Real Estate Investment Outlook April 2019

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The Cal State Companies:  Center for Real Estate Studies ¨ Cal State Properties ¨ Cal State Investment LTD Partnership

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Real Estate Investment Outlook April 2019

             Los Angeles, CA. Economic growth in the US is expected to decline to around

2 ½% in 2019. With the waning of fiscal stimulus and the impact of trade tensions, it appears that real estate investments could take a hit.

            It is estimated by the International Monetary Fund that the impact of fiscal stimulus in the US on GDP growth is shrinking from approximately 0.8% in the first quarter 2019 to 0.1% in the fourth quarter of this year. According to the US Bureau of Economic Analysis, US manufacturing started to decline in late 2018 and continued to weaken at the beginning of 2019.

            The benchmark of stable inflation is the US non-accelerating inflation rate of unemployment. Should the unemployment rate fall below this rate, inflation is expected to rise. In the US, this rate is estimated to stand at 4.5%, according to the Federal Reserve Bank, thereby possibly causing an adverse effect on real estate values. This rate exceeds the current unemployment rate by around 0.5 percentage points. Whether this gap is strong enough to cause wages to rise significantly and pass through to price inflation is an open question.

             Should the US economic recovery start to come to a standstill, the Feds may be inclined to stop the tightening of bank liquidity. As long as inflation remains below the policy target of 2%, it is expected to maintain the current policy stance. Investment conclusions and implications for real estate investments are influenced by the outcome of inflations policy target and trade negotiations.  Although there is uncertainty about the outcome of trade negotiations between China and the US, we expect that real estate investment values will change very little.

            Deloitte reports that multifamily apartments continue to be a preferred property type for investors with a steady outlook for fundamentals and cap rates. Annual effective rent growth is forecast to inch up slightly to 3.1% in the second quarter of 2019 and then start to gradually decline to 2.1% by 2Q 2021, according to RealPage.

            Despite what could be a peak year for completions, the outlook for the apartment market appears to be steady in the short term. The new supply of apartment units has increased every year since 2011 with an estimated 314,747 new units expected to come online in 2019, according to RealPage.

          Potential challenges ahead could include the steady pipeline of new development. So far, demand has remained strong. However, if demand does shift with more renters moving into homeownership, it could have a major negative impact on the sector.

            As reported by Dane Bowler, 2nd Market Capital Advisory specialist, the multifamily sector looks good structurally and fundamentally. It has been boosted in recent years by the shadow supply reduction of Airbnb. We see the primary risks being economic downturn and some sort of regulatory legislative crackdown on Airbnb. Most investors are aware of the implications of Airbnb on hotels so that sector would react immediately to big news, but I think the ties to apartments are less well known so there could be an opportunity to get out after the news, but before the price reaction.

ABOUT THE AUTHOR: Eugene E. Vollucci,  is considered to be one of the foremost authorities on real estate taxation and rental income investing and has authored four books in these fields. He is the Director of the Center for Real Estate Studies, a real estate research organization. To learn more about the Center for Real Estate Studies, please visit our web site at http://www.calstatecompanies.com

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The New Approach to Investing in the 21st Century

Research:  Decreasing the Group Size Making the Second Move

The time was ripe to make the second move on our quest to become millionaires. The proceeds from the first sale were traded, into another property. By keeping up with the research, we knew exactly where to purchase the next apartment building.

Since we did so well on our first move, we were able to make the second move with a smaller group of investors.  

Our second move involved a property that would require a $175,000down payment. Consequently, we needed only half of the original group to reinvest in the second property since each of the original investors now had $35,465 instead of the original $6,000. So, with a group of five members we made our second move.

Using our Research Report, Market Cycles, we discovered that Boston, Massachusetts, had the profit potential we were looking for.

As with the Phoenix area, market conditions indicated that seller financing was available in Boston. There were many different types of financing packages to choose from, but our cost analysis pointed us to seller financing. In fact, seller financing is usually the most economical method to use.

The availability or lack of seller financing also gives additional clues as to current market conditions. While seller financing indicates a “soft” real estate market where buyers can make good deals, the lack of seller financing indicates a “hot” market. Since a hot market is one that favors the seller, it usually means that the seller can maximize profits.  A hot market is a good time to sell real estate, but not a good time to buy.

Our second apartment building was purchased for $1,750,000. Our group had five investors, each contributing $35,000. The $175,000 pool was then used as a 10 per-cent down payment on the property.  

The total number of units in the complex was based on the total square footage and the unit mix to yield 44 units. The most desirable unit mix for this area was three to one.  

The first trust deed was 70 percent of the purchase price. Seller financing amounted to 20 percent; therefore, only a 10 percent down payment was required.

Operating income and expenses per square foot were compared to those published by both local real estate associations and IREM. Local property management firms were consulted to evaluate operating conditions, assist in the estimates, and verify ratios.  

