Apartment Market Digital Spring 2013

Issue 7 • March 2013

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Apartment Outlook

2013 Apartment Investment Forecast - 2013 Evalution of the 2012 Apartment Market Obtaining Multifamily Financing

ALSO IN THIS ISSUE: • Student Housing vs Traditional Multifamily • Supply and Demand in Multifamily Housing • Market Challenges and Hurdles • Effect of Hurricane Sandy on Multifamily Properties • Targeting Seniors for Retirement Communities • Payment Processing • Apartments Amenities of the Future • Real Estate Investor answers questions for investors

Apartment Investment Forecast - 2013 Apartment investment has become popular over the last decade. Investors have opportunities of making big gains.

This is because of the increased demand for apartment living; many people prefer renting a place to live rather than purchasing their own home. When you live in an apartment, you don’t have to worry about the repair; the owner of the complex does all the work of making sure that the unit is in good order.

That is one of the reasons why we have many people preferring to stay in an apartment. Also, for many people, renting is the only option financially pos-

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sible. Furthermore, many people are in the apartment industry due to the high demand for apartments from people who have migrated from rural areas to urban towns.

Many apartments today are built in desirable parts of the town, with access to facilities or entertainment such as movie theaters .The investors who are involved in the apartment building should be very careful in deciding where to invest. The location of the apartment is very important so as to attract many potential home seekers.

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However, there are some challenges which are discouraging people from apartment living today. For example, due to many people living in one building, there can be a lot of noise. People who prefer quiet places would not choose to live in apartments. Today many people have benefited from the discovery of apartments. The investors have been able to gain a lot of profit due to this trend. p

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Evalution of the 2012 Apartment Market The year 2012 registered favorable prices for both the seller and the buyer of multifamily real estate. This was due to the good economic environment that characterized many cities. No matter when or how you want to sell your complex, the strategies you employ must reflect what is actually happening in the apartment market. Although most cities did not experience extreme booms or recessions in the previous year, most properties were sold approximately 20 % faster compared to the year 2010. If you want to know how to set the price for your complex, it is important to consider what factors affected the sales in the previous year. Here are a few tips to

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help you sell your multifamily property with a high confidence level.

Determine whether your city is near recovery.

Though 2012 registered much lower real estate prices, it is expected that these prices are likely to raise a notch higher in the coming years. However, it is important to find out whether your city is experiencing an economic recovery. A good indication of a neighborhood in a recovery state may be the rise in local employment. With good recovery you can have your complex sold for a good price.

Understand the buyer’s psychology Sellers are not the only people who have been affected by the bust. Buyers also find themselves scared of having to overpay for a property. However, many have now adopted a different strategy, whereby they will actually start to bid at a very low price: around 15 % below your listed price. It is advisable to be cautious when dealing with such buyers, as they may easily convince you to sell your complex at a much lower price.

Hold firm to your listed price. p

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Obtaining Multifamily Financing Multifamily financing refers to funds that are given to help people in financing a purchase, construction or renovation of a multifamily housing unit. The loans are usually given to people who want to develop a property. The loan application process is a bit detailed and stricter compared to other loan application processes. In multifamily financing, the lender defines a multifamily unit as a building that houses five or more families.

Mortgages on these houses are financed for a minimum of forty years and the loan is approved for ninety percent of the property’s value. Once a property is selected the corporation begins the

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application procedure for loans that will cover the mortgage. The applicant fills out forms to get 90% of the total financing and pays for the remaining amount as a down payment. This loan type can be secured from either a private or a public company.

The different types of loans offered for multifamily purchases include; · Large balance loans · Small balance loans The large balance loan covers a loan application above five million dollars while the small balance loan covers between $500,000 and five million.

Multifamily loans are not restricted to

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purchases of new property. There are certain cases that the loan can be used to refinance a property and that occurs when its equity is more than or equal to the mortgage amount. Loans for refinancing usually cut down the rates of interest on a mortgage.

