title, loans. Every “share” is identified by a unique number, a node on a blockchain, that can’t be changed and whose owner is unambiguous.

The costs of buying into these shares goes down because it is a fluid, low friction, low overhead marketplace. There would not be brokers or lenders involved in these transactions, only buyers and sellers.

It’s not here yet today, though, because the tools to facilitate these transactions are not yet built. But they’re coming, and the first entries into this marketplace have already been produced and are in use.

Now imagine what it is like to buy stock before it goes public in a technology company that you know the product is good, is selling well, and is likely to have healthy growth for years to come. You’re like an angel investor. When that stock goes public, the valuation almost always goes up substantially.

If you own multifamily today, that’s what you’ll be. An early investor, before it went public. Ownership of the property gets transformed into smaller shares, a market is available to purchase them, and buyers can be anyone.

Let’s watch this new market as it starts taking hold

Chattanooga, TN – Chattanooga got a jumpstart as a tech hub in 2012 when Google decided to build its very first gigabit fiber network across the city. Everywhere. A gigabit is a massive amount of speed for a home internet connection. Cable providers brag about their 100 megabit service, but that’s just one tenth of a gigabit. And this was 2012. Although it started as an electric utility project to help the city cut down on power outages by providing better information real time, it enabled the development of IT entrepreneurs and telecommuting. Again (not to belabor the point), 10 years ago.

No one can argue that this new infrastructure had an impact. Jobs growth for the five years prior to 2014 averaged under 1.0%, and except for 2020, has averaged 2.3% since then.

It also became clear that over the last several years this technology advantage became less significant. Most cities had developed comparable tech infrastructure and had more of the bigger city amenities that people wanted. Chattanooga benefited from the spillover from Nashville and Atlanta growth but otherwise remained quiet.

Since the pandemic Chattanooga has emerged as a beneficiary of work-from-home migrations. Although population growth over the last 10-20 years has been nominal, there are early signs that this is changing. Steady 3-6% jobs growth year-over-year in the last 8-10 months is not something to ignore.

A warm climate and growth-minded city leadership will continue to drive demand for multifamily, especially with the fancy amenities that tech professionals favor! You just have to choose who you’re going to root for, the Titans or the Falcons, because you’re halfway in between Nashville and Atlanta.

The Emotional Connection
What keeps your tenants from moving out? They’re a good tenant, they paid their rent, they’re always pleasant. Then at the end of their lease they see another apartment that costs $25 less per month and is a mile closer to work. What? You’re moving out?

Do you match their rent? Give them a free carpet cleaning? Sure, you can, but these create only tenuous relationships. And then they tell their neighbors and you’ve created a community of renters who know how to negotiate with you.

When we buy software, more and more we’re paying a monthly or annual fee for it. Microsoft Office, Quickbooks, CRMs. The cost of the software each year is no big deal and we’ve built it into our budget. But tell us to switch off of products we like and move to a new tool, forget it. Who wants to make that big change, so we keep paying the fees.

Your apartments can be run the same way. Look for services you can provide them. Cleaning and dog walking, for example. You get a cleaner in to clean 10 or 20 apartments at a time, your cost per unit is very low, much lower than any of us could get a cleaner who comes to our home only to clean our home. You pass that low low fee on to your tenants. And it’s the same trustworthy cleaner that they see each time – monthly, biweekly? And they clean what your tenant says for them to clean – just the bathroom and kitchen? Or everything? This is not a profit center for you.

They love their dog but don’t have time to walk it every day. What if a dog walker walked their dog every day – the same dog walker every day, showing up reliably at the same time. Their dog gets to know this person. Tenants would pay for this, and pay a lot less than if they went through Rover.com or another service. The dog walker shows up and walks several of the dogs on your property every day.

When a tenant acquires these services, don’t they become more attached to your property and the team managing your property? Absolutely they do. And studies have shown they are much more likely to renew their lease because of this connection they have with this apartment community. An emotional connection. You’re not making money from these amenities (what???) but actually you are, because they stay with you, they tell their friends, and they absorb your rent increases.

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.

February 2022

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