Author name: oriondigitaldevelopment@gmail.com

For the Foreseeable Future and in Any Downturn, Why Multifamily Workforce Housing is the Best Real Estate Asset Class to Invest In Posted on April 5, 2021 by Shravan Parsi Above: Texas Workforce housing communities currently/previously owned & operated by Shravan Parsi, CEO of American Ventures   When financial journalists and advisors are nervous about the housing market, investors in multifamily workforce housing are calm. It is no secret that housing can be as volatile as other sectors of the economy. And, like manufacturing, it can indicate whether trends will be more or less favorable in the next year.   However, in times of increasing general volatility, investors and advisors often see the housing sector as a safer haven, if not a safe haven. What makes multifamily workforce housing, when it is properly bought, a safer investment is the dependability of its cash flows.   Ron Rose, founder of Value Creation Strategies Holdings, favors this idea: “In times of financial stress, asset allocation and cash flow take center stage. Good assets that have productive cash flow not only preserve the original capital but can accelerate low-cost, high-quality bargain hunting, which then becomes a key accelerator of future wealth creation.”   Investor equanimity rests on the fact that multifamily workforce housing—just one subsector of the larger housing industry—remains relatively stable long after a downturn begins. But what protects it from the volatility that other sectors of the housing industry experience?   A Self-Sustaining Business Plan   At American Ventures, we believe in three pillars of success: buy right, finance right, and manage right. A well put-together multifamily real estate investment deal is self-sustaining. An apartment complex can generate a positive cash flow starting on day one. Rental revenue can pay predictable operating expenses and can generate enough net operating income to cover debt service, property taxes, and, further, positive cash flows that provide returns for investors.   With this self-sustaining characteristic, along with the right business plan, you also have a preferential mortgage market through Fannie Mae and Freddie Mac. Loans from Fannie Mae and Freddie Mac are not available for other asset classes within the commercial real estate industry. These financial institutions provide a backbone for multifamily mortgage funding, and there are abundant bank and private financing sources as well.   Rental leases, which are short-term—six months to twenty-four months compared to five-year or longer leases in other commercial real estate—enable immediate adjustment to market conditions. During economic downturns, if specific local markets or specific properties demand it, it is possible to lower rents (an unlikely scenario, but possible) to maintain occupancy rates, as was seen in Atlanta, Georgia, and Philadelphia, Pennsylvania, during the 2008 downturn.[1]   During upturns, rents adjust upwards, depending on what the local market will bear. Dynamic pricing models lie behind the ability to make these adjustments overnight.   Need for Affordable Housing   During the 2007-2008 financial crisis and the Great Recession following it, the U.S. government took extraordinary measures to ensure that Fannie Mae and Freddie Mac remained solvent, bailing out the two financial institutions. Why? Affordable housing—synonymous with workforce housing—is one of the country’s biggest problems. Providing stable, accessible funding—that is, a preferential mortgage market—is essential for an economic environment that supports affordable housing.   The two sides of the affordable housing equation are middle-income jobs and the cost of housing. Middle-income jobs include customer service representatives, primary school teachers, police officers, firefighters, emergency medical technicians, managers, and even software developers.[2] The national median annual income in 2018 was $61,937, and median monthly rent for a two-bedroom apartment in workforce housing ranged from $825 in cities like Memphis, Tennessee, $1022 in areas like Dallas-Fort Worth-Arlington, Texas, to $3113 in San Francisco.[3] The picture that the data and a variety of reports paint is one of demand across a diversity of communities that outpaces both newly constructed and existing multifamily housing.   Quality affordable housing is a major concern across the country, and over the last decade has gotten more pressing for workers in many locations. That translates into an opportunity for investors because people who work always need a place to live.   Healthy demand and favorable demographic outlook   Today’s demographics make the rental demand outlook favorable now and well into the future. Multifamily housing offers great options to people when owning a home is out of reach. And that is just the situation today and looking forward. In spite of an expanding economy—we’re in the 127th month and counting of an expansion—a little over 60 percent of Millennials, who make up an increasing percentage of the working population, say they can’t afford to buy a home.   Another 10 to 12 percent simply prefer to rent.[4] Often a desire to protect the environment by having a smaller carbon footprint drives this preference. Millennials choose urban locations and renting because they can use public transportation and avoid owning a car.   At the other end of the age spectrum, baby boomers, who make up around 23 percent of the population, are downsizing, selling their homes, and moving to rental properties near their children and grandchildren. They no longer want the responsibility of maintaining a large house in the suburbs. In addition to living closer to family, when baby boomers rent in metropolitan areas, they have greater access to cultural events.   It’s impossible to say whether a recession is just around the corner. About 38 percent of economists are predicting recession today. Maybe they are right. Maybe they are wrong. The great equity investor Peter Lynch once said, “if you spend 13 minutes a year on economics, you’ve wasted 10 minutes.”   Regardless, if you buy it properly, have the proper reserves and cash flow model, and manage it properly, multifamily workforce housing real estate is a robust asset class for investment.   Originally posted on ForbesBooks. Take My Assessment Are You Ready to Invest or is Your Real Estate Philosophy More Art than Science? Get On Your Hustle! Check out commercial real estate investment opportunities with American Ventures! View

