By: Brian & Vincent “The Apartment Specialists”
Clients are always asking us, “When is the right time to buy?” or “I really want to cash in on my property. Is this the peak of the market?” Both of these great questions are constantly coming from our clients and our overseas investors. The answer is always the same: In every market, at any given time, you will find opportunity. You see, following the trends is wonderful, but looking behind the trends, at the nuts and bolts of what drives a market is the true key to success. Anyone can follow a trend and make a couple of good real estate purchases, but the key to long term success is to continually buy and sell strategically, all the while increasing your total portfolio’s net worth.
Today’s apartment sales are moving fast, and investors from all over the globe are honing in on Southern California with the keen understanding that California will always be a great rental market in which to invest. After the Great Recession, there have been shifts in our local apartment industry and much has changed since 2008 & 2009 when vacancy rates had sky rocketed, rental rates dropped, rent concessions were commonplace and, let’s not forget, litigation was rampant.
Today, if you have your pulse on the market, you understand that values are up, vacancy rates are stable but rental rates are still a bit sluggish. It’s true, you heard that right. Values are up but rental rates are sluggish. You may debate this statement, asking if it’s somewhat of an oxymoron for apartment values to be up while rental values are sluggish. With interest rates at historic lows and Wall Street still going strong even with only a 2.6% rental growth rate from last year, apartment sale prices are up and solid, showing a steady increase since the 1st quarter of 2012.
There are key financial indicators to look at when asking why apartment prices are rising up to nearly pre-Great Recession prices and in some areas of Los Angeles County, prices are the same if not greater. The Federal Government with all their antics have actually helped to stimulate the economy with QE 1, 2 and 3, effectively generating some positive effects for the Los Angeles County metro areas.
After the beginning of QE3, unemployment rates have dropped from 8.1% to 7.6%, adding approximately 89,400 jobs to our local economy in the greater Los Angeles area, the largest growth in over ten years. Also, foreign investors causing bidding wars on single family investments are now frustrated with single family homes and are moving into the apartment investment arena.
Despite the onset of positive circumstances, there are still concerns amongst conservative and doomsday investor naysayers who look at today’s low CAP rates and ask, “Where is the upside?” To them I say, look for the silver lining and there you will find upside. The opportunity is the fact that we are living in the times of the lowest interest rates in history, and with inflation still low at only 2.1% with only a slight increase from 2013, our economy continues to hold steady. You cannot miss out on cashing-in on these rates, not to mention that Fed chairwoman Janet Yellen has committed to continue these low rates for an extended period of time. Commitment to low interest rates means we as consumers can capitalize on this low cost borrowing.
Guess who else sees the opportunity? That’s right…developers! Developers have caught on to the apartment wave and have wasted no time adding to construction jobs and building over 12,000+ new apartment units. Planning ahead is the best way to leverage your real estate investments.
In larger properties, many investors have turned to lower energy costs and water costs by shifting usage to alternative methods. Saving on these overhead costs is like adding rent valve to your investment property. As the old saying goes, “A penny saved is a penny earned”. By retrofitting and lowering water consumption and energy costs, a San Francisco based apartment portfolio was able to save $500 million dollars annually.
More upside potential you will see in the near future that will increase the value of your current apartment purchase or long term apartment holdings is the fact that rental rates have been sluggish for the past 5 to 6 years. Next year, we are projecting a rent forecast growth of 3.3%; this during a moderate climate of economic development. Think of the long term upside on rental rate increases in a thriving and robust economy and what that means in value to you. The demand for apartments in Southern California is stronger than ever with an occupancy rate averaging 96%. Not to mention, future forecasts indicate that we will have a shortage of housing in California by the year 2016.
Knowledge is power, and educating yourself to become an astute investor will help you make calculated decisions that will insure long term growth and stability. In this market there is much opportunity to take advantage of, with a 1031 Exchange, or simply cashing out on today’s prices. No matter how you see yourself and your property in this market, there are opportunities for you to increase the value of your property. Whether through a rental increase, repositioning process, or simply taking that equity built and moving it to a more stable asset, there are more choices and options to build your investment portfolio. And if you are one of the few who opts to pay the IRS and not cash in on depreciation because of fear of not getting top dollar for your investment, perhaps this is the perfect time for you as well. No matter where you are situated in today’s market, there is opportunity.
The key to benefitting in this market is patience, a keen vision for opportunity, and the ability to work with a professional who understands this market and the operations of an apartment building. Wherever you stand, in today’s real estate market, from a small multi-family investor to a large, well seasoned investing veteran, just remember that today is filled with opportunity.
What will you do to be successful in this market? Will you sit by passively and watch? Or will you be an active participant, cashing in on these opportunities? The choice is yours.
Brian and Vincent are the owners of Lotus Property Services, Inc. and are active leaders and real estate brokers in the apartment industry. Brian frequently writes for numerous trade magazines and speaks at numerous seminars. Vincent sits on numerous industry boards and is a frequent writer and speaker for industry events. As industry experts, Brian & Vincent have sold and managed over 1 billion dollars in real estate assets. To contact Brian or Vincent, you can call or email: firstname.lastname@example.org 626. 582. 8001 ext. 104 email@example.com 626. 582. 8001 ext. 102