I must sound a lot like chicken little these days.
My tolerance for apartment offerings with little to no financial information, supporting analytics that are way outside the market norms, proforma or projections that are not in line with reality, has reached its fill.
I’m finding proforma’s w/ less then 30% expenses and vacancy factors of 0% to 2%.
An example for reference.
20 units = 240 months for rent
6 units turnover in a year and require paint, basic remodel for rent ready status = 11 vacant months approx
11/240 = 4.6% vacancy
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I’m finding proforma’s or income/expense breakdowns showing upside/potential rents but real estate taxes as ‘last paid’ or recent tax due. A lack of reassessment and approximating the readjusted real estate taxes is going to put the buyer in a precarious position in 6-18 months when the increase hits.
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Class C properties that should sell between $70k and $100k per unit in todays market are coming along for sale at $125k, $130k and even HIGHER! I understand if the financials support the pricing, but in almost every case, they don’t support it and don’t come close to supporting it.
How can an investor purchase a property at a ‘proforma’ 6% cap rate in October of 2018 when interest rates have popped 3 times already and an investor is likely to see a 5%+ interest rate from a lender. The compounded interest rate is likely 6.25% to 6.5% which makes their purchase a negative scenario.
A lot of properties are being marketed as ‘Value-Add’ or ‘Upside Potential’ and the reality of these statements is difficult to prove and easy to believe.
Are rents below market? Is it just a symptom of current management, amenities, etc? If you spend money on interior or exterior improvements, can you realize the higher upside rents? Can you charge tenants for A La Cart type amenities such as laundry, pet fees, garage rentals, sub-metered water, etc?
What happens when an investor purchases a complex at a 6.5% return with a painted picture of upside & value-add and soon realizes the numbers are not achievable? I believe we are seeing some of this currently, where a buyer may have purchased at $90k per unit and with some rent increases, decides to sell the property for $120-$135k per unit. This may be a recognition of the market shifting and an attempt to transition into a buying stance moving forward.
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If you are looking for some professional guidance or assistance, please feel free to contact Sean Dreznin at (941) 961-8199 or sean@sbrcommercial.com
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