November 2020

Are you seeing more properties become available? We have, and it is encouraging. Owners still want more than the properties are worth, but with options come opportunities. Love it!

A little bit of improvement in clarity on the future after an election helps, and a feeling of plans put on hold for too long helps too.

Throughout this pandemic, even the year or two prior, we have heard brokers tell us over and over that nothing hits the market, it’s bought up before anyone even knows about it. And all of the value-add properties have been bought and renovated. Nothing could be further from the truth. We have a 17 year old property, great structure, nice location, and in good condition, but the interiors were clearly dated.

These are terrific opportunities to renovate and create a killer apartment, features that tenants today will pay for. When you see properties that were renovated just a few years ago, don’t ignore them. The seller wants you to think they’re worth more because they’re renovated, and you want a value-add deal, but there could easily still be an opportunity for you to improve it.

Also don’t believe everything about rent freezes and no upside. We’re very conservative in our underwriting and we don’t expect real estate prices to resume the trajectory they had up to a year ago, but the three to five-year future is not a dismal picture. Look at multifamily in the 2008 recession, which was pretty bad. Valuations held up much better than most other assets. If you are conservative today, you will be
wealthy in three to five years.

Market Update

Winston-Salem, NC – located in the northern middle part of the state with a population of 248,000, Winston-Salem is part of the Piedmont Triad, the other cities including Greensboro and High Point. Nice weather, proximity to mountains and beautiful shores, and a pro-business climate make it an attractive place to live, and population growth of 22% from 2000 through 2017 prove that out. Income and house values growing proportionally as well.

As with so many towns in the Southeast, prosperity grew out of the old textile and tobacco industries. Who leads today in providing employment? Healthcare, schools, government, then Reynolds (tobacco) and some smaller financial institutions. So – fairly stable except for a tobacco industry whose growth trajectory is down.

Sounds like a great area to invest, and for those of us who like to invest where we like to visit, Winston-Salem checks the box!

Dig a little deeper, though. Population growth seems to have trailed off in the last few years, only 8% since 2010. Job growth, according to the BLS, has been positive but not earth shaking in the years prior to Covid, averaging 1.4%.

But wait! Rent growth, at least through February of this year (Covid, among many other nasty attributes, skews rent growth data) was through the roof at 7%, one of the highest rates in North Carolina, higher than Charlotte, Raleigh, and Durham according to Rentcafe.

Definitely a city to consider, especially because if you’re looking for a good local property manager and good contractors to maintain your property, you can look in Greensboro and High Point as well!

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Finer Points

Actuals vs. Projected – which to use in underwriting
The actual income and expense numbers the seller provides you for your underwriting should be close to reality, but even if they are, you’ll operate the property differently. Your numbers may be different. A little or a lot. It’s your decision whether to use the real actuals from the seller’s statements, a rule of thumb, or something different.

For actuals, do you use T12 or T3? Remember that the purpose of your underwriting is to project a picture of the future as accurately as possible. If the property had high vacancy for the six month period up to six months ago, then got units renovated, new marketing , or something else improved, and filled those units, it could be safe to say that the next 12 months of rent income will be more like the last three than the six months starting a year ago. So T3 for income. But you have to be able to explain that. Talk to the seller, find out what happened. It should make sense and be a believable explanation.

Look at the big expenses very carefully – insurance, property tax, and repairs. Other big expenses like utilities and management are easier to project so focus on those first three, first.

Insurance – it is okay to use a rule of thumb, but if it is wildly different than what the seller is paying, find out why. Is their policy not very complete? Did they have a fire so their risk is higher? Also confirm your rule of thumb. Surprisingly, a rule of thumb varies by state. Some could be $225/door, others $300+. Talk to brokers, get a referral to local insurance brokers, and call them.

Property tax – this can be very hard to confirm. Will it go up when the sale is recorded? Or three years later? What is the county’s formula for calculating property tax? Go to the assessor’s web site, call the county, and talk to the broker. Experienced brokers know how it’s calculated and when it goes up.

Repairs – So many income statements that are sent to buyers include other things in repair costs, like capital improvements. If an owner is upgrading a unit from laminate countertops to granite, that is not a repair, that is a capital improvement. They didn’t have to do that, they chose to so the unit would look nicer. But they are operators, not accountants, and the expense got thrown into the same bucket as leaky faucet repair and plugged toilets. Look for repair expenses and be sure to include supplies, maintenance, and turnover expenses. They are often broken out separately but for you to decide if they make sense, lump them together. Rule of thumb might be $300- $600/unit but if it’s higher, do a property tour and see for yourself. Is it a very nice property? Then why so much on repairs? Or is the repair expense very low? Does the owner do repairs him or herself? So are they not accounting for his time and expenses? Get answers.

Utilities – there will probably not be much opportunity to tweak these in your underwriting. Don’t try to project a huge savings because you’re going to just start billing tenants for water. If you do, some will move out. It’s a rent increase to them. Maybe they’ll accept it because rents are so low here, or maybe not. You’ll confirm all of these expenses in due diligence when they send you utility statements.

Management – if the owner has one or two people on staff and their payroll is reasonable, it might be a good plan to keep those people after you take over. So just use their payroll numbers. Or they could be significantly overstaffed so you could plan on reducing this number. Again, be careful of your rule of thumb. Is it $900/unit, $1200/unit, or something different? Depends on the area. You’ll pay more in an expensive city than you will in a lower cost of living city. Management expenses vary too. Could be 3% if they have a strong local presence and are putting staff on your property, or 8% or more for off-premises management. Talk to the local property managers. We almost never use the actual management expenses the seller provides in their financials.

Marketing – if the seller’s numbers are $0, that might be a good indicator that they get drive by traffic or the free listings work for them. Still plan on some marketing, at least the basic premium package from You want strong demand and to build a waitlist.

Landscaping, pest control – these aren’t huge percentages of your expenses but make sure you’re including something. If there’s considerable yard to maintain, snow to remove, trees and bushes to trim, ponds, or storm runoff issues, budget for it. The seller’s numbers here will be very helpful but get good estimates during due diligence.

We will build in increases to income, depending on where rents are, where we think they could be, and the numbers and types of renovations we will do, but we’re not likely to plan for very much reduction in expenses. We’re hopeful we can find savings in utilities, repairs, and other areas, but we’re not typically confident enough to plan on them when underwriting.

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 contact us.

Please note: Past performance is no indication of future performance.