| Market Conditions: A shortage of inventory in the small apartment market in the Fresno/Clovis area has created an unusual market. Prices are very favorable for the investor and interest rates are still low. The problem is finding a quality property. Most of what is on the market at this time is bank owned junk. Be patient and keep looking, the right property is out there.
Property Selection – Apartments:
1) Rent bracket - The vacancy rate is at historic lows. The rental range that I find most desirable is in the $600 to $900 per month range. This means we are recommending older existing units. Newer units now being planned will be built at a cost that will not allow them to compete with the rents of older properties. This means rent competition will be limited to existing properties.
2) Property Location – Rents are increasing and areas that were previously thought of as undesirable are gaining respectability as qualified prospective tenants find it necessary to broaden their searches in order to locate affordable housing. This means we must evaluate each property by immediate neighborhood, not just by what part of town the property may be situated in. Safety and proximity to shopping schools etc are key.
Investment Strategy: Real estate prices in Fresno underwent a 5 year run of price increases followed by an 18 month decline in prices. Therefore as an investor we must look at realistic rents as our basis for price evaluations of most properties. Do a cash flow analysis and price the property to deliver an acceptable cash on cash return. Give your plan 3 years or more to realize the best possible profit.
Financing: One to four units are financed through conventional 75% loans. Five or more units fall into the commercial loan category. Commercialloans are based primarily on the Profit and Loss histories of the properties therefore may require a down payment of 30% - 35% or more. We have ongoing relationships with the most qualified lenders to assist you with financing.
Insurance: This is not as simple as it used to be. Investigating previous claims on the property and shopping the insurance market has become an important part of the overall purchase process.
Price: As discussed above, prices have changed dramatically over a short period of time. We must go back to the old gross multiple and cap rate formulas. A typical 820 sf 2/1 unit will currently rent for about $650 per month. A typical price of two to four units is currently about $65,000 per door. Five or more units will sell for about $60,000 per door.
Amenities: Laundry hookups in the unit, attached garages or carports, garages or carports accessed from the street, two bathrooms, and patio area are considered important.
Management: A majority of those properties on the market, for a variety of reasons, suffer from poor management. This means some changes must be made to realize the greatest return on your investment. An essential part of any investment decision is to investigate the property managers in the area prior to closing escrow on a property and have a game plan with the selected management team in place at close of escrow. I have a personal relationship with preferred property managers and we will assist you in formulating this game plan.
Profit Potential: The market has seen an increase in rents in the 4% range during the last 12 months. I anticipate a sustainable rate of increase in the 4% range into the foreseeable future. This is a best guess based upon population growth projections and household income range projections. I expect to see increased demand from investors to acquire small apartment buildings in the Fresno area. This will cause the gross multiples to increase and cap rates to decrease over time. The investor who gets in early will seethe highest profits.
Cash Flow: See Estimated
Cash Flow of 4-plex, Estimated Cash Flow for 8-Plex and Estimated
Cash Flow for 16 Identical Units worksheets.
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