The final article in this series is a bonus – 18th reason to invest in real estate.
18) Make a Better World – at Rho – Orion Investments we strive to make our corner of the world a better place. We purchase buildings that are in poor condition, poorly managed, sometimes dangerous, always inefficient and underperforming. We correct the problems we find and manage the buildings back into good health and profitability. Moreover we can demonstrate that our buildings improve every neighborhood that they are found in. We increase adjacent property values, increase municipal tax bases, reduce emergency service calls and crime, save taxpayers money, AND we provide safe, affordable, aesthetically attractive and comfortable housing to a wide spectrum of residents.
Creating value in real estate is not a mystery. This week we explore 7 more keys to creating value.
11) Refinance – We are able to withdraw cash through periodic refinancing (Equity Take-out). This equity take-out is tax free money back to the investor so long as it is reinvested in another legitimate investment vehicle.
12) Asset Protection – A comprehensive and well-structured building insurance policy covers all manner of calamitous events and is another form of risk reduction. Even if the building would be completely destroyed by fire or earthquake, with correct insurance it would be replaced in “as new condition.” Additionally, having rental loss insurance would cover any losses from business interruption until such a time as the building was re-built and in operation equal to the period before the damages. Finally, limited liability insurance and proper corporate structure insulates the investor from specious third party lawsuits. As an aside, how many investors in securities or mutual funds over the last decade would have liked to have such protection from down-side risk?
13) Inflation Hedge –Real Estate investing is one of the few investments that hedges against inflation as the cost of goods go up, so generally does Real Estate.
14) Demand – People always need a place to live. Shelter is one of the basic requirements of life. You can be assured knowing that there will always be demand for residential housing whether the market is up or down. (see Business Cycles below) There is always a demand for good, clean, safe, aesthetically pleasing and affordable housing.
15) Affordability –Apartment Rentals are considered affordable accommodation and many jurisdictions limit the rent increases to maintain affordability. While rent restrictions limit the up-side of revenues, it almost guarantees that apartment rentals remains “affordable” to most incomes and in so doing maintains that they will always be in demand.
16) Business Cycles – Multifamily investments are one of the few sectors of the investment space that are sheltered by traditional business cycles. As the economy slows people need affordable housing and as the economy pick up landlords typically increase rents as demand increases through this cycle. Economic downturns creates tenants seeking affordable housing. Inflation makes home ownership unaffordable and we gain new tenants seeking affordable housing. Note: rising interest rates benefits landlords as homes become less affordable which simply increases the demand for rental housing.
17) Maintenance –We ensure that our building are always well maintained, and pro-actively managed to ensure that we maintain and increase the value of the building. We take great care to ensure that our units are clean, quiet, well-managed, aesthetically pleasing, and comfortable and the best offered in a neighborhood. We aim for “near-condo quality” in our market segment and we can usually demand a premium for our units. Typically our rents are 5 – 10% higher than our competitors. Additionally with apartment investing our maintenance costs are spread over a number of units thus utilizing “Economies of Scale”. We have an onsite maintenance person who looks after repair issues on an as needed basis.
Creating value in real estate is not a mystery. This week we explore 4 more keys to creating value.
- Diversification– Well selected multi-tenant residential buildings offer built in vacancy protection by virtue of its scale. 50 units with an 8% vacancy is still a viable investment with a modest risk. Conversely, purchasing a single family home or condo has a much higher risk profile: it is either 100% vacant, or 100% full. There is no market average effect when you only own one unit.
- Market Cycles– A smart investor can buy valuein all market cycles. If you watch the Real Estate market cycles you can time your purchase so you can maximize your short term appreciation by buying at the bottom of the cycle. However, one of the fundamental Real Estate maxims applies favorably: “All Real Estate is Local.” That is, local conditions apply. There may be a global recession, but there are always (local) exceptions for the savvy purchaser.
- Appreciation– Real Estate will always appreciate over time and you don’t have to pay for the increase in value until you sell the building. Since 1968 historic appreciation real estate assets have been 6.7% per year according to the National Associate of Realtors. Since the 16thcentury the average is 4% per year. That is a 500 year sample size dealing with all manner of accommodation from mud huts to castles. Additionally, that increasing equity value can be leveraged again, used to build a solid net worth and estate value for your heirs.
- In Control– Investment risk is managed in large measure by the degree and nature of investor control. With multi-tenant real estate investing you are in control on the major decisions that affect the performance of the asset: purchase, holding structure, budget, dividends, mortgage, marketing, management and cash-flow decisions. AtRho – Orion Investments Inc. we manage every part of the investment to maximize investor returns and reduce risk. With investment in equity markets you don’t have this control; you simply have to trust that the board of directors and executive are making decisions that enhance shareholder value and are honest and transparent with their financial reporting.
Creating value in real estate is not a mystery. In part 2 of this series we will look at several additional ways in which we at Rho Orion Investments Inc.recognize and create value in real estate.
- Tax Benefits–There are many tax advantages unique to Real Estate. While individual purchases may vary, almost all purchases offer capital depreciation, deductibility of expenses and deductible mortgage interest.
- Tangible, Concrete Asset– Investors are purchasing a real interest in a real asset with underlying value (land, improvements and chattels) independently verified by a state agency through property tax assessment, market comparables and simple business evaluation tools. Unlike a stock or mutual fund whose value lies in its perceived trading value, Real Estate has real value. Unlike other investments, a Real Estate investor is buying an operating business with a historical operations record. The business and the underlying asset (the buildings, rental contracts, incomes and expenses) can all be evaluated, measured and compared to arrive at a reasonable purchase price. Who among us can predict a stock or mutual fund with the same certainty? Recent records show that not even professional brokers and agents can.
- Property Management–Due to the number of units in an apartment building we can afford to have professional property management that handles the on-site and tenant matters. Good management reduces risk, increases value, foresees and mitigates problems and ensures that tenants and investors sleep well every night.
Creating value in real estate is not a mystery. In this series I will look at several ways in which we at Rho Orion Investments Inc. recognize and create value in real estate.
- The Smart Shopper: In North America we have created a culture of savvy consumers. We recognize and respect the intelligence of our clients. For good managers, a savvy consumer is actually working for you. They are better able to compare and favour your preferred product over your competitor’s suite. They can use your website, floor plans, staged suites, high resolution photos, on-line ads to compare and choose your product. A smart shopper will actually do much of the work for you.
- R.E.S.P.E.C.T:We also respect our resident’s basic dignity. Landlords that do not have respect for their residents & The Rental Tenancy Act deserve the poor reputation that they have. By treating residents with respect and recognizing that they are clients, not “renters” we change the nature of the relationship we have with our residents. We also believe that we can influence in a positive way the resident experience in our buildings, reduce conflict and also reduce damage. This is not only good for everybody, it is good for business. One final thought on this subject is that one of the internal commandments that we operate on is never to refer to our clients as “renters or tenants.” We can and do choose better words to describe our relationship.
- Client Care is Good Business:Often when I speak of my work, the response I get is, “I couldn’t stand your work. I hate dealing with tenants!” I am always slightly taken aback by this comment. I was a tenant for 17 years. Over the time of my tenancy I calculate that I paid roughly $142,800.00 of my landlord’s interest, principal, property taxes, utilities and repairs. Moreover, I improved each rental with small repairs from washer seals and closet glides to paint jobs and linen shelves. I am sure that I also paid for the landlord’s vacations, children’s braces and new automobiles over that term. I ask, what is not to like about a good tenant that watches over, improves and pays for your investment property? Other industries demonstrate better client care because it is obviously good for business.