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10 Reasons to Invest in Multifamily

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1. Attractive, Risk-Adjusted Returns and Relatively Low Volatility

Multifamily is less impacted by cyclical downturns than  other property types. It was the first sector to recover from the 2008 recession and has achieved superior returns through the recovery and expansion phases. The 2010-2016 average return was 12.1%, based on data from the National Council of Real Estate Investment Fiduciaries (NCREIF). In 2016 and 2017, the annual investment returns reflect the maturity of the sector, yet the income components remain healthy at 4.5%.

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Over the past 25 years, multifamily investment has had the highest average returns of any commercial real estate asset class. The 9.8% average annual return is slightly ahead of industrial, and more than 100 basis points greater than office.

Multifamily can be considered a “defensive play”. Using standard deviation as a measure of volatility over the 25-year period, retail and multifamily had the lowest levels of volatility in return performance.

2. HEALTHY DEMAND AND FAVORABLE DEMOGRAPHIC OUTLOOK
Demand for multifamily housing has been robust in the past several years. From mid-2012 through Q2 2017, net absorption—the measure of demand—totaled 948,445 units or about 189,689 per year (based on the 62 major markets tracked by CBRE Econometric Advisors). This total represents a healthy 7.3% increase to total multifamily demand over the five-year period. The high level of demand is due to a combination of cyclical and secular trends.

3. FAVORABLE REGULATORY ENVIRONMENT
The U.S. has a relatively landlord-friendly regulatory environment. While many governmental regulations exist, especially at the local and state level that protect apartment renters’ health, safety and tenure rights, most multifamily properties are owned and operated without restrictions on rents. There are some exceptions, including metros with rent control (principally city laws limiting rent increases). New York City is one of these metros, and the laws can be complicated. In cities where there are no rent controls, market dynamics and operator skill dictate rents.

With respect to “social” housing, the U.S. has a lower level of subsidized/low-income inventory than many other countries. These properties require additional expertise on the regulatory environment, but represent only a small portion of the total inventory (estimated 5% to 10%).

4. HIGH DEGREE OF TRANSPARENCY
Transparency in the commercial real estate industry, including multifamily, has been rising steadily over the past few decades, and the U.S. has one of the more transparent markets in the world. This transparency allows investors to understand pricing, market conditions, development activity, property ownership trends and other key elements of the industry with relative ease.

Many professional associations, such as the NMHC and National Apartment Association (NAA), regularly host conferences and events with experts discussing key trends  and risks in the industry. Industry groups with a broader spectrum, such as the Urban Land Institute, Pension Real Estate Association and Mortgage Bankers Association (MBA), also host educational and networking events, publish news briefs and trends reports, produce podcasts and webinars, and speak with media.

Public information sources such as the U.S Census Bureau and local and state governmental agencies regularly produce housing, demographic and socio-economic  statistics that provide insight into demand drivers. CBRE is the world’s largest commercial real estate services and  investment firm and provides research and data analysis on multifamily trends, property types, specific properties, market statistics, sales transactions and more.

5. LIQUIDITY

U.S. multifamily assets have a high degree of liquidity (generally defined as the ability to sell or finance assets at the seller’s chosen timing). While there is no good single measure of liquidity, investment volumes provide some sense of liquidity in the marketplace.

The multifamily sector represented more than $1 trillion or 27% of all commercial real estate sales based on the dollar value of all sales over the past 16 years. Over the recovery and expansion years of the current real estate cycle (2010- 2016), investment in multifamily assets totaled $680 billion or 29% of all real estate investment, slightly below office at $700 billion. Multifamily also represented a larger market share in this period than in the 2001-2009 period where the sector attracted 24% of all investment.

One of the principal factors behind the multifamily sector’s high degree of liquidity is the large and diverse pool of investors. Not only is this broad-based capital attracted to primary markets, it is also interested in secondary and tertiary markets. For example, in 2016, the top-10 metropolitan areas for multifamily investment were Dallas/ Ft. Worth, Atlanta, Denver, Miami, Seattle, Phoenix, New York, Los Angeles, San Francisco and Washington, D.C. Another way to consider liquidity is to review the ranges of capitalization rates. Lower and less volatile cap rates suggest greater liquidity, as does a smaller cap rate range between the peaks and troughs of the cycles. From 2004 through Q2 2017, cap rates for multifamily acquisitions averaged 6.3%—nearly a point lower than the  office-industrial-retail average, according to RCA. Cap rates can vary significantly by asset class.