Taking out this loan is a lot of work but it is worth it in the end. One requires to produce a lot of documents such as budgets and the repayment plan for the next thirty or so years. In the long run you will be able to do renovations on your building and attract more tenants. p

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Student Housing versus Traditional Multifamily Student housing is property owned by schools designated for resident students. Mostly this type of housing is offered as dormitories. Student housing is typically found around colleges and universities. They offer an advantage to students due to their proximity to the schools. Some towns around schools have customized their homes and lodges to offer alternative accommodation

to students. In some schools, it is compulsory for freshmen to stay in dormitories at least for their first year.

A traditional multifamily home is a housing structure built for more than one family to live in. It has separate accommodations. There are mainly two types of multifamily homes; duplexes and apartments. A duplex is just two single-family homes only sharing a wall.

Both sides have a similar design and each appears as a mirror image of the other. While duplex is a common type of multifamily home structures, it may also be extended to triplex or fourplex which house three and four families respectively. A multifamily home usually gives a good bargain for those looking for cheap housing. p

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888-441-7355 Publisher Darrel Dickson Graphic Designer Andrea Coulter The statements and representations made in the news articles contained in this publication are those of the authors and as such do not necessarily reflect the views or opinions of PPI Creative.

The Apartment Market - Digital is produced monthly and is published by PPI Creative An Oregon Corporation.

PO Box 30327 Portland, OR 97294-3327.

(503) 221-1260 • (800) 398-6751 Copyright 2012. All rights reserved.

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Supply and Demand in Multifamily Housing

When the economy took a downward plunge in the past few years, multifamily housing demand went up. The market trends changed, and people started favoring other means of acquiring new homes.

This trend has continued in the year 2012 in some regions, and sturdy growth is to be expected in 2013. In the past year, the demand for apartments was much higher in some metros, while others still struggled slightly.

Though not all metros in the whole United States witnessed a leap in multifamily housing, there was a leap that

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cannot be ignored. The year 2013 will build on this leap. Since homeownership rates might remain to be on the low, this single family and multifamily rental market will have no option but to expand and accommodate the overflow.

Current demographic trends coupled with economic forces push families out of owning real time expensive homes and cause them to settle for smaller, cheaper, and working solutions at least for a while. With all the factors favoring this field, the demand for multifamily houses is expected to be high not only

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in the year 2013 but through to 2015.

On the other hand, supply for all this demand might falter some bit, but this is not something that investors will let go on for a while. Economical analysts believe that entrepreneurs will be more than willing to take loans and dive deep into the business of churning out new apartments and housing units. The demand will be high, the supply will struggle under the load, but not enough to push the prices far beyond the common citizens reach. p

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Market Challenges and Hurdles It is a great time to invest in multifamily, but investors and owners may face several challenges in the year 2013.

It is important for apartment owners and investors to take note of these challenges. • Competition for acquisition: In some cities, the apartment market is very active. The number of renters is high, and many players in the apartment market have responded to this de-

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mand. As an investor, it may be difficult to acquire your desired property and still be able to offer an affordable rent. • Obtaining financing: Along with the competition for acquisition, there may be competition for obtaining multifamily financing. If you are planning to remodel an apartment complex, it may be wise to plan for rehabilitation that is economical. Some inves-

tors obtain their desired properties, and plan to obtain financing for rehab later on.

With careful planning, market challenges and hurdles may be overcome, and the apartment market could be your greatest investment in the upcoming year. p

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Effect of Hurricane Sandy on Multifamily Properties Hurricane Sandy blew through the north east and left a trail of destruction in its wake. Many were killed and property was destroyed. The multifamily housing industry was affected strongly, as most areas were flooded and many housing units were left with no heat and power for more than a week. However, this housing industry is headed for normalcy once again as it has begun to recover.

The multifamily industry is slowly taking steps in the right direction toward recovery. Before the storm hit,

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the industry had a strong offense. For instance, some staff members were trained on how to handle emergency situations. This was, however, not enough, as they also experienced damage and suffered as much destruction as everyone else on their property.

