Broken Arrow Holding
Seeing many scenarios of 4-plexes selling in the same price range as 5-plexes given the availability of 30-year, fixed rate debt (and likely better rates).
The 4 to 5 unit hurdle is what largely separates the owner occupant from the professional operator.
Sourcing commercial debt is much more complex than residential, creating higher barriers to entry and ultimately less (emotional) demand for these assets.
People are willing to pay up if they plan to live in the property.
Things we’re always careful of within our general due-diligence process:
-Future tax assessments
-Potential of rising insurance costs
-Bad corridors within otherwise good neighborhoods (crime, noise, traffic)
-Environmental issues (was the neighboring property once a gas station?)
-Encumbrances
-Un-permitted renovations
-Shared utility meters
-True rents vs. projected rents (numbers need to work with the current market rates)
-Building materials and remediation costs (lead paint, asbestos, cast iron, knob and tube)
-Depressed pockets of land (that become the run-off sight for your neighbor)
-Contingencies (never know what’s behind those walls)
-Current and pipeline of inventory around the asset
-Property's ability to withstand a ~20-25% decrease in gross income
There are many ways to create or source value in the real estate sector, but I believe that whatever work you do will be amplified if you’re in desirable locations.
From our experience, everything is easier when you’re in A class neighborhoods.
The locations with nice amenities are generally the priciest and where people want to live.
The tenant base is largely high credit and generally hold some of the highest paying jobs in the market.
A higher credit tenant based generally implies they are responsible people who will (hopefully) treat their units well.
Going a step further, you generally have more pricing power given the increased demand for good locations when compared to B/C areas.
Rent rolls reflect this over time depending on the supply constraints in the area, which is why we seek out areas with high barriers for development.
If it’s hard to add new inventory into an area that people will continue to seek out, signs point to growth over time.
On the flip side, desirable locations also attract more investors and ultimately create more competition that can drive up prices.
Sometimes you can rip a good deal, sometimes you’ll be getting outbid and shocked after you project the other buyer’s returns.
We’d prefer to sacrifice scale and transact less if it means we can own in the best locations.