6. PREFERENTIAL MORTGAGE MARKET AND ABUNDANT FINANCING SOURCES

Loan terms, leverage and pricing are more favorable for multifamily than other property types. The availability of  debt capital is important for investment in any commercial  real estate sector. Leverage is used for most transactions, with acquisition financing usually in the 50%-to-75% loan- to-value (LTV) range.

The largest sources of capital for financing acquisitions of  all property types in the U.S. are banks, life insurance companies and CMBS or conduit lenders. The multifamily  sector also benefits from U.S. government-backed lending programs not available for other property sectors.  specifically, Fannie Mae, Freddie Mac and the Federal Housing Administration are major sources of debt capital for existing assets. Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) because they are backed by the U.S. government.

The GSE share of multifamily mortgages has risen  dramatically over the past two decades, and the availability of capital from Fannie Mae and Freddie Mac provides a unique financing advantage. These capital sources increase investment and financing liquidity—important during economic downturns—and help the multifamily sector sustain premium pricing.

Multifamily’s strong market performance, active investment arena and the availability of agency GSE for financing acquisitions and refinancing assets (during both favorable and unfavorable phases of the market) have contributed to the sector’s ability to obtain more favorable loan pricing and terms than other property types. Current loan underwriting metrics reflect the preferential loan underwriting characteristics that multifamily mortgages received in Q2 2017 compared with other major property types.

Multifamily borrowers have obtained higher LTV ratios and lower debt-service-coverage ratios. The average mortgage rate was lower than all other property types combined by 30 bps. Multifamily’s preferential treatment is not limited to 2017. Historically, multifamily debt capital has been more favorably priced than other commercial property assets.

7. DIVERSIFIED CREDIT RISK

In commercial real estate, there is always risk that leases will not be renewed or easily back-filled when space is vacated. In addition to revenue loss from vacancies, there are costs to release and physically prepare available space for new tenants. Multifamily shares this risk in the aggregate, but the sector is very different in that each individual lease only represents a very small portion of overall income of the asset.

Because multifamily assets have a large volume of leases, it also means that credit is well diversified across many leases and lease holders. Diversified credit mitigates risk and gives the sector a distinct advantage over office, industrial and retail assets, each with much smaller numbers of tenants.

8. SHORT-TERM LEASES ALLOW IMMEDIATE ADJUSTMENT TO MARKET CONDITIONS

Short-term leases—typically one year vs. five or more years for office, industrial and retail—means that leasing activity is a constant part of multifamily operations. Short-term leases and the steady leasing/renewal activity provide a financial cushion for operations which generally results in higher occupancy. In other sectors, the loss of an individual tenant can seriously disrupt cash flow and create more risk for owners.
The short-term lease structure, relative to other property types, provides an advantage with respect to both market conditions and inflation. In periods of high rent growth, the short-term leases provide owners the ability to adjust rents upward quickly. More importantly, if the U.S. moves into a period of higher inflation, short-term leases provide  owners with the ability to make upward adjustments to  over the increased costs of operations.

9. RELATIVELY LOW CAPITAL EXPENDITURES CAN BE MORE ACCURATELY FORECASTED.

Multifamily investments tend to provide elevated net cashflow. While multifamily properties require ongoing maintenance and, occasionally, major capital improvements, the amount of capital expenditures (“cap ex”) needed to maintain them is typically lower than the cap ex investment required for other commercial real estate assets.

Similarly, apartment unit turnover requires only minimal investment in contrast to what can be unpredictable and significant tenant improvement expenses needed to attract and retain office, industrial or retail tenants. Annual unit turnover costs are predictable within a tight range and do not result in dramatic swings in cash flows for multifamily owners and investors.

10. THIRD-PARTY LEASING AND MANAGEMENT OPTIONS

In the U.S., it is common to outsource property management and leasing for all types of commercial real estate, including multifamily assets. Management and leasing are almost always handled by the same organization in the multifamily sector.

The NMHC reported that the 50 largest multifamily management companies in the U.S. managed 3.2 million units. Many management companies also own assets, and these units are included in the count. The largest 50 firms each managed at least 30,000 units; the top five are each responsible for more than 100,000 units. Additionally, many of the larger firms have a broad geographic coverage and operate in all or most major metropolitan areas across the U.S.

