This article discusses the advantages of commercial real estate (including
apartment houses) compared to single family homes.

Commercial Real Estate Compared to Single Family

By Raymond Pedersen

Compared to single-family houses, you can build wealth with investment properties
with less search time. Even in high-cost areas, a $5 million or $10 million
portfolio of houses would (or at least should) include at least 15 to 20
properties. In lower-priced areas, a portfolio of this amount might include 50
properties. To buy that many houses would require several thousand hours to find
houses, look at houses, evaluate neighborhoods, negotiate purchase contracts, and
apply for loans. With income properties, you can work up to a $5 million or $10
million portfolio with as few as four to eight acquisitions. Even if each deal
takes three to four times as long to complete as one single-family purchase, you
still save search time.

As you move up to a $20 million, $30 million, or $50 million portfolio of
properties (should you plan to grow that wealthy), a comparable sum devoted to
single family houses would prove impossible to acquire and manage. If you want a
life (not a job), investment properties provide more return for each hour spent in
property acquisitions and negotiations. If you own 15 or 20 houses, you own 15 or
20 roofs, electrical and plumbing systems, and yards to oversee. If you own two or
three investment properties instead, you reduce the number of components that will,
at some point, need attention. Although maintaining an investment property can cost
more per building, it costs less per unit, in terms of both dollars and time.

If you choose, you can also own net lease investment properties. Net lease office
buildings, shopping centers, and free-standing retail stores shift responsibility
(in varying degrees, depending on specific lease terms) for maintenance, repairs,
property taxes, and insurance to the tenants. You can operate multifamily apartment
buildings under a master lease (likewise for office and retail). With a master
lease, one master lessee (tenant) pays you and assumes responsibility for leasing
out individual units (spaces) and paying expenses. As another alternative, employ
an on-site manager who attends to day-to-day concerns that arise. Compensate your
on-site manager(s) with a nominal amount of rent reduction. On-site people can
perform some maintenance and repairs, address most tenant problems or concerns, and
prepare and lease vacancies as they occur. To build wealth avoid paying taxes. For
owners of investment properties, the Internal Revenue Code offers a generous
advantage. As you acquire larger and larger properties, the law permits you to
pyramid your wealth-building tax free through a Section 1031 tax deferred exchange.

This article discusses the potential problem of increases in apartment vacancies
arising from higher unemployment among the renting population. It also points out
that the increase in the renting population resulting from foreclosures or new
households may offset the potential vacancy problem.

Renter Affordability Likely to Remain Issue

Published: December 08, 2008

By Keat Foong, Executive Editor, Multi-Housing News

Austin, Texas–Rental affordability is likely to continue to be an issue despite the recession, suggests a research report from Mission Residential LLC, an apartment development and investment company. Analyzing data from the American Housing Survey, Richard Moody, chief economist and director of research at Mission Residential wrote that “renter households continue to face imposing housing cost burdens, an issue that will only be compounded by what looks to be a deep and prolonged recession in the U.S. economy.”

Mission Residential’s December 2008 research report entitled “Affordability Remains an Issue in Rental Housing Market” said that since December 2007, lower-skilled workers in lower-wage jobs (those most likely to rent) have been the most prone to losing their jobs.

Retail trade jobs have fallen by 328,100 through October 2008 from its peak in March 2007. And payrolls in leisure and hospitality services have fallen by a net 88,000 jobs since May 2008, the report pointed out.

Renters under financial stress may double up or move back home. However, the report said that the number of renter households has also been steadily rising over the past few quarters as a result of foreclosure or new households who are not buying homes.

This article, from Torto Wheaton Research paints an optimistic picture for the future demand for industrial space. Investors would be wise to observe the industrial markets in coming months in addition to closely following the apartment markets for buying opportunities.

December 24, 2008

RAY OF LIGHT: INDUSTRIAL’S LONGER-TERM PROSPECTS BY TORTO WHEATON RESEARCH

Laura Stone Mortimer, Senior Economist

The industrial market is currently feeling the effects of weak demand, which will continue through the near term as the U.S. and world economies continue to struggle. While the economic news of late is rather dour, the benefits of globalization and a more open economy are bright spots for longer-term growth in demand for industrial space.

TWR believes the long-term outlook holds a great deal of potential for industrial assets. The U.S. economy is becoming more open and globally integrated. As a consequence, trade - measured by the sum of imports and exports of goods - will continue to account for an increasing share of GDP. Is it anticipated that over the next ten years, many emerging markets in Asia and Europe will contribute to increases in global trade as their economies and currencies gain strength - much as China has done in the current decade.

