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Real Estate
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Can low risk investments be made in real estate today? By: Roxanne Krauss & Tom Buckley
Over the past 13 years, as a local residential real estate agent, I have worked to locate homes for my clients. In addition to discussions about their home living needs, they frequently inquire about investment opportunities in real estate. My experience has taught me that real estate through the eyes of an investor is very different than property as viewed by a potential homeowner. To address this persistent need, I have teamed with Tom Buckley, a commercial real estate and investment services specialist. His 25 years of business experience is leveraged to provide pointed advice to our common clientele. In this article we intend to answer the most common question asked: can low risk investments be made in real estate today?
Risk is the Focal Point of Investors Today All investors, regardless of investment type ask themselves three basic questions. How much must I invest and how much will be made? How fast will I see the expected returns from my investment? How risky will it be? Many real estate investment experts point to the multi-family housing sector as the property type with greatest appeal to the risk-adverse, cash flow seeking buyer today. The reason is fairly simple. During real estate downturn cycles, jobs are typically lost, single-family home foreclosures increase, and credit (as is the case in this downturn) becomes difficult for many to secure. This is the time when buyers will seek out the least expensive housing - typically rental units in apartment complexes. This in turn, drives up the rental and occupancy rates which results in improved cash flow and valuation of multi-family properties. There are very few investments that respond this well during economic downturns.
Prices: A Wait and See Game? So if its low risk, positive cash flow, and good appreciation that most investors are seeking, and its apartment investments that offer this sanctuary, why aren't buyers abundant, sellers motivated, and transactions plentiful? Many believe this is due to buyers and sellers alike waiting on the sidelines: buyers waiting for prices to drop and sellers waiting for prices to rise. Timing the market, unfortunately, is a difficult if not impossible task that few if any have mastered. The reason? The price or value of commercial property, like multi-family housing, is the result of complex interactions between many moving parts. As an illustration, here is a snapshot of a few of the supply & demand factors in our local Tampa Bay marketplace that are currently dictating price movement over the short term:
Currently at an all time low of less than 3.5% of total market. If inventory falls further (and from its current level that is highly unlikely) than prices should go up. On the other hand, inventory may increase as properties become distressed over time and current inventory remains unsold on the market. The impact: for now, low inventory is keeping prices resilient.
At present, there are many condos for sale and still more where owners have rented them out, again waiting for the market to improve before attempting to sell. It is likely that condos will remain in the rental supply for some time. The impact: prices on multi-family properties are being driven down.
Of all the factors affecting the price of multi-family real estate, this one has historically had the biggest impact. Prices on single-family homes today have come down from their 2005 peak and their rate of decline is beginning to slow. In the past, this would have translated to a drop in multi-family property values. But the criteria for single family home loans has changed, hence single family home inventories have remained high. The impact: tension between home values and available credit is resulting in a slight downward movement in multi-family prices.
Foreclosures have hit record numbers over the past couple years and most experts predict that many will continue into 2009. Foreclosures translate to an increase in rental tenants which results in increased demand for multi-family housing. The impact: as foreclosure rates remain high, multi-family property prices are being influenced upward.
Nearly all the national lenders are forecasting interest rate increases for the coming years. Currently a commercial loan can be had for 6.5-7.0 annual percentage rate. It is likely that this may climb to 8.0-9.0% over the next year, beginning in 2nd quarter 2009. Typically, when interest rates climb, investors will see a possible change in cash flow in the early years of their investment. The impact: prices for multi-family properties are adjusting downward in response to interest rate increases.
Presently, unemployment is climbing. Many factors are contributing to this, but few would dispute the impact real estate, and in particular the slowdown of new construction has had on jobs. The impact: job loss is resulting in increased demand for rentals in multi-family complexes, driving up the multi-family real estate prices.
As you can see, there are many local interacting and conflicting elements that are influencing multi-family real estate prices today. Have we hit rock bottom? It's hard to say. There may be some further corrections in certain local neighborhoods while simultaneously others in top locations continue to appreciate. In the mean time, many buyers and sellers are waiting on the sidelines, attempting to forecast the best time to buy or sell. Savvy investors on the other hand are engaging in deal making as we speak, taking advantage of the fact that there are few competitors.
Where to Go From Here? Whether you are a seasoned investor or a first time buyer, our answer to the question of whether or not low risk investments can be made in real estate today is a resounding Yes! Our advice and that of expert investors is founded on the belief that money can be made regardless of your entry point in the real estate cycle as long as a) you invest in properties located in outstanding areas, b) you commit to continuously improving the property through renovation and rent increase, and c) you adopt a longer term "hold" strategy letting the property appreciate steadily over many years. Yes, there is risk in any investment, and yes, things can go wrong, but following this simple formula and working closely with commercial real estate service specialists that know the local issues, substantially improves your probability of success. Multi-family commercial real estate may offer a good alternative to the "higher-risk, uncertain-reward" investment environment of present.
Just send us an email with your contact information and let us know if you would like to receive our electronic announcements about upcoming free seminars. You can reach us at BuckleyThomas@live.com (727)-501-5458 or RKraussRealtor@msn.com (727)-698-8856. We look forward to discussing your individual real estate investment objectives and exploring the numerous opportunities that exist throughout the Tampa Bay Area.
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