Have you noticed you haven’t been hearing many recent real estate success stories lately? I don’t read about too many, I don’t get those stories when I talk with other investors, and those aren’t the stories I hear at multifamily conferences. Instead, what I hear is people are waiting for things like interest rates to come down, bonus depreciation to be restored, and cap rates to compress again. Or worse, they are bailing. No more real estate in their future.
That’s unfortunate because these are the conditions that build wealth. Or maybe it’s fortunate because there’s less competition.
My teacher/mentor started buying multifamily in the 1990’s. He bought in Texas and he bought at cap rates of 8-10%, probably higher in many cases. Good properties, cash flowing, in decent condition, and many of them 90% occupancy or higher. He would renovate, hold for a few years, then sell it, again at an 8% cap rate. They printed money and a fortune was made. So that’s what he taught. Negotiate a deal at an 8% cap rate.
Ha, fat chance! By 2015 too many of us got the word and competition drove cap rates down. Way down. If you bought at 4 to 5% cap rate, you had virtually no cash flow until you finished renovating and hiked rents.
But that worked for a few years. We’ve all been buying at cap rates under 8%, everywhere in the U.S., and making it work until interest rates spiked. Rates have been stuck where they are today for most of the last two years. Values have not moved much and cap rates have climbed.
We all see it, and many of us have become disillusioned. No more money to be made in real estate.
How many times have we heard that tired quote from Warren Buffet saying be greedy when others are fearful.
I’m not sitting back and waiting. At no time in history has there ever been a down time when it has not come back and grown bigger than before. That won’t happen now either. It will come back and Q1 2025 will be recognized as the turning point.
My favorite quote is about green lights. When all the economic lights are flashing green, your window of opportunity will have passed.
Market update
Allentown, PA – Known since the 18th century as an industrial center because of its rich coal and iron ore deposits and steel mills, and access to all the major east coast markets, Allentown played major roles in all important stages of the growth of the U.S. Allentown’s history is the history of U.S. industry growth.
Companies and industries found their way to Allentown throughout most of the 20th century and Allentown grew to be the third largest city in Pennsylvania. Until taxes and regulation pushed people out to neighboring communities. The downturn in this rust belt city was even memorialized by Billy Joel in “Allentown” from 1982.
Recognizing these trends, city leaders passed Neighborhood Improvement Zone laws in the early 2000’s, and those investments are paying off in a big way. The city has achieved recognition as one of the 150 best places to live in the U.S. by major publications. When heavy industry moved out, new businesses moved in.
A better characterization of this area is an area that includes Allentown known as Lehigh Valley. It includes Bethlehem and Easton as well as Allentown, both Lehigh County and Northampton County, all not far from Philadelphia. If you’ve ever driven through these cities and towns, you know this is an extensive rural part of the country where it is easy to find peaceful, quiet, low-crime communities. Good highways as well as strong, smart, capable workers.
Jobs growth has been in the 1.3 to 1.7% range over the last three years, which isn’t bad but not strong enough yet to classify it as an emerging market. Population growth of 17% over the last 20 years is also good but not spectacular. What makes it particularly impressive, though, is how it contrasts with most Northeast cities who have stagnant or negative growth. When people flee the Northeast, they mostly move south, but in Lehigh Valley they can settle with the qualities they like about the Northeast and without the qualities they don’t like.
Rent growth has been reported by Apartments.com to be 2.8% over the last year and 10% by Zillow. Both are impressive given national averages are zero or negative. Pennsylvania’s average rents declined over 2%, so Allentown is doing something right.
Milken Institute ranked Allentown #78 in Best Performing Tier 3 Cities, moving up from #84 last year. There are thousands of Tier 3 cities in the U.S. A rank of #78 is impressive.
It remains to be seen whether Lehigh Valley can sustain this growth, but it certainly looks like their momentum is increasing. Better yet, they’re not on everyone’s radar yet.
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Finer Points of Multifamily Properties
Unplanned repair issues? Kick the can down the road?
Something on our property breaks, we fix it, right? Maybe not always. It’s a big expense, we didn’t plan for it, and we can live with it for awhile.
How often do these problems fix themselves? Never. Even if they don’t get worse, more people – tenants – notice them after time. Then they become the focus of anyone who is not 100% pleased with everything on the property, and if there’s an opportunity for them to complain, they will take it.
I’ve had this problem more than once. It is not easy to look at every problem, big or small, and have it fixed immediately. You’re always prioritizing, deciding how serious the repair issue is, if there’s a reason to defer the repair. Maybe you’ll have more funds in six months, maybe there will be better weather, maybe there is an upcoming project that you’ll include this repair in, and maybe you’re planning to sell the property. Those are all good reasons.
Here are a few reasons for not deferring the repair:
1. Safety is at issue
2. The problem will get worse over time
3. The problem impacts a tenant
There are more.
If it is a safety issue but you decide it’s really not that unsafe, a tenant will decide that yes it is unsafe. They have several options, none good for you. Their best option is to report it to the city. Other than an actual injury, this is your worst option.
The city will mandate a resolution that is much more comprehensive than what you could have done when you first noticed it. They could require permits, compliance with current code, and a timeframe that borders on impossible. All of that means expensive. You could have done the job when you first noticed the problem, done a perfectly good job, even to the satisfaction of the city, but without the city’s enforcement at work and at a lower cost.
I knew an owner who had a small water leak that came from a roof issue. They didn’t even notice it until a tenant reported it. They fixed the unit but not the source. It grew to be a huge structural issue, tens of thousands to fix it, because they didn’t appreciate the extent of the damage.
Another time I had roof leaks. I fixed them, one at a time. Ceilings were getting stained, so I fixed those too. Over and over. The city found out about it, inspected, and then I was on the hook for a new roof. I should have replaced the roof much sooner and would have saved having to make considerable related repairs.
If you have had these issues, be aware that the tenants have options and city enforcement of housing standards is like death and taxes, unavoidable. Even more important, you can save a lot of aggravation and expense by fixing the issues early.
“Success in real estate starts when you believe you are worthy of it.“
– Michael Ferrara