BACKGROUND

In today's turbulent and uncertain economy, many individuals and institutions are finding real estate to be a particularly interesting investment sector. While this is scarcely a new phenomenon, participation in this market sector has been increasing significantly.

One attractive strategy is the ownership of moderate and moderate-lower income multi-family rental housing situated in primary and secondary urban centers — ownership of established properties with verifiable earnings records. Professional property management is a critical element of each facility. This strategy is based upon the continuing shortage of good housing in these income brackets and areas as well as a history of low vacancy rates.

A MULTI-FAMILY REAL ESTATE STRATEGY

An attractive strategy is direct ownership in forthcoming real estate acquisitions — 10 up to 100+ units. This may be appealing for an individual (or perhaps an affinity group, e.g., family members or professional colleagues) seeking direct ownership in a multi-family (apartment) facility. The experience of many has been that a prudent direct multi-family property can yield more attractive operating as well as long-term returns than alternative opportunities.

Unless one has both strong experience as well as adequate time to search for, undertake the often-extensive "due diligence," and subsequently manage this kind of investment, it is prudent to work with a seasoned associate. A knowledgeable multi-family real estate strategy will encompass:

   Ongoing searches to identify possible real estate acquisitions that appear to be stable and attractively profitable.

   Once an attractive real estate acquisition is identified, an objective financial and marketing analysis is undertaken to eliminate any potential acquisition that fails to meet your "hurdle" performance criteria. Depending upon your preferences and goals, current criteria generally seek cap rates of not less than 8% and "cash-on-cash" returns of not less than 12%, loan-to-value (LTV) ratios of 70% to 80% (depending upon whether recourse or non-recourse financing is used), and debt service coverage of at least 1.25.

   Following an acceptable analysis, a Limited Liability Company (LLC) will often be established to ultimately take title to the property. One's seasoned associate may be designated the Managing Member of the LLC, i.e., acting as "project manager." If consummated, the individual owners(s) will participate in the net income of the project in conformance with a stipulated schedule in the Operating Agreement of the LLC. This Operating Agreement will also address other issues such as exit terms to meet the goals of the owner(s).

   The LLC will then present an Offer and undertake the subsequent "due diligence," e.g., professional property inspection, professional appraisal, title search, ASTM E-1528-00 Environmental Transaction Screen, and lead paint and asbestos inspections, if required.

   The satisfactory completion of "due diligence" will lead to the anticipated execution of a Purchase and Sales Agreement. If the due diligence examination uncovers problems or deficiencies that cannot be cured, the negotiations should be terminated.

   Following execution of the Purchase and Sales Agreement, negotiations will be initiated to secure the mortgage financing meeting the individual or institutional owner's financial goals.

   All due diligence analyses and reports are made available to all participants to facilitate timely decisions.It is desired that all negotiations move expeditiously. This is almost always in the best interests of the Buyer and the Seller.

   All conditions of the transaction, viz., terms, interest rates, amortization, and payment schedule, are to be designed to meet the individual or institutional owner's financial goals.

   While understandably subject to the constraints of the Seller, the target is to complete a transaction within 60 to 75 days of the initial commitment to proceed.

OTHER OPTIONS

In lieu of the strategy summarized above, a prospective investor may prefer a very different kind of ownership in forthcoming real estate acquisitions to meet their individual or institutional goals; e.g., a private real estate syndicate, a limited partnership syndicate, tenant-in-common (TIC) agreement, or a real estate investment trust. In many cases, §1031 tax-deferred exchanges are to be accommodated.

AVOID INVESTING FADS

Disappointments and uncertainties in the securities markets over the past five years have driven many investors into the appealing characteristics of real estate markets. However, markets are always changing. Today, with much more money chasing real estate investments, many professionals feel important sectors of the real estate market are fully-priced — perhaps over-priced. There are always good investment opportunities, but these are more difficult to find in 2005 than they were just a few years ago. A real estate acquisition is not a sure fire winner! The best advice to the real estate investor is to be very cool, never become enamored of any possible acquisition, work the numbers dispassionately, and team up with an independent associate with a strong track record. Of course, this is the best advice in any market!

——————

Thomas A. Faulhaber
Harrison Company, LLC

Email: harrison@businessforum.com

227 Fuller Street
Brookline, Massachusetts 02446.5757 USA

Telephone: 617.232.6596 — FAX: 617.232.6674

URL: http://www.businessforum.com/hc.html
Revised: January 4, 2005 TAF

© Copyright 2005 Harrison Company, LLC, All Rights Reserved.

 

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