Gross annual rental income was derived by multiplying the average rental rate of $8.01 per square foot times the total square footage of 32,258 square feet, for a total of $258,387. Per IREM’s reports, projected annual expenses of 35 percent of gross income were broken down as follows:

 Sales conditions in Boston were very good. The recent drop in the vacancy rate drew many sellers back into the Boston market. It was definitely the right time to sell.

A selling price of $2,325,000 was calculated by multiplying the total square footage of the property (32,258) by the selling price per square foot of $72.13, as listed in the National Real Estate Index for Boston. Total cash flow from the operations of the property combined with the equity from the sale yielded a total of $740,574 as of December 31, 1987.Since there were now only five investors in our pool, each investor netted $148,115 for each $35,000 invested. This represents a return of over323 percent, or approximately 162 percent per year.

At the end of the second move, some people might be tempted to stop here, count their winnings, and leave the real estate game. For those of you, who wish to make the last move and gain real financial independence, please follow along next month for part 6.

ABOUT THE AUTHOR: Eugene E. Vollucci, is a real estate advisor and Director of The

Center for Real Estate Studies, a real estate research organization in Torrance, California and co-author of "How to Buy and Sell Apartment Buildings" Second Edition (John Wiley & Sons, 2004).  To obtain more information about Center for Real Estate Studies, please visit our web-site at calstatecompanies.com

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The Cal State Companies:  Center for Real Estate Studies ¨ Cal State Properties ¨ Cal State Investment LTD Partnership

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Is Real Estate Worth the Investment?

           

            LOS ANGELES, CA. Years ago, I discovered that real estate was the best investment to control risk and create wealth. The Real Estate Digest reports that seven out of ten millionaires made their money in real estate, and Forbes magazine states that there is a three times greater chance of becoming wealthy through real estate than with any other type of investment.

Using Real Estate Investing to Control Risk

            Real estate allows you to control your risk because you can actively participate in the decision-making process. Passive investments such as stocks don’t give you this opportunity. Movements in real estate values are less erratic than in the stock market. Most people don’t understand the economic forces influencing the market. Since real estate is less volatile, it’s easier to control and to understand.  Real estate is tangible. You can touch it, you’ve been exposed to it all your life, and you can identify with it. As a result of this familiarity, you are better able to understand it. 

Effectively Reducing Your Taxes

            Real estate ownership continues to be the most popular form of investment because of its potential for substantial tax savings. Since you are able to actively participate in the management of real estate, the Internal Revenue Service (IRS) currently allows qualifying individuals to write off up to $25,000 per year against salary and other income. No other investment gives you this capability. In addition, you can defer paying income taxes on profits indefinitely by using tax-deferred exchanges. 

Leveraging That Works

Real estate is the only major investment that gives you the ability to acquire ownership with very little money down. This degree of leveraging allows you to amplify profits by using other people’s money. The more assets you are able to control, the more opportunities you have to succeed.  The degree of leverage is calculated by dividing the total purchase price of the property by the amount of funds used to purchase it. Thus, if a down payment of $10,000 plus a $90,000 loan is used to purchase a property, a 10 to 1 leverage ratio has been achieved.  The greater the leverage, the more equity will increase with the change in value of the property.

Residential Income Properties

            In the past 20 years, residential income properties have delivered the highest average total investment returns of all real estate types. With a built-in hedge against inflation, it’s no wonder that residential real estate has out-performed all other types of real estate investments with relatively low risk. Based on supply and demand over the next 10 years, residential income will out pace all other types of real estate investment. Strong demographic and financial indicators along with changing lifestyles should continue to positively influence residential income investments. 

Residential Real Estate Investing’s Three Advantages

1.      They are less dependent on business cycles for occupancy than any        other type of real estate investments. It doesn’t matter if interest rates                and home prices are high or low, residential real estate investments are generally more affordable.

2.       They have shorter leases; thereby offering greater protection          from inflation than the long-term leases associated with                         commercial properties. Rents can be negotiated more frequently.

3.      The pool of tenants is much greater for them than other types of                  properties. This ensures a more consistent occupancy than industrial             or commercial properties, which usually have only a few tenants to           choose from.

Real Estate Investments as a Shock Absorber

            Real estate generally outperforms equities because of its higher yields, greater price stability, and downside protection even in a recession. When stock markets are down, real estate investments hold value and produce a positive return. Real estate is less prone to booms and busts. Residential income real estate is now stronger than it has been in many years. 

ABOUT THE AUTHOR: Eugene E. Vollucci,  is considered to be one of the foremost authorities on real estate taxation and rental income investing and has authored four books in these fields. He is the Director of the Center for Real Estate Studies, a real estate research organization. To learn more about the Center for Real Estate Studies, please visit our web site at http://www.calstatecompanies.com

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