An expert from Marcus & Millichap discusses the importance of taking a strategic look at your current real estate holdings as we approach the end of this cycle amidst the uncertainties of tax reform, rising interest rates and inflationary pressures
By Anthony Hardy (MultiHousingNews.com Article) — Oftentimes small- and mid-market apartment owners are so entrenched in the day-to-day operations and constant challenges that come with effectively operating apartments that they rarely can come up for air to see what’s going on in the rest of the world. In today’s frothy market, savvy owners look to their commercial broker to strategize and analyze short- and long-term opportunities.
A strategic analysis is one tool that allows mid-market owners to get a snapshot of what’s happening, not only from an individual property perspective, but also from a broader industry view.
Features & Benefits
A strong, competitive strategic analysis is more than just sales comparables. It includes a comprehensive evaluation of the portfolio, debt, equity, yield and opportunities to optimize performance. The strategic analysis offers a host of information designed to help small- and mid-market owners make well-informed decisions.
The process begins with the broker touring the portfolio. On-site tours are highly recommended, because even in a virtual era, the hands-on approach gives an undeniable understanding of property condition, operations and community dynamics. Next the owner provides a comprehensive fiscal overview of the asset. Some owners attempt to opt out of the financial analysis by saying they don’t want to waste the broker’s time because they aren’t selling. But, the savvy owner knows it’s not merely about selling; it’s about having a clear understanding of current market dynamics and optimizing ROI amidst the headwinds. It’s critical for owners to know precisely where things stand, especially in a market as fluid as today’s.
The analysis should include rent comparables, area economic and physical vacancy rates. Moreover, if the team preparing your analysis is active in your market, they probably understand some of the challenges you’re facing, such as attracting the highest quality resident pool. He may also be able to share with you some best practices that other owners in similar situations have implemented to overcome those same obstacles.
Other components of a strong strategic analysis include trend reports for your submarket, internal rate of return reporting, debt restricting options and the return on equity calculations.
Inspect What You Expect
Recently while going over the ROI section of the analysis with me, a small-portfolio owner decided it would be prudent to refinance and redeploy some of his dormant equity. This turned out to be a wise decision because he was able to create an effective hedge against inflation and make his money work for him at the same time. During our discussion of the findings of the analysis, the investor discovered that he had about $3 million in equity lying dormant. He decided to refinance and lock in a long-term fixed mortgage and simultaneously redeploy $1.5 million of the dormant equity into a triple net-drug store with an established lease, which could very well produce positive returns through year 2060.
Real estate holdings are usually part of the retirement plan for most small- and mid-market owners. Most people look at their retirement statements at least quarterly, not necessarily because they’re cashing out but because of a desire to “be in the know,” and “inspect what they expect.” It’s not uncommon for commercial real estate holdings such as multifamily investments to contribute to your monthly cash flow and retirement substantially more than the 401K. As such, it just makes good sense to get together with your broker for an hour or two every 12-18 months for this update.
Anthony Hardy is the team leader of The Hardy Apartment Group at Marcus & Millichap, a team of Chicagoland multifamily specialists dedicated to helping clients create and preserve wealth through the timely acquisition and disposition of multifamily properties.