A new year and a booming stock market. What a great start! We’re just going to keep rolling right through the election!
Right?
Read one expert and we’re all in on stocks. Read another and too much irrational exuberance, the market’s crashing.
Getting back to numbers, which is what real estate investors do, we can see that this is one tired bull.
This chart is from the Financial Samurai blog, one of my favorites. It tells us mainly one thing: be wary of the stock market today, very wary.
It also makes a good case for more future investments moving toward real estate. Are interest rates low enough? The Fed sees economic risks on the horizon. Fed Funds Rate dropped from 3.5% to .25% in just 2008 and since then has risen to 2.5% in 2018 but has settled at 1.75% today. LIBOR, the average rate that banks loan to each other, dropped to nearly .5% in 2014, then rose to over 3% in 2018 but has settled at around 2% today. Those are some seriously low rates. Try supporting yourself on the income from CDs. It’s difficult.
Enter real estate, and the reason it is healthy today. It’s not just hot markets like the Carolinas and Texas that drive investments. It is shaky alternatives like the stock market, borrowing costs that may not be this low much longer, and a favorable regulatory climate.
Oh, one more thing. In the most recent down market, 2007-2009, the Dow dropped 54%. Multifamily valuations dropped a lot too in that time period, 40% according to Freddie Mac. But vacancies dropped from an average of about 8% prior to that recession, to 10.3% and rents dropped about 4.5%, according to RCLCO Real Estate Advisors. Take a look at the link to that article below. Can you sustain 10.3% vacancy? Model your break-even point, consider concessions and rent reductions, and think twice before over-borrowing.
Just closed? What’s first
You are buying apartments that need work. You plan to renovate and find tenants who will pay more. That’s the value add plan, and it usually makes the most sense. You’re forcing appreciation, and replacing disruptive tenants makes it easier to attract better tenants.
But what you’re often buying with a neglected property is trashy grounds, cracked sidewalks, visually painful color schemes, poor or nonexistent signage, unsecured mailboxes open to the elements, and nothing at all attractive to the tenants you’ll be looking for. Go ahead and spend thousands of dollars making your units look nice – sparkling kitchens and bathrooms and luxurious flooring, but when the tenant drives by, they won’t bother looking inside, they’ll keeping on driving.
One of your first priorities should be to make the outside look clean and well taken care of. Ideally you are closing in warmer months when you can get this kind of work done. Repair the gutters and downspouts, all the stairs need to be solid, clean up dead bushes, cut the branches away from the buildings, plant grass where there’s dirt, keep the grass cut. That’s just for starters. Those are the easy things.
Look for opportunities to make a good first impression. Flowers are nice near the entrances, but also invest in improving the structure around your mailboxes. Cover it so tenants don’t get wet when they open their box. Get locking boxes because that’s what your competition offers.
Then start in on the bigger things. It’s not that expensive in most cases to have the buildings painted. That makes a huge difference in first impressions. Old concrete cracked sidewalks should be replaced. Recoating and striping the pavement is also a huge aesthetic improvement, not to mention it makes the pavement last longer.
What else can you do? Do your homework, check the nearby apartments. Nicer complexes might offer a host of amenities. Are workout facilities in your budget? Maybe not, but look for inexpensive features to add. Barbecue grill stands and picnic tables. Dog parks. Covered structures for parking. Tenants love these. Tenants who take care of their cars take care of their apartments.
