Talk about an optimistic bunch. Professional Apartment Investors are all smiles when it comes to their upbeat outlook for the early part of the next great cycle, according to the annual CFO Strategies Survey, conducted by Multi-family Executive’s sister publication, Apartment Finance Today. Here’s just one of the many quotes in the report…
“We’re obviously bullish that we’re at the beginning of a development cycle, so we’re putting a lot of time, energy, and resources there,” says Jay Hiemenz, CFO of Phoenix-based Alliance Residential. “And the cap rate compression, coupled with better fundamentals, has made deep renovations feasible again.”
Alliance Residential is currently working on a $45,000-per-unit rehab of a 40-year-old community in Rancho Palos Verdes, Calif., looking to move rents by $750 a door. Alliance isn’t alone in its optimism. About 42% of multifamily firms are increasing their acquisition appetites.
Why the Apartment Investor Pros are Buying:
- Both the data and interviews with active players in the industry indicate that multifamily firms are feeding their growing appetites for deals more aggressively than at any point since the Great Recession.
- Financing is becoming more available, with many private-sector lenders growing more competitive. Last year, only 16% of survey respondents borrowed from either life insurance companies or conduit lenders. But more than twice that, 39%, expect to tap commercial mortgage or life insurance company debt over the next year.
- Availability of equity capital has also improved. Nearly 60% of respondents believe equity capital is more available now than it was one year ago. And 65% expect the market to stay just as healthy, or even improve, in 2012.
- And it is a great time to sell—the “cap rate conversion” and rebound in values has prompted many firms to reconsider their hold periods.
- Read the full report here.
How Apartment Market Big Bucks are Made:
When you buy with a high cap rate (percentage of net cash flow vs. purchase price, before debt service) and sell at a low cap rate (when the project is stabilized) – this is called “cap rate compression”. This is how the big bucks are made in the apartment market. This happens typically from adding value to a property, where then many outside investors bid up the price to purchase the project.
Cap rate conversion is a big reason why apartments are getting alot of attention lately. “Cap rates compressed much quicker than anybody expected, and it’s become the new norm,” says David Messenger, CFO of UDR, Inc.
It is no wonder that optimism has begun its reign in the apartment investing market. There are increased opportunities to find and buy foreclosure apartment projects at a fraction of their replacement cost (read more in “Apartment Foreclosure Deals Abound“). You truly have the perfect storm to profit from apartment finding or investing. There is an increased amount of available financing (both private and public) for you to structure your deal without using any of your own cash or credit.
I’m very excited about the opportunities out there. Are you investing in apartments in 2012? Do you think I am crazy and there is nothing out there? Let me know by commenting below.
Become a Professional Apartment Investor:
Learn more from professional apartment and foreclosure investor expert, Michal Ballard from his “Earn Huge Profits Investing in Apartment Foreclosures“ Live, Free, upcoming Professional Investors Webinar. You’ll thank me for having him on. Talk to you then.
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