The role the U.S. plays in world trade and the distribution of goods will be increasingly important. With the dollar’s recent weakening, our exports have become more attractive worldwide, creating greater demand for American-made goods. Historically, the U.S. consumer has demanded more foreign-made goods than foreign consumers have demanded American-made; this, however, is currently reversed, resulting in a more open economy. Over the long-term, export demand for U.S. goods and services is anticipated to continue to grow.

Given the increases in globalization and the long-term trend in trade that will represent a growing share of GDP over the next 10 years, it is entirely possible that growth in warehouse demand will outpace domestic economic output growth. As such, our demand forecasts are slightly more optimistic over the longer term once the economy enters its recovery phase. Trade growth, which up until 2004 represented less than 20% of GDP, has grown to represent about 30% of GDP in 2008.

At this pace, trade growth as a share of GDP could continue to grow to as much as 40% over the next decade. This will have a significant impact on the nation’s industrial markets - particularly those that serve as transshipment centers and those that are well-positioned, in terms of minimizing transportation costs and serving large areas of the population.

If you are a property owner you need to contact a bank, mortgage broker, lender, etc. and find out your ability to refinance your property. Mortgage rates have dropped significantly and you don’t want to miss out on lowering your monthly payment or converting to fixed rate financing.

While financing has become more difficult over the past year it is not impossible and it is much easier to refinance a property than get new financing on a purchase.

Amid Rate Drops, Mortgage Applications Soar

With interest rates approaching reaching historic lows, the application volume for mortgages jumped a seasonally adjusted 48 percent last week compared with the previous week, according to the Mortgage Bankers Association’s weekly survey.

Application activity for the week ending December 19th was 124.6 percent over the same period a year ago, the Washington, D.C-based MBA said. The spike in applications coincided with another drop in mortgage rates, as the government’s efforts to unfreeze the residential-mortgage market show further signs of having the desired effect.

Applications to refinance existing mortgages increased 62.6 percent on a week-to-week basis, while applications filed
for mortgages to buy homes increased a seasonally adjusted 10.6 percent.

Refinancings made up 83.2 percent of all applications filed last week, up from 76.9 percent the previous week.

According to the MBA survey, interest rates fell across the board:

• Rates on 30-year fixed-rate mortgages averaged 5.04 percent last week, their lowest level in more than five years. This was down from 5.18 percent the previous week.

• Fifteen-year fixed-rate mortgages averaged 4.91 percent, down from 4.93 percent the week before.

• One-year ARMs averaged 6.36 percent, down from 6.63 percent.

Source: Mortgage Bankers Association and MarketWatch (12/24/08)

Posted by Carter Brown

With the drop in interest rates many people are wondering if they should jump in and refinance their properties. There is a cost to refinancing and it is important to look at some numbers before refinancing to make sure you are better off with the new loan.

There are four things you need to consider when refinancing-

1. How much your payment will decrease
2. How much it will cost to refinance (closing costs, points, etc.)
3. How long you plan on keeping the property
4. Are you refinancing to lower your payment or get better financing terms?

I think an example will best illustrate the analysis.

Scenario -

Payment will decrease by $90 per month
Closing costs will total $1800

Analysis -

Divide the total closing costs by the monthly savings to determine how many months it will take to recoup your out-of-pocket costs (many of these costs can be rolled into the mortgage and don’t necessarily have to come out of your pocket)

$1800/$90 = 20 months.

If you plan on owning this property for more than 20 months than it would be financially beneficial to refinance.

Keep in mind it is not only a financial decision to refinance. It can be smart to refinance even if your payment increases slightly if you are converting short term financing to a long term fixed rate to hedge against increasing rates.

Posted by Carter Brown

Most real estate markets have been battered and most real estate markets are going to rebound. The question is when? No one knows when but certain indicators will give us an idea that things are starting to pick up.

This article talks about how buyers are starting to come back into the market increasing demand for homes and stabilizing prices.

Business Picks Up Where Prices Have Tumbled

Sales are picking up in markets where prices are deflated, but the business is different than it was before the bubble burst, observers say.

The housing market in deflated markets–like Arizona, California, Florida, and Nebraska–are beginning to show signs of a rebound. Analysts say that prices have fallen to the point that those with average salaries can afford to buy once again.

