Tag Archives: apartment market

The Trustworthiness Of Prospective Tenants

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A few days ago I stumbled upon this article in the NY Times and it got me thinking about the different ways some of my clients (and myself) pick the best possible tenants to rent apartments to in the Glendale area.

The article obviously talks about how credit reporting agencies are essentially changing the substance of their reports to better identify low-risk and trustworthy consumers. Now, a person’s rent payments, bounced checks, broken leases and such will have an impact on their credit score.

Why should an apartment owner care?

With the onslaught of foreclosures and bankruptcies that took place over the last couple of years, many former homeowners are left with damaged credit. Most of them were forced to rent somewhere, but had to get “creative” with signing a lease because most landlords won’t accept someone with the amount of debt they have. The changes being made to credit reports now will help landlords identify the good tenants from the bad tenants without wasting much time.

For example, a young lady I recently showed an apartment unit of ours to in Glendale, CA had absolutely terrible credit stacked with delinquent accounts, huge debt and so on. She also mentioned that she’d be breaking out of her lease to rent the unit because her job simply wouldn’t cover her rent there. On the flip side, I had an older gentlemen who had just been foreclosed on and suffered through a tough divorce from his wife of 30 years. His credit score was also butchered, but it was because of his foreclosure and bankruptcy. He had the same decent job for the last 10 years and was making more than enough to cover rent. So, who’s the obvious winner?

We’re going to be dealing with “bad credit tenants” for years to come because of the financial situation. That just means we’ll have to find the honest and trustworthy ones to work with in order to keep our investments in the green.

What other leasing challenges have you faced as an apartment owner/manager?

Finding Off Market Commercial Real Estate Deals

Please note that we work in the Los Angeles, CA area and are no longer active in sourcing national deals. However, we’re always help with investment advice if warranted. 

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Believe it or not, it’s rough out there for commercial real estate investors. The amount of time some buyers spend analyzing deals is more than they spend at their real jobs. Day after day, I meet more buyers who are absolutely against looking at anything on the market. If it’s already been on LoopNet, they’ve “seen it” and completely disregarded it. There’s the problem, though. They’ve “seen it”…meaning they looked at the price, location, unit mix, read a few words of the description, and MAYBE called the agent and said “DO YOU HAVE ANY OFFERS?!” and once the agent lied and said ‘yes’, they gave up and moved on.

It’s no wonder you have all these brokers running around asking each other for off-market deals or “pocket listings”. When nothing on the market seems reasonable, it’s time to hit up the people who DON’T actively want to sell. That makes sense, right? Nope.

In a perfect world, listing agents who put their listings on sites like LoopNet would 1) price it correctly 2) be descriptive 3) sufficiently inform their clients. Also in a perfect world, someone who claims to be a savvy apartment investor would know that everything is negotiable to a certain extent, including price. I get a kick out of the guys who, no matter how high of a CAP rate they’re getting, will insist on offering $100k less. “Property’s listed at $1m? Deliverable at $900k? I’ll offer $800k.” This isn’t the right way to make strategic investments in multifamily properties.

I’ll use a previous client of mine as a case study to show you how my father and I successfully find deals that make sense for our investors AND sellers. We used all the tools and resources available to give our client the technical data, facts and ideas necessary to make the most educated decision possible.

First, we’ll identify their buying needs: In this example, our client came to us with $2million that he needed to invest. His main objective was to gain cash flow and build equity in an appreciating asset that he can cash out in a few years. He had a steady job, paid off home, and was generally in great financial shape. He saved up this capital over the course of a decade, so he was naturally very careful of any risky investments. He decided real estate was the way to go and even did quite a bit of research on his own…even went so far as to get on LoopNet and start calling on the deals that were on the market in his neighborhood.

Clarify market knowledge: It’s always challenging when a client comes to you reciting things they heard their realtor friends saying about the commercial real estate market. That’s because 99% of it isn’t true. “My sister’s realtor friend told me people are buying apartments  in Montrose for 20 cents on the dollar!” No. “But I read online that you can make 15% on your money in apartment investing.” Hmm.

So, we spent about half an hour bringing him up to speed on market metrics (CAP rates, IRRs, vacancy rates, etc.) and what the current market conditions were like in the area.

Set reasonable goals: We set reasonable goals for the local markets here surrounding Glendale, CA that we would aim to achieve; 7% CAP, 10.5 GRM, 10% IRR, ~$130k/unit. If you don’t know what these metrics mean, well…don’t worry about them. Basically, we wanted to accomplish a reasonably profitable investment rather than try to find a “steal of a deal” and be stuck with problems.

Deal-searching: Yea, he’s seen every apartment building for sale in Glendale, CA  on LoopNet all right. He even knows each on-market property’s address and physical description by heart and he’s not happy about any of them. When we put the LoopNet results page on the screen in front of him for North Hollywood apartment buildings, he started going down the list one by one saying “this one’s great but not worth it, that one looks like a dump, this one’s empty.” We explained to him that the “price” on listings aren’t like price tags on stuff you buy at the store. You can negotiate. In fact, there are quite a few agents out there who specifically over price their listings because they’re used to being low-balled. Also, every property is being sold for a reason. Leveraging that information could be very lucrative in this business.

Naturally, he wasn’t content with what was on the market no matter how low we negotiated some of the deals. We had literally talked each seller down by at least $100k off of each listing. Our stubborn buyer still wanted to see more. We developed a method which would help us target off-market sellers (and yes, I’m totally giving away my secrets by saying this but I must warn you…no one does it quite like we do.)