The construction teams that were supposed to start working on new buildings could not because they had to repair the damage caused by the storm.

This stalled progress and also led to loss of money, as a lot of it was used in the repairing process. Wage rates also went

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up because there was a shortage of expertly trained crews; this led to more money wastage.

Tenants kept staying at the premises after repairs were done. This means that the multifamily industry did not lose more money by losing renters.

The reason that many tenants stayed is partly due to the fact that housing in the regions that were affected is in high demand and they were not likely to find a similar place. p

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Targeting Seniors for Retirement Communities As people grow older, their ability to move around decreases and they get bored easily if they live with their children who are rarely home due to work or school commitments. Elderly people who are staying alone all day often consider retirement communities and senior living apartments. They will have to decide where they want to live, for instance, they might choose areas with an appealing climate. There are different communities for retirees, such as • Alzheimer’s care communities • Nursing care communities • Active retirement communities

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The amenities are also important. So apartment owners have to include elevators for those with knee problems.

Wide hallways to facilitate for wheelchair movement are also another thing to consider when building retirement homes. Communities that offer active lifestyles are preferred by some people because they keep them occupied. The activities may include golfing, swimming and many others. They are good for exercise. Shower chairs might also be useful for people on wheelchairs.

Overall wheelchair accessibility is also preferable.

Safety is paramount in retirement communities. There should be security personnel around the clock to keep the tenants safe. Locks on the main doors can also be a great indicator of a safe community. Another thing to look out for is staff friendliness. They will want to stay in a place where the staff is helpful and kind. Ask the other retirees living in the community whether the staff members are friendly and also observe how they interact with one another to get a clearer picture. p

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Payment Processing Multifamily housing units are a good investment because they generate income for the owners. There are various ways of paying rent and the method used depends on you, the apartment owner. The payment processing methods are varied according to convenience and simplicity. Here are some of the available payment processing methods; Check It is a very common payment option because all the tenant does is sign the check in the required amount to property management. Organized people like to pay rent via check because all they need to do is keep tabs on their bank

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balance and pay their rent when it is due. Payment by check is advantageous to owners because it is hassle free.

Money orders Money orders assist forgetful or busy people to avoid overdraft problems involved with check payment. They look like checks but they are a representation of cash. However a money order payment is almost like a cash payment in that it cannot bounce. This method is better than check payment because once the home owner receives it; it is like having cash in hand. The only drawback would be if lost, the process of getting the money back is harder.

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Online payment Your tenants can also pay rent using credit cards or by automatic bank withdrawal when they use online payment methods. It is a very convenient method for both the tenant and the apartment owner. The funds are deposited directly into your bank account. This method requires you to set up a website that tenants can visit when they need to pay rent. Once the tenant sets up an account, they can deposit funds monthly when their rent is due.

All the above payment processing options have their own advantages but the most convenient option for owners is online payment. p

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Apartments Amenities of the Future

The future will likely bring many changes to the way we live our daily lives. In the near future, the needs people rate as basic are going to morph and grow exponentially, and so will desired apartments amenities of the future.

One mandatory need in the future will be internet connectivity. Many of the gadgets at your apartments may soon need updates and instructions

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streamed in through the internet link or will need some mode of inter connectivity to work.

The electronic gizmo trend does not stop here. Future apartment amenities will also demand that some extra fittings be put in place to ensure that electronics work efficiently.

Since most of the new amenities will probably depend on electricity, ensur-

ing that there never will be total power outages is another thing that future apartment designers should always have in mind.

Your grandchild’s apartment will not be like yours today; it will be different.

Most of these differences will be born of the current rigorous electronic gadget and internet implementation innovations taking place. p

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Real Estate Investor Answers Questions for Investors Darrel Dickson of ApartmentsForSale.com and Preferred Capital Management, Inc.

What about the industry has changed most since you started your career?

When I started in the business in 1987 interest rates were substantially higher than what they are today. Right now interest rates on 30 year amortization on a Market rate deal are about four and a half percent fixed for ten years. When I got started in the business it was in the 7-8% range for a ten year fixed rate loan.