“The buyers are returning,” says Lawrence Yun, National Association of Realtors chief economist. “And in such a strong way that, now, we are hearing in some cases there is multiple bidding, which hints that maybe pricing is reaching a bottom point. But inventory remains high.”

In California’s San Joaquin County, sales in September and October reached sales levels about equal to business at the height of the boom in 2005, says DataQuick, which provides property data.

But new buyers are primarily first-timers and investors looking to cash in. Local practitioners say the buyers are primarily local residents who have cash to spend.

“It’s the couple down the street that has a nice nest egg and who wants to put it into something that will give them a good return,” says Bev Marlow, head of the Central Valley Association of REALTORS®.

Source: The Christian Science Monitor, Ben Arnoldy (12/16/08)

posted by Carter Brown

Prosper Weekly Real Estate Podcast 12-22-08

Thsi article discussed the importance of Freddie Mac and Fannie Mae to the multi-family housing industry.

Multifamily Contemplates the Future of Fannie, Freddie

Published: December 02, 2008

By Keat Foong, Executive Editor, Multi-Housing News

Washington, D.C. - Debate continues about the future of Fannie Mae and Freddie Mac.

This week the Wall Street Journal reported that Congress and the future Obama administration would be likely to restructure the two entities and in doing so consider the economic crisis and conflicts between the companies’ mission to support the housing market and their need for profits.

David Cardwell, Vice President of Capital Markets and Technology, has told MHN that the apartment industry has an interest in seeing Fannie Mae and Freddie Mac continue as private companies.

Whatever the eventual structure of the two entities, the multifamily industry has a big interest in Fannie Mae and Freddie Mac’s continuing to provide liquidity to the industry and keep interest rates low.

“Historically, 30 percent or more of all households in U.S. live in apartments, so you cannot talk about housing in U.S. without talking about apartments,” argued Jeffrey Friedman, chairman, president and CEO of Associated Estates Realty Corp. “What Fannie Mae and Freddie Mac have done very successfully is that by providing a steady and reliable source of financing for apartments they have improved housing affordability in the U.S.”

Friedman said he has not noticed a change in the GSEs’ operations since they were taken over by the government in September. He surmised that to the extent Fannie Mae and Freddie Mac continue to be a part of the government, that would help keep borrowing costs for apartments low.

As much a 90 percent of the long-term financing in the multifamily industry is currently said to come from these two Government-Sponsored Enterprises.

Distressed Opportunities Heat Up

By Jerry Ascierto, Housing Finance News

The transaction market continues its sluggish pace as 2008 winds down, but some buying opportunities are emerging.

Two large multifamily transactions were announced in November, and the types of transactions illustrate the types of opportunities available in the market - namely, distressed situations.

Guardian Management, LLC, recently acquired more than 4,000 units from Atherton-Newport Investment, which filed for bankruptcy in January. Many of the apartment communities were located in markets hardest hit by oversupply, like Phoenix, Las Vegas, and Miami. Terms of the deal were not disclosed.

In late November, Property Holdings acquired a 17-community portfolio from Aimco, valued at more than $285 million. Many of the properties are located in softening markets like Cincinnati and Columbus, Ohio; Charleston, S.C.; and Atlanta. Like all apartment real estate investment trusts, Aimco has seen a sharp decrease in stock price over the last three months, from $36 a share in early October to just $11 on Dec. 9.

And more properties go on the block every day. In early December, Babcock & Brown said it would exit the multifamily business in an effort to pay off its debt and reduce operating costs. The company is putting its multifamily portfolio, consisting of 28,500 units throughout 10 states, on the block.

A good measure of the risk premium for buying apartments is in the difference between capitalization rates and the yield on the 10-year Treasury. A cap rate, which is a property’s net operating income divided by its purchase price, is a measure of return on investment. At the height of the condo boom in September 2006, the difference between cap rates and the 10-year Treasury was about 80 basis points. In November 2008, that spread had widened to about 280 basis points.

“People are pricing in greater risk,” says Robert White, president of Real Capital Analytics. White expects that spread to increase heading into 2009 as cap rates continue to rise.

Still, the expectation gap between buyers and sellers was starting to close in the fourth quarter, as sellers grew more realistic. “There are still way more sellers than buyers, but we’ve seen asking cap rates spike at least 20 basis points since September, so at least they’ve adjusted their expectation a little bit,” says White. “There are a lot of sellers out there that were reluctant to take too much of a discount and turned their noses up at some deals earlier this year that wish they could have those deals back.”