Revenue management systems are used by nearly all major management companies. These sophisticated software programs are like those used in the airline and travel industries and help determine optimal rent pricing based on market conditions, property occupancy, availability of units by size and other market and property-level criteria. Revenue management systems greatly assist in obtaining the best pricing for new leases and renewals, enhancing revenue for the owner.


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Multifamily Market is on fire!!!

We were outbid again on a phenomenal asset in the Dallas Fort Worth (DFW) Area. It fits perfectly into our wheelhouse on every angle so we were prepared to push hard to get it.

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Our initial underwriting put us at $12MM – in line with the guidance we were receiving.  After some further research, we felt comfortable pushing to $12.2MM, maybe even $12.3MM if we had to.  Not bad to have a few $100K to play with if need be.  Our lender even mentioned we could still get 70% LTV at $12.5MM.  While our returns began to take a hit at that point, it settled out in the 8% COC and 13% IRR.  While that may seem a little low, you have to remember that we’re talking a home run asset in a home run market so you’re going to have to give a little with the expectation that the team and the market will allow you to outperform in the long run.  Long story short the word on the street says this deal went north of $15MM before the dust settled.  WOW!

With yet another crazy price in the books, we went to go back to double check our data.  Are we being too conservative, are we missing opportunities with too much of a rearview mirror?  We don’t think so.  We think our pricing was spot on and takes into account the upside in the market.  On the flip side, I also don’t think that 4-5% returns are market either (which is what the deal would have penciled at $15MM).

We’ve been tracking the market pretty closely the past few months given all the money that’s flooded into our space and have made a couple interesting observations.

First, beginning in March of this year, rental rates literally took off on a tear.  We’ve been seeing healthy rental rate increases across the board for the past decade, but something happened in March to really amp that trajectory significantly.  Traditionally leasing season gets underway in a serious manner around that time for southern states, but usually doesn’t get it’s stride until May or June up north.  However, this trajectory was pretty consistent across all of our markets regardless of geographic location – and it’s not a small deviation, it’s massive!

Second, the spreads and rates for debt have gone to yet another record low level.  Bridge debt, the more risky debt for value-add deals, which even a month ago was 4.5%, is now in the low 3% range.  Lenders are practically climbing over themselves to sign up multifamily debt.  While occupancy, rental rates, and collections continue to make new highs as the economy improves, we suppose it’s not too hard to understand some of the enthusiasm.  This is interesting, though, considering we’re about to, hopefully, see an expiration to the eviction moratorium and potentially millions of evictions from people who have chosen not to pay rent for the past months (or year).  Maybe the market has already priced in this potential downside?

In the DFW market, the average effective rent growth was 1.9% for the quarter.  Yes, that’s the quarter, not the year.  While Class A and B took the lions share of that rent growth, that’s still an amazing statistic.  Lease concessions drove much of that increase as properties phased out previous leasing concessions that were no longer needed as demand came roaring back.  We’ve seen the same in our properties as rental rates and collections reach all time highs.  With new construction moderated by the inflationary situation for raw materials, this continues to bode well for stabilized assets.

All this to say, it is somewhat understandable why some buyers are throwing caution to the wind just to get their hands on a deal – especially in Dallas.  And while it can be frustrating and the old FOMO (fear of missing out) can set in, we have to remind ourselves that this is a long game and these are times when it’s easy to make mistakes.  We’ll continue to push forward and do the best we can to adjust our expectations (within reason) to the current market conditions, but don’t expect us to throw caution to the wind just to put another notch on the deal belt!

If you would like to learn more about Multifamily Real Estate and how to invest, please email me directly at James@jcoreinvestments.com


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Why we like the Texas market

With COVID-19 cases continuing to fall and vaccination rates rising, things are beginning to feel a bit more normal. The economy is growing, and the outlook remains positive as the health crisis abates. Here’s a quick look at current conditions and our latest projections for business activity in Texas.