Therefore if you can find an apartment building that is well priced you have a chance to make greater cash flow.

There is a large demand to receive a stable return on investment from investors. Many are starved for cash flow.

Currently investors are getting almost nothing on bank certificates of deposits. When I started go started in this business interest rates on bank certificates of deposits were much higher. The returns through CDs at banks are currently close to zero. Investor can receive 5 to 10% steady cash flow in through owning apartment building.

Investors will seek to deploy capital aggressively in the real estate considering the sustained low treasury rates that are available.

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What do you perceive for the economy in the next year so?

How will this affect the industry?

Powerful demographic and economic trends will continue to strengthen the apartment market. The apartment market is in the fourth year of an increasing demand for rental units.

The US vacancy rates was at 4.3% in 2012 which is resulting in a projected 4-5% rent growth nationally in 2013.

The oldest echo boomers turn 28 years old and have created a significant number of new households over the next few years additionally there’s approximately 1.2 million to 1.6 million immigrants that will arrive annually through 2017.

The unique demographics of increased Echo boomers as well as new immigrants looking for new rentals will put pressure on vacancy notwithstanding the increase in supply of rental units.

Between 2005 and 2010 the number of 20 to 34-year-olds living with parents increased 600%.

As the job market improves these young singles living with parents will be looking to exit from living with their mom and dad and get an apartment.

The economy is clearly one of the most important topics of conversation and concerns.

How is the economy affecting the multifamily rental housing industry today?

The home ownership percentages since 2006 in the United States are as follows:

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2006: 68.9%, 2007: 67.8%, 2008: 67.5%, 2009: 67.2%, 2010: 66.5%, 2011: 66%, 2012: 65.5% The percentage of a home ownership has consistently dropped annually since 2006.

Every 1% drop in housing ownership represents approximately 1,000,000 new renters.

Another reason that multifamily properties have been doing well is that there are fewer homeowners and more renters.

The market for multifamily housing construction will remain strong in 2013 according to the NAHB. NAHB chief economist David Crow estimated that there would be 299,000 new multifamily residential units built in 2013. He said that this is still considerably less than the 350,000 units the required to keep up with the demand and supply imbalance.

The Cost of materials and labor make it unfeasible to build in certain areas.

Also there are financing hesitations on the part of some lenders to build new construction multifamily which makes it difficult in some circumstances. The demand for multifamily units will continue to remain strong.

Multifamily assets remain have the highest occupancy rates with the most aggressive rent growth and are the easiest to finance. These are all compelling reasons for investors to continue to invest in apartment buildings in 2013.

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Real Estate Investor Answers Questions for Investors Continued from page 12 What you feel are the most important things to consider when hiring a vendor for your business?

First look for someone that is concerned about doing the right thing for the property. Our management company looks to get three bids prior to hiring a vendor. We want to make sure that our vendors are providing work that has been competitively bid. Our management firm I also look to make sure that our vendors have good insurance and name our company and the apartment building as an additional insured. Good references from satisfied customers are important, as well as the knowledge to do what is right for the building, and the tenants.

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Generally speaking what two or three pieces of advice would you give to a room full of investors?

Look to invest in markets where there is something significant going on for example major job and growth population growth and revenue growth are important to add value to a multifamily investment property. Secondly look to obtain long-term fixed-rate financing at low rates. Third look to buy well below replacement cost in well located areas.

And fourth make sure you do your due diligence very well prior to purchasing a multifamily property. Some of the best deals you do are the deals you don’t do.

If you don’t have the time to manage your own property you will want to consider developing opportunities with

sponsors who have a proven track record operating multifamily properties.

For small independent owners do you suggest self-managing or hiring a property manager?

If you or your wife has the time you can do the property management and save a lot of money. However if you are busy executive and you don’t have time then really you want to find a property manager. It makes sense to have a property management that has a significant investment in the property so that your interests are aligned.

Written by Darrel Dickson of Preferred Capital Management, Inc. and ApartmentsForSale.com in March of 2013.

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