January 1, 2008

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The Multiplying Effect

Multi-family Housing Offers a Hot Property for Savvy Investors

Heather Stewart

January 1, 2008

Stocks, bonds, gold, startup companies, racehorses: Investors have a tremendous variety of places to plant their money and (hopefully) watch it grow. One often-overlooked investment option in the real estate market is multifamily properties, which can offer a steady stream of income or, in some cases, fat profits. “Making an acquisition now is going to be the best investment over the next three to five years,” predicts Kip Paul, a Commerce CRG broker who specializes in multifamily dwellings. Why? The market in Utah is hot, especially when compared with the surrounding region. Demand for apartments is high, as is demand for reasonably priced condominiums, and that demand is not projected to subside any time soon. But apartments and condos are two very different animals. Each is affected differently by the same market conditions, and each entails a distinct investment strategy. No Vacancy “Multifamily is a robust, high-demand segment of the market,” says Paul. Apartment rents are rising in the Salt Lake area, making it an ideal owner’s market. Over the past year, apartment rents have risen nearly 12 percent in Salt Lake, according to a Commerce CRG report. The average rent for all types of apartments is now $728. And Paul projects that rents will continue rising due to a number of market factors. “Tightening mortgage rules are keeping renters in the rental pool,” he explains. Families that last year might have been able to become homebuyers are now subject to much stricter mortgage requirements. Further, construction of new apartments is minimal because the Salt Lake Valley has little available land that is zoned for apartment buildings. Each year, the market sees a miniscule 1 percent increase in supply due to new construction. All of this has dropped the rental vacancy rate to 3.2 percent, and “anytime the vacancy rate is below 5 percent, you’ll begin to see rents increase dramatically,” Paul says. “I am very pleased with the growth in the [Salt Lake] rental market in the past 18 months,” says Martin Barkan, an active real estate investor based on California. Barkan entered the Utah market about four years ago because, he says, it has the qualities he looks for: appealing economics, significant population growth and strong employment numbers. “Salt Lake was a market with opportunity, a stable market I could see myself as a long-term investor in,” Barkan says. Indeed, about 50 percent of Paul’s clients are out-of-state investors attracted to Utah’s strong market. So you want to get into the game? “Buy quickly. Buy now,” advises Paul. But understand, apartments are typically a long-term investment – unless you intend to flip the property by fixing it up and reselling. Apartment buildings offer a steady revenue stream from rents, versus the relatively quicker return on investment offered by developing and selling condos. When investing in apartments, the first issue to consider is whether to build new or buy an existing building. Construction costs add to your overall expenses, explains Paul, meaning it will take longer to recoup your investment in rents. On the other hand, an older building may require significant repairs and present more maintenance challenges. “Buy as good a quality project as you can,” he advises. “It will bring in better tenants, and you’ll have fewer management issues.” On the Market Apartments and condos face very different market conditions. When condos are selling well, apartments may languish. When condos become priced too high for the average buyer, apartment vacancy rates go down and rents go up. However, both the apartment and the condo markets are affected by the single-family home market. “If single-family homes get too expensive, condos become more attractive, and that has started to happen in the Utah market,” says Kevin Rowe, president of Jones Waldo Holbrook & McDonough and a specialist in real estate financing. Condo prices are rising as well. According to a report compiled by NAI Utah, condo prices in southern Utah began rising dramatically in 2005 and peaked in the first quarter of 2007 at an average of about $220,000. Neil Walter of NAI Utah offers three pieces of advice to new condo investors. First, don’t pay too much for land. If you pay a lot for property, and the market shifts, you could be stuck with an overpriced piece of land. Second, make sure the land is zoned for multifamily development. “Just because it’s in a good location, it doesn’t mean the city will allow you to develop there,” he says. Finally, do your research on impact fees. Cities – particularly in southern Utah – are steadily increasing the impact fees on residential dwellings. “Often, the impact fee for a single-family home is the same as the fee for a single condo unit,” he says. In a large development, those fees add up to a big fat bill. Additionally, Walter says, “Investors need to recognize that they need to be patient.” An excess of condo inventory on the market is beginning to deflate prices a little bit, especially in southern Utah. “It’s not as good as investment as it was, but compared with other housing products, it’s still an attrac-tive investment.” But the biggest piece of advice for new multifamily dwelling investors? Hire a knowledgeable broker or financial expert. “Multifamily is its own special world,” says Rowe. This type of investing “is not something you do unless you’re a sophisticated investor and know what you’re doing.” Investing in real estate of any kind requires a great deal of capital and a great deal of patience. “But if you sit on the sidelines,” says Paul, “you’re never going to get into the game.”
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