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Texas has recovered more than one million of the nearly 1.5 million jobs lost in March and April of last year due to the pandemic. The state added 13,000 jobs in April (on a seasonally-adjusted basis) as strong gains in a few industry groups, such as leisure and hospitality and professional and business services, were partly offset by losses in construction, manufacturing, mining and logging—which in Texas is essentially oil and gas activity—and several others. The state’s unemployment rate has improved significantly, but is still above the national level. The bottom line is that while we’re moving in the right direction overall, there are still a few bumps in the road.

One issue is worker shortages, which were already a significant problem before the pandemic. Competition for knowledge workers and other skilled occupations is intense, industries such as restaurants and hospitality are having difficulty coaxing employees back, and school and childcare challenges restrain the entry of many (particularly females). Supply chain challenges also remain. The pandemic disrupted the entire global manufacturing and distribution complex, and it is quite a process to restore the relatively smooth functioning that typically supports production processes. This situation results in both cost escalation and bottlenecks that inhibit or even interrupt activity.

Our most recent forecast indicates an estimated 1.6 million net new jobs are projected to be added to the Texas economy by 2025, representing a 2.39% annual rate of growth over the period. This expansion is somewhat front loaded, as the state continues to regain the activity lost during the downturn and returns to long-term patterns. Services industries will drive job gains, with wholesale and retail trade businesses also forecast to see notable hiring. Real gross project is projected to gain $424.4 billion over the next five years, and output in all major industry groups is forecast to expand, with the mining and services segments leading the way. In particular, the energy sector is expected to continue its strong comeback.

I expect Texas to reach pre-pandemic employment levels in the next year or two. The state’s combination of natural resources, a large and growing population, and expansion in emerging industries position it well for expansion. While there are challenges ahead, such as providing the requisite education and training for future jobs and assuring the provision of essential infrastructure, Texas has the potential to remain a growth leader for the foreseeable future. Stay safe.

If you would like to learn more about Multifamily Real Estate and how to invest, please email me directly at James@jcoreinvestments.com


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Do you need an Limited Liability Company (LLC)?

It really depends on your personal situation and comfort level.

First off, what is an LLC? An LLC stands for Limited Liability Company and is an entity that separates business owners and their assets from their business. When a person operates a business (rental properties) without separating themselves from the business, they essentially put themselves in a situation of unlimited liability.

If anything goes wrong (tenant gets hurt or you are sued personally) the business owner’s personal assets could be targeted in a lawsuit to award damages to the Plaintiff. But by creating a LLC, the business owner protect themselves from the threat of lawsuits, debts, and other damages.

Back to the question do you need an LLC, my recommendation is you first need to review your own situation and decide on your personal liability. For my family, there are two reasons on why we decided to created several LLC’s. The first reason is obviously “Liability” and second and even more important is “Inheritance” for my family.

I’ll start with inheritance first since it is the foundation of how my wife and I structured our business entities. My wife and I do not own anything in our name except for our personal checking accounts for day-to-day purchases. Seriously nothing!! Instead, everything that we technically own is actually legally owned by our family revocable trust that in turn owns all our assets in LLC companies. For example, our family trust owns a Holding LLC that was formed in WY and that holding LLC then owns LLC’s that were formed in the state of where our rental property is located.  Side note, the reason for the Wyoming holding companies is when forming/file your LLC with WY, the member and mangers names of that LLC are never on public record. That’s ultimate privacy on the ownership of your assets.

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Above is an example of the structure I use

I know this sounds complicated but the reason for this chain of ownerships through our trust and LLC’s is to avoid having to change individual ownership on our assets when life changing events happen. Why is this important you may ask? If I were to die then nothing changes on ownership of our assets but instead my wife becomes sole beneficiary of all our assets through our trust. If both my wife and I die, my kids become beneficiaries of the trust and all the assets easily pass to them. To better explain this, none of our rental property’s deeds or other assets would need to be changed/filed to move ownership to our kids if we died since everything is owned by our Trust.  Also, the additional benefits is the trust has clear guidance that explains how to manage our assets if our kids are still minors. This is peace of mind for my wife and I to know that our kids are taken care of if we were to pass.

Now let’s talk about Liability. There are 2 ways to think about this when you are trying to protect your assets. One way is the asset itself – what if your tenant gets hurt on your property and they want to sue the property owner. If the property is in the owner’s name then that means all assets the owner has are up for grabs. If the property is owned by an LLC then only the assets that LLC owns are liable. The second way to think about Liability is if you are sued personally for any reason. Everything that you own under your name could now be awarded as compensation in the lawsuit. When your assets are owned by LLC’s, then you are better protected on not having to liquidate those assets owned by the LLC if you lost the lawsuit.

