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November 2021

In-person real estate conferences are back. Halleluiah! They are one of my favorite real estate activities, more so now because we’ve been homebound. No place else can you begin to understand the people you might want to work with. Zoom is great but nothing replaces the visual and personal experience for sincerity, connection, mutual interest, and can I work with this person for the next several years, be on weekly calls with them, depend on their commitment. From your first short conversation you know who is not a fit.

Does it make you nervous to network with strangers? The right group of people will be open and receptive to us stepping out of our comfort zone. Multifamily real estate is that kind of group. Like everything else, if it’s not your thing, you’ll try it, mess up, then get better. What do we get out of meeting people? A smart real estate investor I got to know early in my investing always said that in real estate, for anything you don’t know, there’s someone who does know who can help you. You can find ways past your roadblocks. Meeting people already in the business is how. You share your experience and goals, but more important you ask how you can help the person you’re talking with. And along the line you ask how they would get past the roadblocks you have.

The people I met at my last conference were extraordinarily diverse. Some were hugely successful doing things I wouldn’t want to do, others were just starting out, and many I felt I could work with. The one thing they all had in common though, every single one of them, is their positive mental attitude. That alone makes the trip worthwhile because it’s energizing, and I’m certain that was the experience of nearly everyone who participated. I’ll be going to more conferences before the end of the year. If you see me, stop me – I would love to talk more with you, help you if I can!

Bremerton, WA – Waterfront cities automatically have a livability advantage but often they don’t take advantage of it, and even more often, that’s only one of many strengths. Bremerton fits that mold. Bremerton is home to a large Naval facility on the Puget Sound – a shipyard, a graveyard for decommissioned ships, a submarine base, a Navy museum, and home of the Navy’s Pacific Northwest fleet. But over the years it has evolved into much more than a host for the Navy. With a population of 41,000 it supports ferry traffic into Seattle every day.

Bremerton enjoys visibility as a strong real estate market by doing a lot of things right. In Milken Institute’s Best Performing Cities publication for 2021 Bremerton ranked #3 in their Tier 2 cities, just below Dallas and above higher profile cities such as Atlanta, Charlotte, and Tampa. What pops out are two metrics – High Tech GDP Growth and Broadband Access. High Tech GDP Growth measures the market value of high tech product in the market, and specifically how much it has grown in recent years. Broadband access is a measure of the concentration of households in the market with access to broadband. Bremerton’s rankings in these two measures: #1 and #1. That’s across all the U.S.!

If you’re looking for leading indicators of future growth, these are strong metrics. Broadband access foreshadows inclusive growth based on housing and infrastructure, and high tech GDP growth is an attractor of high paying jobs. Add to that another strong metric, a year-over-year job growth ranking of 14, although to be fair, job growth metrics through the pandemic are skewed and unreliable. Getting better though. If only Washington State’s appreciation of real estate owners and landlords would improve, Bremerton would have it all! Visit Bremerton next time you’re in the Northwest, see the awesome beaches and parks, and check out some multifamily.

Projecting Rents
Understanding where you think rents and rent income will be is one of your biggest challenges when underwriting a deal. In my experience, I pass on more opportunities for this reason than any other. It’s not just that I can’t see rents being increased enough to make this a value-add opportunity for me, it’s how much will income be. There is a difference, and it’s important to understand that difference and what drives it.

Let’s say you find a property whose units are in decent condition and rents are $150 below market. You’ve been taught that you’re not going to get $150 more out of each of those units in the first year. Of course not. Their lease expiration dates are spread out through the year. So you get some increased in year 1 and the rest in year 2.

But what about vacancy? How many will move out because of your rent increases?

And how about renovations? Will you take the unit off line to work on it? For how long?
And month-to-month units?

If they are month-to-month does that mean you can increase their rent right away?

I have needed to come up with ways in my underwriting to account for these factors, but the good news is you can make informed assumptions.

You can plan for some time to renovate, and the loss of income during that period.

My underwriting has evolved to take as much of this into account as I can, because they are assumptions that might change from property to property. For example, if the property has a lot of month-to-month units, you can certainly end the tenancy of all those units at once and fix them up right away. But the contractor can only do so much at a time. How long will some sit, un-rented, waiting for the contractor. And then you get a large batch of them renovated and back on the market. How many vacant units will your market absorb in one month?

Think about these variables. Stagger the renovations through the year. Don’t end all of the month-to-month leases at once. Think about the seasonality of lease-ups – who’s looking for new apartments in December vs. May? And then use that to project your income – month by month, unit by unit.

You might discover that given the number of renovations and lease-ups you can accomplish in one month, it will take you longer than one year, maybe more than two years, to complete your renovation plan. It’s better that you know that up front, then maybe the deal got worse, or possibly better.

Earlier in my career I was a computer programmer so more recently I have written some programs to model rents based on a bunch of different variables. If you know a programmer, think about how you might build your own model and partner up (give her/him some of your GP!). It’s a great experience seeing how quickly your assumptions illuminate the strengths and weaknesses of your deal.

I’m a fan of rules of thumb and have used them extensively, but when you can dig deeper and quantify more, your information quality is higher and your decision making is better.

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.

November 2021

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