Individual Investors Eye Apartments

Recent trends have seen large investment firms buying up single-family homes to convert into rentals and some individual investors have opted not to compete with them, instead turning …

Recent trends have seen large investment firms buying up single-family homes to convert into rentals and some individual investors have opted not to compete with them, instead turning their attention to apartment complexes. Some of self-funded while others collect a pool of like-minded investors, but all have the goal of expanding in scale rather than squabbling over the piecemeal returns in the single-family market. Many start with 6- or 8-unit complexes and work their way up to larger complexes, establishing stronger lending credit along the way. For more on this continue reading the following article from TheStreet.

From his small rented apartment in the New York City’s East Village, former advertising executive Joe Fairless, 30, is in the final stages of closing on a $6.8 million apartment building in Ohio.

"I made my first real estate purchase in Dallas in 2009 at the time when the market was perfect for the single-family home and there were a ton of foreclosures," said Fairless, principal of Fairless Investing, who switched from buying single-family homes to investing in apartment complexes last year.

Real estate investors like Fairless are kicking single-family homes to the curb in today’s housing market to purchase apartment complexes in areas with low vacancy rates.

"There’s a little uptick in transferring from single-family homes to multifamily complexes," said Leanne Eicoff, vice president of loans at CLD Capital, an Atlanta-based national lender for commercial loans and apartment mortgages.

Apartment vacancies have fallen to 4.3% in the first quarter, the lowest level since the first quarter of 2001, according to an April report released by real estate research firm Reis, Inc.

The demand for rental properties is on the rise with the housing bust, economic recovery, high mortgage requirements and a constrained supply of newly constructed apartments, Fairless said.

"You have record high occupancy for rentals and new construction is starting to take place, so therefore we have more people looking for apartments," he said.

Multifamily investing is growing and in its fourth year of expansion because of the current economy and demographics, according Marcus and Millichap Real Estate Investment Services.

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Hedge funds are buying up foreclosed single-family residential homes and squeezing out single-family investors and first-time home buyers, Eicoff said.

"We’re seeing an uptick in these types of people – usually it’s for [buying] a five- to ten-unit complex," Eicoff said about investors who are switching from single-family home investments to multifamily ones for higher returns and increased cash flow. "It’s just a start to get their feet wet."

Spencer Cullor, founder of Kansas-based Cullor Properties/ApartmentVestors, purchased his first apartment complex in 2006 before the housing market imploded.

"A lot of people start with a four- to eight-unit and work their way up," said Cullor, who switched his business from building single-family residentials to spec on farmland and transferred to investing in multifamily. "We even started our business like that."

Cullor has since expanded his business, which was initially self-funded, to incorporate multiple private investors. He now owns a stake in 400 units across Kansas, Missouri and Oklahoma.

"We’re now looking more at Texas, eventually looking at Houston, Dallas or Austin," he said. "It all comes from growth, so you look at places where the population is growing."

Texas is in the top one-third of places for investments in multifamily housing because of its job market momentum, according to a Marcus and Millichap Real Estate Services apartment report.

"Texas is trading a ton," Eicoff said. "People feel like they can still get deals in Texas and we’re seeing a lot of deals in Houston."

Eicoff added California has the highest trade volume in the country and represents 40% of CLD Capital’s business in multifamily lending.

"San Francisco is going crazy," he said. "The potential income is high. There is Silicon Valley with a lot of people with cash and disposable income and they’re trading in cash."

The requirements for multifamily loans are based on the cost of the property. Most loans under $3 million typically require a a personal guarantor, but commercial loans with a pool of investors on a property costing over $3 million are treated differently.

"For over $3 million dollars with a pool of investors, we’re not going to underwrite each one individually." Eicoff said. "We look at the shareholder with more than 20% ownership and also base it on the strength of the property and its cash flow."

Higher mortgage requirements make it more difficult for individuals not in full-time employment to qualify for a mortgage – as in the purchase of a single family home, Fairless said.

"It’s definitely a different ballgame than the single0family home," Fairless said. "For lenders, they look at the investor, but primarily they evaluate the investment on the cash flow of the apartment."

Fairless is closing on his first apartment complex in June – a $6.8 million lease agreement for 168-unit apartment complex in Cincinnati, OH under a syndicated deal with a group of investors.

"It’s more work to buy an apartment, but the returns are greater," Fairless said. "If you want scale, it’s an apartment complex. It’s the equivalent of buying 100 homes at once."

This article was republished with permission from TheStreet.


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