Going back to using a Holding LLC in WY, this is an added layer of protection because it is hard for the so called “ambulance chasing” lawyers to figure out how many assets you have. To the lawyer, if you look like you have no assets or those assets are owned by LLC’s they may not take the lawsuit since you are not an easy mark. Additional the LLC provide protection by the privacy since ownership is hard to identify.

Summary

I’ve probably convinced you for the need for LLC’s because of liability protection and inheritance but this does come at a cost. It is fairly easy and cheap to go online and create an LLC but I caution against doing that unless you fully understand what you are doing. If you do not create the LLC correctly than you might not actually have the liability protection you thought you did which defeats the purpose. I recommend instead that you discuss your personal situation with an asset protection lawyer who specialize in this even though it may be costly. The other cost to LLCs are the filing fee with the state you form the LLC in. Those cost can be different in each state and usually includes a yearly reoccurring cost. Also, you will need to pay for a registered agent in the state the LLC is formed. These costs can also range but they are a person or entity that is designated to receive mail for that LLC. Once the LLC is created there will be more fees to the county clerk to change the ownership of the deed of the rental property. Finally, with every new LLC you create the process of preparing taxes becomes more complicated. Even though the LLC may be a pass-through entity, and even if there is no money coming in or going out, you will still need to prepare K-1 that will be filed with your personal tax returns as part of your schedule C.

If you have any additional questions, please email me directly at James@jcoreinvestments.com


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Why we love Dallas

Dallas Fort-Worth is one of the most resilient MSAs in the nation with a diverse economy, affordable living, and lower costs of doing business. The region is a top choice for multifamily investors due to its rapid population and job growth, leading the nation for several consecutive years. The graph below illustrates the demand for apartments in the DFW area - it's off the charts, literally!

Similarly, job losses in the DFW market have been less than any other major metro area in the country.  All 12 of the nation’s largest metro areas had year-to-date job losses.  Seven metros exceeded the national average of 7% - with New York and San Francisco leading the losses at over 11% each.  Phoenix and Dallas were basically tied for the least job losses at 3.5% each - that's less than one-third the job losses or those two leaders and less than half the loss of the national average!  Economic resiliency is key for investing in multifamily.

DFW is a leader in transportation and logistics.  Dallas leads the job growth in the US. DFW has one of the most diverse economies in the country and it actually leads the country in net migration by adding over 1 million residents since 2010!  I could go on and on but you get the point.  We're not seeing any discounts in the Dallas market but there's a reason - the facts just don't justify it.  With rates low and opportunities still in the market, we plan to continue moving forward.


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Some Huge Personal News

If you’re reading this, I’ve been fortunate enough to connect with you over the past few years. And since we’re connected, it’s time to update you on some recent changes along with why I’m so excited about the future.

I’m beyond grateful for the support of my wife and family and the education and mentorship I’ve received from so many amazing people in my military career as well as in my Real Estate Investing ventures. This support has enabled me to achieve so many amazing milestones and set my family up for financial success for years to come. 

It’s also a large part of the reason why I’ve formed a Real Estate Investing partnership with several other current and former military investors, the ‘JCORE (Joint Chiefs of Real Estate) Partners.’ We are dedicated to bringing you valuable investing education and passive investing opportunities.

As military members, we understand the demands of a busy work life, travel, family, and deployments. We acknowledge that not everyone has the time and knowledge to invest ‘hands on’ in Real Estate. Therefore, we have partnered to provide solutions through Apartment Syndications- a truly passive way to invest in Real Estate. We work to acquire, manage and operate large Apartments so that you can collect mailbox money and focus your attention on your career and family.

If you’re somebody who values your time and your financial future, then please visit our website at https://www.jcoreinvestments.com/ to access our FREE Multifamily Investing Masterclass Interviews and to schedule a call with me or one of my partners. 

In spite of the challenges of 2020, we have seen tremendous success and our momentum is building! I want to thank you from the bottom of my heart for your connection, time and interest. Please don’t hesitate to reach out and let me know if there is anything I can do for you personally or professionally.

Signing Off,

Noel