As investors , we typically want to find a great partner — someone who has a track record , aligns culturally with us , and has the same views about how we ’ re going to operate it as an investment . Obviously , the first thing we are looking for is the right property — I mean , it ’ s got to make sense financially . But secondly , who ’ s going to be our partner ? Who ’ s going to be the day-to-day person running that property , ensuring that the property ’ s being properly managed , and doing all the right things for the tenant and our investors ?
CIRE : IN THE AFFORDABLE HOUSING SPACE , DO DIFFERENT DEVELOPERS AND INVESTORS FOCUS ON CERTAIN PRICE POINTS ? DO THEY SPECIALIZE IN A SPECIFIC SLICE OF THE MARKET ?
JACKSON : You do have companies that are focused , for example , in the [ U . S . Department of Housing and Urban Development ] space , which typically has long 35-year mortgages . That space can be appealing to certain people . And we don ’ t see a ton of overlap between that and those dealing with market rate properties .
But specifically to a price point , you have to differentiate a bit between workforce and affordable housing . It ’ s a little nuanced . Workforce housing is simply a designation that says the average median income in this particular MSA is $ 45,000 , for example , so you ’ re renting properties to somebody for 50 percent of their take-home [ after-tax ] income . This type of housing puts the renters into a bucket that we see as workforce housing .
When a percentage of someone ’ s overall take-home income is allocated to a place to live , that ’ s the governor on how much you can charge for rent . If you ’ re a landlord wanting to increase rent by $ 100 a month , you often can ’ t . Your average tenant is saying , “ Hey , I ’ m already at my limit . I ’ m not willing to have ketchup sandwiches twice a week to pay higher rent .” As a property owner or landlord , you don ’ t have the luxury of increasing rent as much as possible . Tenants just don ’ t have the money . Wages , also , are not growing at such an exponential rate historically that allows them to absorb the rent increases .
Operators in this space have to be very mindful of how they run their business . They need to be efficient because raising rent by $ 20 could be the difference between keeping your tenants and not . You have to be focused on your costs to be appealing in the marketplace . There are specialists in this area , and a lot of advantages come with scale . You can find yourself squeezing out a bit more profit than a smaller company that only has one or two properties . Larger operators can pool resources , whether it ’ s maintenance or other costs , and that ’ s an important advantage when you ’ re trying to maximize efficiency . As an example , we have a client that has a huge portfolio — hundreds of millions of dollars — and his whole business model is buying properties that need a substantial facelift , rehabbing them , and putting tenants in there . He never wants to sell . But he operates at such a scale that he can buy 500 ceiling fans or 1,000 lighting fixtures . That saves money but it also makes it easier to service apartments going forward . If a tenant has a problem with a microwave , he knows it ’ s the same model in every unit . If it needs to be replaced , he ’ s got one waiting and it ’ ll slide right in the old space . This streamlined approach is only possible when you ’ re dealing with such scale that you see these benefits .
LISTEN ON :
Apple Podcast
CIRE : FROM AN OUTSIDER ’ S PERSPEC- TIVE , WORKFORCE HOUSING INCLUDES AN INHERENT TENSION BECAUSE YOU REALIZE THERE ’ S A CEILING ON INCOME . WHAT CAN YOU DO TO MAKE SURE THE NUMBERS WORK TO KNOW AN INVEST- MENT HAS POTENTIAL ?
JACKSON : I can give you a hypothetical example . Let ’ s say we have someone come to us with a building where they plan to jack up the rates by $ 250 after fixing it up . One of the first things we ’ ll ask is : What ’ s the median income in the area ? Is that a reasonable assumption ? A lot of times , you realize that ’ s not a feasible plan . You ’ re not going to be able to make the numbers work because other units in the area may come with a certain price point . You just can ’ t ignore the market . The people renting these units are on a budget where $ 20 a month can matter a lot . I think that ’ s an important thing when we are looking at investments — we ’ re looking at how realistic it is .
CIRE : LOOKING FORWARD , HOW IS MULTIFAMILY POSITIONED AS WE COME OUT OF THE WORST OF THE PANDEMIC ? WHERE DO YOU SEE THE SECTOR GOING IN THE SHORT TERM ?
JACKSON : I ’ d be foolish not to point out there has been a lot of distress , and certain sectors in the marketplace have been more affected than others . Certainly , hospitality and retail have been impacted greatly . And while not every apartment building has weathered the storm , the nice thing about multifamily is there are a lot of investors looking to buy . That is a positive moving forward — being able to bring in new operators with the financial wherewithal to be able to
Pat Jackson
rescue an underperforming property .
Everybody talks about cap rates , and they haven ’ t really changed a lot in this sector . They haven ’ t gone up to create more compelling buying opportunities . I think that is , in part , because it ’ s looked at more as a steady , reliable return . We don ’ t see them going a lot lower either , because it ’ s going to be hard to justify those . For potential investors , look where you can add value — like an older property owner who is ready to move on or a property that needs a facelift , where some sweat equity will make sense . But you can ’ t approach [ the multifamily sector ] as a place where you can buy and do nothing , with an attitude of , “ Hey , it ’ s a rising tide that will lift all boats .” That ’ s not a sound investment plan for the long term .
Nicholas Leider
Senior content editor of Commercial Investment Real Estate Contact him at nleider @ ccim . com .
Editor ’ s note :
This article is an adapted excerpt from a fulllength Commercial Investment Real Estate podcast . To listen to the full episode , head to SoundCloud , iTunes , Spotify , or wherever you listen to your favorite podcasts . Don ’ t forget to subscribe , rate , and review .
CIREMAGAZINE . COM COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE 7