How to Redefine Multifamily and Commercial Real Estate Investment Success in the Pandemic Posted on April 5, 2021 by Shravan Parsi As a unique and devastating force majeure, the COVID-19 pandemic tested how well we could navigate what seemed like never-ending economic challenges. It was, perhaps still is, a game of The Floor is Lava. When you must jump high or burn your feet, your best chance for success, in real estate or otherwise, comes from embracing the challenge and moving toward it calmly and confidently.   Our success always depends on how we shape our relationships with stakeholders. But now, mundane actions and relationships–things that we often take for granted or do infrequently because of how smoothly they normally operate–moved to the forefront. The pandemic forced us to think about ourselves as the hub of a wheel. To keep it moving, our work was ensuring that every spoke in the wheel could play its role well. The lessons bring into high relief how we can do our jobs better during normal times as well.   Relationships and Information at the Forefront   Regardless of disagreements regarding lockdowns, we had to face the reality that companies were furloughing, laying off, or letting workers go, small businesses were temporarily or permanently closing, and large numbers of people were unemployed. Economic activity didn’t just slow. It ground to a halt during April and May 2020.   We could expect and ask retail tenants and residents to pay monthly rent, but businesses and families suddenly had no revenue or income. They knew that very quickly their reserves and savings would disappear. Our situation was the same. Reality was not supporting our underwriting models, and we needed information to develop effective plans.   At the time, Mark Hansen, our director of operations, told me, “You can’t ask an individual whether they lost their job.” A business tenant might not be forthcoming if you ask whether they are in danger of shutting down operations. But in both cases, you can draw inferences from macro data.   Our go-to resource is the National Apartment Association. They have aggregate big data about collections, for example, that we could monitor to stay informed about what was happening in our markets. Combined with data on unemployment and economic activity, we could infer what percentage of the population was struggling and why. This would tell us what business and residential tenants could and could not do.   Although it seems counterintuitive, the government ban on evictions helped us gather information. Once individuals and families trusted that they would not be evicted if they could not pay rent, they began to talk about their situation. The nature of COVID-19, which sometimes led to severe illness and death, gave us another incentive to do whatever was possible to keep residents in place. It was clear as well that we were less likely to find new residents. No one was moving around.   In the normal course of real estate investing, most owners like American Ventures® rely on third-party professional management companies to manage day-to-day activities. We don’t usually conduct daily reviews of resident-level information. Instead, our property management company gathers information and reports on it in aggregate once a week and once a month.   Safe housing is a basic necessity, even more so during a pandemic. To combat the COVID-19 contagion, property management companies had to halt normal, day-to-day operations. In the resulting uncertainty, we needed to know about residents on a more personal level to make and implements effective decisions.   Our situation with retail tenants was similar. We might want to keep a retail tenant, but if their business closed there was not much we could do. The solution in both cases was to partner with businesses and residents and find ways to help them stay in place.   Our biggest footprint is in multifamily properties, largely because this asset class performs well compared to other real asset classes in times of economic uncertainty or economic boom. However, we own one mixed-use apartment complex with retail space in downtown Waco, a block away from Magnolia Silos.   We’ll look at a case based on one of our retail tenants at this location to illustrate how we managed the challenges the pandemic brought. Regardless of the asset class, the key to success is having enough information to make good decisions.   A Case Study on Preserving the Investment   Some facts are so obvious that we don’t usually think about them. For example, both retail businesses and property owners know that owners must pay utility companies, lenders, tax escrow accounts, and insurance. Retail businesses know that operating rent-free is not an option. Owners know similar facts about retail business tenants. Even with limited revenue, they need to pay employees, suppliers, and so on, to stay in business. These facts drive owners and businesses to develop a mutual understanding that each must give during negotiations.   Negotiating when there is little margin for error is stressful. In the time of COVID-19 lockdowns, the stakes demanding cooperation were so high that all parties knew they had to play nice. Competing over who was getting the best of a bargain was not going to work.   In this case, our retail tenant was a home décor store that sold stylish and unique home furnishings. They had been open for six months in a temporary space, rent-free, while we built a retail space tailored to their needs. They moved into this new space just before the pandemic hit. Although they were generating income and a stable revenue stream, they were still operating on a razor-thin margin. By April, the business was generating no income and could not pay both the rent in May and its operating expenses, like employee salaries and suppliers.   We examined data about what was going on in our larger market—the macro data at city, county, and state levels. We also factored in information about how local universities and government were handling the economics