Most people know that the acronym IPA stands for India Pale Ale in the craft beer world. If you’re a beer lover, you know that the United States is the largest producer of hops in the world, and 99% of those are grown in the Pacific Northwest, including my home state, Oregon.
My first foray into real estate investing started in Oregon. Twenty years ago, I bought my first duplex for less than $100,000. A few years later, I bought a quadruplex. Today, I am a director and co-president of a company that owns and operates a national apartment portfolio valued at over $1 billion.
Craft beer often starts as a passion, and over time it becomes a profession. Similarly, real estate offers an accessible starting point for investors, who can start small and grow their capital and portfolio over time, often resulting in a full-time source of income.
Selecting the right properties is the key ingredient to portfolio growth. The acronym IPA is our proven guiding philosophy for identifying good apartment investments. Whether you’re looking to buy a duplex or an institutional-grade property with hundreds of units, these three metrics are critical to your success.
What is Intrinsic Value? (I)
Intrinsic value provides a deeper understanding of a property’s value than just focusing on the current market price. To determine the intrinsic value of an asset, you need to explore its inherent characteristics.
The intrinsic value of an apartment building can be found in its quality construction or attractive design, desirable floor plans or attractive community layout. Location, however, is almost more important than the building itself. Components of intrinsic value include:
-Above average population gains
-Positive gains in terms of jobs and wages
-The balance between supply and demand for housing
-Favorable lifestyle factors such as climate, neighborhood amenities and regional recreation
-Accessible educational and medical centers
-Demonstrated public commitment to infrastructure, including transport, renewable energy and internet access
Without these fundamental characteristics in place, even a well-managed “A+” property will not be able to increase its revenue and value over time.
What is the price per book? (P)
Market value tells us what investors are willing to pay for a property. Multifamily investors often refer to “price per pound” as the price per unit, simply calculated as the purchase price divided by the total number of units. This base is locked on the closing day and sets the course for your business plan.
Now more than ever, buying at an attractive price per pound relies on subjective assessment and an objective understanding of market and submarket trends. The first step is to find comparable data on sales and rentals.
For example, last year we purchased a new apartment building in San Antonio located along a major freeway expansion project. Although the price per pound seemed high to other buyers, we knew it was below market. We had objectively determined that the rents were lower than the competition due to temporary construction noise and nearby debris. Looking ahead from a subjective perspective, we were confident that as the construction project moved into its next phase, increased traffic and demand would fuel rental growth. Today, less than a year later, the market value of the property has increased by almost 15%.
Apartments remain a sought-after asset class with relatively low inventory. As a result, properties trade for a premium. Combine that with the many lingering impacts of the pandemic – from rising construction costs to interest rate volatility – and you can expect yields to compress in the near term. As long as underwriting remains disciplined, good opportunities are still there to be found.
What is the level of affordability? (A)
We use the term “affordability” to mean that your rental rates provide good value for money and should be considered affordable to your tenants. Thorough research should be done on the demographics of your target tenants in order to develop a sustainable business plan.
Our firm only invests in markets with above-average intrinsic value that consistently offer rental rates below 30% of household income. Raleigh, NC and Greenville, SC are great examples. Expensive coastal markets have seen rental prices decline as tenants continue to migrate to cities and homes that offer better value and lower rent-to-income ratios.
The market we currently find ourselves in requires investors to adapt quickly to market forces and adopt innovative approaches that benefit tenants, communities and neighborhoods. Maintaining an affordable and balanced housing supply is an essential element of economic recovery.
Just as the boom in craft beer is seemingly unstoppable, so is the popularity of multifamily investing. Our “IPA” acquisition approach continues to deliver favorable results through changing economic cycles. The next time you enjoy a glass of your favorite cold beverage, I hope the thought of building an inherited real estate portfolio comes to mind. Multifamily investing can be a “hopped up” journey, but if you have these three basic factors in place, you’ll do well on the other side. Cheers!
Karlin Conklin is pprincipal and co-chairman of the Investors Management Group.