January 2021 Edition - Moving Forward

I wish you the BEST in this New Year.  2020 is behind us and it’s time to regroup and move forward with renewed enthusiasm, energy, optimism, and realism.  We have a new administration that will be governing our country and with that comes a certain amount of concern for the unknown.  Whether you are a Democrat, Republican or Independent it’s time to move forward.  Also, the Covid recession is not over yet.  It will continue to cause uncertainty well into the new year.

Like our country, our multifamily industry had its share of issues in 2020 but it wasn’t as bad as it could have been.  Looking back, the apartment industry faced new challenges in 2020 and demonstrated its strengths in a year of unparalleled turbulence.  Multifamily owners and operators were forced to quickly adapt and innovate in the face of new social distancing guidelines and renter’s strained economic circumstances.  But, with the assistance of the federal government’s stimulus money and additional unemployment benefits, the industry weathered the storm better than most other commercial property sectors.  Our sector of commercial real estate had the highest average annual returns while simultaneously being the second lowest in volatility.  In most areas, the multifamily market has continued to grow even during these challenging times.  Our market is considered by investors to be a traditionally slower and more conservative growth market thus providing investors with more confidence in their investment plans.  When the economy shifts or recessions occur, multifamily has consistently proven its resiliency, stability and predictability.  Housing is a necessity and is less susceptible to the more volatile economic fluctuations.  In downturns or crises, people shift priorities to their most basic needs.  When money is tight, you cannot get much more essential than food and shelter.  If there’s a decision to be made about where a limited amount of available money will go, the allocation for housing is high on the priority list.

Private equity firms across the globe hold an estimated $328 billion ready to invest in real estate (Bloomberg, May 19, 2020).  The world’s largest real estate investors are sitting on piles of cash, preparing for once-in-a-lifetime opportunities created by the pandemic.  I believe that before the end of this year, we will begin to see the investing of a large amount of this capital into the multifamily industry.

With the soon to be Democratic Party control of the Presidency, the Congress and the Senate our new incoming President’s campaign proposals have a better chance of making it to the floor to be voted on.  The Senate is split 50:50 between Democrats and Republicans with incoming Vice President Kamala Harris having the tie-breaking vote.  With this type of control, President Biden will have a far easier time getting his choice of Cabinet nominations, Supreme Court Justices, and some new legislation approved with a simple majority vote.  However, this does not guarantee that President-elect Biden’s campaign priorities will become a reality.  Despite numerous policies put forward by the President-elect during the campaign, the political division in Congress will greatly restrict legislative reform.  Republicans can and will filibuster anything controversial or remotely partisan resulting in the Democrats needing to have at least 60 votes to pass.  This means that Democrats will need to be 100% united and win over at least 10 Republicans.  This will be a virtual impossibility.

Once the Covid situation has stabilized, President-elect Biden will shift his focus to a range of policy initiatives, including tax reform.  During the campaign, the Biden team suggested eliminating the step-up basis on estate inheritance and the 1031 tax-deferred exchange for real estate investors earning over $400,000.  These and other tax changes are improbable given the current division in Congress.  While the 50:50 split in the Senate creates one pathway to tax reform via budget reconciliation, there is no margin for error.  The complete cooperation of every Democratic senator, as well as two Independent senators will be needed to reach the 51-vote threshold.  That challenge is unlikely to improve after the 2022 midterm election, as such contests historically favor the party aligned opposite the executive.  This reduces the probability that real estate investors will face substantive tax reforms in the near future.  Consistency from a policy perspective will help lay a stable groundwork for future decision making by commercial property investors.

Multifamily investors are optimistic and the market in the southeast is  very active.  There is significant capital available and lenders are lending.  2021 should be a very good year for multifamily owners and investors.  If you are looking to invest, please contact me and consider allowing me to represent you as your Buyer’s Agent.  The acquisition process is complex and involves a myriad of important steps to select and properly analyze a multifamily investment.  You will find that the acquisition process is one of the most important processes involved in your ownership of income producing properties.  Every purchase transaction is unique and having your own representation is extremely important.  The acquisition process includes the identification of available properties, visiting and evaluating the properties, analyzing the markets, underwriting the properties, due diligence analysis, negotiating the Purchase and Sale Agreement, arranging the debt and equity capital and closing the purchase.  Having your own representative with boots-on-the-ground and with knowledge and experience in the geographic area is important.

As you move forward with your investment considerations, please keep the following few tips in mind.  These tips will help you avoid making costly mistakes with your acquisition process:

1. Retain a Buyer’s Agent to represent your interest.

2. Do an independent verification of all information provided by the seller or the seller’s listing agent. 

3. Be sure to read and abstract all tenant leases.

4. Carefully review the rent roll and delinquencies.

5. Obtain tenant estoppel letters from all tenants.

6. Have your attorney prepare the Purchase and Sale Agreement.

7. If using an underwriting program, check all formulas to verify correctness.

8. Visit the property and inspect it yourself.

9. Be sure to have a Phase I Environmental evaluation and a Property Condition evaluation conducted by an independent professional firm.

10. Be sure to prepare a schedule and funding mechanism for property capital improvements and deferred maintenance repairs.

11. Reconcile the apartment property’s yearly effective gross income to the seller’s yearly cash deposits on the bank account statement.

12. Review the tax returns for the entity that owns the property.

13. Prepare a “most likely” and “worst case” scenario underwriting analysis of the property.

14. After completing your due diligence, request from the seller a price discount for undisclosed and contingent repairs, maintenance, tenant issues, lost rent

and other negative items discovered.

15. Review all employee contracts and plan for Unrelated Business Taxable Income issues and Employee Retirement Income Security (ERISA) items.

16. Calculate accurately and underwrite the new property tax assessment and real estate tax expense.

17. Buy smart.  You make your money when you buy a property and collect your profits when you sell.

“Just-In-Case You Missed It” is a monthly letter prepared for multifamily owners and prospective owners.  It is a compilation of multiple articles from multiple sources or a reprint of an article from a specific source (source credit given).  Its purpose is to present both facts and opinions that may influence our multifamily business in the Southeastern U.S. If you have any questions and/or would like to discuss any of the comments above, my conclusions or your multifamily business, please contact me at your convenience.  I can be a valuable resource to you without adding expense to your budget.  I look forward to speaking with you and having an opportunity to meet with you.  I am always at your disposal to assist you with your multifamily business.  If you would like to review previous editions of my monthly “Just-In-Case You Missed It” letter they are posted on my website, www.rickbakermultifamily.com.

Respectfully

Rick

G.F. Rick Baker, CCIM 

Multifamily Specialist/Investment Advisor 

www.RickBakerMultifamily.com 

2504 Tinderbox Ln.

Greensboro, NC 27455

Cell: 336.549.6083 

Email: rickbakermultifamily@gmail.com

Per NC Real Estate Law, please review the   "Working with Real Estate Agents"  agency disclosure.  We are available to discuss the contents of the disclosure after you have had an opportunity to review.