  1. Foreclosure Records: filtered and searched through Notice of Default and Notice of Trustee Sale records (or properties that are in foreclosure).
  2. Expired Listings: pulled a list of all properties that match our criteria that were on the market in recent years.
  3. Target Search: went through my database of apartment buildings and found properties that match our criteria but are also owned by elderly retirees and have no debt/depreciation left on them. Why? Because older investors who have managed and dealt with their apartment buildings for decades are going to love the idea of exchanging into a NNN fast food restaurant for more cash flow and no hassle. =)
  4. Contact Property Owners: After all of that, we had 12 off-market properties to work with, all of which were in awesome locations and had great potential to add value. I contacted every single owner directly and had a brief conversation about their investment, told them what I was trying to accomplish and suggested letting us do a property valuation for them, free of charge. Only four of them agreed to have their property valuated by us. One out of four of those owners actually decided she would very much love to get fair market value for her building because her home was also in foreclosure and she needed money fast in order to save it. We put the deal together literally over-night and opened escrow the next day.

Boom! Our picky buyer acheived/surpassed every single one of the target goals and thanked us over and over again. This is what we do for our clients. Sure, some of our clients can probably just do it themselves if they really wanted to. However, the advantage of using Verdugo Properties as your commercial real estate brokers in the areas surrounding Glendale, CA is that we’re extensively trained and experienced in surgically orchestrating and executing transactions just like this. No matter which product type you’re into, we’ll achieve the same result over and over again; success.

 

Clear & Concise: Housing Market vs. Apartment Market

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Glendale Apartment InvestmentsBefore I get into this, I want to encourage you to throw in your two cents. Obviously, if you’ve found this blog, you’re involved in the commercial real estate industry in some way and have the ability to form your own intelligent opinion. Don’t be afraid to speak your mind and/or ask a question. None of this is really news, but rather an obvious concept that most passive investors don’t really look into.

All over the internet, you can find articles and blogs discussing technical data, showing graphs/charts and “forecasting” where the markets are heading. Some of the industry’s leading researchers and advisors – like Hessam Nadji of Marcus & Millichap in his blog “StreetSmart” (found here) – talk about the multifamily sector as a whole and how the general outlook is positive for the time being. 

If you’re like most of my clients, you don’t have the time nor the brainpower to sit there analyzing these things yourself. You have a direct question and expect a direct answer.

When a large number of homeowners are in foreclosure and the housing market is going down the drain again, every apartment investor wants to know one thing:

How will my apartment investment be impacted by the decline of the housing market?  

Answers:

–Larger Tenant Pool.

  •  Older and more affordable buildings experience an increase in occupancy while newer construction buildings have to compete with the demand for more affordable housing by possibly reducing rents. People who are losing their home need a new place to live, even if it’s a major downgrade from the house they couldn’t afford anymore. Also, some are finding it more logical to rent until home prices bottom out so they can purchase a new home. In Glendale, for example, a family who is struggling to make the $5000/month payment on their large house in the hills wouldn’t mind short selling and moving in to a 3 bedroom apartment for $2,800 if it means saving their credit and financial strength.

– What Credit Report? 

  • Landlords are faced with an influx of rental applications from non-creditworthy tenants with foreclosures and bankruptcies on their credit report. Some clients I’ve spoken to recently even mentioned that they no longer give credit reports too much attention. As long as the tenants are employed and seem trustworthy, they feel comfortable. One owner said he has received 20 applications for the same unit, all of which were from prospects who are coming out of a BK or foreclosure.

– More Demand = More Dollars 

  • Major rent growth! In some cases, I’ve seen landlords go from having 50% of their building vacant to being 100% occupied and at full income potential within one month. Recently, we sold a building that was completely vacant. Within just a few days, we had the entire project rented out and cash-flowing nicely. This is mainly because of the high demand for affordable housing stemming from people losing their homes and/or downgrading in order to survive financially.

– Ready. Set. Sell. 

  • Everyone loves a stable performing asset. Apartment owners who have been sitting on the sidelines waiting for their property to appreciate will finally have the chance to entertain reasonable offers on their investments with the help of brokers like myself. Although the “vultures” are out looking for distressed deals, most investors turning to multifamily from the stock market or commodities markets are actively seeking out stabilized assets that are cash-flowing from day one and don’t require much management/maintenance.

– Refi Time!

  • Better fundamentals and occupancy generally translate to easier financing conditions. Property owners who have loans maturing or have bad interest rates will have the chance to refinance their mortgage and yield a higher return on their investment.

So, with all this being said, you can kind of see how this all works. Homeowners become prospective tenants for apartment buildings due to foreclosure and/or financial weakness. Apartment investors leverage the increase in demand by collecting higher rents. Because of this, their property values go up substantially and they have a chance to make some very lucrative moves in the market. Those owners who aren’t over-leveraged have the opportunity to sell their building and reinvest the equity into something more profitable.

I’ll even be so bold as to say that if you own an apartment building in the Los Angeles area today and haven’t at least checked with your broker to see what your building is worth, you’re doing yourself a huge disservice. While most investors are still in the “wait-and-see” mode, there is serious money to be made in today’s market.

Fortunately, I provide free property valuations and get a thrill out of helping investors strategize their investments. Feel free to get in touch with me if you want to know what your building is worth in today’s market and how much more money you could be making.