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September 2022

How do you approach someone in a networking environment? We know that real estate investing is a team sport, so we need to get out there and meet people, but what’s the most effective way to do that.

I’ve been taught to introduce myself, ask them questions, look interested. That’s fine, but two people are talking already – do I just step in and interrupt? Stand by and listen? Or only seek out individuals standing alone?

If you’re at a conference for real estate, there’s a lobby, and people are talking in the lobby, they want to meet people – you. You have to make the move and stop being shy. Almost 100% of the time people already in groups, 2 or more, want to talk and meet more people. They might not look up right away but look for ways to contribute to the conversation and you’ll be welcomed.

What to say? Others have shared that you can ask them why they’re there. Are you here looking for investors in your deals or for a smoking hot deal. That might get some attention but it’s not always the best opening line.

What does work best nearly always is to be authentic. Be yourself. Are you the person who can pull off an assertive intro? If not, don’t try it. If you can, be sure you can follow through because if you learned one great conversation starter but then stumble, you are not being authentic.

Asking questions is the number one way to engage a new contact. Take interest, think of things you’d like to know about them, like where they’re from, what they’re interested in, why they came, etc. Somewhere in there will be a conversation.

When you ask intelligent questions, you come across as informed, experienced, and potentially someone they’d like to work with, and that’s why you came to the conference.

Kansas City – the diversity in industries, cultures, and growth opportunities in this city that spans two states, Kansas and Missouri, is impressive. In one city you can find five different counties, each with their own real estate laws and tax structures, and each with different perspectives on doing business in their county. And so many surrounding cities, all within reach of each other.

As I’ve gotten to know the Kansas City area, brokers readily tell me the cities that are growing and the cities to avoid because of no growth, crime, stagnating rents, etc. But they’re by no means on the same page. Take bedroom communities like Raytown, Grandview, Independence, all in the KC MSA. Avoid them? Sure say some, maybe dig deeper say others. Because what happens in cities that have not so stellar reputations is change, sometimes significant change. Developers smell opportunity and next thing you know you have a tech center, or distribution center, or a major manufacturer bringing thousands of jobs.

That’s the problem with surface-level demographics. How fast is KC growing? The Missouri side is growing a little faster than the Kansas side, about 8% over the last 10 years vs. 5% for KC, KS. Jobs growth is doing decent but not spectacular for both sides.

But have you ever lived in a city where certain areas seem to be gaining all the growth and others are flat or declining? Kansas City is experiencing this. Big things like a new $4B Panasonic plant in De Soto, KS for EV batteries change the landscape for this submarket. It’s growth trajectory that will be vastly different than other areas around KC.

Kansas City is a study in why it is critical to fully understand a market. Don’t discount it because the big city’s performance doesn’t meet your criteria. Acquire the data you need to understand the submarkets and target those.

High Rents vs Low Rents

Have you struggled trying to understand how two properties are very similar in most respects, but one shows much better returns than the other?

Let’s compare two properties. They are both well managed, in similar condition, and in good markets. The first property has rents averaging $600 and the second property has rents averaging $900. The reasons for the differences in rent levels are what you would expect – the second one is in a higher rent market, and maybe they have larger units or more bedrooms, but the first one is in a good enough market that they keep occupancy high and can increase their rents at the same rate as the property with higher rents.

You underwrite with certain assumptions about rent growth and use the same assumptions for income and expense growth for each property. Rents rise the same for each.

But Net Operating Income and appreciation don’t grow the same. NOI and appreciation grow considerably higher on a percentage basis for the property with lower rents. Why is that?

Digging deeper you can see that operating expenses for the two properties in most of the bigger expense categories are pretty close to the same. Repair costs, landscaping, pest control will be close to the same because you have the same number of units, and we’re assuming the conditions of both properties are the same.

Utility costs – if both properties have the same number of units and, again assuming they are in similar submarkets, unit costs for water and electricity will be the same. Tenants in both properties will consume similar levels of water and electricity.

Insurance? Probably similar rates as insurance is based on factors like how many units and square footage, could the property be destroyed by a natural disaster, is it in a dangerous neighborhood, does it have dangerous electrical or plumbing, etc. We’re assuming both properties are similar in these respects.

Property management might be one of the only income-based expenses, that is, if the manager is getting paid as a percentage of gross rents. If they have employees on site, then again payroll costs will be the same for both properties.

This all distills down into an expense cost per unit number that is similar between both properties, but a gross income that is higher for one than the other. In our example, let’s say operating expenses are $300 per unit per month. For the $600 rent property the margin is $300, for the $900 rent property it is $600. A 5% rent increase for the first property is a $30 increase in rent, which is a 10% increase in NOI ($300 margin increased by $30).

A 5% rent increase for the second property with $900 rents is $45. The $600 margin increases by $45 which is 7.5%.

As you know from underwriting, increasing NOI is your path to accelerating the growth of your property’s valuation, forcing appreciation. Lower rent properties are often problematic properties, located in bad areas, deferred maintenance, incompetent management, etc. Those are good reasons to avoid properties with lower rent regardless of the income they produce, unless you are ready to take on a major repositioning.

But if it’s an otherwise decent property, it could produce the returns you need.

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.

September 2022

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