Buying, Selling and Holding Apartments at the Top of the Market
Commercial Real Estate
August 1, 2019
Associate Broker, REIM
The Phoenix metro area has experienced ten consecutive years of overall positively trending metrics including property appreciation, increasing rents and record sales driven by growth in population, corporate investment, and employment. The big question in front of us now is how long will this positive momentum last? Some economists speak of softening in established US markets like New York, Chicago, and Los Angeles, however, the Phoenix MSA is still going strong. This could be because we were the first to go down and one of the last markets to fully recover. Or maybe we learned our lessons from the last crash, and we invested properly this time. Either way, if you are careful with your investing, you will probably be successful in the long run.
Before investing in a property, know your exit strategy. If your goal was to buy and sell, you may want to consider selling now because we are in very strong seller’s market, and as previously stated, no one knows how long that will last. My philosophy is and always has been, sell a year early rather than a minute late. Depending on the property’s location, condition, and cash flow, it may take longer to sell. If the plan is to sell sooner rather than later, present economic conditions are ripe for a divestiture.
Perhaps you are considering purchasing in this market today. If so, be aware it may be challenging. Buying in a “seller’s market” has some built-in challenges (overpricing). The key is to understand current metrics as well as your appetite for the deal. Examine similar properties for a solid understanding of realistic cap rates and ROI for your investment. A 5% cap rate today has merit if you understand the context of the asset relative to your overarching investment goal. Typically cap rates reflect risk. Also, if you just sold a property, it may make sense to do a 1031 exchange to delay the tax gain. Value add, turn-key, and short or long term holds still present solid investments in this market, however it takes more time and due diligence to ensure a good buy, so do your homework.
Choose a property in a well-established area or transitioning location. In terms of condition, find a property that has good reposition potential or has already been rehabbed. In particular, the most attractive are properties that potential renters will find desirable and offer stability in the future. Finally, make sure
that you do a thorough review of the financials on actual numbers, not proforma. Many opportunities today present proforma “future” stabilized operations. Be mindful that to reach these proforma figures and their promised pot of gold, you will likely be required to devote time and additional capital to achieve solid operations. Your lender will include all of these factors in their calculations, so ensure you do so too.
In summary, Phoenix continues to present solid growth that underlines an appreciating market. Savvy investors stay alert to some flattening trends on the horizon. Since interest rates are still low, it may be an opportune time to decrease any leverage to make sure you are in a safe position should there be a correction. If you are considering selling your apartment investment, do it now. If you are looking to buy, take care to perform proper due diligence. Wishing you continued success with your real estate investments.